Ralph Lauran Corporation is one of the leading companies in designing, advertising, marketing and distribution of high quality lifestyle products. It offers products basically in 5 different categories, namely, home, accessories, apparel, hospitality and fragrances (Annual Report, 2020). The reputation and image of the company is developing continuously across the wide range of brands, number of products and international markets. Ralph Lauren has effectively maintained its level of long term debt at around US $585.80 million. There has been a significant rise in cash and cash equivalents of the company from US $584.10 million in 2019 to US $1620.40 million in 2020. Moreover, the company has efficiently generated US $754.60 million cash from operating activities and has incurred an additional capital expenditure of US $73 million in 2020.
Cash flow from investing activities has been increased substantially to US $702.10 million from the negative cash flows of US $879.30 million. Total payment of cash dividends amounted to US $203.90 million in 2020 which is more than the amount of dividends paid in 2019 (Ralph Lauren, 2020). The main purpose of the report is to analyze the financial position and health of the company by calculating various ratios, namely profitability, gearing, investment and liquidity ratios to help the investors in their decision making process. Also, various factors are to be identified that have influenced both short term and long term operations of the company. At last, recommendation is to be provided to the investors whether to invest in the shares of Ralph Lauren or not.
Profitability ratios |
|||
Particulars |
Formula |
2020 |
2019 |
Gross profit margin |
(Revenue - COGS)/Revenue |
0.59 |
0.62 |
Operating profit margin |
Operating profit/Revenue |
0.05 |
0.09 |
Net profit margin |
Net income/Total sales |
0.06 |
0.07 |
Return on assets |
Net income/Average total assets |
5.81 |
7.13 |
Return on equity |
Net income/ total equity |
12.85 |
12.78 |
Return on invested capital |
Net operating profit after tax/Total invested capital |
7.34 |
9.77 |
Profitability ratios help in assessing the ability and competency of the company to generate higher amount of revenue relative to its tax payments, operating expenses and shareholders’ equity. The total revenue of the company has been reduced to US $6159.80 million in 2020 from US $6313.00 million in 2019 while cost of revenue has increased to US $2504.30 million from US $2419.80 million due to which there is a fall in the gross profit of the company from US $3893.20 million to US $3655.50 million (Morningstar, 2020). Total operating expenses including selling and administrative expenses, labor expenses and other related expenses have also increased leading to decline in the net operating income off the company. Net operating income of the company is reduced by US $244.8 million in the current year. Finance costs related to interest expenses have been remained the same and there is substantial increase in the investment and interest income of the company. Analysis of income statement indicates that the profit of the company was reduced to US $259.00 million in 2020 from US $458.50 million in 2019 due to inflow of various unusual items (Infront Analytics, 2020). It cannot be considered as a positive indication that the company’s profits are getting affected by these unusual items. However, the financial position of the company will improve soon with a stipulated period of time (Simply Wall Street, 2018). There are many listed companies whose financial statements and position get affected by various unusual items but they disappear after some time. Therefore, there is high probability that the Ralph Lauren will generate higher amount of profit in the next year and undertake suitable measures to reduce the amount of operating expenses.
Gearing ratio |
|||
Particular |
Formula |
2020 |
2019 |
Gearing ratio |
Total Debt/Total equity |
0.8 |
0.27 |
Gearing ratio help in achieving better understanding with regard to capital structure of the company by comparing shareholders’ equity with the total amount of debt borrowed by the company to finance its operations. This ratio has increased from 0.27 in 2019 to 0.8 in 2020. The rise in gearing ratio indicates that the capital structure of the company comprises of more amount of debt than total amount of equity (Simply Wall Street, 2019). This will raise the expenses in the form of interest which is to paid at regular intervals of time to the lenders and thus affect the overall profitability of the company. Also, the interest paid on debt is considered as a charge against profit; therefore, it is to be paid irrespective of profits earned by the company in a particular year.
Liquidity ratios |
|||
Particulars |
Formula |
2020 |
2019 |
Current ratio |
Current assets/Current liabilities |
1.61 |
3 |
Quick ratio |
Quick assets/current liabilities |
1.21 |
2.16 |
Liquidity ratios help in analyzing the capability of the company in meeting its short term liabilities or debt obligations. Current liabilities have been increased to US $2092 million in 2020 from US $1200 million in 2019 (Morningstar, 2020). However, amount of current assets have been lowered down by US $219.6 million. With this decreased level of current assets, the company has the ability to meet its short term debt obligations. Quick ratio has also been declined from 2.16 to 1.21 because of the increase in current liabilities.
Investment ratios |
|||
Particulars |
Formula |
2020 |
2019 |
Price - earnings (P/E) ratio |
Price/EPS |
17.99 |
20.41 |
Earnings Per Share |
Net income/ No. Of shares |
4.98 |
5.27 |
Payout ratio |
Dividend per share/EPS |
31.4 |
44.4 |
Investment ratios are used to determine and analyze the performance of the shares of the company in the market. Price earnings ratio, payout ratio and Earnings Per Share, all these are calculated to help the investors in undertaking investment decision regarding whether to invest in the company’s shares or not. The occurrence of unusual items has somehow reduced the earnings of the company over the last year. Therefore, profit-earnings ratio of the company has reduced to 17.99 in 2020 from 20.41 in 2019 (9CSI Market, 2020). Earning per share reduced to 4.98 from 5.27 over the last year. However, there are high chances that these ratios will get improve in the next year (Simply Wall Street, 2020). Fall in the payout ratio indicates that the company has reduced the payment of dividend amount to the shareholders. It has retained the larger amount of profits to meet the future growth opportunities. These opportunities will help the company in restoring its place in the industry.
In order to determine and analyze the factors that have affected or may affect the future performance of the company, PESTLE analysis would be considered as an effective tool (Parera, 2017). This tool provides the list of various macroeconomic factors that may influence the performance and profitability of the company. Pestle stands for the acronym, political, economic, socio-cultural, technological, legal and environmental factors. The environment in which Ralph Lauren carries out its operations is dynamic and complex featured by growing competition, changing customer preferences, technological advancements, regulatory changes and legal amendments.
The investors can buy the stock of Ralph Lauren although its financial performance has been decreased in the current year as compared to previous year figures because it has performed better as per industry averages. There are high chances that the financial ratios will get improve in the next year (Ralph Lauren, 2020). Fall in the payout ratio indicates that the company has reduced the payment of dividend amount to the shareholders. It has retained the larger amount of profits to meet the future growth opportunities. These opportunities will help the company in restoring its place. There are many listed companies whose financial statements and position get affected by various unusual items but they disappear after some time. Therefore, there is high probability that the Ralph Lauren will generate higher amount of profit in the next year and undertake suitable measures to reduce the amount of operating expenses.
Ralph Lauren should undertake effective control over the expenditure in order to improve its long term profitability and sustainability in the market. It must formulate and implement management strategies after thorough analysis of current trends followed in the market (Amatulli et al., 2017). It must establish an effective system to analyze the requirement for skilled employees and workers as shortage of labor at times, affect the efficiency of the business operations. It must consider fluctuations in exchange rate and interest rate while undertaking investment. Marketing and various business strategies must be developed after taking into consideration the demographic characteristics and must select the right segment of the market which has high potential of growth. The practices of business management must be changed at the time of entering the markets with low or high power distance. It must form local teams and develop partnerships with the local firms in order to get the idea about the societal norms and attitudes to customize its marketing strategies as per the culture of different society.
Amatulli, C., De Angelis, M., Costabile, M., & Guido, G. (2017). Sustainable luxury brands: Evidence from research and implications for managers. Springer.
Annual Report. (2020). Ralph Lauren Corporation. Retrieved from http://investor.ralphlauren.com/static-files/68fc21c4-168b-44eb-b23d-16e551109737
CSI Market. (2020). Ralph Lauren. Retrieved from https://csimarket.com/stocks/fundamentals_glance.php?code=RL
Infront Analytics. (2020). Ralph Lauren Corporation. Retrieved from https://www.infrontanalytics.com/fe-EN/33151NU/Ralph-Lauren-Corp-/gprv-profitability
Li, Z., Minor, D. B., Wang, J., & Yu, C. (2019). A learning curve of the market: Chasing alpha of socially responsible firms. Journal of Economic Dynamics and Control, 109, 103772.
Morningstar. (2020). Key ratios. Retrieved from https://financials.morningstar.com/ratios/r.html?t=0P0000CJC8&culture=en&platform=sal
Morningstar. (2020). Ralph Lauren. Retrieved from https://www.morningstar.com/stocks/xmun/prl/financials
Perera, R. (2017). The PESTLE analysis. Nerdynaut.
Ralph Lauren. (2020). Financial Highlights. Retrieved from http://investor.ralphlauren.com/financial-information/fundamentals/income-statement
Ralph Lauren. (2020). Investor relations. Retrieved from http://investor.ralphlauren.com/news-releases/news-release-details/ralph-lauren-reports-first-quarter-fiscal-2020-results
Simply Wall Street Pty Ltd. (2018). Ralph Lauren Corporation (NYSE:RL): Financial Strength Analysis. Retrieved from https://simplywall.st/stocks/us/consumer-durables/nyse-rl/ralph-lauren/news/ralph-lauren-corporation-nyserl-financial-strength-analysis/
Simply Wall Street Pty Ltd. (2019). Is Ralph Lauren Corporation (NYSE: RL) A financially strong company? Retrieved from https://simplywall.st/stocks/us/consumer-durables/nyse-rl/ralph-lauren/news/is-ralph-lauren-corporation-nyserl-a-financially-strong-company/
Simply Wall Street Pty Ltd. (2020). Ralph Lauren’s (NYSE: RL) earnings are growing but is there more to the story? Retrieved from https://simplywall.st/news/ralph-laurens-nyserl-earnings-are-growing-but-is-there-more-to-the-story/
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