7BUS2101 Accounting and Finance for International Business Assignment Sample
Evaluate the financial performance of ASOS Plc
| ASOS Plc | |||||
| Particulars | Formulas | 2022 (£m) | 2021(£m) | ||
| Profitability ratios | |||||
| Gross profit margins | (Total sales – COGS/Total sales*100) | 44% | 45% | ||
| Sales | 3,936 | 3,910 | |||
| COGS | 2,219 | 2,134 | |||
| Net profit margin | (NP/Sales) | 1% | 3% | ||
| net income | 30.80 | 128.40 | |||
| Net sales | 3,936 | 3,910 | |||
| Liquidity ratios | |||||
| Current Ratio | (CA/CL) | 1.49 | 1.56 | ||
| Current Assets | 1,554.00 | 1,559.00 | |||
| Current liabilities | 1,040.00 | 998.00 | |||
| Quick Ratio | 0.46 | 0.75 | |||
| Current assets | (CA-inventory)/CL | 1,554.00 | 1,559.00 | ||
| Inventory | 1,078 | 807 | |||
| current liabilities | 1,040.00 | 998.00 | |||
| Efficiency Ratio | |||||
| Asset Turnover Ratio | 394 | 559 | |||
| Net Sales | Net Sales / Average Total Assets *365 | 3,936 | 3,910 | ||
| Average Total Assets | 10 | 7 | |||
| Inventory turnover ratio | 16.38 | 15.52 | |||
| Cost of Goods Sold | Cost of Goods Sold / Average Inventory | 2,219 | 2,134 | ||
| Average Inventory | 136 | 138 | |||
| Solvency Ratios | |||||
| Debt Ratio | 0.66 | 0.64 | |||
| Total Liabilities | Total Liabilities / Total Assets | 1,982.00 | 1,851.00 | ||
| Total Assets | 2,997.00 | 2,885.00 | |||
| Debt to Equity Ratio | 1.95 | 1.79 | |||
| Total Liabilities | Total Liabilities / Total Equity | 1,982.00 | 1,851.00 | ||
| Total Equity | 1,015 | 1,034 | |||
Table 1: Financial Ratios
Interpret the ratios to evaluate the performance of a company
Ratios are important financial metrics that provide insights into the relationships between elements of a company’s financial statements. Evaluating ratios analyze and interpret various aspects of business performance, financial health and efficiency (Ningsih, 2019). The current study evaluates the financial ratio for two years 2022-21 to identify the financial performances of ASOS plc. Metrics such as inventory turnover and accounts receivable turnover help evaluate the way that the company efficiently manages its assets and liabilities. The financial ratios allow for the comparison of a company’s performance with industry averages or competitors. This helps to identify areas of strength or weakness. Ratios provide management with valuable information to make informed decisions (Arsyad et al., 2021). For example, analyzing the return on investment may help in deciding whether to pursue a particular project. Financial ratios are often used in financial modelling and forecasting to estimate future financial performances and make informed business plans. Based on evaluations, the current market revenue of ASOS plc is depicted as £3936.5m (Annualreports.com, 2023). Despite this, the UK delivered good revenue growth for the year of 7% to £1762.8m and the performance of Topshop’s brands remained strong throughout the year. This is because the company continued to grow its share of the adult online apparel market by 10.1% in FY22., while premium consumers also grew 6%. It has been identified that amid FY22 consumers faced huge cost-of-living challenges (Batrancea, 2021). Therefore, the company noted an improvement in H2 as delivery disruption eased and ASOS has been able to return more normalized delivery propositions.
The above computation depicts the financial ratio of ASOS plc consisting of profitability, Liquidity, Efficiency and Solvency.
Gross profit margins: Gross profit margin is a financial metric that expresses the percentage of revenue that exceeds the cost of goods sold. It is the key indicator of a company’s profitability and operational efficiency (Bordeianu, 2020). The above computation of financial ratio depicts the lower profitability performance of 44% in the current FY22 as compared to last year. This is because the cost of producing or purchasing goods is high and significantly impacts the gross profit margins. Poor gross profit margin suggests that the company is retaining a smaller percentage of its revenue to cover operating expenses and generate profits (Tumanggor, 2020). Investors may view the sign of lower profitability as potentially affecting the attractiveness of the investment.
Net profit margin: Net profit margin is a financial metric that represents the percentage of revenue that remains as profit after all operating expenses. The above computation depicts the lower net profit margins by 1% in FY22 as compared to last year. This is because of the difference between revenue and COGS. As a result, investors often use profit margins to assess the financial health and efficiency of a business.
Liquidity ratio
Current ratio: The current ratio is a financial metric that measures a company’s ability to cover its short-term liabilities with its short-term assets. The above calculation depicts the current ratio defining its poor liquidity in the current FY2022 by 1.49 times as compared to 1.56 of last year. This is because of huge dues and short-term loans as well as operating expenses acquired by the company (Mao, 2023). Low liquidity generates prominent risk and distress faced by investors while investing in particular projects.
Quick Ratio: The quick ratio provides a more stringent measure of a company’s liquidity than the current ratio because it excludes inventory that may not be as easily convertible to cash in the short term (Le et al., 2020). The computation of the quick ratio reflects its poor performance by 0.46 times as compared to last FY21 by 0.75 times. This is because of huge obligations that are due within the next years as debts, and accounts payable. It generates a huge impact on investment such as incurring a high level of financial risk.
Efficiency ratio
Assets turnover ratio: the assets turnover ratio indicates good efficiency in current FY22 by 394 days as compared to last year. This is because Asos Plc can transform its liquidity assets into cash. It generates a positive impact on company investment, investors often view companies more favorably and have better decision-making.
Inventory turnover ratio: The higher turnover ratio mainly indicates important financial metrics to help measure the operational efficiency to manage inventory effectively (Steedman, 2019). The above computation of the efficiency ratio depicts the poor efficiency in managing cash and assets benefits into revenue as 16.38 days in FY22. This is because the company fails to sell its inventory quickly and efficiently. However, investors may face disruptions in decision-making for further investment within any projects.
Solvency
Debt ratio: it is an important financial metric that provides insights into the proportion of company assets. The above computation depicts the overperformance of assets and liabilities within Asos Plc by 0.66 times as compared to last FY2021. This is because of huge financial risks and burdens while balancing capital structure. It generates a huge impact on investment such as reducing the attractiveness of investors can potentially impact returns.
Debt to equity ratio: it is an important financial metric that helps to compare the total debt to the total equity of Asos Plc. The computation depicts the good performance as 1.95 times as compared to last FY2021. This facilitates a huge impact on investors such as gaining short-term investment benefits, and additional paid-up capital for a better financial structure of the company.
Furthermore, various limitations of the ratio have been analyzed as it simply complex financial information into a single number which oversimplifies the financial health (Kliestik et al., 2020). The financial ratio is often based on historical cost accounting principles that may not reflect the current market conditions. Similarly, the comparisons may be distorted whether Asos plc adopted different methods for revenue recognition.
References
Annualreports.com, 2023. Financial performance. [online] Available at: https://www.annualreports.com/HostedData/AnnualReports/PDF/LSE_ASOS_2022.pdf [Accessed on: 20-11-2023]
Arsyad, M., Haeruddin, S.H., Muslim, M. and Pelu, M.F.A., 2021. The effect of activity ratios, liquidity, and profitability on the dividend payout ratio. Indonesia Accounting Journal, 3(1), pp.36-44.
Batrancea, L., 2021. The influence of liquidity and solvency on performance within the healthcare industry: Evidence from publicly listed companies. Mathematics, 9(18), p.2231.
Bordeianu, G.D. and Radu, F., 2020. Basic Types of Financial Ratios Used to Measure a Company’s Performance. Economy Transdisciplinarity Cognition, 23(2).
Kliestik, T., Valaskova, K., Lazaroiu, G., Kovacova, M. and Vrbka, J., 2020. Remaining financially healthy and competitive: The role of financial predictors. Journal of Competitiveness, (1).
Le, M., Hoang, V.N., Wilson, C. and Managi, S., 2020. Net stable funding ratio and profit efficiency of commercial banks in the US. Economic Analysis and Policy, 67, pp.55-66.
Mao, R., 2023. Verify the Relationship Between a Company’s Earning per Share, Return on Equity, Return on Asset, Sales Growth, Price to Earning Ratio, Current Ratio, Gross Profit Margin, Quick Ratio, Asset Turnover and Its Stock Price. In SHS Web of Conferences (Vol. 163). EDP Sciences.
Ningsih, S. and Sari, S.P., 2019. Analysis of the effect of liquidity ratios, solvability ratios and profitability ratios on firm value in go public companies in the automotive and component sectors. International Journal of Economics, Business and Accounting Research (IJEBAR), 3(04).
Steedman, I., 2019. Natural prices, differential profit rates and the classical competitive process. In From Exploitation To Altruism (pp. 98-116). Routledge.
Tumanggor, M., 2020. The influence of current ratio, quick ratio and net profit margin on return on assets at PT. Hero Supermarket Tbk. PINISI Discretion Review, 3(2), pp.137-146.
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