2012

Introduction to Accounting

FINANCIAL ANALYSIS

INTRODUCTION TO ACCOUNTING

Introduction to Accounting

Contents
Contents................................................................................................................ 2 Executive Summary .............................................................................................. 4 Introduction............................................................................................................ 5 Brief History........................................................................................................... 6 Company Performance Ratio.................................................................................7 Profitability.......................................................................................................... 7 Return on Capital Employed............................................................................ 7 Gross Profit Margin.......................................................................................... 7 Company Performance Ratio.................................................................................8 Profitability.......................................................................................................... 8 Operating Profit Margin................................................................................... 8 Net Profit Margin.............................................................................................. 8 Return on Capital Ratio.......................................................................................... 9 Analysis on the ROCE.......................................................................................... 9 2008 - 2009................................................................................................... 10 2009 - 2011................................................................................................... 10 2012.............................................................................................................. 10 Gross Profit Margin............................................................................................... 11 Analysis on GPM................................................................................................ 11 2008 2010................................................................................................... 12 2011.............................................................................................................. 12 2012.............................................................................................................. 12 Operating Profit Margin ....................................................................................... 13 Analysis on Operating Profit Margin.....................................................................14 2008 - 2010................................................................................................... 14 2011.............................................................................................................. 14 2012.............................................................................................................. 14
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Net Profit Margin.................................................................................................. 15 Analysis of Net Profit Margin................................................................................15 2008 - 2010................................................................................................... 15 2011.............................................................................................................. 15 2012.............................................................................................................. 16 Conclusion .......................................................................................................... 16 Recommendations .............................................................................................. 18 Bibliography......................................................................................................... 20 Appendix.............................................................................................................. 21 Average daily visitors ...................................................................................... 21

Introduction to Accounting

Executive Summary
The reason for this chosen performance ratio is to compare the earnings of the company with the expenses as it is known that the top priority for potential shareholders is to know if the company will give them a return at the end of the financial year; this will also show the companys overall efficiency and performance which is also key. This Profitability selected area will give prospective investors a view of the performance in the companys profit for the past 5 years and what the forecast looks like in the years to come. The emphasis of this report is to expand the potential shareholders knowledge about the advantages or disadvantages of investing in ASOS. There will also be brief glance at the market share to which ASOS holds in our
growing fashion world especially in the UK.

From the report, a conclusion will be drawn and recommendations made with backed up analysis from previous years as to why it is profitable or not profitable to buy shares in ASOS.

Introduction to Accounting

Introduction
This report aims to focus on ASOS. One of the reasons is because it is

a relatively new company and it has been a global phenomenal to which many use at some point in life. The rationales behind this report were to critically analysis the profitability of ASOS, within this report there will be a focus on the profitability, which will look into the gross profit margin, return on capital, net profit margin, and operating profit margin. All this will support to determine if the company either a profitable on unprofitable venture to invest in. After all the findings a conclusion will be drawn as to if it is profitable for shareholders to invest in ASOS or if it will be advisable for shareholders to look into investing in its competitor.

Introduction to Accounting

Brief History
ASOS is an international online fashion and beauty retailer and offers over 50,000 branded and own label merchandise across womenswear, menswear, footwear, accessories, jewellery and beauty. As a company, ASOS developed websites to target the UK, Australia, Spain, USA, Germany and France also delivers to over 190 other countries from the central supply centre in the UK. ASOS is targeted at fashion accelerative 16 to 34-year-olds; ASOS attracts over 13 million exclusive visitors a month and 3.2 million active customers from 160 countries.

Introduction to Accounting

Company Performance Ratio Profitability

Return on Capital Employed
Net Income x 100% Return on Capital Employed (Non-Current Liabilities + Shareholder Fund)
= =

2008 7311 x 100% (680 +15944) 731100 16624 43.98%

2009 14125 x 100% (0 + 25709) 1412500 25709 54.94%

2010 20339 x 100% (0 + 45478) 2033900 45478 44.72%

2011 15705 x 100% (0 + 72120) 1570500 72120 21.78%

2012 30349 x 100% (0 + 95235) 3034900 95235 31.87%

Gross Profit Margin

Gross profit x 100% Gross profit margin Sales
= =

2008 37284x 100% 81044 3728400 81044 46.00%

2009 71699 x 100% 165395 7169900 165395 43.35%

2010 93132 x 100% 222999 9313200 222999 41.77%

2011 131690 x 100% 339691 13169000 339691 38.77%

2012 251970 x 100% 494957 25197000 494957 50.91%

Introduction to Accounting

Company Performance Ratio Profitability

Operating Profit Margin
Operating Profit x 100% Sales
= =

2008 6962x100 81044 696200 81044 8.59%

Operating Profit Margin

2009 13935 x 100 165395 1393500 165395 8.43%

2010 20311 x 100 222999 2031100 222999 9.11%

2011 15907 x 100 339691 1590700 339691 4.68%

2012 31199 x 100 494957 3119900 494957 6.30%

Net Profit Margin

Net Profit x 100% Net Profit Margin Sales
= =

2008 7311 x 100% 81044 731100 81044 9.02%

2009 14125 x 100% 165395 1412500 165395 8.54%

2010 20339 x 100% 222999 2033900 222999 9.12%

2011 15705 x 100% 339691 1570500 339691 4.62%

2012 30349 x 100% 494957 3034900 494957 6.13%

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Return on Capital Ratio

Return on capital employed (ROCE) is a measure of the revenues that a business is achieving from the capital employed, generally considered in percentage. Capital employed equals a company's Equity plus Noncurrent liabilities (or Total Assets Current Liabilities), in other words all the long-term funds used by the company. ROCE indicates the efficiency and profitability of a company's capital investments. (Anon, 2011)

By paralleling net income to the totality of a company's debt and equity capital, you will get a vibrant picture of how the use of leverage influences a company's profitability. As an analyst, a consideration of the ROCE measurement to be a more broad profitability measure because it gauges the management's ability to generate earnings from a company's total capital. ROCE should always be higher than the rate at which the company borrows otherwise any increase in borrowing will reduce shareholders' earnings, and vice versa; a good ROCE is one that is greater than the rate at which the company borrows. (Anon, 2011)

For this calculation, this report has used the profit before tax method (Net profit before taxation), bearing in mind that the taxation charges in the accounts can be subject to various adjustments, and this method will measure the pre-tax profit against what the shareholders like yourselves have invested in the entity.

Analysis on the ROCE

From Fig.1, it is clear that the company has seen some sort of growth in the past years.

Introduction to Accounting

2008 - 2009
ASOS saw the highest rise in the companys profit till date, there was an outstanding result for ASOS The Company made record sales that were up by 90% to 81.0m, and record profits (before tax), up 117% to 7.3m, this was achieved when a number of retail businesses were reporting rough trading conditions. 2008 was the only year that ASOS had long-term liability affected the overall return in that year.

2009 - 2011
During this years there was a widely forecast for the slowdown in consumer spending, especially with the younger customer group and the Internet continued its robust growth as a retail channel. In the year 2010, ASOS turned ten and has had cutting-edge growth from a small innovative start-up to a leading UK fashion brand. Although the company saw a dip in 2011, a continuous investment as was being made has the company is said to have a very bright future. Fig. 1

2012
The sudden change as explained earlier explained was a loss of competitive advantage in the market and it is is gaining its market share back in the year 2012. Therefore it s i t R c n a m o f r e P clear that the company

60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

ReturnOn Capital Employed

ROCE

2008 2009 2010 2011 2012

shows that the company is able to extract more earnings out of every pound of capital it employs. As a high ROCE specifies that a larger chunk of profits can be invested back into the company for the benefit of shareholders.

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Consistency is a key aspect to performance. In other words, investors have continued to reinvest in the company on the basis on how the ROCE has behaved over some years and have followed the trend closely. ASOS is a company that, year on year, its earns higher returns on every pound invested in the business and has a higher market valuation.

One of the main things to look out for is the fact that ASOS does not have a huge long term borrowings or owings running the company on the shareholders fund; this means that, all monies will be for the profit of the shareholders and the company.

Gross Profit Margin

Gross profit of an entity is its remaining profit after selling a product or providing a service and deducting the costs connected with its production, rendering and sale. The accompanying costs can include manufacturing costs, raw material expense, direct labour charges, and other directly attributable costs. (Anon, 2005)

Gross profit is a very significant measure to be considered when analysing the profitability and monetary performance of a company. Gross profit is a vital gauge because it indicates the proficiency of the management in using labour and materials in the production process. Changes and trends in gross profit margin often provide valuable information for the investors. Therefore, the gross profit of a company should be analysed over a number of periods. (Atrill, 2001)

Analysis on GPM
Although gross profit provides the significant evidence about how much mark up a company can make on its sales, it is not the best measure of profitability of a company as a whole because it excludes many costs such
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as financing costs and overhead expenses. (Anon, 2005) gross profit.

Therefore

profitability of a company should not be measured solely on the basis of

2008 2010
There was a steady decline during these years within the company, with the main dip in 2011 as a result of other online fashion companies coming into the market and it was also down to the recession that the world is experiencing currently. In 2010 ASOS introduced free delivery thresholds and free returns, this brought about a net loss for the year of 2.9m. The cost of free returns was charged directly against the P&P margin, this cost was 1.6m in the second half.

2011
Like in the calculation of the ROCE, one can see here also that in the year 2011, the same decline was reflected in the companys financial report. This confirms that the economic situation was one of the causes of the decline. Although there was a decline in the gross profit margin, from the calculation below shows that for every 1 of sales generated, ASOS makes around 0.39 gross profit in the year 2011. A sharp decrease in the gross profit margin and the corresponding sharp increase in sales may propose that the company has lowered prices in order to stimulate sales.

GrossProfitMargin
2012
The calculation below shows that for every 1 of sales generated, around ASOS makes

60.00% 50.00% 40.00% 30.00% 20.00%

i t R c n a m o f r e P

GPM

0.51 gross profit in the

10.00% 0.00% 2008 2009 2010 2011 2012

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year 2012. This is seen as the year the company made its highest profit till date. Fig.2

You can see here in Fig.2 that the company in the last five years has not seen a year where it is making less that 0.30 per every pound generated in its sales. The graph above compared with an industry average of these years suggests that the company had a satisfactory performance in 2012. In 2012 the 'ASOS' own-label brand established its own identifications as a global fashion brand and Menswear saw a particularly strong performance in that year.

Operating Profit Margin

Operating profit also known as return on sales (ROS) points out how much profit an entity makes after paying for variable costs of production such as wages, raw materials, etc. (but before interest and tax). It is the return attained from normal operations and does not include unique or one off transactions. ROS is usually expressed as a percentage of sales (revenue). (Anon, 2005)

Operating profit margin can be used both as a tool to analyse a company's performance compared to its past performances. The ratio varies widely by industry but is useful for comparing dissimilar companies in the same industry. Let's face it, as an investor your main objective is to make money and retain it; this depends largely on liquidity and efficiency. Since this physiognomy determines a company's capacity to pay investors a dividend, profitability is echoed in share price. Naturally, because the operating profit margin accounts for not only costs of materials and

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labour, but also administration and selling costs, it should be a much smaller figure than the gross margin. (Anon, 2005)

Analysis on Operating Profit Margin

2008 - 2010
If you follow the historical amendments of the operating profit margin on return investment. on Fig.3 from 2008 2010 it is clear that ASOS are operating at about 7% on

Performance Ratio

10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2008

OperatingProfit Marg in

2011
There was significant drop of about 60% in the operating margin in profit 2011;

OP M

2009

2010

2011

2012

this can be either down to direct costing or spending within the organisation. For the 2011 ASOS invested substantially in its people Fig. 3 during the year, taking on 273 new colleagues.

The recruitment strategy made payroll increase by 38%, thereby delivering further operating cost improvement. This was done in aid to make sure that the necessary expertise and management structures are in place to deliver its future growth strategy. Other factors are production of the goods, warehousing the goods, marketing and depreciation all this was increased in 2011 due to the new competition in the online fashion industry.

2012
In 2012 ASOS invested in price points and quality of the 'ASOS' own label, which helped increase the growth of the brand, whilst technological innovation continued through developments like iPhone and iPad shopping apps, magazine apps, developments to the Fashion Finder and
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Marketplace websites.

Another factor was the fact that ASOS launched

the country-specific websites in Australia, Spain and Italy.

Net Profit Margin

The profit margin expresses to you how much profit a company makes for every 1 it generates in revenue or sales. (Kennon, 2009)

Net profit margin is one of the most important models used to understand a companys performance; net profit is not a measure of how much cash a company received during a specified period, this is because the income statement includes a lot of non-monetary expenses such as depreciation and amortization.

Analysis of Net Profit Margin

2008 - 2010
There was a steady growth with the between these year apart from the slight decline in 2009. This was quickly improved in 2010 as seen in Fig.4. There was an improved advertising investment, which drove a 130 basis point dilution in the retail margin, and in addition, ASOS offered customers a number of free delivery periods over the Christmas trading period. This effort accounted for most of the weakening in the net profit gross margin.

2011
In 2011 ASOS saw the sharpest low for years in the company, some of the factors to this was the restructuring on the people side;

Net Profit Marg in 10.00% 8.00% 6.00% 4.00% 2.00%

i t R c n a m o f r e P

NPM

0.00% 2008 2009 2010 2011

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2012Fig. 4

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these included the dual site decollation costs, relocation and redundancy costs, staff training, and other one-off costs. In this case, lower net profit margins signifies a pricing strategy; especially as a retailer, who is known for their reasonably priced goods with a high-volume approach.

2012
Over the historical four years, ASOS has financed over 35m in guaranteeing that technology in the company is of the top standard and high-tech. knowing fully well that customers value the depth of choices that, online processes can offer.

During the 2012 Marketplace was rolled out to International sites and now promote product from a number of international boutiques. ASOS Magazine and shopping apps was also launched to exploit the increasing movement of mobile browsing; 16% of ASOS traffic is now via mobile. (Beighton, 2012).

Conclusion
In conclusion, it is advisable that potential investors invest in ASOS; reasons for this conclusion are that; ASOS transits into this new financial year with confidence, and persists to be committed to its global growth plans and to driving shareholder value. The Group's overall strategy has been re-examined to exploit on its current size and prestige, and investment in the compulsory resources will remain to ensure effective delivery of those objectives. ASOS as a company and an international group is well on its way to becoming the world's number one online fashion destination. Currently

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over 50 million people visit ASOS online fashion store each year: in two or three years, that figure could double due the investments that being pumped into the company. (Check appendix 2. for the traffic to other online fashion website). ASOS remains a company that flows with the culture and phase that we live in, this is one of the reasons why many of its customers stay loyal to the company because they know that what is in vogue in the society will be found on the site. As it is clear that there has been a continuous growth in ASOS and the only year where there was a decline was in 2011, which, was known to be the year of major investment into the organisation in UK and overseas. This has brought about much growth in 2012 and it looks set to bring a higher return in 2013 and years after. Within the next year, it is forecasted that the EPS is to grow by 70% which will give a return of 1,515.50p per share, see Fig 5.

Forecasts
Year Ending 31-Aug-13 Revenue (m) 734.88 Pre-tax (m) 56.07 EPS P/E EPS PEG Grth. 0.6 +70% Div 0.10p Yield 0.0%

50.57p 42.4

Fig.5 From the findings of this report, it is recommended that potential shareholders invest in the business because in the last year ASOS's share price has fluctuated from 1,142.00p to 2,530.00p and stockbrokers are presently rating this stock as buy; the current trade price per share is 2,165.00p. From Fig 6, you can see that profitability of the company together and it is clear that the only major declining year was 2011 and that the company is on its way back up.

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Fig.6 60 50 40 30 20 10 0 200 8 20 09 20 10 20 11 2 012 R 0C E G PM OPM NPM

Recommendations
One of ASOS message to potential shareholder is ASOS applies a philosophy of aligning the interests of shareholders and management team by sharing risk and reward through equity participation. Through a combination or organic growth and capital investment we aim to continue to profitably develop our businesses and therefore deliver total shareholder returns, to the benefit of all shareholders, employees, customers, suppliers, local communities and other stakeholders. (Lord Alli, 2012) . It was decided by ASOS that in the short term, shareholders' greatest benefits are served by on-going reinvestment of money to exploit the considerable growth prospects both in the UK and overseas. Comparing ASOS with current companies like Shop Direct Group who owns the Very brand, is only launching its international agenda. The Shop Group also owns the Littlewoods and Isme.com; these companies have been in existence for more than 10 years and one would think the global agenda would have been in the pipe line a while ago. Whilst the Shop
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Direct Group seem to be a threat to the success of ASOS, it is clear that ASOS is much more forwardly sophisticated than its competitors. It is also recommended that shareholders invests in a known company like Shop Direct Group and it is seen that most online fashion companies are starting to integrate the ideas that ASOS had in selling product from other designers and not just own brands. This can appear as a threat to the company but with the accelerative thinking of ASOSs directors, other companies might still be left in the dust of its speed. Main recommendation is to adequately invest for a strong return in 2013 and keep an eye on the market.

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Bibliography
1. Anon., 2005. Investopedia. [Online] Available at: http://www.investopedia.com [Accessed 7 Novermber 2012]. 2. Anon., 2011. Ready Ratios. [Online] Available at: http://www.readyratios.com [Accessed 7 November 2012]. 3. Atrill, H. M., 2001. Accounting fo Business. 3rd ed. Oxford: Butterworth. 4. Beighton, N., 2012. ASOS. [Online] Available at: http://asos.annualreport2012.com [Accessed 10 NOVEMBER 2012]. 5. Dyson, 2010. Accounting for Non-Accounting Students. 8th ed. Essex: Pearson. 6. Kennon, J., 2009. Beginner Invest. [Online] Available at: http://beginnersinvest.about.com [Accessed 10 November 2012]. 7. Lord Alli, C., 2012. ASOS. [Online] Available at: http://asos.annualreport2012.com [Accessed 10 NOVEMBER 2012].

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Appendix Average daily visitors comScore rankings for 15-34 year olds (31 March 2012) showing ASOS as the second most visited fashion website on the planet (daily)

VANCL.COM ASOS H&M.COM Nike Moonbasa.com Trendyol.com Inditex Group Inditex Group Bonprix Forever 21, Inc. Limitedbrands

Average daily visitors 920 749 606 465 458 380 375 375 353 327 317

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