Financial Analysis Of Specialty Fashion Group Limited (2015-2017)

Horizontal Analysis

Discuss about the Financial Analysis of Specialty Fashion Group Ltd.

Specialty Fashion Group Limited is an Australian listed company that operates as specialty retailer of the women’s fashion products. It operates several women’s clothing brands comprise of Miller’s Retail, Katies, Rivers, Crossroads, City Chic and Autography. Its miller brands is said to operate around 350 store while its Katies delivers clothing for all form of occasions, from the work wear and fashion pieces to denim and loungewear. On the other hand, its autography entails design, styling and filling plus-size women (Specialty Fashion Group Limited, 2017). The company has over 3 million members who are reached via email. It operates around 1,080 sites across Australia, United States, South Africa and New Zealand. With these considerations, the paper aims to present financial analysis of Specialty Fashion Group Limited over the last three financial years; that is, 2015, 2016 and 2017. This would be based on horizontal, vertical and ratio analysis.

Based on the horizontal analysis in Appendix 2, it is evident that the company experienced slight decrease in its assets, especially in 2017. Further, based on Appendix 4, it is evident that the company experienced slight decrease in its revenue in 2017 in comparison to 2016. Its gross profit also decreased over the same period with 3.03%. This decrease could have been attributed by relatively high cost of sales. In addition, the company net loss is said to have decreased over the period with a significant margin. Additionally, based on Appendix 6 below, it is evident that the company cash flows from the operating activities decreased in 2017. This trend was also observed in its cash from the investing activities. Nonetheless, the cash flow used from the financial activities increased with a significant margin in 2017.

From the vertical analysis in Appendix 3 and Appendix 5, it is clear that the company has been struggling over the years. This is evident by negative percentage of the net income over sales in the last three years.

Ratio analysis is considered as mathematical comparison of the financial statement categories or items. This assist in understanding how well an organization is performing. In other words, ratio analysis is one of the most widespread and common financial tool utilized in examining an entity’s financial standing (Daniel, 2015). It gives room to compare organizations across sectors, small and big, in identifying their weaknesses and strengths. In this case, financial ratios which would be analysed are categorized into profitability, gearing, profitability and efficiency ratios.

Vertical Analysis

Rate of return on net sales

The ratio helps in measuring proportion of the net profit or loss earned for every amount of dollar of sales. It is used in measuring profitability of an organization over a specified period. It is usually computed as;

Rate of return on net sales = Net income/total sales

As such return on net sales over the last three years was;

2015 =-0.56%

2016 = -0.27%

2017 = -1.04%

Rate of return on total assets

This ratio examines the relationship that exists between net income of the organization and its total assets (Daniel, 2015). It assists in measuring how efficiently the company utilized its assets in generating income. The ratio is computed as;

Rate of return on the total assets = Net income/total assets

As such the company ROA over the last three years was;

2015 = -2.06%

2016 = -1.00%

2017 = -4.14%

Asset turnover 

This ratio helps in assessing how efficient an organization is in using its assets. In other words, the ratio helps in assessing whether company management is efficient or effective enough in spending its assets in generating sales or revenue.

Asset turnover r= Sales/total assets

As such the company asset turnover over the last three years was;

2015 = 3.66

2016 = 3.78

2017 = 3.99

Rate of return on ordinary shareholders’ equity

The ratio examines relationship in between organization’s equity and net income. It is the measure of how efficiently an organization used its shareholders’ equity in generating income (Daniel, 2015). The ratio is computed as;

Rate of return on equity = Net income/total shareholders’ equity

As such the company ROE over the last three years was;

2015 = -6.82%

2016 = -4.13%

2017 = -19.03%

Earnings per share

This is the proportion of the organization’s income allocated to every outstanding share. It serves as the sign of an organization’s profitability (Daniel, 2015). It is computed as;

EPS = (Net income-dividends) average outstanding shares.

As such the company EPS over the last three years was;

2015 =-0.02

2016 =-0.01

2017 =-0.04

Working capital

This is the form of financial ratio used in measuring cash flow within an organization. In other words, it represent amount of cash capitalized in the resources which are mainly subject to speedy turnover (Daniel, 2015). The ratio is computed as;

Total current assets – total current liabilities

As such the company working capital over the last three years was;

Ratio Analysis

2015 = 14,988

2016 = 2,608

2017 = 2,568

Current ratio

This ratio is considered as the reflection of the financial strength. In other words, it is viewed as number of times an organization’s current assets is said to exceed the current liabilities. It is computed as follows;

current assets/current liabilities

As such the company current ratio over the last three years was;

2015 = 1.15

2016 = 1.02

2017 = 1.02

Acid-test ratio

The ratio is used in evaluating or testing whether an organization could be in a position to meet its key obligations even in adverse situations. It is the measure of whether an organization is capable of settling its debts using its most liquid assets.

This ratio is usually computed following this formula

 (current assets- total inventories)/total current liabilities

As such the company acid-test over the last three years was;

2015 = 0.26

2016 = 0.25

2017 = 0.23

Inventory turnover

The ratio is used in measuring number of times an entity turns its inventories into revenue (Faruk & Habib, 2010). It is computed as;

Cost of sales/inventories

As such the company inventory turnover over the last three years was;

2015 =3.68

2016 = 4.14

2017 = 3.92

Days in inventory

The ratio helps in assessing number of days inventories are sold or used within a year (Daniel, 2015). It is computed as;

Days inventory = 365/Inventory turnover

As such the company days in inventory over the last three years were;

2015 = 99.13 days

2016 = 88.20 days

2017 = 93.12 days

Gross profit percentage

This is the measure of the proportion of the gross income over total sales. It is also a measure of an organization’s profitability over time (Faruk & Habib, 2010). The ratio is computed as;

Gross profit/revenue *100%

As such the company gross profit margin over the last three years was;

2015 =58.57%

2016 =55.56%

2017 =55.98%

Accounts receivable turnover

The ratio assist in measuring or assessing number of times an organization turns over its account receivable (Faruk & Habib, 2010). Higher ratio shows shorter period between making sales and collecting money from debtors.

Accounts receivable turnover = sales/receivables

As such the company account receivable turnover over the last three years was;

2015 = 93.80

2016 = 87.26

2017 = 89.34

Days’ sales in receivables 

The ratio helps in assessing number of days an organization’s account receivable remain outstanding (Alrafadi & Md-Yusuf, 2011).  Low ratio is considered better since it means that the company is able to collect cash owed by debtors on time and fasters. It is calculated as follows;

Rate of return on net sales

Days in receivables = 365/receivable turnover =

As such the company days in receivable over the last three years were;

2015 =3.89 days

2016 = 4.18 days

2017 = 4.09 days

Gearing

Debt ratio

This is a financial ratio used in measuring extent of an organization’s leverage. In other words, it is viewed as the proportion of an organization’s total assets which are financed using debts (Alrafadi & Md-Yusuf, 2011). The ratio is calculated as

Total liabilities/total assets

As such the company debt ratio over the last three years was;

2015 =0.70

2016 = 0.76

2017 = 0.78

Debt to equity

The ratio is considered as the quantity of how reliant an organization is on the debt financing in comparison to the equity financing (Alrafadi & Md-Yusuf, 2011). In other words, the ratio indicates how much of an organization is owned and the amount owed. It is computed as follows;

Total liabilities/shareholder’s equity

As such the company debt to equity over the last three years was;

2015 = 2.30

2016 = 3.12

2017 = 3.60

Times interest earned ratio

The ratio is used in measuring the capacity of an entity in honouring its depts. Payments (Stickney, Brown & Wahlen, 2004). The ratio is computed as;

Times interest earned ratio = EBIT/interest

As such the company interest coverage over the last three years was;

2015 =-0.19

2016 = 0.53

2017 = -1.93

Conclusion

Based on the financial analysis above; that is, horizontal, vertical and financial ratio analysis, it can be concluded that Specialty Fashion Group Limited has been experiencing some financial challenges over the past three financial years. In essence, based on the profitability ratios, it is evident that the company has not been profitable over the past three years. In addition, based on the gearing ratios it is evident that Specialty Fashion Group Limited has been financially weak and therefore risk going bankrupt or being liquidated. Therefore, there is a need for the management to undertake the necessary measures in improving its financial performance. In fact, given that the asset turnover, inventory turnover and account receivable turnover over the last three years, it can be stated that Specialty Fashion Group Limited has not been efficient enough in turning its assets to sales, selling its inventories or collecting money owned by debtors.

References

Alrafadi, K. M., & Md-Yusuf, M. (2011). Comparison between financial ratios analysis and balanced scorecard. American Journal of Economics and Business Administration, 3(4), 618.

Daniel, G. A. (2015). A Consensus on Commonly used Financial Ratios. Proceedings of FIKUSZ 2015, 79.

Faruk, H., & Habib, A. (2010). Performance evaluation and ratio analysis of Pharmaceutical Company in Bangladesh.

Specialty Fashion Group Ltd. (2015). Specialty Fashion Group Ltd annual report 2015: Retrieved it 6^th May 2018 from; https://www.specialtyfashiongroup.com.au/index.php/component/docman/doc_download/142-annual-report-2015?Itemid=

Specialty Fashion Group Ltd. (2016). Specialty Fashion Group Ltd annual report 2016: Retrieved it 6^th May 2018 from; https://www.specialtyfashiongroup.com.au/index.php/component/docman/doc_download/189-annual-report-2016?Itemid=

Specialty Fashion Group Ltd. (2017). Specialty Fashion Group Ltd annual report 2017: Retrieved it 6^th May 2018 from; https://www.specialtyfashiongroup.com.au/index.php/component/docman/doc_download/217-annual-report-2017?Itemid=

Stickney, C. P., Brown, P. R., & Wahlen, J. M. (2004). Financial reporting and statement analysis: A strategic perspective. South-Western Pub.