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Financial Analysis of Primark Essay

Background

At present, the Primark Ltd has 162 stores located in the UK, Spain and Ireland. They are subsidiary of Penney Brand Company which is based in England and recently announced it has hired its 25,000th person among its stores (Nagdeman, 2009). According to a recently research, the Primark company rose its selling space by 65% in the past 12 months, which is clearly showing how successfully these stores are being and ever-expanding. With regards to products and services it is very obvious to see demand has increased quickly in recent years trading. This may because the Primark Ltd is dealing in a fashionable market but with affordable clothing for everyone in the mainstream market at the moment (Yun, 2008).

Introduction

This report will concentrate on the financial analysis of Primark. To begin with, the trend analysis is used to analyse the financial situation of Primark from 2006-2010. Additionally, ratio analysis technique is provided to analysis the financial performance of Primark by comparing with Next Ltd and New Look Ltd. Besides, financial strengths and weaknesses will be indicated. Furthermore, by using the industry sector index to explain where Primark would be ranked financially on the LSE will also provide in this research. Moreover, forecast the 2011 post-tax profits will be illustrated. Evaluate the techniques and recommend the corporate governance structure will be reflected at the end of this research.

Financial result

The financial result in 2010 is well ahead of market expectations showing importantly rose revenue and profit. By improving net profit margins, a strengthening order book which has increased and reduced net loans rarely. During 2006 and 2010, the total current liabilities have increased sequentially (from 923.3 million Pound to 1126.81 million Pound). In addition, the number of employees experienced a gradually rise during this time (from 13144 to 23707). It is clearly to show that the influence of the Primark company in UK is expanding rapidly and the Primark company are becoming generally strong and stable global market with activity in the UK, Sweden, the USA and the Middle East particularly good (Yun,2008). The total turnover for 2010, plus our share of joint ventures and associated undertaking, increased by 10% to 1985.74 million Pound generating adjusted profit before interest and tax of 191.9 million Pound at net margin of 9.0%.

Adjusted profit before tax increased by 300% to 151 million Pound. Basic and fully diluted earnings per share were 44.9p and 51.3p respectively (Bloomberg, 2011). From 2006 to 2010, the profit after tax reached the bottom point at 14.71 million Pound in 2008 and increased to the highest point at 191.9 million Pound in 2010 (Bloomberg,2011). Specifically, the total trend of the profit after tax was fall between 2006 and 2008. And then, it experienced a dramatically increase after 2008. On balance sheet, the total fixed asset of the Primark Ltd was fluctuated during this time. It dropped to the bottom point at 2006 (948.4 million Pound), and increased to the highest point at 2010 (1075.55 million Pound). Specifically, the biggest change was cash at bank part.

It have become more than six times than before (from 3.96 million Pound to 20.88 million Pound). There was not big change in other parts (Bloomberg, 2011). The total of cost of Primark increased gradually from 2006 to 2010, and the cost in 2010 (724.64 million Pound) has nearly doubled than the cost in 2006(1599.64 million Pound). However, the total expense rose to 223.91 million Pound in 2009, and then drop to 187.25 million Pound in 2010. That is might because the Primark Ltd tried to reduce unnecessary cost successfully (Bloomberg, 2011). Current liabilities are divided in three parts: trade debtors, group loans and bank overdraft. Trade creditors increased steadily from 52.63 million Pound to 102.51 million Pound. Besides, the bank overdraft was 5.02 million Pound in 2006 and 7.92 million Pound in 2009. The bank draft in other times was all less than 1 million Pound. Director loans fluctuated all the time (Bloomberg, 2011).

Industry sectors and competitors analysis

This chapter will concentrate on the industry sector, and financial situation of Primark and its two competitors: Next and New Look. The financial analysis tools, ratio analysis will be used to indicate and evaluate these three organisations. Figures and tables are available in this case study, calculation and data analysis are also provided (see more details information in Appendix). Moreover, the financial data (Balance sheet, Income statement and Cash flow) were collecting from Bloomberg and Hemscott Company Guru.

Industry refers to the production of an economic good or service within an economy (Dictionary Reference, 2011). Basically, industry sector refers to the organisations within the same industry. In this research study, Primark belongs to the retail industry. Morningstar Company Intelligence (2011) clearly illustrates four main areas of the retail industrial sector index, which include Market capitalisation, Turnover, number of employees and PER prospective from 2010 to 2011 (see Appendix 1-2). Below table shows the average of Market capitalisation, Turnover, number of employees and PER prospective.

In this research study, Next and New Look Ltd were selected to analyse and compare with Primark. Next and New Look Ltd are both based on UK retail companies, Next Ltd is listing on the London Exchange Market. Financial ratios provide a quickly and relatively way of assessing financial situation of an organisation. Ratios could be very helpful when comparing the financial health of different business, and it describes the relationship between different items in financial statement (Elliott & Elliott, 2008). By calculating a relatively small number of ratios, it will build up a good picture of the position and the performance of an organisation. Ration analysis includes five main areas, which are including profitability, efficiency, liquidity, financial gearing and investment (Atrill & Mclaney, 2006).

However, Primark is not issues it shares yet, and the whole data were not available, so the working capital cycle and investor ratios are missing in this research. The detail ratio analysis of Primark, Next and New Look are provided in the Appendix 3-13.

By calculating and analysing the ratios, it seems likely that the financial situation of Next is better than Primark and New Look. Particularly, the profits and sales volume are often stable when Next Ltd facing Financial Crisis 2008, and this company have enough cash to pay off its current liabilities in recent years (2006-2010). Besides, the good inventory turnover (average 48.13 Days) guarantees this company have positive operating situation. Therefore, the high gearing ratio of Next means they have lots of long-term borrowing, the investors are confidence with the development of this company.

Financial performance of Primark is not good as Next Ltd, especially during the period 2007-2009, the profit margins, ROCE and return on asset are relatively low; it is still facing liquidity problems in recent years (cash trouble, weak pay off ability), however the company’s performances (net profits, sales volume and short inventory turnover days) are increasing sharping in 2010. New Look were facing financial issues in recent years, it has negative growth in net profits margin, ROCE and return on assets, which indicate that New Look lose profits, the situation is not under management control. It is clearly reflected this company have negative gearing ratio in 2007, however, from 2008-2010, the proportion are extremely increased, which means they attract lots of long-term borrowings.

Financial strengths and weaknesses of Primark

Ratios help to highlight the financial strengths and weakness of a business. By calculating and evaluating the ratios (see more detail information in Appendix 3-13), it seems likely that Primark have several financial strengths and weaknesses.

Strengths

* Strong interest pay off ability
Because of the low interest expense of Primark, the result suggests that the ability of Primark to pay the interest is quite strong

* Stable increase of profitability
The gross profit margin, operating margin and net profits margin are increase in recent years; the asset turnover is growth, and the inventory turnover is decreased, which means efficiency of inventory turnover is getting better. ROCE is increasing sharply in 2010 as well as the return on assets.

Weaknesses

* Poor liquidity
Current ratio is very low, which indicates Primark do not have enough cash to meet their commitments to pay off their current liabilities. Similarly, quick ratio reflects Primark has recent cash trouble.

* Lack of long-term borrowing
The lower proportion of gearing ratio reflects Primark lack of long term investment. If a business has a high gearing ratio, which means a large amount of the money invested in the business has come from long term loans, therefore, long-term borrowing means investors are confident with the development of the organisation. Forecast Primark’s 2011 post tax profits

Primark’s owner Associated British Foods plc posted revenue of Primark has increase 13% to £3043m, and the adjusted operating profit is fell 8% from 335m to 309m (Associated British Foods plc, 2011). There are many factors lead the Primark’s operating profit fell. First is the standard rate of VAT was up from 17.5 percentage to 20 percentage on 4 January 2011 (“Directgov”, para 1 , 2011), which lead product’s sale price need to increase, and Primark need take heavy discounting to maintain the price, thereby the profit is decrease. Second is the cotton price, from the below table-Cotton
monthly price (Indexmundi, 2011) it is easy to see the cotton price was nearly doubled from September 2010 to March 2011.

Primark not pass on high cotton price to customers (“The telegraph”, 2011), so the profit further decline. This decision reduced company’s profit but improved product’s price advantage. Since April to September, cotton prices were fall back to the basic level in 2010. The other problem is continued weakness in UK consumer demand (Retailmoves, 2011). However, due to Primark’s product has a low price, so compared to other companies, consumer purchasing power down is minimal impact to Primark. As the price advantage, it may be good news for Primark, because of lower purchasing power, customer will first select the low-price products. Cotton – Monthly Price (Pound Sterling per Pound)|

Techniques (ratio analysis) evaluation

The purpose of financial ratio analysis is to discover the operating and financial difficulties of a company. From the financial statements, there are many financial ratios can be calculated, and this ratios are related to a firm’s performance on management and financing. The common ratios include the price-earnings ratio, debt-equity ratio, earnings per share, asset turnover, quantitative analysis and working capital.

Many companies use ratio analysis because of these advantages as following: ● There are complex and huge number of data from the financial statement, but financial ratios can simplify and summarise these data so that the data can be effectively analysed. ● Financial ratios study the past data and present related findings, which could be used to forecast the future. ● Financial ratios can help creditors, bankers and shareholders to know the profitability of a company and the ability to pay them.

However, there are limitations of the financial ratio analysis at the same time as following: ● The calculated ratios are only correct based on the correct accounting records. If the accounting data is incorrect, then the ratios are influenced. ● How much accounting data could apply is depending on a company’s financial policies, so it is difficult to compare the ratios between two firms.

Corporate governance recommendations

The purpose of corporate governance is to help companies deliver the long-term success by effective, entrepreneurial and predicting management. The 2004 Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance are responsible for those areas:

● Effective corporate governance framework
● Shareholders rights and key ownership functions
● Shareholders equitable treatment
● The role of shareholders
● Transparency
● The responsibilities of the board

Primark believes that appropriate governance can present essential protection for the Company’s shareholders and support the long-term and healthy development of the Company. Good corporate governance has the features of effective, integrity, accountability and transparency.

► Possible corporate governance structure
Board of Directors|
Accountability and Audit Committee| Finance Committee| Remuneration Committee| Responsible for
Responsible for
Appoint
Appoint
Shareholders’’ Meeting
(Annual General Meeting, etc.)
Shareholders’’ Meeting
(Annual General Meeting, etc.)

Appoint
Appoint

CEO
CEO

Management
Management

► Primark corporate governance bodies

General Shareholders’ Meetings
The general shareholders’ meetings of the Company have the right to make key decisions, in particularly, to appoint and select the board of directors.

Board of Directors
The board of directors of the Company is responsible for the long-term success development. It might include accountability and audit committee, finance committee and remuneration committee. And the Board is responsible for appointing the President of Primark and the Chief Executive Officer (CEO) as well.

President and CEO
According to the guidelines and instructions from the board of directors, the president and CEO of the Company are responsible for the establishment of strategy of Primark and giving middle level managers instructions about the daily operational management.

► Recommendations for corporate governance

Board performance evaluation
A whole assessment of the performance of the board, to provide feedback about the review of the effectiveness of the internal control to the Chairman and the business performance with main issues and improvements, in particularly, how much and how well the strategy is implemented.

Transparency

The corporate governance of the Company should be considered with some more appropriate polices for transparency to avoid the possible abuse of authority, because some financial data of Primark is not public which could be lack of monitor and lead to some potential problems.

Compliance with the appropriate provisions set out in the UK Corporate Governance Code For example, the Code Provision D.1, “Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose.” (Financial Reporting Council, 2010, p.22). Many people choose to Primark is attracted by such low price, so avoidance of unnecessary remuneration is essential to save cost.

Conclusion

This report analysis the finance situation of Primark, the competitors and give some recommendation. From 2006-2010, Primark has a significant increase at turnover, profit and number of employees, especially after economic crisis, this is due to product price advantage. There are two major advantages of Primark’s finance which are the strong interest pay off ability and stable increase of profit, but is also have little disadvantages, such as poor liquidity and lack of long-term borrowing. This problem may be due to it is not listed now.

Through analysis its sector competitors, Primark is a very good company, and have potential to IPO. Here have some recommendation for Primark, use board performance evaluation to improve efficiency, increase the transparency to avoid abuse of authority, and avoidance unnecessary remuneration. Through analyse the industry and sector competitors, NAPP Group PLC have potential to IPO. Here have some recommendation for this company, use board performance evaluation to improve efficiency, increase the transparency to avoid abuse of authority, and avoidance unnecessary remuneration.


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