Table of contents 1. Introduction6 2. Review of Company Profile7 3. Analysis of Financial Position8 4. Financial and Non-Financial Factors20 5. Recommendation22 6. Conclusion23 7. ReferencesError! Bookmark not defined. 8. Appendices23 List of figures Figure 1: Du Pont Analysis Figure 2: Relationships amongst Profitability measures Figure 3: Profit Margin Ratio Figure 4: Gross Profit Rate Figure 5: Assets turnover Ratio Figure 6: Return on Assets Ratio Comparison Figure 7: Debt to Total Assets Figure 8: Cash Debt Coverage Figure 9: Current ratio
Figure 10: Quick Ratio Figure 11: Oroton Share trend Figure 12: Hour Glass Share trend Figure 13: Earnings and Dividends per share Figure 14: Dupont Comparative Analysis of Oroton and Hour Glass List of Appendices Appendix 1: Ratio Analysis Appendix 2: Income Statement – Horizontal Analysis Appendix 3: Balance Sheets – Horizontal Analysis Appendix 4: Cash Flow Statements – Horizontal Analysis Appendix 5: Liquidity graphs Appendix 6: Profitability graphs Appendix 7: Solvency graphs Appendix 8: Share Trends 1.
Review of Company Profile (approx 300 words) The Hour Glass is a public company based in singapore. Their primary business is retailing of high end watches through their own stores in six countries, 11 in Singapore, 5 in Malaysia, 3 in Thailand, 1 in both Hong Kong and Japan and 3 in Australia.
They describe themselves as “Asia’s leading specialist luxury watch retailer. ” They also operate 2 museums of watches to promote horology in asia, a successful marketing strategy by making Asian consumers more appreciative of specialist luxury watches.
The Hour Glass concentrate primarily on retailing and do not manufacture or design any of their own product, instead being sales agents for many big name watch brands like Rolex, Omega, Breitling, Bulgari and Longines. Orotongroup is a public company based in Australia.
Their primary business is retailing of clothing, leather goods and fashion accessories through the Oroton Brand and they also hold the exclusive rights to Polo Ralph Lauren for the Australian and New Zealand markets.
They operate out of their own premises in Australia and New Zealand and their Oroton branded products are distributed globally through specialist retailers overseas. Oroton design and manufacture their own products with the exception of their Polo Ralph Lauren brand. The retail industry in Australia is currently suffering from a downturn due to reduced consumer sentiment and reduced spending due to threat of rising interest rates, the introduction of a carbon tax, local and abroad political issues and global financial issues.
Luxury goods retailing however has not suffered as significant a decline as lower end areas of the market. Both companies have defied this trend and have grown both their sales revenue and profit consistently over the last several years. While The Hour Glass suffered a small decline in revenue in FY2009 they have since recovered to above previous sales highs experienced in FY2008, Orotongroup has seen constant growth over the last 5 financial years. With both companies being publicly listed they have a board of directors with a leadership group reporting to them.
Both company boards consist mainly of independent directors, The Hour Glass with 75% directors being independent and Orotongroup with 50%. Oroton Groups CEO, Sally Macdonald, is also the Managing director. The Hour Glass does not have any of their executive management team sitting on their Board of Directors. 3. Analysis of Financial Position(approx 800 words) Figure 1: Du Pont Analysis One of the most valuable insights of financial analysis is the interconnectedness between the various components of the financial statements as seen in the Du Pont Analysis. [Carlon et al. 009, p. 676] We have used this model as the basis for our financial analysis. 1. Profitability To begin our analysis of these two entities we will look at multiple profitability ratios in determining the entities financial standing. Multiple ratios are used as they paint a more detailed picture of exactly what is happening under the surface of a particular entity as some information can be misleading when observed from one dimension. Profitability is the measure of profit or operating success of an entity for a given period of time [Carlon et al. 2009, p. 675].
As an investor it is essential that these two entities are profitable as this can be seen as the key indicator of the success of the entity itself, due to its effect over the entire entities business, from the ability to obtain finance, meet liquidity requirements and to essentially be in a position to grow as a business. Figure 2: Relationships amongst profitability measures The Profit Margin Ratio (Figure 3) details the profit generated by each dollar of sales. Oroton has seen a slight reduction for the year ending 2010 of 21. 03% compared to 2009’s figure of 21. 05%.
This shows that Oroton’s margin of profit is 21 cents for each dollar of sales made. The Hour Glass however has a much lower figure of 8. 43% for 2010 and 8. 01% for 2009 showing while they have increased from the previous year they are only making 8 cents profit for each dollar of sales. While this may show that Oroton appears to be a much more profitable entity in comparison to their sales, these figures may also just be detailing the fact that The Hour Glass is purely a retailer which sells other brand name products while Oroton manufactures and sells their own product. pic] Figure 3: Profit Margin Ratio To understand these figures more accurately it is necessary to look at the two entities Gross Profit Ratio (Figure 4) which shows the margin between the selling price and cost of goods sold. With similarities to the year’s profit margin ratio, Oroton has shown a slight increase to its gross profit ratio from 20. 28% in 2009 to 21. 43% in 2010. The Hour Glass has also shown a slight increase to finish 2010 on 8. 43%, up from the 8. 01% of 2009, the same figures as their profit margin ratio.
These results show that Oroton has a much larger profit margin on the sale of an item compared to the cost of that item while The Hour Glass receives less of a margin. These findings once again detail the fact The Hour Glass does not sell their own product and therefore receives smaller profit for the sale of such product while Oroton manufactures and sells their own product increasing the margin between the sale price of their products and the cost of goods sold. [pic] Figure 4: Gross Profit Rate
Another important measure of an entity’s profitability is the Asset Turnover Ratio (Figure 5) which shows how effectively an entity uses its assets to generate sales. As figure 5 demonstrates, Oroton has shown a slight decrease in their asset turnover to be at 266. 03% for 2010 down from 272. 47% for 2009. This figure demonstrates that for each dollar of assets, Oroton receives sales of 250 dollars. The Hour Glass also has a reasonably stable result, showing an increase from 2009’s 188. 36% to 190. 82% in 2010. While these results show that Oroton is generating more sales from their assets ompared to The Hour Glass, this ratio can be at times misleading, as one entity may have a much larger asset base compared to the other, but nonetheless the ability to generate more sales off less assets is still a positive sign. [pic] Figure 5: Assets turnover Ratio (ATR) Our final measure of profitability is done with the Return on Assets Ratio (Figure 6) which shows the overall profitability of an asset in terms of its generated profits. Similarly to other profitability ratios, Oroton has recorded another slight decrease in their return on assets ratio to finish 2010 on 55. 3% compared to 57. 36% for 2009. The Hour Glass however has seen a slight increase to be at 16. 09% for 2010 up from 15. 10% for 2009. The results of this ratio analysis show that as with the Asset turnover ratio in terms of sales, Oroton generates good profit from their asset base. The Hour Glass generates much smaller profit from their assets but this may be in part due to their large asset base. [pic] Figure 6: Return on Assets Ratio Comparison 3. 2 Solvency In analysing the financial position of these two entities it is important to assess the company’s solvency.
That is the ability of the companies to survive over a long period of time [Carlon et al. 2009, p. 49]. As an investor into either of these two companies this is critical to ensure that the long-term investment either as a shareholder or as a creditor to the company can be paid back. The debt to total assets ratio (Figure 7) highlights the proportion of creditor funds that are invested in assets by each company. Oroton increased its debt to total assets ration slightly from 2009 to 2010 from 49. 63% to 50. 32%. This indicates that half of every dollar invested in assets came from creditors.
In contrast Hour Glass improved slightly in there ratio from 19. 97% in 2009 to 18. 54% in 2010. Not only is this an improvement, but the amount is significantly lower than Oroton. From a solvency perspective Hour Glass is in a much better financial position as it does not have as high a risk of not meeting creditor demands or repayments forcing the company into insolvency. In the recent financial environment that has impacted the world this does pose concern and something that would need strong consideration. It is important to view this in relation to the profit and cash flow. pic] Figure 7: Debt to Total Assets In order to have a better assessment of the individual company’s solvency it is appropriate to also look at their cash debt coverage ratio. This will indicate the company’s ability to generate cash to meet its long term needs [Carlon et al. 2009, p. 50]. Figure 8 summarises the cash debt coverage of the two companies. Oroton has a much higher cash debt ratio of around 0. 90 times. This is in contrast to The Hour Glass with only around 0. 40 times. Both companies are quite steady, but Oroton is generating much more cash to cover debts.
Cash generated from operations from Oroton was adequate to cover 80% of their debt. In contrast with hour glass only being able to cover 40% of their debt. Both companies have been quite steady over the last two years in cash debt coverage. Figure 8: Cash Debt Coverage [pic] 3. 3 Liquidity Liquidity ratios can be quite valuable for short-term creditors and suppliers. They are moreover valuable at providing an overview to managers who need to have an understanding of the entities short-term ability to pay its maturing obligations and to meet unexpected needs for cash.
A comprehensive liquidity ratio analysis can assist with exposing any weaknesses in the financial position of an entity. There are several liquidity ratios’ that can be applied and one of them is the current ratio. This is calculated by dividing current assets by current liabilities. This ratio is one of a few that have the ability to measure an entities short-term ability to pay its maturing obligations and to meet unforeseen needs for cash. [Carlon et al. 2009, p. 46] Figure 9: Current ratio [pic] Both Oroton and Hour Glass have increased in 2010.
Oroton increased from 144. 58% to 169. 23% resulting in a 24. 65% increase for the year. Hour glass also increased from 444. 55% to 466% with a 21. 45% increase. Based on this information it is evident that both entities show trends of a stable short-term debt paying capability. One thing to note about the current ratio is that it does not take into account the composition of assets. The composition of the assets is important because a dollar of cash is more readily available to pay the bills then is a dollar of inventory.
Inventory will be converted into cash available to pay debts only after the item is sold and the cash has been received from the consumer. [Carlon et al. 2009, p. 46] Another practical measure of liquidity is the quick ratio. This ratio is a measure of an entities immediate short-term liquidity. [Carlon et al. 2009, p. 515] it measures the level of all assets that can be quickly convertible into cash and used to meet short term liabilities. The quick ratio provides a more conservative measure than the current ratio because it excludes inventory.
The formula for this ratio is Quick Ratio = (Current assets – Inventory) / Current liabilities. The high the ratio, the higher the level of liquidity for either entity. Generally speaking the quick ratio is 1:1 or higher which results in current liabilities being met from current assets without the need to sell inventory. Figure 10: Quick Ratio [pic] Oroton is showing strength of their short-term debt paying ability going from 19. 78% to 40. 32% resulting in a 20. 54% improvement. Hour Glass has also increased from 121. 13% to 144. 50% resulting in similar improvement of 23. 37%.
This proves that both entities have improved their short-term debt paying abilities by approximately 20%. 4. Horizontal Analysis 3. 5 Share Market Performance The sharemarket performance of The Hour Glass has shown a steady increase over the last 5 years. While it did suffer from decline in growth during the GFC, the stock price has outperformed the market by a significant margin. Oroton group has also performed well over the past 5 years and their share price has generally followed the market however it has still performed better than the market average. It only suffered a slight decline during the GFC.
Both companies have performed well however The Hour Glass experienced a far greater decline due to the GFC than Orotongroup. Even though the market entered significant periods of negative growth, The Hour Glass has recovered all its share price decreases to close the period higher. These differences are closely tied to the economies in which they operate. Australia did not suffer as great an impact of the GFC in comparison to Singapore however Australia is now feeling a decline in retail sales that Singapore and other asian countries are not, especially Hong Kong, Singapore and Malaysia.
The companies primarily differ in their performance over the last 6 months. While The Hour Glass has continued to increase their share price over the period by 20%, Oroton Group has shown a decline of 5% over this same period. This downward trend for Orotongroup is only one quarter of the overall downward trend of Australian Stock Market, while the performance of The Hour Glass is 4 times higher than the market. [pic] Figure 11: Orotongroup Share trend [pic] Figure 12: The Hour Glass Share trend 4. Financial and Non-Financial Factors (approx 300 words)
The major issues facing both companies at this time are worldwide uncertainty surrounding the worlds major economies. The retail market in Australia is in decline presently (abs. gov. au, 2011). The clothing retail market has declined by 0. 5%. Reasons for this decline are include and increase in online sales, which takes money away from local retailers, as well as other issues like political and financial uncertainty in Australia. Oroton currently has an online sales offering to complement it’s bricks and mortar stores.
It is important for an exclusive fashion brand to maintain it’s exclusivity by not lowering prices on a regular basis. Discounting an exlusive brand dilutes it’s desirability. Due to their ability to control the selling price of their goods they are able to maintain sales margin and retain the brand integrity for quality design and manufacture of fashion goods. This is in contrast to other brands that are distributed through independent retailers where control is lost over the pricing of goods. The retail market in Singapore is experiencing growth. Currently the retail market in Singapore is growing at 8. %, however the watches and jewellery retail has experience growth of 25. 7%, this is a major driver in the current increase in the share price for The Hour Glass. Reason for this are a continuing growth in population and the growth of the overall Singapore economy. Tourist numbers are also up which is another major source of customers for The Hour Glass stores. The main factors that could influence these brands in the future are more uncertainty surrounding sovereign debt crises in Europe as well as current issues regarding the debt ceiling of the USA.
If any of these economies were to fail or not recover soon then the economies of both Singapore and Australia could be adversely effected. Figure 13: Earnings and Dividends per share 5. Recommendation (approx 800 words) Figure 14: Dupont Comparative Analysis of Oroton and Hour Glass (2010 year) 6. Conclusion 7. Appendices Appendix 1: Ratio Analysis Appendix 2: Income Statement – Horizontal Analysis Appendix 3: Balance Sheets – Horizontal Analysis Appendix 4: Cash Flow Statements – Horizontal Analysis Appendix 5: Liquidity graphs Appendix 6: Profitability graphs Appendix 7: Solvency graphs Appendix 8: Share Trends
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