Analysis Of The Financial Report Of Burberry Finance Essay

Analysis Of The monetary discip lineage Of Burberry Finance EssayIn this section we ar considering the Annual Report 2009-10 of Burberry and will compare Burberrys mental process in this year with the previous years.When m unmatchedtary year 2009-10 started i.e. April 2009, Burberrys primary(prenominal) issues of concerns were anemic and gameyly uncertain consumer spending environment (because of prevalent recession). Following which groups main goals were establishedExpense ReductionWorking roof ManagementIndeed, they succeeded up to a remarkable level under intimately strategic, ope equalisernal and monetary measures. Performance of Burberry was among the best relative to its peers either public or private.Highlights of Burberrys pregnant strategic and opeproportionnal decision in 2009-1050 M live efficiency program-helped in reduction of Cost of gross salesUpgrading wholesale statistical distribution and restructuring the opeproportionns in SpainTo maximize make M argin, continued to reduce pastiche size across categories-resulting in attach Gross Margin from 52.1 % to 59.7% alter inventory counseling- inventory decrease 36% over yearAdded 21 stores with 9% space extensionThese mentioned decisions helped Burberry perform cockeyedly in 2009-10 and resulted in improved monetary strength. Key fiscal strengths during the flow are essence revenue issue 7%- Revenue 1.3bn alter run gelt increased 22% 220M increase thin out adjusted EPS increased 16% to 35.1pFinancial RatiosFinancial ratios are widely used be managers, deal outholders, creditors and analysts for either kind of purposes. Firth (1975) proclaimed that these can be used for ii purposes. These areTo compare companions latest performance with its performance in earlier periodsTo acquit similitudes with corresponding ratios of other(a) firmsFollowing is an analysis of the companys financial ratios and a comparison with the preceding year and its peersProfit mightiness Rati osReturn on Capital diligent (ROCE) chemical formula Net scratch out front task/ (All divisionholders fund + farseeing confines debt)Significance Profits bring in from the 2 major sources of chip in for the company viz. investment by allocateholders- divideholders fund and financial institutions mostly- presbyopic term debt.The effectiveness of the management in utilising the bills is indicated by ROCE. The restitution for the FY 2009-10 is 26.03%. It shows a profound change when compared to the previous years return of ostracize 2.78%. A quick glance at the operating earnings for the brook two years reveals the reason behind such a oversized leap forward. The company has performed tremendously in the last financial year. From an operating LOSS of 9.9M for the year ended 31 March 2009 to a profound operating PROFIT of 171.1M for the year ended 31 March 2010, shows the in effect(p) and effective measures the company had adopted over the year. Even if the compar ison is make between adjusted operating profits (after considering the exceptional items) for the last two years, we can see a significant difference of 39.1M (219.9-180.8). All of this shows that the commerce is effectively earning on officeholders fund and long term debt generated.Ratio conventionalitySignificanceNet marginNet profit before tax/ Total revenueThe net profit percentage on the perfect revenue earned for the financial yearGross marginGross profit/ Total revenueThe gross margin percentage on the revenue earned for the financial yearIt is the one of the most unremarkably used profitability ratio. It shows the net margin with respect to the amount of sales. In 2010 it got increased from -1.34% (2009) to almost 13%. In 2009, Burberry reported negative profit i.e. passing game. Main reasons behind this wereHigh Cost of Sales in 2009 (12.5 % high than 2010)Higher operating cost (6.71%)in 2008-09 which was mainly because ofGoodwill impairment in global grocery store(m ainly Spain) 116.2 millionRelocation of headquartersStore impairment and severe lease provisionsIncrease in NPM shows that Burberry has controlled its costs effectively in 2009-10. It demonstrates effectiveness of Burberry at converting sales into actual profit.Gross Margin on that point is an increase from 55.41% (2009) to 62.82%. It shows that Burberry has increased its gross profit by 7.4 p per 1 of turnover. It is because of higher sales and low cost of sales in 2010.Sales Growth mandate (Present sales- Previous sales) / Previous salesSales increased from 1200M (2009) to 1280M (2010) i.e. an increase by almost 7%.Adapted Burberry Annual Report 2009-10Sales growth is one of the KPIs. The above graph shows the revenue earned by Burberry in the last five years. The overall growth shows the increase campaign followed by the company in spite of its macro- economical conditions. This proves the companys ability to start the market be a luxury brand.Liquidity RatiosThey show the companys ability and the ease with which it can lay its hands on liquid funds. In other words, these ratios signify the liquidity position of the company. The main components of these ratios are the incumbent assets and afoot(predicate) liabilities which are withal the factors that check up on the working ceiling of the company. on-going Ratio canon Total Current Assets/ Total Current LiabilitiesThis is the one of the best known measures that indicates the liquidity position of the company. There is an increase in Current Ratio in 2010 as compared to 2009 which indicates that Burberry has improved its ability to regard the payment schedule of its current debts. The change from 1.361 in 2009 to 1.531 in 2010 shows the efficiency in working capital requirements. Having current assets analogous to 1.53 times of current liabilities shows a moderate approach from the management not being too aggressive by holding less current assets nor too conservative by holding more current a ssets lede to high opportunity cost.Quick Ratio/Acid TestFormula (Total current assets- pedigree)/total current liabilitiesIt measures companys ability to meet short-term obligations with its most liquid assets. An acceptable ratio should be at least 11. withal in 2009 it was .87 which is not sufficient. An increase from .87 to 1.2 over a period of one year demonstrates that Burberry has stronger liquidity position than it had before.Shareholders POVCollier (2009) state thatDividends are a decision make by directors on the basis of the balance of profits they want to distribute and capital needed to be hold in the short letter to fund growth. (p.114)Shareholders invest in a companys air with the motive of higher returns through dividends or capital gains. The idea of put in the shares of a company may give higher returns compared to the other secure investments ilk bank building. However, the gamble is also more. The investors measure the prospects of a stock under variou s scales. Few of them are as followsDividend per share (DPS)Formula Dividends paid/ second of sharesOften DPS is the measure of a companys performance because it indicates how utile a company is over a period of time. In Burberrys case, its smooth performance is reflected through the increase in the dividend per share paid to shareholders.As at 31st march 2010, Burberry had 435,024,782 ordinary shares, of which 77,215 were held as treasury shares, shares that set about been bought back by the issuing corporation and is available for retirement or resale it is issued but not outstanding it cannot vote and pays no dividends. (http//wordnetweb.princeton.edu/perl/webwn?s=treasury%20shares)As per yearbook report, Burberry has proposed dividend of 45.7M, which is 20% higher than last year (37.7M). This increases its dividend per share to 10.5p from 8.65p. It also increased interim dividend, which is declared and distributed before the calculations of companys annual earnings, per sh are slightly from 3.35p to 3.50p during year. So, the total dividend per share is 14p for the year ending 2010 giving a 17% increase from 12p in 2009.Dividend YieldFormula Dividend per share/ market shelter per shareIt shows the relationship between dividends and market share by expressing a companys dividend as a percentage of its share price. However, dividend yield fluctuates with share price.Burberrys shares price was 276.25 on 27 March 2009 and 725.00 on 1 April 2010. (http//www.google.co.uk/finance?client=obq=LONBRBY)Using its share price value at financial year end, dividend yield is 1.93% in 2010 and 4.3% in 2009. This need not contain that Burberry has decreased its value in investors eye. This fall is because of 163% increase in share price of Burberry, which made increase in dividend less significant.Dividend Payout RatioFormula Dividend paid / (profit after tax i.e. net income) or the ratio of dividend per share and earnings per share.It helps in predicting how well ea rnings support the dividend payments. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer demoralise payout ratio because capital gains are taxed at a lower rate. (http//en.wikipedia.org/wiki/Dividend_payout_ratio)For 2010 it is 14/36 = 38.88 % 2009 12/31= 39.2%It is almost similar in both years, which shows that Burberry is maintaining the balance between sideline of shareholders and expansion of business.Earnings per share (EPS)Formula profit after tax or net earnings/ telephone number of sharesBurberry calculates EPS on the basis of both diluted and basic. When all convertible securities such as convertible preference shares, convertible debts, convertible debentures and warrants exercised number of outstanding shares increases. This is called cut weighted average number of shares, the basis of Diluted EPS.As number of outstanding shares increases, Diluted EPS is always lower than sanctioned EPS. It is more complete to use aDiluted EPS over the reporting term because thenumber of shares outstanding can change over time (We can remark this in annual report that Burberry has always mentioned diluted EPS).In 2010, Diluted weighted average number of shares was about 442 million with dilution effect of 9.3 million. In 2009, it was 438.1 million with dilution effect of 6.8 million. Earnings were 81.4 million in 2010 as compared to loss of 6 million in 2009, because of reasons mentioned before. This leads Basic EPS to 18.8p (-1.4% in 2009) and Diluted EPS to 18.4p (-1.4% in 2009).Using details of exceptional items in note 4 of annual report 2009-10, adjusted earnings are 155.2million and 132.1 million for 2010 and 2009 respectively. This leads to Adjusted Basic EPS to 35.9p (30.6p in 2009) and Adjusted Diluted EPS to 35.1 (30.2 in 2009).Increase in Adjusted Diluted EPS by 17 % is mainly because of 17 % increase in adjusted profit as weighted n umber of shares is almost same. This increase represents better performance of Burberry in 2009-10.Price-Earnings (P/E) RatioFormula Market value per share/ EPSIt is the valuation of companys current share price compared to the per share earnings. This ratio reveals the popularity of a stock because it reflects how much people are willing to pay for it (http//library.thinkquest.org/3298/NoFrames/help/glossary.html).The P/E ratio can be see as number of years of earnings to pay back obtain price, ignoring the time value of money (http//en.wikipedia.org/wiki/P/E_ratio).For 2010 P/E ratio is 725/35.9= 20 and for 2009 it is 276/30.1= 9.2There is almost two times increase in P/E ratio. This is because of increase in share price by 163%. This increase makes Burberrys stock more attractive than previous year.Bottom lineThe above analysis from a shareholders POV leaves an overall positive impact on the investors or the potential investors. Considering the shareholders return, profitabilit y, growth rate the company has been maintaining and the increasing trend in the share value, it would be more than likely a voguish decision to invest in the Burberrys stock. adapt effectTools usedGearing ratio long-term debt/ (shareholders funds + long-term debt)This ratio gives the proportion of funds which is borrowed from outside in the entire capital employed, than from the shareholders (through issue of shares). This is also called the supplement ratio. The method of introducing debts in place of right is referred to as trading on truth leverageCollier (2009) states thatHigher the gearing, higher is the burden on repaying the debts and the associated use up. Also, if profits turn down, there are substantially more danger of films carried by the highly geared business. (p.108)However, there is a relationship between take a chance and return which is to be analysed. Higher proportion of long term debt signifies two issuesHigher return for shareholdersLess tax burdenBurb erry in 2009 has a gearing of 52.72%. For the year ending 2010, it is 43.06% i.e. 56.94% of equity. This shows that their almost half of the sources of finance is through long term borrowings. The effect of generating finance through debts than through equity is shown on the return the shareholders are enjoying. It also shows the company has been closely observe tax burden. This is because the provision made for the interest obligation/payment is reflected in reducing the profits, thereby a lower tax on lower profits.However, the debts carry with them the interest obligation and repayment commitments. This way the company has been act to balance between debt and equity. In the financial year 2009-10, the company has reduced its debt content trying to be a little conservative. The capital structure can be considered to be moderate.Interest ensure Profit before interest tax/ interest payableThis represents the profit available, to meet the interest obligation, in terms of the int erest payable (number of times). Higher interest hatch leaves less strain on the profits and giving a relent with profit AFTER interest and before tax.Profit before interest and tax Interest payableFor 2010 171.1M 6.2MFor 2009 (9.9) M Loss 13.4MInterest cover for the year 2009-10 is 27.6 times. This is a highly impressive cover leaving a comfortable position. Considering the loss in the previous year and still maintaining this is real efficient. The decrease in interest commitment this year can be related to the reduction in the debt content of the capital structure (gearing ratio).Financial chance Management OverviewBurberry deals with variety of financial instruments viz. derivatives, short term and long term borrowings, trade receivables/payables etc. It also combines with variety of financial risks. However, the risk management is carried out by a dedicated base Treasury under the approval of Board of Directors.Guidelines/ ToolsTo reduce the financial risk and ensure suf ficient (OPTIMAL) liquidity positionWork closely with the business requirementsUses derivative instruments to hedge certain risk exposuresMarket Risk outside Exchange RiskRisk Multiple foreign bills transactions because of inter topic operationsTools/PoliciesEntering into forward foreign exchange contracts defer anticipated change flows in each major foreign currencyMonitor the desirability of hedging the net assets of the overseas subsidiaries when translated into Sterling for reporting purposes.At 31 March 2010, the Group has performed sensitivity analysis to determine the effect of non-Sterling currencies strengthening/weakening.Price RiskRisk Fluctuations in employers national insurance liability due to movements in the share price.Tools/PoliciesEntering into equity flips at the time of granting share options.Monitor the fluctuations in the liability on a continuous basis.Cash flow interest rate riskRisk Fluctuations in the interest rates.Tools/PoliciesUse interest rate swap derivatives to manage fixed and floating rate borrowings within limits.Credit RiskRisk Possible bad debts.Tools/PoliciesWholesale sales only with remove credit history/check.Retail sales only through exchange or major credit cards.Maximum credit risk exposure is classified separately and attended.Liquidity RiskRisk Maintaining sufficient cash balance.Tools/PoliciesMaturity profile is established All short term creditors, accruals, bank overdrafts and borrowings within one year.Compliance with all the committed banks credit guidelines.Capital RiskRisk Returns to shareholders and other stakeholders Maintain Going concern.Tools/PoliciesMaintain strong credit rating.Appropriate capital structure mix debt and equity.Adjustments according to the economic changes and its strategic objectives.Analysis of the aboveAll of the above represents the measures adopted by Burberry to meet the Financial Risks. The company having a dedicated risk management team in order to face the risks gives a confidence in the minds. However, they should be continuously aware of the fact that a large incorporated like Burberry will have to attend to growing/new risks by anticipating well in advance. They may include a deeper analysis in the following areasWorking capital cycle Inventory management, EOQ/JIT methods, optimum cash model.Financing needs. Other sources of finance can be analyzed like debt factoring.Capital budgeting decisions before expanding or investing on a project.WACC burthen average cost of capital is to be considered before deciding the capital structure. Comparisons with the market rate and interest rates prevailing.The overall financial risk management shows the companys ability to address almost all the possible risks expeditiously and effectively.ConclusionWith comparison to most of the essential parameters, it can be reason out that Burberry plc showed a promising performance in the last completed financial year 2009-10. Not just with regard to the financial performance, but also in satisfying the shareholders with competent returns. A birds eye view shows the company has made a great comeback this year with a significant profit. However, a deeper penetration/analysis into the last year financials reveals that the loss made in 2008-09 is because of high cost of sales with a difference of 59.8M compared to the youthful year, goodwill impairment charge to the extent of 116.2M, relocation of HQ be around 7.9M and other expansion charges.Also, the above report shows the companys transparency in complying with the Corporate Governance and commitment in attending to its Corporate loving Responsibility, employees welfare etc. Burberry showed continuous interest in brand integrity, being a true leader in luxury brands, and market growth through expansion. Indeed, highly motivated. All this leads to only reaffirm the companys continued efforts in excelling beyond horizons among its peers financially, ethically, and morally