Professional Documents
Culture Documents
Financial Modelling
Course Work
1. Executive Summary 1
2. Company Profile 2
3. Introduction 3
4. A framework for Evaluating Company 3
Main Ratios (Table) 3
5. Profitability Ratios 4
5.1 Return on shareholders funds (ROSF) 4
5.2 Return On Capital Employed 5
5.3 Gross profit Margin Ratios 5
5.4 Net Profit Ratio 6
6. Efficiency Ratios 6
6.1 The average stock turnover 7
6.2 Average settlement period for receivables 7
6.3 The sales to capital employed 7
6.4 Average Payment Period 7
7. Liquidity Ratios 8
7.1 The current ratio 8
7.2 Quick Ratio 8
8. Gearing Ratios 9
9. Investment Ratio 9
9.1 Interest covering ratio 10
9.2 Dividend payout ratio 10
9.3 Earning per share 11
9.4 Price Earning Ratio (P/E) 11
10. Conclusion 12
11. References 13
12. Appendix 14
Esprit Ratio Analysis
1. Executive Summary
Esprit has been performing excellent in overall operations, demonstrating sustainable
growth in turnover and earnings. The Group’s turnover reached HK$29.6 billion, an
increase of 26.9%. With improving efficiency, the Group’s operating profit grew
31.4% to HK$6,259 million. This is a big plus in the upward trend in the growth.
The ratio analysis is the effective and reliable evidence of the company’s success.
There are several ratios that are calculated in the report. The significant success
depicted in the profitability ratios which shows the gross profit margin has constant
trend line through out 3 consecutive financial years. the period. Where as ROSF
(Return on shareholder funds) is getting upward trend in the current financial year
The Esprits efficiency ratio clearly indicates the strength of the company to operate
the business effectively. Where as the receivable settlement period also indicates the
favourable results. The average stock turnover in year 2007 has gone down and
indicates more in and out of the business.
The company’s liquidity ratios depict the upward trend which is favourable trend.
This shows the excellent level of the liquidity available in the company.
The Esprit does not have any long term liabilities since 2005 therefore the Gearing
Ratio is not applicable over this period of time.
The investment ratio shows strongly favourable outcomes for the company. This
shows upward trend in the Earning per Share, the dividend payout ratios and price
earning ratios. These ratios attract the traders to invest in the business. More the
investor invest in the business more the liquidity rise and more the income for
operations become available.
The success of Esprit can be measured through significant financial information of the
company that is available in the financial reports. These numerical have, mostly the
positive trends in the business operations.
2. Company Profile
ESPRIT is a youthful Lifestyle brand which offers fashion and new style apparels,
footwear, jewellery, house wares etc which was established in 1968 and has its
headquarters in Hong Kong. ESPRIT does the business under the group ESPRIT
HOLDINGS LIMITED. The group is engaged in production and distribution
(wholesale and retail) of high quality and affordable products under its globally
renowned ESPRIT brand and also cosmetics and other body care products under its
RED EARTH Brand. The group operates in more than 40 countries directly
controlling more than 660 retail stores and over 13,000 controlled space wholesale
point-of-sales internationally.(ESPRIT Annual report 06/07).
On April 2006, Forbes recognised ESPRIT as one of the World’s 2000 largest Public
companies. (DeCarlo, S.2006).
3. Introduction
To gauge the performance of any company requires the careful understanding of the
financial information provided in the financial statements. This information can be a
matter of interest for the stakeholders in many ways. The most important is the buying
and selling of the company’s shares. The ratio analysis provide the careful numerical
to judge the profitability, efficiency, liquidity, gearing and success of financial
investment of the company.
Assessing the company creates unique modelling opportunities and challenges. When
deciding to acquire the company, one has to carefully analyse the strengths and
weaknesses of the company on the numerical backgrounds. To understand the
company’s risks is very crucial before the actual decision being made.
Main Ratios
Ratio Analysis
5. Profitability Ratios
The financial metrics that used to assess business capability to generate revenue as
compare to revenue. (Michel Schlosser 2002)Profitability ratios are calculated to
measure the company’s performance to determine whether the company is performing
at satisfactory level i.e. the ability to generate profits. (Wood, F and Sangster, A,
1999, Berman.C, et al 2006)
Profitability Ratios
70
60
50
Percentage
ROSF
40 ROCE
30 Net Profit Margin
Gross Profit Margin
20
10
0
2005 2006 2007
Years
Return on Shareholders Funds is the ratio that depicts the level of investment by the
shareholders in the company and the returns that company pays off to its shareholders.
The profit that shareholder actually receives from the company’s total generated profit.
The Esprit according t pots financial statements paid highest percentage in 2005 as it
is 47% where as it is 41% in 2006 and it goes down as low as 43% in 2007. The year
2005 however was not that desirable but in the current trend of the company’s
financial performance it is visible that the trend going up which is good sign for the
company.
These are the returns that company is getting back from its capital employed in the
business. Through this indicator company gauge the performance and asses whether
business process has generated the sufficient amount of return to pay for its cost of
capital. (Michel Schlosser 2002)
Esprit gained 60% of return on capitals in 2005. The return reduced as low as 50% in
2006 and the same percentage in 2007. There seems considerably drop in the financial
ratios of the company in year 2006 and 2007. This result indicates that the company is
paying more cost on the investment on company’s assets in the year 2006 and 2007 as
compare to the ratios depicted in 2005.
This is very useful ratio specially where stock is purchased gained mark up and sold.
However this reflects the position of strength of the business profitability. According
to the company’s financial statements it can be analysed that the company is making
the best performances on its profitability side. It indicates that the trend goes around
the same thought pout the period from 54% in 2005 and a slight dip towards 53% and
recovery take to 54% in 2007, that reflects the company’s good financial position. The
gross profit margin remains at 54% and Net profit margins remain more likely to be
steady at 20% through out the period. (Esprit annual report FY 2005-06 and 2006-07)
This ratio is very important for the company to retain the existing share hokders as
well as to make it attractive for the buyers in the stock market. This includes the profit
generated from trading activities.
Esprit generated around 16% in 2005 and trend goes to next year and then graph
moves up to 17% in the year 2007. This depicts the company’s profitability is
growing up at the tremendous level which is a good sign for the stakeholders.
6. Efficiency Ratios
The efficiency ratio depicts how effectively a business is operating. The main
objective in this ratio is to measure the efficient use of the assets. (Michael Jones
2006) These ratios measures the way in which certain resources are utilized or
managed within the business. Profitability of a business varies according to the way in
which the assets are used. (Atrill P. and McLaney, E. 2006)
Efficiency Ratios
80
Avg Stock turn over
60
40 Ave settlement
period for receivable
20 Avg payment period
0
2005 2006 2007 Sales to the capital
employed
Years
time at Esprit is Average 49 Days in 2005 which increase 58 days in 2006 and
decreases in to 37 days in 2007. this depicts that the stock remained in the business for
more days in 2006 which is not considerably treated as desirable. But in the year 2007
this decreased to 37 which show the more business sales trend and more in and out
behaviour. The one of the reasons can be the new fashion items and seasonal impacts.
Some time out of season stock get stuck up and takes time to sale.
Compare the sales of company with total assets employed. The Esprit has 2.9 times in
the 2005 as compare to 2.6 in 2006 and 2.5 times in 2007. This clearly indicate that
the company is constantly investing in assets buying and at the same time its sales
trend is going well stable by maintains the desirable ratio of times in the business
operations (Esprit annual report FY 2005-06 and 2006-07) Therefore after analysis on
financial reports of Esprit that can be stated that the company is efficiently managing
its resources effectively by efficient internal working capabalities.
6.4 Average Payment Period
The slower a business is to pay the longer the business has the money in the bank. The
Esprit average payment time period is 38 days in 2007 which has the same trend in
the following years. This shows that the company takes almost 38 day to off the debts.
7. Liquidity Ratios
Liquidity ratios seek to test how easily a company can pay its debts. (Michael Jones
2006). this ratio determines a firm’s ability to meet its short term financial obligations.
(Atrill, P. and McLaney, E.2006)
Liquidity Ratio
3
2.5
2
Current Ratio
1.5
Acid Test Retio
1
0.5
0
2005 2006 2007
Years
This ratio is the measure of extreme short-term liquidity. As more the stock the Esprit
sold more likely to increase debtors. More the debtors pay the cash more the business
gains cash. It is kind of immediate test of the company. The thinking is that if all debts
needed to be settled tomorrow or next week, could they be? Where as the Company
here got 2.02 in year 2007 as compared to the 1.63 in 2006 and 1.50 in 2005. This
ratio indicates that company has acquired strong ability to payoff the debts in short
notice that strongly reflects the company’s position to meet the short obligations.
(Esprit annual report FY 2005-06 and 2006-07
8. Gearing Ratios
Gearing ratios are derived from the balance sheet. Gearing effectively represents the
ordinary shareholders funds and the debt capital of the company. Gearing refers to
relationship between the amount of finance provided by outside Parties to the
company.(Lunt.H, 2006).This ratio measures the contribution of long-term lenders to
the long-term capital structure of the company (Atrill, P. and McLaney 2006).
The Esprit does not have any long term liabilities since 2005 therefore the Gearing
Ratio is not applicable.
9. Investment Ratios
This ratio depicts the future position of the company and helpout the investor to make
investment decions accordingly. If it refledcts positive growth that likely to attract the
investor in the company. This ratio specifically deals with shareholder’s returns.
Investment Ratios are those ratios available and which are designed to help investors
to assess the returns on their investment. (Atrill, P. and McLaney 2006).
Investment Ratio
80
Years
This ratio calculates that how easily the company can pay off the debts. According to
the financial calculations of Esprit that can be analysed that the company has got
strong ability to pay off the long-term debts well in time in the financial year 2005
and year 2006 where as it seems there is no gearing available for the company in the
year 2007 the interest covering ratio can not be calculated for the period.
The Company has announced dividends and paid off to the share holders every year.
The graph above shows that the paid off dividend in the year 2005 was about 51 %
which rose to 65% in 2006 and again a slump of 5% realised by taking it to the 60 %
in the financial year 2007. This can be assume that the company has started investing
the different projects which will likely to generate higher returns in the future
This ratio is the important source of measuring the performance of the company. The
importance of this ratio can be gauged easily by the fact these ratios are published in
the accounts of listed companies unlike other ratios.
The Esprit financial reports show that company has been generating earning per share
on the continuous upwards trend. Each share earns HK $ 2.79 in 2005 and HK $ 3.09
in 2006 where as it is as much as HK $ 4 in 2007. This depicts the company’s
excellent earnings on per share.
This is another key stock market measure. This depicts the company’s current price
in relation to the strength of the share to earn in future times. This ratio encourages the
investor to buy the share if the ratio is higher. The higher ratio depicts the popularity
of the company.
The Esprit has very strong P/E ratio. It is as favourable as 22.51 in 2007. The lowest
trend can be depicted through the figures in 2005 as low as 19.27 as compare to 20.51
in 2006. The company in 2007 has generally enjoyed the market confidence.
10. Conclusion
After having careful analysis on the company’s financial statements we are can build
an opinion that the Esprit has got the factors of success in various parts of the business.
The trends in financial flows are stable through out the year. Which is a strongly good
sign for the company. The company has high level of availability of funds to pay of
its short term liabilities on a very short notice which will keep the operations of the
company very smooth. However the company has realized the slumps in the indices
of ROCE, the obvious reason of this can be the more investment being made in the
business then rate of return on it.
The numerical analysis on the financial numbers indicates the success of the company
and the continuous growth in the profitability, earning per share and price per share,
which even makes company lucrative for the stakeholders.
The present trend in the growth of the company clearly indicates that the company
will geographically expand more and will realize more profits that will certainly
attract investor to invest in the business and will give a boost to the company image in
the eyes of its target market.
11. References:
DeCarlo, S. (2006), Forbes magazine, Special Report ,The Worlds Largest Public
Companies, Published on 03.30.06.
http://www.forbes.com/lists/2006/18/06f2000_The-Forbes-2000_Rank_13.html
(Accessed on 11th May,2008)
Michel Schlosser (2002), Business Finance Application, models and cases, first
edition, ch: 8 p.144.145
12. Appendix
In MN HK$ millions
1. PROFITABILITY RATIOS:
2. EFFICIENCY RATIOS:
3. LIQUIDITY RATIOS:
4. GEARING RATIOS:
5. INVESTMENT RATIOS:
C. Calculation of ratios
Profitability Ratio
1. Return on shareholders funds
(ROSF) = Net profit after tax & preference dividend * 100
Ordinary Share Capital + Reserves
2. Return on Capital Employed (ROCE) = Net profit before interest and tax * 100
Share Capital + Reserves+ Long term liabilities
3. Net Profit margin = Net profit before interest and tax * 100
Sales Revenue
Efficiency ratios:
Liquidity ratios
Gearing Ratio
Since they don’t have a long term liability (no borrowings) gearing won’t occur.
2 1 nil
Investment ratios
1. Dividend payout ratio = Dividend announced for the year *100
Earning for the year available for dividends
= 51 % = 65% = 60 %
53.75 63.40 95
2.79 3.09 4.22