Financial Decision Making

Table of Contents

Introduction.

Ratios.

Valuation Ratios.

Profitability.

Management Effectiveness.

Financial Strength.

Efficiency.

Liquidity.

Critical evaluation of corporate governance.

Conclusion.

References.

Introduction to ASOS Plc

ASOS Plc is an online cosmetic and fashion retailer. The company is headquartered in London and was founded in the year 2020. There are around 850 brands on the website that are sold that include a range of clothing and accessories that are shipped to around 196 countries from the centers of fulfillment that are in the UK, EU, and US. ASOS stood for As Seen On Screen. The net income for the company stands at 1.307 billion pounds while the revenue for the company is at 2.573 billion pounds. The gross profit of the company is at 13334.3 million pounds and profit after tax stands at 24.6 million pounds (Wells and Ellsworth 2016). Net assets for the company are at 453.6 million pounds. The products dealt on the website include clothes, shoes, beauty, and accessories. The company is into the industry of e-commerce clothing.

The company has around 4000 employees and around 20.3 million customers. On the website of the company there are 85000+ products. The company has a market share of 37.4% in the UK in which £ 993.4 million comes from retail sales while £11.5 billion in online apparel. The market share of the company in the US is 12.8% in which £ 341.2 million comes from retail sales and £ 69.8 from online apparel. In the EU it holds a market share of 31.1% in which £ 825.7 million comes from retail sales and £ 38.2 billion is from online apparel (Wei 2016). The mission of the company is to become the world's best or the number one destination for fashion-loving 20-somethings. This report studies the ratios of the company for 5 years and drives conclusions on various aspects of the company.

Ratios of ASOS Plc

ASOS PLC

Valuation Ratios

Company (2019)

2018

2017

2016

2015

P/E Ratio

80.95

61.82

73.41

108.37

67.43

Debt/ equity

0.9282

0.023

0.032

0.105

0.014

The valuation ratio depicts the relationship between the equity and market value of the company with any metric of finance (Giordani and Halling 2019). Valuation ratio helps in knowing the price that is being paid for the earnings of the company.

P/E ratio that is price upon earnings ratio shows how much price an investor is ready to pay for a dollar of the earning (Kumar and Babu 2018). Over the years the P/E ratio of the company has improved. Except in the year 2016 where it skyrocketed and then normalized in the year 2017. In the year 2018 it fell a little more but in the year 2019, it again gained its momentum. The average industry ratio lies between 18 to 20 for the retail. This shows that the company is performing very well in comparison to its sector and people are ready to pay $80 for $1 earning of the company. This depicts that the company has the potential to grow as people are willing to invest in the company.

The debt to equity ratio depicts the degree to which the operations of the company are financed through debt or by the equity that is wholly owned funds. This helps in knowing the ability of shareholders for covering the debt in any specific situation. The company before the year 2019 was utilizing its debt taking capacity at a slower pace but in the year 2019, it has utilized its capacity as per the industry average. The company can now generate more funds than it was able in previous years. This will help the company in growing further and infuse more capital into the business.

The valuation ratios depict a good position and as the company is planning to be one of the biggest companies, there is a scope to do so.

Profitability

2019

2018

2017

2016

2015

Gross margin

47.89%

51.18%

49.82%

49.98%

49.93%

Operating margin

2.16%

4.22%

4.14%

4.36%

4%

Pretax margin

1.96%

4.22%

4.16%

4.41%

4%

Net Profit margin

1.48%

3.41%

3.33%

3.56%

3%

Profitability ratios are an important measure for the business as they help in understanding the revenue generation for the company (Laitinen and Laitinen 2018). ASOS PLC's gross margin ratio spiked in the year 2018, but in the year 2019, it has normalized again. This means that the cost of sales for the company increased in the year. Operating margin, pretax margin and Net profit margin all have declined from the past years. This means that the administrative cost of the company has increased. The company needs to reduce it as over the years the company has managed a net profit margin of around 3.5% which was a little less than the industry average of 4.1% but it was close. In the year 2019, the company's net profit has reduced and reached at 1.48%. The company needs to reduce its administrative cost and increase sales. To be the best in the business company needs to have a profit margin that is above the industry. So, actions like reducing operating costs, increasing sales through promotions, etc. should be taken by the company. Reduction in operating profit margin shows the same that the cost of operations has increased which has reduced the profits. Since gross margins have stayed inline as per the past years like in the year 2017, 2016, 2015, shows that cost of sales is almost the same but operating expenses need to be worked upon.

Profitability ratios of the company describes that the company is a bit behind the average of the industry and to be the largest company in the industry, it has to make sure that profitability increases (Abdul 2017). For doing so the company has to make a strategy that reduces its operational cost and increases sales.

Management Effectiveness

2019

2018

2017

2016

2015

Return on Equity

8.88%

19%

22%

12%

16%

Return on Assets

3.12%

16.38%

7.63%

24%

7.71%

Return on Investment

6.61%

23%

28%

24%

20%

Management effectiveness is the ratios that help in understanding the effectiveness of management in using the equity and assets of the company (Ugoani 2018). Return on equity is the return that the company is generated for the equity shareholders of the company. From the year 2015 to 2018 the company was giving returns from 16% to 22%. The average return on equity lies in between. But in the year 2019, there is a sharp decline in the return on equity of the company. The one reason for that is the company has raised debt in the year and utilized its debt capacity for growth. This has reduced the returns on equity as debt has increased. The company needs to maintain the returns with debt. It has to increase it's earning to manage the burden of debt and improving the return on equity.

Return on Assets shows how well the assets of the company are generating returns. The returns concerning assets have been varying over the past 5 years. The highest was in the year 2018. In the year 2019 the profit margins of the company have declined due to increase expense of debt and operating expenses. This has reduced the returns of assets. To improve the ROA Company needs to boost sales and improve the operating efficiency to reduce the cost (Yanti and Dwirandra 2019).

Return on investment of the company measures the returns company can provide to its investors. These measures indicate the future investments. If the ratio is less then investors will look for another opportunity that is prevailing in the market. Return on assets has been inconsistent over the year for the company and it 2019 it slid at its lowest. The average return on investment in the retail industry lies at around 13%. The company was providing higher returns that make it an attractive destination for investment until the year 2018. Also, to become the largest company on the Index, the company needs to see that it provides better returns so that people invest more and by that growth can take place.

Financial Strength

2019

2018

2017

2016

2015

Interest Coverage

10.87

509.5

N/A

630

543.2

The interest coverage ratio defines the ability of the company for meeting its payments of interest. It defines the earning that a company is making (Cheng et al. 2016). The company has a very less amount of debt over the years. From 2015 to 2018, the interest coverage ratio was very high. Even in the year 2017, no interest was being paid by the company. In the year 2019, the company utilized its debt capacity and has taken loans for growth. This is when its interest coverage ratio has come down within the normal range. Still the company is having the paying capacity matching the industry average of 10.56%. The company still is earning a little better than the industry average which is a good sign and shows that the company can grow further into the business.

Efficiency

2019

2018

2017

2016

2015

Asset Turnover

2.1

5.51

6.70

7.21

2.41

Inventory Turnover

3.07

2.89

2.99

2.80

2.97

Receivable Turnover

45.42

56.74

67.26

96.33

63.74

Efficiency ratio helps in analyzing the use of assets. Inventory and receivables internally. It will help in knowing how the assets are performing and what the turnover of the industry is. This is used by investors for the investment purpose too (Minetto, Rossetti, and Marinetti 2018).

The asset turnover ratio shows the effectiveness of assets in bringing the sales for the company. It was highest in the year 2016 and has managed its returns between 5% to 7%. But in the year 2019, it has declined. The company has invested and assets have been improved but for returns, some time will be taken. But, these returns will push back certain investors. To make sure, this does not happen the company needs to increase its sales so that return on assets improves.

Inventory turnover shows the times the inventory for the company is fully consumed (No 2018). The ratio has been best in the year 2019. This shows that the company has made appropriate investments. It might have increased the cost of the company but the company can increase the momentum of its goods. The products were turned around more than 3 times in a year which is a good number and it can also be improved by the company.

Receivable turnover ratio shows the effectiveness of the company for extending the credit and collecting the debts. In the year 2019 the ratio has improved to 45 days. The company has its highest receivable turnover ratio in the year 2016 where debtors were giving 96 days. Lesser the number of days more will be the cash flow in the company. Also, in the year 2019 the liabilities of the company have increased so it is better than the company increases its cash flow and by a reduction in the receivable turnover ratio, cash flows will improve. So, to improve its performance the company is taking appropriate measures.

Liquidity

2019

2018

2017

2016

2015

Current Ratio

0.8269

0.9025

0.9454

1.406

1.42

Quick ratio

0.1561

0.17

0.35

0.44

0.60

Debt/ capital

0.4814

0.023

N/A

0.11

0.014

Liquidity ratio defines the ability of the company to pay off its debt without raising any capital from outside (Bunker, Cagle, and Harris 2019). Current ratio depicts the ability of the company to pay off its short term obligation. The current ratio of the company was apt in the years 2015 and 2016. After that, the ratio has declined. The company needs to improve its current ratio as it helps in having a better safety.

The quick ratio also depicts the liquidity of the company. It reduces the inventory from the assets. These are more liquid for the company. The quick ratio of the industry lies are .21 while the company's is at .15. There is not much difference between the two. Thus, the company has enough quick liquidity.

Debt to capital ratio shows the interest-bearing debt coverage with capital. Since the company has never utilized its debt capacity much before, the ratio depicts an average position. In 2019 it has improved as the company is using its capability of debt.

Thus, overall the health of the company is appropriate. There are certain improvements that the company needs to do like increase its sale, increase its return, and increase its function substantially to be the largest company on the index.

Financial Decision Making - Section - B

Critical Evaluation of Corporate Governance

ASOS has frameworks establishes for the financial controls internally. The effectiveness of the control systems are audited by the committee. The board approves the strategies of companies and in that Audit committee asses the board. This makes sure that the company complies with all the legal regulations. Also, the company has a defined line of structure for the responsibility and approval thereof. The company follows a procedure for reporting and has a consistent system concerning the prior appraisal of investments.

Non-financial corporate governance covers various areas of ASOS that includes compliance concerning legal and regulatory. The integrity of the business is to be followed and health and safety should be kept at top. The company also has certain standards for the corporate responsibility that includes trading ethically and standards of the suppliers that are to be me by every supplier. Also, the company takes care of the environment and makes sure that it does not hurt the natural resources in the process of manufacturing. The company's code of ethics has been made in such a way that everyone working acts with integrity and behaves ethically at work. The company's reports suggest that the company complies with the UK government's corporate governance codes and thus follows practices that are best for everyone.

Medium-Term Financial Strategies to Become FTSE100 Company

To become one of the FTSE100, the company needs to improve its market capitalization. In doing so, the company needs to grow. Company needs to take certain actions for that:

  • Raise capital: To grow the company needs investment. The company has started using its capacity for debt that is step one (Chugunov and Makohon 2019). For other companies can issue shares in the market. It will help in bringing the capital in the company that can be used for growth purposes.
  • Increase revenue: Company should focus on penetrating the market more. It should expand its operation in various Asian countries, where it is still not functioning. This will bring more customers and increase sales.
  • Investment strategy: For expanding its operations in various countries ASOS needs to have a proper strategy of investment. It should decide where its warehouse will be and how it will operate. Also, to bring in more money, the company can invest funds in the stocks. This will help in the growth of the company.

Conclusion on Financial Decision Making

ASOS plc is a company in the retail sector that has its business online for clothing and beauty. The ratios of the company depicts a good position. In the year 2019 the company's performance has dipped a bit. But the measures taking were appropriate. The company follows various policies regarding corporate governance as described by the UK government. This helps the company in building its image. The company plans to enter FTSE100 on the stock exchange for that it needs to build a financing strategy that should include raising the capital, expansion, and investment strategies. Thus, it will help the company in growing further and reach its target.

References for Financial Decision Making

Abdul, A.A.A. 2017. The Relationship between Solvency Ratios and Profitability Ratios: Analytical Study in Food Industrial Companies listed in Amman Bursa. International Journal of Economics and Financial Issues7(2), p.86.

Bunker, R.B., Cagle, C., and Harris, D. 2019. A Liquidity Ratio Analysis of Lean vs. Not-Lean Operations. Management Accounting Quarterly20(2), p.10.

Cheng, B., Cui, L., Jia, W., Zhao, W. and Gerhard, P.H. 2016. Multiple regions of interest coverage in camera sensor networks for tele-intensive care units. IEEE Transactions on Industrial Informatics12(6), pp.2331-2341.

Chugunov, I. and Makohon, V. 2019. Fiscal strategy as an instrument of economic growth. Baltic Journal of Economic Studies5(3), pp.213-217.

Giordani, P., and Halling, M. 2019. Valuation ratios and shape predictability in the distribution of stock returns. Swedish House of Finance Research Paper, (17-5).

Kumar, N.V. and Babu, M.G. 2018. Impact of valuation ratios on the performance of major Indian sectoral market indices. Asian Journal of Multidimensional Research (AJMR)7(9), pp.336-344.

Laitinen, E.K. and Laitinen, T. 2018. Financial reporting: profitability ratios in the different stages of the life cycle. Archives of Business Research6(11).

Minetto, S., Rossetti, A., and Marinetti, S. 2018. Seasonal energy efficiency ratio for remote condensing units in commercial refrigeration systems. International Journal of Refrigeration85, pp.85-96.

No, J.K.S. 2018. Decision Table with Inventory Turnover Ratio to Solve Operational and Strategic Issues. Journal of Information Systems Engineering and Business Intelligence: Volume 4 Number 1, April 20184, p.32.

Ugoani, J. 2018. Performance Ratio Analysis and Management Effectiveness. Business, Management, and Economics Research4(12), pp.171-177.

Wei, L. 2016. Decision-making Behaviours toward online shopping. International Journal of Marketing Studies8(3), pp.111-121.

Wells, J.R., and Ellsworth, G., 2016. ASOS PLC. [Online]. Available at: https://www.hbs.edu/faculty/Pages/item.aspx?num=50945 [Accessed on: 5th May 2020].

Yanti, N.M.Y.W.A. and Dwirandra, A.A.N.B. 2019. The effect of profitability in income smoothing practice with good corporate governance and dividend of payout ratio as a moderation variable. International research journal of management, IT and social sciences6(2), pp.12-21.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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