Financial Analysis of Primark Assignment Sample

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Financial Analysis of Primark

INTRODUCTION

Financial analysis is important to be carried out by the organisation as provides clear picture about the financial situation in the best possible manner. The enclosed report deals with financial analysis of Primark which is clothing giant and a market leader (Cucchiella and Rosa, 2015). Various competitors' are available in the market which eventually have impact on it. As such, financial analysis is important for it so that it may work upon weaknesses and maximises strengths in the best possible way. For carrying out the financial analysis, financial ratios play a vital role to the company and as a result, Primark is able to carefully analyse its strengths and weaknesses quite effectively with much ease. It may be said that ratios are vital to organisation to have an eye on the financial position in effectual manner.

1. Analysis of current situation and financial situation of Primark

Primark plc

Particulars

Formula

2014

2015

2016

Profitability ratio

Gross profit margin

Gross profit / net sales * 100

24.30%

23.60%

23.40%

Liquidity ratios

2014

2015

2016

Current ratio

Current assets / current liabilities

0.42

0.05

0.73

Quick ratio

Quick assets / current liabilities

0.05

0.08

0.13

Solvency ratio

2014

2015

2016

Interest coverage ratio

EBIT / Interest Expense

15.17%

12.95%

19.61%

Debt to equity ratio

Long term debt / shareholders equity

2.43%

3.20%

2.30%

Efficiency ratio

2014

2015

2016

Stock Turnover ratio

COGS ÷ Average Inventory

6.10%

5.65%

5.05%

Fixed assets turnover ratio

Net sales / Average fixed assets

2.81%

2.80%

2.60%

Investment ratio

2014

2015

2016

Dividend payout ratio

Dividends / Net income

0

0

36.70%

Earnings per share

Net income/ Outstanding shares

0.96%

0.67%

1.03%

2. Researched evaluation and financial competitor analysis

The Primark has 3 competitors such as New look, Next plc and M & S (Marks and Spencer). These competitors have great impact on Primark as market share are divided in these companies as well. The financial ratios calculated above will provide clarity about the Primark plc of its financial performance (Kallala and et.al, 2015). The financial performance of Primark has increased from past years considerably and as a result, it is performing well in the market. New look plc, Next plc and M & S are performing well in the market and as a result, Primark has to perform well so that it may outreach them in the most proficient way. Below are the financial ratios of three plc's :

New look plc

Next plc

M & S plc

Particulars

Formula

2016

2016

2016

Profitability ratio

Gross profit margin

Gross profit / net sales * 100

34.80%

77.40%

39.10%

Solvency ratio

Interest coverage ratio

EBIT / Interest Expense

27.21%

5.24%

5.84%

Efficiency ratio

Stock Turnover ratio

COGS ÷ Average Inventory

6.03%

2.80%

8.05%

Fixed assets turnover ratio

Net sales / Average fixed assets

8.03%

1.12%

2.10%

Investment ratio

Dividend payout ratio

Dividends / Net income

73.50%

69.70%

68.50%

Earnings per share

Net income/ Outstanding shares

2.21%

0.81%

0.49%

By analysing the financial ratios of these companies, it may be conveyed that all the companies are performing well in the market. They have good dividend ratio as well as good earnings on share. Primark has to implement well- structured strategies so that it may beat them and gain more market share (Cucchiella, D’Adamo and Gastaldi, 2015). This way, it will be a market leader in clothing industry. Primark main competitor is M & S which has a good market share. Primark should be able to form and implement competitive strategies so that it may gain market share and become ahead of it. The dividend payout ratio of M & S is 68.5 % and of Primark is 36.70 % only. It clearly shows that dividend ratio of Primark is not at all good and it is not paying better dividends to its shareholders'. It has to make better strategies so that better profits may be earned by it and in turn more dividends be paid to shareholders' and as a result, it can beat M & S which has a remarkable dividend payout ratio which shows that it is able to make good profits and this is directly reflected in the dividends paid to shareholders'. New look and Next plc has 73.50 % and 69. 70 % of dividend payout ratio which is just doubled of Primark.

The gross profit margin of New look, Next, M & S plc are 34.80 %, 77.40 %, 39.10 % which is much better than Primark having only 23.40 %. It has to formulate well- structured strategies so that profit margin may be increased and it may be more profitable than its competitors. Primark is facing liquidity issues as current as well as liquid ratios are not ideal and it is not favourable to it as it will be unable to pay off obligations and liabilities which is to be paid within one year. Now analysing interest coverage ratio of Primark is 19.61 % which is better than other three companies which has 27.21 %, 5.24 %, 5.84 %. Lower than 1.5 % is not favourable to company as it will be unable to meet its interest expenses and as a result, higher than 1.5 % is better and ideal interest coverage ratio which is good of Primark. While, Next and M & S companies are not having good interest coverage ratio (Dewachter and et.al, 2015).

It may be interpreted that financial situation of Primark is good but it has to make better strategies to beat its competitors so that market share may be gained by it and customers' may be satisfied in effective manner.

3. Critical appraisal and strengths and weaknesses of Primark

The financial ratios clearly shows strengths and weaknesses of Primark. It is described below :

Strengths

  1. Strong interest payable ability -

The interest payable ability of Primark is good. It is able to make timely interest payments on the loans taken by it. As, it can be seen in the interest coverage ratio which is 19.61 % in the year 2016. The interest payable by it is better and it is strength of Primark. The interest expenditures of Primark is low which shows that it has strong interest ability. The ideal interest coverage ratio should be more than 1.5 % and Primark has better ratio and is able to make quick interest payments with much ease.

  1. Increase in profitability -

The profitability position of Primark is constantly increasing from the past years which shows that it has formulated and implemented better strategies which has given proficient results in the form of profit and increased market share. In the year 2016, it has gross profit ratio of 23.40 % which is not fluctuated from the past years (Rigamonti and et.al,2015). It can be analysed that Primark is able to make good and consistent revenue, thereby deteriorating costs significantly. In relation to this, stock turnover ratio is also become efficient which has resulted in more profits at its disposal. M&S has 39.10 % which is good and Primark should increase it.

Weaknesses

  1. Poor liquidity -

The main weaknesses of Primark is that liquidity position is not good which should be increased otherwise, it will be unable to pay its liabilities. The current ratio is 0.73 : 1 which is not good as ideal current ratio is 2 : 1. It clearly shows that Primark will be unable to meet short-term liabilities. In relation to this, quick ratio is 0.13 : 1 which is also not good as it will not be able to meet extreme short-term obligations. Ideal quick ratio is 1 : 1 and which implies that it has poor liquidity position and it should increase the liquidity aspect of it (Atoom, Malkawi and Al Share, 2017).

  1. Weak dividend payout ratio -

Primark is not able to provide better dividends to shareholders'. The dividend payout ratio is 36.70 % which should be increased so that it may provide good dividends to shareholders. The dividend payout ratio should be better so that organisation may be able to increase shareholders' as it ultimately increases financial funds which are most required by it. Higher the dividend ratio, better for the company as it shows concern of the company to its shareholders' and gradually revenue increases as more shareholders' subscribe shares of organisation. As compared to other three companies, dividend payout ratio of Primark is not good and it should transform this weakness into strength by providing better dividends to shareholders'.

4. Recommendation of price range for the shares of Primark for using in IPO

The share price of company is vital factor as it should be effectively done else, company may not be profitable. IPO (Initial Public Offerings) is a mechanism by which shares are issued to public for the first time. The price range of shares is important factor which should be carefully analyzed by the company and should be quoted to public (Delen, Kuzey and Uyar, 2013). It is recommended that Primark should analyze critically the market and then shares prices should be set accordingly. The valuation methods should be used by it so that IPO may be offered by it with much ease.

Valuation methods such as income valuation and discounted cash flow methods should be used by the organization. Discounted cash flow method is recommended to be used by Primark to value the shares and accordingly IPO may be offered to the public. This method considers time value of money. Moreover, all future cash flows are estimated and are then accordingly discounted by the cost of capital which ultimately gives present value of cash flows. It is recommended that Primark should use discounted cash flow method to have fair prices of shares (Buchman, Harris and Liu, 2016).

IPO is decided by analyzing that how much amount company is looking for raising the capital and number of shares offered by it and also percentage of shares it is selling to the shareholders'. It is important to note that price shares is also based on price earnings ratio of organization. If earnings are good then, good value of shares may be offered by it in the market. The price of shares must be in relation to price earnings ratio and consecutively shares must be offered at competitive price range by Primark.

5. Factors impacting valuation of share price

  1. Earnings per share -

It impacts valuation of share price too much extent. Primark company is impacted by earnings per share. The share price is much hiked when firm has more earnings per share. It can be said that shares are directly impacted by earnings on it. If company is performing good then, share prices are consecutively increased and this is beneficial for it.

  1. Return on investments -

Return on investments also impacts share prices up to much extent. The required rate of return will automatically adjust price that an investor is looking to pay for. This impacts share price. When investor makes changes in return on investment, then maximum price of shares will also be changed drastically (Schönbohm, 2013). This implies that shares are much affected by return on investment. 

  1. Dividend per share -

When dividend per share of Primark company is hiked, then share prices also gradually increases. Shareholders' are paid more dividends and this leads to more value of shares of it. In contrary to this, when dividends are not paid adequately then price of shares is undervalued. As such, Primark should provide adequate dividends to shareholders' so that it may be able to enhance shareholders' satisfaction and it ultimately leads to maximum valuation of shares price.

  1. Exchange Rates -

Foreign exchange rates have a direct impact on company's share prices. It impacts share prices of Primark as if foreign currency rates does not remain stable. The changes in foreign currency rates goes up or down, consecutively share prices also goes upward or downward. The stock value has immediate effect on the exchange rates of the company doing business in that country (Gunawardena and et.al, 2015). This initiates changes in share prices of the company at large basis. It is external factor and company cannot handle it in either way. Hence, share prices is impacted by foreign exchange rates.

  1. Supply & Demand -

When price of the shares are less, investors will buy more and as a result, share prices gos up. In contrary to this, when prices are more quoted by Primark, then investors will not be attracted towards it and hence, demand for shares decreases, which leads to low valuation of share. Company should quote low price so that investors are attracted towards it and ultimately invests in company leading to more availability of funds for operation with much ease. Afterwards, when share prices rises as supply decreases as investors are ready to pay for successful shares and are ready to pay more prices.

6. Critical evaluation of the finance techniques

The financial ratios are vital part of the company as it shows financial position of it in the best possible way. Financial ratios take into account past figures and data which forms basis for the financial information of the company in effective manner. The advantages of financial ratios are numerous such as it provides financial viability of the business and as a result, it shows accurate interpretation of company (Meriç, Kamışlı and Temizel., 2017). The financial ratios are depicted with the help of financial statements such as income statement, balance sheet and cash flow statement which are pillars of finance and it shows accurate results of the entity in the most proficient way.

Moreover, financial ratios are helpful for comparing companies in the same industry with much ease. The comparison help company to evaluate on the basis of liquidity, efficiency and profitability position. One company may easily compare with another on the basis of profitability ratios and efficiency ratios which are calculated from the financial statements. Further, it helps company can create benchmark for better performance and this helps it to be effective enough in the market and market growth can be analyzed by it in the best possible way. Stock valuation is also accomplished by organization with the help of ratios. Investors are delighted by the effective performance of the company by analyzing financial ratios and as a result, share prices of organization is valued more and increase funds availability to it. Hence, it is advantageous to Primark in the most proficient way (Davidson III and Dutia, 2017).

In contrary to this, financial ratios have limitations as well to the company. The financial ratios are based on historical facts and this may be manipulated. If the financial facts are manipulated, then results drawn are not accurate and lack much efficiency. Financial ratios are not reliable as it draws out improper conclusions which are irrelevant to the company. On analyzing and comparing with another company also is not worth as company charges different methods for stock valuations and thus, comparison is irrelevant and does not provide concrete conclusion. This can be articulated that Primark is using FIFO and other company is using LIFO method and as such, valuations are different and hence, not comparable with each other.

Moreover, inflation may lead to difference in financial statements. The historical cost based balance sheets and accounting figures do not reflect accurate figures. The financial ratios are misleaded as different firms purchase assets at different dates (Limitations of financial ratios). As adjustments are not recorded balance sheets and other financial statements in reference to the inflation and as such, false information is provided which is not useful at all. As a result, despite of certain limitations, financial ratios are calculated by organization effectively to analyze correct financial position.

7. Recommendations for corporate governance structure

The purpose of corporate governance structure is to support companies to impart success by effective management so that organization may be able to sustain in the market in the best possible way (Liang and et.al, 2016). The main recommendations for Primark is that it may be able to provide ownership rights to shareholders' as they are entitled to it. Moreover, it is recommended that transparency be initiated so that share prices are not high and investors may be attracted to company for investing and this helps it to have effective availability of funds which are required for successful operations in the best possible way.

It is also recommended that Primark should use suitable share valuation method such as discounted cash flow which is allows adequate offering of initial shares to public and is a useful method for valuation of shares in effective way. IPO may be offered by company which is analyzing the number of shares it is offering for subscription. The appropriate corporate governance structure is required to be followed by Primark so that it may enhance shareholders' up too much extent and as a result, long term survival may be achieved by it in the best possible way (Najjar, 2013). 

CONCLUSION

Hereby it can be articulated that financial analysis plays important role in valuing company and extracting its financial strengths and weaknesses in the best possible way. It is important for the company so that it may analyse weaknesses and implement well structured strategies by which weaknesses are transformed into strengths. For carrying out financial analysis, ratios play vital role to the organisation. Ratios are calculated with the help of balance sheet and income statement which provide accurate results to organisation. Primark is able to carry out the ratios by referring to the financial statements and as a result, accurate conclusions are drawn out of it which provides financial position of it in the best possible way.

REFERENCES

Atoom, R., Malkawi, E. and Al Share, B., 2017. Utilizing Australian Shareholders' Association (ASA): Fifteen Top Financial Ratios to Evaluate Jordanian Banks' Performance.Journal of Applied Finance and Banking. 7(1). p .119.

Buchman, T. A., Harris, P. and Liu, M., 2016. GAAP vs. IFRS Treatment of Leases and the Impact on Financial Ratios.

Cucchiella, F. and Rosa, P., 2015. End-of-Life of used photovoltaic modules: A financial analysis. Renewable and Sustainable Energy Reviews. 47. pp.552-561.

Cucchiella, F., D’Adamo, I. and Gastaldi, M., 2015. Financial analysis for investment and policy decisions in the renewable energy sector. Clean Technologies and Environmental Policy.17(4). pp.887-904.

Davidson III, W. N. and Dutia, D., 2017. Debt, liquidity, and profitability problems in small firms. Entrepreneurship Theory and Practice.

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach.Expert Systems with Applications. 40(10). pp .3970-3983.

Dewachter, H. and et.al, 2015. A macro-financial analysis of the euro area sovereign bond market. Journal of Banking & Finance.50. pp.308-325.

Gunawardena, M.M.D. and et.al, 2015. Predictability of Stock Returns Using Financial Ratios Empirical Evidence from Colombo Stock Exchange.

Kallala, R.F. and et.al, 2015. Financial analysis of revision knee surgery based on NHS tariffs and hospital costs. Bone Joint J. 97(2). pp.197-201.

Liang, D. and et.al, 2016. Financial ratios and corporate governance indicators in bankruptcy prediction: A comprehensive study. European Journal of Operational Research. 252(2). pp.561-572.

Meriç, E., Kamışlı, M. and Temizel, F., 2017. Interactions among Stock Price and Financial Ratios: The Case of Turkish Banking Sector. Applied Economics and Finance.  4(6). pp .107-115.

Najjar, N. J., 2013. Can Financial Ratios Reliably Measure the Performance of Banks in Bahrain?. International Journal of Economics and Finance. 5(3). p.152.

Rigamonti, L. and et.al,2015. Economic-financial analysis of the Italian packaging waste management system from a local authority's perspective. Journal of Cleaner Production. 87. pp.533-541.

Schönbohm, A., 2013. Performance measurement and management with financial ratios: the BASF SE case (No. 72). Working Papers of the Institute of Management Berlin at the Berlin School of Economics and Law (HWR Berlin).

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