Introduction
In any businesses today, progress that businesses are making is recorded as basis for, among a host of other essential things, decision-making and as a benchmark for measuring the firm’s performance for the period under scrutiny (Ali, A 1993 and Pike, R & Neale, B 1999). A financial situation analysis is one such yardstick that documents current and future financial situation in an attempt to determine a financial strategy to help achieve organizational goals. This serves as a proof that more and more organizations are realizing the importance of the analysis of their financial situations in order to keep up with the demands of the business world nowadays.
This paper is evaluates and analyses the financial situation of Esprit. The main purpose of this paper is to examine the financial statements of the company by using tools such as Ratio Analysis and also to see what might be the other factors that can influence the company’s growth and its decision making and than to see the limitations of the financial analysis. These performance indicators are better known as ratios and constitute the main tools of conventional financial analysis. This serves as a proof that more and more organizations are realizing the importance the analysis of their financial situation in order to keep up with the demands of the business world. Basically, this paper will be discussing the financial status Esprit holdings Ltd. in accordance to their income statement, cash flow and balance sheet.
Corporate Profile of Esprit[1]
From www.esprit.com, it states that the company is an international youthful lifestyle brand offering smart, affordable luxury and bringing newness and style to life. The Group offers 12 product lines encompassing women’s wear, men’s wear, kid’s wear, edc youth as well as shoes and accessories through over 640 directly managed retail stores and over 12,000 wholesale point-of-sales worldwide, occupying over 817,000 square meters directly managed retail space in more than 40 countries.
Esprit licenses its logo to third party licensees that offer products bearing the same Esprit quality and essence to consumers. Esprit also operates the Red Earth cosmetic brand which includes cosmetics, skin care and body care products.
Esprit is listed on the Stock Exchange of Hong Kong Limited in 1993 and is a constituent stock in the Hang Seng Index, MSCI Hong Kong Index, FTSE All-World Index for Hong Kong and S&P/HKEx LargeCap Index and S&P Asia 50 Index.
Analysis
Typically, financial measures as well as the relationships utilized in performance measurement are designed to stress outcomes with minimal or no consideration of the decision processes of the manager. The traditional or conventional measures of performance are based on periodic profitability indicators without the consideration to particular variables that drive these measures (Daroca and Nourayi, 2002). Performance in the past is mainly based on conventional accounting and measures based on market performance. Specifically, these measures include the evaluation on net income, return on equity/capital employed, earnings per share as well as share-price return. Some financial outrages have put corporate governance in the business spotlight. Basically, the issues and interest in the subject corporate finance can be traced back at least to the eighteenth century and economists such as Adam Smith. Certainly, there is probably little new in the existing debate involving to financial negligence, except for the range of the financial and economic consequences which replicate the greater importance of finance in the current economy. The purpose of this paper is to examine the economic and financial context of corporate governance of a clothing company i.e. Esprit. It attempts to compare the current situation of these companies in terms of the financial reports. Basically, corporate governance has significant implications for the performance of the financial sector and, by addition, the economy as whole. Well-organised resource allocation is supported by strapping shareholder control rights, which assists investment in fresh development actions and confines the scope for corporate over-investment. Apparently, investment decisions are further linked to corporate governance insofar as investors prefer to invest in appropriately supervised corporations and be apt to avoid investing in ambiguous environments. In this way, the investor assurance created by sound corporate governance provisions and the security of minority shareholders encourages the financial market progress by encouraging share ownership and capable capital allocation across firms. Transparent financial reporting is necessary to sending efficient corporate governance.
For the last several years, the clothing industries in HK have seen the rapid growth of the number of firms offering financial situation analysis services. This serves as a proof that more and more organizations are realizing the importance the analysis of their financial situation in order to keep up with the demands of the business world.
Analysis of Information
- Profitability Ratios
From the given summary of income statement (see figure 1), Esprit Holdings Ltd grew revenues 25.60% from 29.64bn to 37.23bn while net income improved 24.52% from 5.18bn to 6.45bn. Basically, we can deviate from this values that Esprit was performing expressively despite of the current global financial crisis. As we can see in figure, both the revenue and net income of Esprit are constantly moving upward.
Figure 1. Summary of Profitability Ratios
(Prices are in HKD)
Source: http://www.hkex.com.hk
From the given situation and results of revenue and net income of Esprit, the company not only needs to evaluate their business strategies but also the political, economic, and cultural factors of their host country i.e. HK. It is not whether the business is in a market oriented status or not. The business norms in HK have been changing and are becoming more compatible with international codes and norms after a series of economic reforms (Barton, D., Newell, R. & Wilson. G. 2002). Given the nature of the HK economy and the large potential of the market, doing business with HK requires a continuous process of learning, caution for instability, and flexibility to catch opportunities.
· Liquidity and Debt Ratios
In financial analysis, the balance sheets of company reports conform to the financial ratios (see Appendix for the complete details of balance sheets of Esprit). The purpose of ratios is to find out how profitable the company is, we can calculate if company has enough liquid resources to pay its creditors, employees and finance charges. It is a useful to shareholders to find out their value of shares. Ratios are most powerful and simplest tool to evaluate company’s performance and its validity (Riahi-Belkaoui, A 1998).
Atril & Mclaney (2004) stated that by calculating a relatively small number of ratios, it is often possible to build up a reasonably good picture of the position and performance of a business. Ratios help to highlight the financial strengths and weaknesses of a business, but they can not, by themselves, explain why certain strengths or weaknesses exist, or why certain changes occurred. Just by details investigation will find the reasons. Ratios can be grouped into certain categories; each of them identifies a particular aspect of financial performance or, position. In this part of the paper, we’ll be considering the liquidity ratios and debt ratio of Esprit.
Liquidity ratios show how quickly the company can meet its short-term obligations using its current assets (Riahi-Belkaoui, A 1998). The following ratios are needed to determine the status of liquidity of the firm under analysis:
Ø Current Ratio; and
Ø Quick Ratio
Each of them are calculated for Esprit as follows:
The current ratio shows the ability of the company to pay its liabilities, i.e. debts and payables during the period (Pike, R & Neale, B 1999). It is expressed as:
As an alternative to the use of the current ratio, which may include financial statement items that are not easily liquidated and have uncertain liquidation values, the quick ratio does not include inventory in the computation of liquidity (Pike, R & Neale, B 1999). In formula:
Figure 2. Summary of Liquidity and Debt Ratios of Esprit
Source: http://www.hkex.com.hk
It is evident in the computations that Esprit was always in good position to meet its short-term debt. This means that Esprit is always bale to meet their current liabilities using their current assets (cash, inventory, receivables). The figures are not high so as to make the shareholders fear that the assets of the company are not working to grow the business, and not low so as to drive creditors away with respect to the level of risk present. Since quick ratios are perceived as a sign of the company’s financial strength or weakness, the figures in the previous table shows the relative stability of the financial strength of Esprit. A higher number would indicate stronger financial performance, and a lower one means weaker performance.
Apparently, the high financial leverage ratios of Esprit provide an implication that the organization is solvent in the long-term. With this regard, the debt ratio shows the Esprit’s position to meet its long-term obligation or liabilities. Debt ratios are dependent of the company’s classification of long-term leases and other items as long-term debt (Pike, R & Neale, B 1999). Pike, R & Neale, B 1999, stated that this is the gauge with which the financial strength of a company is a sign of the ratio of capital that has been funded by liability, counting preference shares.
A higher debt ratio (which means the company has low equity ratio) does not give the firm’s creditors the security they require from an organization (Pike, R & Neale, B 1999). The firm would, as a result, find difficulty in raising supplementary financial support coming from outside sources if the firm wishes to take such action. Therefore it reveals that the higher the debt ratio, the harder it is for the company to raise funds from the outside. Figure 2 shows the performance of Esprit in terms of debt ratio. Actually, Esprit Holdings Ltd uses little or no debt in its capital structure as supported by a debt to capital ratio of 0.00%.
Conclusion
The results of the analysis carried out on financial and marketing indicated very significant effects on business sustainability, even amidst the threats of unrest. Therefore, we could conclude that the business strategies such financial and marketing could still be expected to improve business sustainability faster than average.
The review of financial capabilities and resources towards business sustainability revealed very little inconsistencies regarding its strategies. This is coherent with its traditional inside-out approach. However, the need to reconcile both the inside-out and outside-in approaches becomes imperative now for marketing.
Moreover, it can be said that Esprit is a company whose financial situation is stable and highly likely to improve in the years to follow. To sustain their development, the company should regularly assess the value of their portfolio of its business. They have to be positioned on fast-growing opportunities, whether geographically or by market segment through choosing to invest in businesses with long-term tail-wind profiles. If the current financial situation carries on consistently, Esprit would well achieve their vision of becoming the leader in their industry and a major player in each of their market segments and key geographical markets. The comparison of the past and present performance helped in bringing out pertinent bits of information which led to the conclusion that the HK offices adds value and contributes significantly to the progress of the firm as a whole.
References:
Atrill, P & McLaney, E 2004, Financial Accounting for Decision Makers, 4th edn., Prentice-Hall, New Jersey.
Ali, A 1993, ‘Decision-Making Style, Individualism and Attitudes toward Risk of Arab Executives’, International Studies of Management & Organization, vol. 23, no. 3, pp. 53+.
Barton, D., Newell, R. & Wilson. G. 2002, When Is a Good Time to Make Strategic Advances? during a Crisis, of Course. The McKinley Quarterly, pp. 77+
Daroca, FP & Nourayi, MM 1996, Performance Evaluation and Measurement Issues, Journal of Managerial Issues, vol. 8, no. 2, pp. 206+.
Pike, R & Neale, B 1999,Corporate Finance and Investment Decision and Strategies, 3rd edn., Pearson Education Limited, England.
Riahi-Belkaoui, A 1998, Financial Analysis and the Predictability of Important Economic Events, Quorum Books, Westport, Connecticut.
www.esprit.com
Appendix
Esprit Holdings Ltd Balance Sheet
Source: http://www.hkex.com.hk
[1] From www.esprit.com
Credit:ivythesis.typepad.com
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