Financial report of Burberry

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This study will carry out a restricted analysis on Burberry Business. The study analyzes and interprets the company's financial position and makes decisions on the basis of monetary status. The essay would also cover the company's business, clients, brands, plans, history, and context. This will form the basis on which investors will focus when making a financial decision. The related statements of accounts shall contain the statement of revenue and the financial statement. On the basis of Burberry's paper, an outline and statement were made on the four ratios of earnings per share, gearing, return on capital employed and gross profit margin.

Background of Burberry

The company was established in 1856 with the objective of focusing on the attire that was meant for outdoor activities. Since then it has diversified and is now manufacturing trench coats, pattern based scarves, and other accessories. For now, the company has established and now manufactures cosmetics, sunglasses, fragrances, fashion accessories and ready to wear outwears (Burberry Limited 2017).

The organization designs and manufactures commodities under the brand Burberry. The companies headquarter located in London.  Some of the material that the company uses are brought in from external and supplier’s network, or the company owned facilities.  Burberry commodities are sold through an online and stores at the company’s website (burberry.com). Burberry employs more than 11000 who are located globally.

 The competitive environment of luxurious commodities puts the company in a tight situation when it comes to increasing global sales.  In this context, Burberry Inc. has embarked on accelerating efficiency and productivity agenda.  The organization has a strong brand; it is driven by innovation and heritage. The company’s future focus is to continue strengthening the brand so as to maintain and gain more customers all over the globe. The company offers products with strength in both fashion and heritage (Burberry Limited 2017).

From the financial information, Burberry has shown a consistent growth but there is, however, still a chance to increase the company’s end to end retail as part of the push to continue market expansion and even reach potential customers in other parts of the world. When it comes to the long-term plans, Burberry has identified programs that will see it cut costs by at least 100 million euros by the year 2019 (Burberry Limited 2017). This will be equal to the 10 percent of the organizations operating expenses when depreciation and fixed rent is deducted, while the company maintains its position as the market leader in the digital sector. The company continues to expand and use this digital platform to expand the market. Recently the focus has been on continuing to grow its website Burberry.com through driving penetration of e-commerce and increasing conversation; this will be achieved by introducing furthering investments in other places such as Asia and introducing the customer application. 

Burberry's website is well structured to meet customer’s needs; it has the best navigation system that directs clients to lookbook information, e-commerce, and digital content. All the products produced by the company are embedded with the digital chips.  The chip is meant to inform the customer about the commodity creation. This strategy is also used to market the company’s commodities.

Liquidity Ratio

This ratio determines the firm’s ability to meet debts when they fall due. A higher liquidity ratio implies that the company has more cash to meet operations. When a company is unable to meet its financial obligations may consider being insolvency and it will have poor credit worthiness. When looking at Burberry financial information, it is clear that the significant asset is fixed assets. 

The Current Ratio

This ratio is determined by finding the ratio of the current asset to current liabilities.  The standard ratio is 2:1; that is assets to liabilities.

2016

2015

Current ratio= 2254.92/ 813.03=2.77

Current ratio 2152.8/ 937.29=2.30

 

Burberry, the company, has fulfilled the minimum ratio of 2:1 this implies that the company is operating efficiently and can, therefore, meet its financial obligations. There was an increase in the current ratio from 2.30 in 2015 to 2.77 in 2016 implying that financial security increased (Amigobulls 2017).

Acid-test Ratio

This acid test ratio measures the firm’s ability to pay its debts when they fall due. This is the ratio of the current asset to current liability after deducting stock. Having a satisfactory current ratio does not mean that the acid test ratio will be favourable (Bragg 2014, p. 107).

2016

2015

Acid Test Ratio= (2254.92-734.14)/ 813.03=1.87

Acid Test Ratio=(2152.8-704.58)/ 937.29=1.55

 

Burberry acid test ratio slightly increased 0.32. The ratio was above one implying that it was operating above capacity. Suppliers can thus have confidence in this company because they will receive their payments when they fall due. This is a good indicator because it signifies that company’s financial strength and the capability of the organization to pay debts.

Profitability Ratio

The profitability ratio indicates business’s capacity to minimize its expenses and generate enough revenue. The profitability ratio indicates the firm's overall performance and efficiency. The ratios are split into two return and margins. Burberry profitability ratio is important to the investors in gauging the ability of the company to use their capital to generate returns (Burberry Limited 2017).

Return on Capital Employed

This ratio indicates the efficiency with which an institution can use the permanent assets or long-term funds to generate more returns for the shareholders. Return on capital employed gauges the management’s ability to generate revenue from the company’s large pool of capital (Horngren, Harrison, and Thomas 2014, p. 304).

Profit before operating interest/aggregate employed capital=Return on capital employed

Capital employed= current assets current liabilities

Capital employed 2016 =2254.92-813.03=1441.89

Capital employed 2015=2152.8-937.29=1215.51

2016

2015

Return on capital employed= 630.21/ 1441.89=0.43

Return on capital employed=710.55/ 1215.51=0.58

From the above information, the ability of the firm to use long-term funds to generate returns revenue slightly declined from 0.58 in 2015 to 0.43 in 2016.  The management's ability to generate revenue from a large pool of capital seems to be dropping.

Gross Profit Margin

The gross profit ratio indicates the firm’s financial capacity that is the excess money after subtracting costs. Gross profit ratio is determined by dividing the gross profits over the aggregate revenue.

Gross profit margin=gross income/aggregate revenue

2016

2015

Gross profit Margin= 1134.32 / 3793.19* 100=2.99%

Gross Profit Margin = 2849.16/ 4071.94* 100=6.99%

Burberry gross profit ratio declined for 6.99% in 2015 to 2.99% in 2016. This is a significant problem to this profit generating firm. The declining gross margin ratio was caused by an increase in operational costs. It was also caused by declining revenue. This indicates a downfall in this market because Burberry is supposed to generate enough revenue so as to pay dividends and retain some money for investment. Based on this ratio investors can lose confidence in the firm.

Gearing Ratios

These ratios indicate the company's financial risks (the probability that the company will not service is debt). If a company has more debts, it implies that it will have a higher financial risk. This ratio indicates the amount of financial leverage that the firm has. There are a couple of gearing ratios that includes the debt ratio and the dues to equity ratio, a higher the gearing ratio implies there are higher risks that the company faces.

Debt Ratio

Debt ratio indicates the proportion of the debt finance to the overall employed capital of the firm. If the ratio in any given year is more than 50 percent, then the company is highly geared.

Debt ratio=total debt/employed capital

Capital employed= current assets-current liabilities

Capital employed 2016 =2254.92-813.03=1441.89

Capital employed 2015=2152.8-937.29=1215.51

2016

2015

Debt ratio= 231.99/1441.89*100=16.1 %

Debt ratio = 225.93/1215.51*100=18.59%

 

Burberry has been operating efficiently since the ratio remained below 50 percent. The ratio also declined to imply that the company is not at financial risks and can, therefore, service its debt without much problem. Burberry is not depended on leverage funds (the funds owed and borrowed from others).

Debt to Equity Ratio

This ratio indicates the percentage of the non-owners to the total owner's funds. If the company is highly geared, the ratio of this company will be 100 percent. The debt to equity ratio designates how the institution is using the debt to finance the company’s asset about the owner’s equity.

2016

2015

Debt to  equity ratio= 231.99/2444.98*100=9.49%

Debt to equity ratio = 225.93/2342.43*100=9.65%

From the above 2015 and 2016 ratios, the company has financed its operations using the shareholder's equity as compared to debt. This is a good indicator putting in mind that the company will spend less money servicing debts while a greater portion will go to shareholders’ dividends. There was also a slight decrease from 9.65 percent in 2015 to 9.49 percent in 2016 indicating that Burberry reduced debt equity (Amigobulls 2017). 

Earnings per Share

This is the percentage of after tax-yield that is allotted to the company’s shareholders. Earnings per share show the aggregate company’s profit on each share basis. This ratio is determined by dividing the earning that is attributed to the equity shareholders by the total number of equity owners.

Earnings per share =earning that is attributed to the equity shareholders/ aggregate value of equity shares (Horngren, Harrison, and Thomas 2014, p. 329).

2016

2015

Earnings Per Share=0.99

Earnings Per Share = 1.18

From the above information, there was a reduction in earnings per share from 1.18 in 2015 to 0.99 in 2016. The earnings per share are quite important because it reveals the financial health of the company. From the reduction, it is indicating that Burberry’s financial health is declining. The drop was caused by increase costs or a decline in the company’s revenues. The company ought to streamline its processes so as to continue generating more profit and paying shareholders higher dividends.

Activity Ratio

Activity ratios indicate the efficiency at which the firm uses fixed assets to generate revenue.  Activity ratios are also known as turnover ratios and indicate how the company’s assets can be converted into the total sales.

Fixed Asset Turnover

Fixed asset turnover indicates the sales that can be generated by the company’s fixed assets. When the ratio is high, it indicates that the company is efficient in managing the fixed assets. A lower ratio indicates that a company is underutilizing assets.  The fixed asset turnover proportion is determined by dividing the aggregate sales by the number of fixed assets. 

2016

2015

Fixed asset turnover=642.88/3793.19=0.17

Fixed asset turnover = 704.42/4071.94=0.17

From the above information, the fixed asset ratio of the company remained the same (0.17). This indicates that Burberry did not create extra value using its assets. The ratio indicates that the company has been underutilizing its sales.

Recommendation

The above information has proved Burberry's overall performance and certain area that need improvement. The liquidity ratios (acid test and current ratios) indicate that Burberry is operating efficiently. This ratio is importance because it gives a clear picture of the company to stakeholders especially the creditor.

The gearing ratio also indicates that the company is operating well. In both the two years Burberry has managed to maintain the gearing ratio below 50%. Which is a good sign, however, efforts should be channelled towards reducing debt equity because it drains the cash flow when servicing the debts.

The company’s EPS reduced from 1.18 in 2015 to 0.99 in 2016. This is a dangerous trend because it reduces shareholders confidence in the company.  Burberry should strengthen its cash inflow and at the same time reduce costs. Such a scenario will make sure there is enough profit after to pay the dividend. There has been consistency in most ratios, and the company seems to be doing well.

Conclusion

Burberry should focus on developing and deploying unique resources that will compete favourably thereby generating more revenues that will help strengthen the company’s financial base. The company should focus on capitalizing on enhancing the product lines such as perfumes, cosmetic and wears. The diversification to these areas of operations will give the company a bigger market share which will, in turn, increase the revenues generated. Although the company’s diversity into the newer markets has had an impact on profitability, the success of the firm can be principally be accredited to its capabilities and exclusive resources, the company’s distributional, fabrication and managerial competencies have served as the institution's core achievements.

 

References

Amigobulls. (2017). Burberry group income statement for 2016, 2015. [Online] Available at: http://amigobulls.com/stocks/BURBY/income-statement/annual?t=ibc  [Accessed 16 Apr. 2017].

Bragg, S. (2014). Financial analysis: A business decision guide. Accounting Tools.

Burberry Limited. (2017). Burberry | Iconic British Luxury Brand Est. 1856. [online] Uk.burberry.com. Available at: https://uk.burberry.com/.

Horngren, C., Harrison, W., and Thomas, W. (2014). Accounting. 10th ed. Toronto: Pearson Canada.

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