Financial Accounting Session 17 Prof Ankur Mehra, PhD Spring 2019 Semester Office: C – 212 D | M: +91 9903831354 E: ankur.mehra@snu.edu.in School of Management & Entrepreneurship Shiv Nadar University Financial Ratios Financial Statement Analysis Fashion Financial Accounting | Term I | MBA | Shiv Nadar University 3 Fashion Retailer of fashionable clothes and accessories targeted at late Millennial generation and early Gen Z • Most locations are in shopping malls and on shopping streets like DLF Mall of India, Ambience Mall, Connaught Place etc • Presence in Top metro and Tier 1 locations – 126 stores in India – Owns most of its stores; no franchisees Financial Accounting | Term I | MBA | Shiv Nadar University 4 Fashion Strategy – Reputation as a fashion trend-setter in good quality clothes at premium prices • Designers work two-years in advance to create a stylish but basic “look” – Deep inventory of a limited number of items • New collection of styles every two months; older stock is sold quickly by slashing prices four times a year – Clothing is manufactured under “A&M” label • Over 150 suppliers; 48% in India, rest in Thailand and other countries • Strict quality standards and inspections – Most inventory is maintained at regional distribution centres • Point-of-sale scanners automatically re-order to re-stock retail stores Financial Accounting | Term I | MBA | Shiv Nadar University 5 Fashion Strong brand name – Extensive advertising and promotional campaigns – Celebrity endorsements like Anaya Pandey and Ishaan Khattar – Stores also have the same “look” with frequent rearranging of displays • Stable management team – Most still around from founding of company (Since 2008) • High growth in sales and earnings – Despite struggles in industry, labeled as “nation’s hottest retailer” by Vogue India – Most growth is due to new store openings – Stock price is INR 55 a share with a price-earnings ratio of 32 ππππππ‘ πππππ πππ πβπππ πππππ π‘π πΈππππππ π ππ‘ππ = ∗ 100 πΈππππππ πππ πβπππ (π΅ππ ππ) Financial Accounting | Term I | MBA | Shiv Nadar University 6 Threats of competition – Major retailers and other clothing chains have which offers similar lines of clothing like Cara, Lero Noda, etc • Future goals and plans – Maintain at least 30% ROE and 11% ROS – 20% sales growth Fashion • New store openings and enlargement of some existing stores – Capital expenditures of INR 200 million per year • Expansion into South-east Asia and Australia – Keep focus on core competencies in millennial fashion • But studying possible expansion into late Gen-Z and Kids market – Consider launching its own co-branded credit card by being in partnership with a Private Bank • Spur growth in sales Financial Accounting | Term I | MBA | Shiv Nadar University 7 Fashion Income Statement (in INR Millions) 2015 2016 2017 2018 2019 Sales βΉ 1,062.00 βΉ 1,252.00 βΉ 1,587.00 βΉ 1,934.00 βΉ 2,519.00 Cost of Goods Sold 654 814 1,009 1,190 1,499 Gross Profit 408 438 578 744 1,020 Selling, General, and Admin Exp 254 271 364 454 576 Operating Income before Depr 154 167 214 290 444 Depreciation and Amortization 25 31 38 52 70 Operating Profit 129 136 176 238 374 Interest Expense 4 3 3 1 4 Other Gains and Losses 0 7 10 0 -1 Pretax Income 125 126 163 237 371 Income Tax Expense 55 52 65 92 141 Net Income βΉ 70.00 βΉ 74.00 βΉ 98.00 βΉ 145.00 βΉ 230.00 Financial Accounting | Term I | MBA | Shiv Nadar University 8 2015 2016 2017 2018 2019 βΉ 67.00 10 248 40 365 528 144 384 28 βΉ 193.00 8 314 51 566 738 190 548 33 Balance Sheet (in INR Million) Cash and Equivalents Accounts Receivable, Net Inventory Other Current Assets Total Current Assets Gross PP&E Accumulated Depreciation Net PP&E Intangible Assets Total Assets Accounts Payable Taxes Payable Other Current Liabilities Total Current Liabilities Long-term Debt Other Liabilities Total Liabilities Total Stockholder's Equity Total Liabilities and Equity ASSETS βΉ 32.00 βΉ 63.00 9 6 195 193 23 13 259 275 234 286 77 95 157 191 18 32 βΉ 434.00 βΉ 38.00 6 244 29 317 352 114 238 25 βΉ 498.00 βΉ 580.00 2015 2016 LIABILITIES & EQUITY βΉ 68.00 βΉ 98.00 6 15 48 54 122 167 19 22 20 33 161 222 273 276 βΉ 434.00 βΉ 498.00 2017 Financial Accounting | Term I | MBA | Shiv Nadar University βΉ 94.00 15 75 184 21 37 242 338 βΉ 580.00 Fashion βΉ 777.00 βΉ 1,147.00 2018 2019 βΉ 115.00 βΉ 158.00 33 32 103 137 251 327 18 81 42 62 311 470 466 677 βΉ 777.00 βΉ 1,147.00 9 Statement of Cash Flows (in INR Millions) 2015 2016 2017 2018 2019 βΉ 125.00 25 0 9 -10 9 3 11 -14 -49 βΉ 126.00 31 7 3 2 10 30 6 13 -43 βΉ 163.00 38 10 0 -51 -16 -4 21 4 -63 βΉ 237.00 52 0 -4 -4 -11 21 28 5 -71 βΉ 371.00 70 -1 2 -66 -11 43 34 20 -140 109 185 102 253 322 Acquisition of PP&E Change in Intangible Assets -49 -18 -52 -14 -66 7 -176 -3 -210 -5 Net Cash from Investing Activities -67 -66 -59 -179 -215 Net Proceeds from Issuing Debt Dividends Interest Paid 7 -67 -4 3 -88 -3 -1 -64 -3 -3 -41 -1 63 -40 -4 Net Cash from Financing Activities -64 -88 -68 -45 19 Change in cash -22 31 -25 29 126 Operations Profit Before Tax Depreciation and Amortization Other Gains and Losses Chg. in Accounts Receivable, Net Chg. in Inventory Chg. in Other Current Assets Chg. in Accounts Payable Chg. in Other Current Liabilities Chg. in Other Liabilities Income Tax Paid Net Cash from Operations Financial Accounting | Term I | MBA | Shiv Nadar University Fashion 10 DuPont Analysis: Decomposition of ROE An important method to identify a company’s competitive advantages or disadvantages Financial Accounting | Term I | MBA | Shiv Nadar University 11 DuPont Analysis: Decomposition of ROE Ideally, ROA would measure operating performance independent of the company’s financing decisions • But, the numerator of ROA, Net Income, includes Interest Expense – More leverage => higher Interest Expense => lower Net Income • To truly remove all financing effects from ROA, we must de-lever Net Income • ROA = De-Levered Net Income / Avg. Assets – De-levered Net Income = Net Income + (1-t) x Interest Expense Financial Accounting | Term I | MBA | Shiv Nadar University Delivering Net Income No Debt Some Debt Pre-interest Income 300 300 Interest Expense 0 50 Pretax Income 300 250 Taxes (35%) 105 87.5 Net Income 195 162.5 Delivered Net Income 195 195 162.5+50*(1-0.35) 12 DuPont Analysis: Decomposition of ROE π ππ‘π’ππ ππ πΈππ’ππ‘π¦ π·π − πππ£ππππ πππ‘ πΌπππππ πππ‘ πππππ π΄π£πππππ πππ‘ππ π΄π π ππ‘π = ∗ ∗ πππ‘ πππππ π΄π£πππππ πππ‘ππ π΄π π ππ‘π π΄π£πππππ ππ‘πππβππππππ ′ πΈππ’ππ‘π¦ = πππ‘ ππππππ‘ ππππππ ∗ πππ‘ππ π΄π π ππ‘ ππ’ππππ£ππ ∗ πΉπππππππππ πΏππ£πππππ ππ’ππ‘ππππππ π ππ‘π’ππ ππ πΈππ’ππ‘π¦ = π ππ‘π’ππ ππ π΄π π ππ‘π ∗ πΉππππππππ πΏππ£πππππ ππ’ππ‘ππππππ Where, De-levered Net Income = Net Income + Income Tax Expense * (1 – Tax Rate) Financial Accounting | Term I | MBA | Shiv Nadar University 13 DuPont Analysis: Decomposition of ROE Ratio Analysis Return on Equity Return on Assets Financial Leverage Correction Factor Return on Assets Return on Sales Asset turnover A&M Fashion 2016 2017 2018 2019 Fashion Avg π ππ‘π’ππ ππ πΈππ’ππ‘π¦ = πππ‘ πΌπππππ ∗ 100 π΄π£πππππ ππ‘πππβππππππ ′ πΈππ’ππ‘π¦ π ππ‘π’ππ ππ π΄π π ππ‘π = π·π − πππ£ππππ πππ‘ πΌπππππ ∗ 100 π΄π£πππππ ππ‘πππβππππππ ′ πΈππ’ππ‘π¦ 27.0% 31.9% 36.1% 40.2% 33.8% 16.3% 18.5% 21.5% 24.2% 20.1% 1.70 1.76 1.69 1.68 1.71 0.98 0.98 1.00 0.99 0.99 6.1% 6.3% 7.5% 9.2% 7.3% 2.69 2.94 2.85 2.62 2.77 FLM= π΄π£πππππ πππ‘ππ π΄π π ππ‘π π΄π£πππππ ππ‘πππβππππππ ′ πΈππ’ππ‘π¦ π ππ‘π’ππ ππ πππππ = ∗ 100 π·π − πππ£ππππ πππ‘ πΌπππππ ∗ 100 πππ‘ πππππ πππ‘ πππππ Asset Turnover= π΄π£πππππ πππ‘ππ π΄π π ππ‘π ∗ 100 Where, De-levered Net Income = Net Income + Income Tax Expense * (1 – Tax Rate) Tax Rate = 40% Correction Factor = Net Income/ Delivered Net Income Financial Accounting | Term I | MBA | Shiv Nadar University 14 Industry Classification • NIC 2008 – National Industrial Classification for India Link - http://mospi.nic.in/classification/national-industrial-classification Section C Manufacturing Division 13 Manufacture of textiles Group 131 Spinning, weaving and finishing of textiles Class 1311 Preparation and spinning of textile fibres Sub-Class 13111 Preparation and spinning of cotton fibre including blended cotton • BSE and NSE Classification • Look at who analysts and data services use as comparisons for the company – Analyst reports will often mention competitors – Google Finance (and others) give a list of “Related Companies” • In the end, use your judgment on whether companies are competitors based on a detailed look at business and segments Financial Accounting | Term I | MBA | Shiv Nadar University 15 Thank You “Do you know what you are? You are a manuscript of a divine letter. You are a mirror reflecting a noble face. This universe is not outside of you. Look inside yourself; everything that you want, you are already that.” β Rumi
