Executive Summary
This analysis looks at two Australian companies in the fashion industry, and basically takes three fundamental perspectives. These perspectives are the financial stability, efficiency in using the shareholders’ investment, and business profitability. To help in the endeavour, a number of ratios for the two businesses have been looked at, which include current ratio, quick ratio, debt-asset ratio, inventory turnover, creditors turnover among other ratios.
The analysis shows that both companies have a poor standing with respect to the amount of debt used in operating business. Apart from market capitalization, there is no particular one area which any of the companies could be labelled as stronger than the other since one company is strong in one aspect while weak in another aspect that falls in the same category as the first. Thus, it is recommended that both companies work to reduce the amount of debt used in business operation.
Introduction
This analysis looks at two companies, which fall in the same fashion industry in Australia. One of the companies analysed is the Specialty Fashion Group which was founded in 1933 by Miller and Gary. It started as Miller’s Retail Limited. The business saw a rapid growth that enabled the establishment of 147 extra stores by 1998. It was listed in 1998, and this gave the business a bigger justification for diversification as the century turned. Currently, the company has a market presence in both Australia and New Zealand. It currently owns more than 840 stores in Australia and New Zealand. Its main differentiating factor in the market is that it operates a lean cost base which enables it to garner a high apparel margin especially when there is smooth operation and there is little market turbulence.
The other company is Noni-B, which is also a fashion retailer in Australia, and was established in 1977 and currently owns over 170 stores in Australia. It was listed on the Australian stock exchange in May 2000. It mainly operates its stores in shopping centres. Noni-B also owns and operates the Liz Jordan stores as part of its brands. A differentiating factor for this business in the market is the kind of market clientele it targets and its mode of targeting these customers (Noni- B, 2010).
Company Analysis
Profitability
For the year ended 2009, Noni B had a gross profit margin of 57.48% while the following financial year saw it increase to 59.69%. This implies that the company is currently more efficient in extracting and retaining profit from each dollar invested by investors than it was a year ago. During the same periods, Specialty Fashion Group had a gross profit margin of 57.52%. This is slightly higher (by 0.04%) than the respective year for Noni B limited, which was 57.48%. It means that for the year 2009, Noni B would have attracted investors than Noni B since SFG has a higher retention than NBL.
There is a significant drop in the gross profit margin for SFG for 2010 financial year while the NBL records an improvement in its gross profit margin. Thus, NBL has overturned the tables and now performs better in retaining a part of every dollar invested than it was retaining earlier as compared to its competitor (Specialty Fashion Group). In other words, for the two companies, NBL currently retains a greater portion of its generated revenues for the purposes of servicing administrative obligations and paying off other costs.
When we look at the return on shareholder’s equity, there is a significant difference between the two companies. For instance, in 2009 NBL registered return on equity of 9.75% while SFG registered a 73.32% return on equity. Given that the ROE measures the amount of net profit made by a firm using the investors’ money; it is evident that SFG exhibited higher income on the shareholders’ investments.
For the year 2010, even though SFG still generates a higher net income from the shareholders’ equity, we realize that there a tremendous drop in the figure when it compared the one recorded in 2009. A reduction by 23% is significant and this can be a worry for the investors as it reduces predictability, hence making investors have less confidence (Goto, 2009). However, the risk of investors investing despite the huge uncertainty should be compensated by higher profit margins that are recorded.
Efficiency
A firm’s efficiency in profitably employing the shareholders’ investment is gauged by a number of ratios which include return on assets (ROA). There is a bid disparity between the two companies when it comes to the return on assets realized. In 2009, NBL had a ROA of 5.36% while its competitor had a ROA of 22.38% for the same year. This shows that in 2009, SFH was more efficient in generating return from its assets when compared to the efficiency of NBL on the same scale. For the year that followed, NBL recorded an increased ROA which went up to 12.65%. We notice an increase of about 7.3%.
The competitor’s ROA moved from the previous 22.8% to 30.04%, and this gives an increase of about 7.7%. Thus, it is evident that even there is a wide difference in the individual ROAs, the rate of growth in ROA remains almost the same or at least the difference in growth is slim and could easily be accounted for by the difference in capitalization.
The asset turnover times for the two firms enables us to have a hint of how each of the firm is effective in generating sales from their respective assets. For this reason, a higher value of asset turnover is interpreted as an indicator for better performance since the share prices for the two companies are considerably not different. The asset turnover for NBL for 2009 was 2.68 times while SFH had 3.68 times. The asset turnover for NBL reduced to 2.61 times in 2010 while that for SFH increased to 3.88 times.
Given the disparities in the profit margins, it would be expected that SFH would have a lower asset turnover since it recorded high levels of profit margins. It would also be expected that NBL would have an asset turnover greater than that of SFH.
Another efficiency ratio is the inventory turnover ratio, which enables us to determine the rate at which the firms turn their inventory into or merchandise into sales (Dirks 2007). Therefore, we expect that low inventory turnover rates are indicative of slow conversion of inventory into sales. On the contrary, Dirks (2007) continues to note, high inventory turnovers indicate the firm quickly turns its inventory into sales. When the days for the year or period under consideration are divided by (the ratio what results gives us a hint of how many days it takes the firm to sell the merchandise it has on hand completely.
At this point, the higher the days the lower the rate of converting inventory into sales. NBL initially has 105 days for the year 2009, but this figure increases to 122 days. It signifies that while all stock on hand would be sold completely after 105 days, this period has currently increased and it now takes longer to turn the available stock into sales. This may be an indication of heightened completion in the industry, unfavourable changes in sales strategies, loss of customer loyalty due to brand redundancy or overstocking, among other issues. SFH had inventory of 67 days in 2009, which increased by one day to 68 days in 2010. However, the increase recorded by NBL is evidently significant as it still shows that SFH is still more efficient in turning inventory into sales.
The Debtors turnover gives information on the length of time taken for the outstanding debts to be settled by the customers. In other words, what is the firm’s level of efficiency in collecting its accounts receivables? Therefore, this ratio gives us important information on the credit policy of the company. For both 2009 and 2010, SFH has no entry for the debtors’ turnover ratio. This means that it very stringent and does not allow customers any credit terms. For NBL, the figure increased from 1.38 days in 2009 to 1.5 days in 2010.
The implication is that previously, the company would collect all the debts it was owed by customers within 1.38 days of offering the credit terms. However, it has become slacker thus the period has increased to 1.5 days (Pratt, 2008). Conversely, in 2009, SFH took an average of 67 days to settle all debts it owed to suppliers though the figure increased to 77 days in 2010. SFH previously recorded a creditors-turnover of 21 days implying that the firm averagely took 21 days to pay off all its accounts payable. The figure increased by 2 days in 2010. It means that it currently takes longer than before by 2 days to settle its accounts payable.
Financial stability: short-term and long-term
The current ratio shows how easily a firm can settle its short-term financial obligations as they fall due. In other words, it shows us how many times the current assets can be deployed to pay off short-term liabilities. With this in mind, we have sufficient evidence to say that NBL is better placed in terms of readiness to settle its short-term financial obligations than SFH. In 2009, NBL had a current ratio of 1.27 which meant that its current assets at that time could pay off current liabilities 1.27 times. However, SFH had a current ratio of 0.566, and this was a dangerous standing because it implied that even the current assets could not fully pay for the current liabilities. In fact, even though SFH recorded an increase in its current ratio, the current ratio as it presently stands cannot meet the firm’s current financial obligations fully; thus it stands at 0.838.
However, when the inventories are eliminated from the calculation, we see that both companies have quick ratios that are less than 1 for both periods. In fact, the two firms fall in almost similar situations (Pratt, 2008). This means that NBL heavily relies on stock settle its current liabilities yet we previously saw that the firm has difficulties in turning the stocks into cash as it takes longer to convert inventory into sales (this was relayed in the inventory turnover days).
With respect to the debt-asset ratio, SFH is more at risk in operation than NBL both for the current year and even for the year 2009. In 209, it had a debt-asset ratio of 79.77%, though this reduced to 58.92% in 2010. In comparison, NBL had 46.43% in 2009 which reduced to 42.9% in 2010. A similar perspective is derived from the debt-equity ratio (Cockerell et al 2007). This has exposed the greater risk SFH is facing as its ratio is over 100%. At this point and in consideration for this ratio, NBL still stands at a slightly lower risk in operation. Nevertheless, the ratios for both firms are still high.
Additional information
As of 23rd December, 2010, the market capitalization for Specialty Fashion Group stood at 216 million dollars. Specialty Fashion Group trades under the stock trading code of SFH. The shares for the company traded at an average share price of $1.120 as at 23rd December 2010, and the volume traded was equivalent to 10,575 shares. On the other hand, Noni B has a market capitalization of 34 million dollars as of 23rd December 2010 represented by an equivalent of 32 million shares (Aegis Equities Research 2010). For the financial year ended June 2010, SFH had a yield rate of 7.1%, which was a substantial increase over the previous year’s 0.0% yield rate. The earnings per share for the company for the year ended June 2010 was 15.7, also indicating an increase over 11.7 recorded the previous year.
For Noni B, the yield rate for the year ended 2010 stood at 7.8%. This is a moderate yield rate though it is notable that it slightly exceeds the one recorded by SFH by 0.7%. NBL recorded earnings per share of 12.1 for the year 2010 which was an increase over the last year’s record by about 71.4%. It is worth noting that we saw above that SFH had an EPS of 15.7 which was an increase from 11.7. This increase is about 25.5% for purposes of comparison. Therefore, it is evident that NBL recorded a higher growth in EPS than its competitor SFH.
Limitations
Most financial ratios are useful when they are compared on a large scale; for example when the firm’s ratios are tallied to those of the sector or to the industry averages. The scope of this company analysis limited this to the Specialty Fashion Group limited and Noni-B limited. Secondly, while companies are driven by different objectives and mission, these become important decision points for investors wishing to invest in a particular company or firm. This is also not covered under this analysis. Nevertheless, the information provided in this analysis is intended to help both companies and guide current and prospective investors in aligning their investment decisions with their desired outcomes or objectives.
Recommendations
The first recommendation is for the SFH limited to reduce the amount of debt incorporated into the operation of the business. The debt-equity ratio stands at 143%, and this is financially dangerous and risky to the common shareholders. Secondly, to the NBL management, since the average period taken for collecting debts seems to be increasing, it might cause a problem especially given that the business currently takes averagely longer to pay its creditors than it used to do in the previous business years. NBL should also work at reducing the debt-equity ratio as the current standing puts the business operations at risk.
List of references
Aegis Equities Research (2010) Specialty Fashion Group Limited-SFH: Company Profile. Web.
Cockerell, L; Pennings, S & Kent, C (2007) Private Business Investment in Australia. Web.
Dirks, M. (2007) From Value to Growth Stocks–A Financial Ratio Analysis. Web.
Goto, M. (2009) Financial Ratio Analysis: An Application to US Energy Industry. Journal of Productivity, Efficiency, and Economic Growth, Springer. Web.
Noni- B. (2010) About Noni-B. Web.
Pratt, S. (2008) Valuing a business: The analysis and appraisal of closely held companies. Web.