Essentials of Finance and Accounting

Question: Discuss about the Essentials of Finance and Accounting. Answer: Introduction: The set up of ASOS happened in the year 2000 with the headquarters located in London. The company has crafted a place for itself in the industry by catering to the tastes of youngsters in terms of fashion. It is popularly known as the fashion point where fashionable stuffs are available. The company has a giant reach as it offers over eighty thousand brand and high end products through mobiles and web services. As per analysis of the annual report it is seen that the company recorded a strong growth in sales that surpassed twenty percent in comparison to the figure of eight percent (ASOS, 2015). The international sales also witnessed a jump of over ten percent. This is entirely by dint of technological improvement and developments made in each year. The company strives to attain the topmost position. Ratio analysis Profitability Ratio The profitability ratios are the ratios which help to determine the level of expenses and profits of a company. These ratios evaluate the companys profit generating levels, by comparing the gains and expenses based on various metrics (Christensen, 2011). Return on assets: the return on assets ratio help the investors calculate and measure the performance of assets in terms of profits generated by the company. This ratio calculates the assets efficiency in earning profits (Christensen, 2011). Higher the ratio, better it depicts the utilization of assets. Following is the formula which is used to calculate the return on assets. Return on Assets for ASOS Return on Assets 2015 2014 2013 2012 2011 Net Income 36,866 36,950 40,928 9,904 10,849 Assets 4,77,897 3,79,963 3,11,751 2,06,278 1,36,168 Return on Assets 0.08 0.10 0.13 0.05 0.08 Gross Profit Margin: It denotes the profit made by the company after the cost of goods sold. For the computation COGS is eliminated and then the computation is done. Higher percentage is a good indicator and helps in providing a better result (Needles Powers, 2013). The Gross profit for ASOS for last five years is: Gross Profit Margin 2015 2014 2013 2012 2011 Gross income 575000 485000 399000 252000 167000 Sales Revenue 11,50,788 9,75,470 7,69,396 2,38,023 3,39,691 Gross Profit Margin 49.97 49.72 51.86 105.87 49.16 Liquidity Ratio: Liquidity refers to how quickly the company can have access to cash. In order for smooth functioning of a business, company needs to maintain a proportion between its liquid and non-liquid assets. The companys ability to meet with its obligation in due time is calculated with the help of these ratios (Libby et. al, 2011). Quick Ratio: this ratio is a better indicator as compared to the current stock because the inventory part is eliminated at the very beginning and stock is not sold to repay the money. A standard quick ratio denotes 1:1 (Merchant, 2012). This ratio indicates that the funds must be adequate to repay the dents or obligations. The Quick ratio for ASOS is given below: Quick Ratio 2015 2014 2013 2012 2011 Current Assets Stock 143 100 90 48 45 Current Liabilities 237 186 152 100 90 Quick Ratio 0.5 0.48 0.592105 0.537634 0.603376 Efficiency Ratio: as the name suggest these ratios are used to determine the efficiency of the company in terms of figures these are determined using the various incentives given by the company to its shareholders like dividends, bonuses, stock appreciation, etc. (Choi Meek, 2011). These ratios help the investor compare between two or more companies of the same industry. Earnings per Share: the earnings per share are calculated by dividing the total earnings of the company by the weighted number of equity shares of the company (Melville, 2013). These help the investors determine the gains made by the company per share issued to them. The earnings per share of ASOS Plc are: Earnings Per Share 2015 2014 2013 2012 2011 Total Earnings attributable to owners 36,866 36,950 40,928 9,904 10,849 No of Shares 83,034 83,125 81,751 79,078 74,375 Earnings Per Share 44.40 44.45 50.06 12.52 14.59 Solvency Ratio: the solvency ratios help us to analyse the capital structure of the company. These ratios calculate the relationship and weight age among various sources of funds which are used in the business, as the cost of capital plays a very important role in the development of the company (Melville, 2013). Debt Equity Ratio: Debt equity ratio is the ratio between the total funds of the company with respect to total equity funds. This ratio helps to determine the ratio of outside funds used in comparison to owned funds. Some companies operate better with loan high loan funds whereas some not (Deegan, 2011). The equity ratio of ASOS for last five years is: Equity Ratio 2015 2014 2013 2012 2011 Total Equity 2,37,315 1,93,031 1,59,799 1,05,987 72,120 Total Assets 4,77,897 3,79,963 3,11,751 2,06,278 1,36,168 Equity Ratio 0.50 0.51 0.51 0.51 0.53 Price Earnings Ratio of ASOS Plc International Limited: In order to calculate the PE ratio for ASOS Plc International Limited, we are required to collect some information - the price of the shares of the company and its last reported earnings. Using various sources the following data was collected, It can be interpreted that the investor is willing to pay a price that is 18 times the EPS of the company. Share Price movement of ASOS Plc during the year 2014-15 The following graph shows the share price movement of ASOS Plc during the year 2014-2015. It is clearly visible in the graph below that the share price of the company ranged from $ 3.3 to $ 2.7 during the year (ASOS Plc, 2015). No major or sudden movement in the stocks of ASOS Plc was witnessed. Therefore, we can say that the shares of ASOS Plc not highly volatile (Fields, 2011). Analysis of ratios of ASOS PLC The important ratios of the company are already given above. Further the important areas of the company will be put to discussion. Profitability- From the profitability ratio it is evident that the company has made significant achievements. The net profit margin has enhanced from 3 to 5 percent, the highest report was seen in the year 2013 here it clocked near 5%. The return on net assets is stable and is projected to have a strong performance with each passage of time. This report was highest in the year 2013. Liquidity In order to determine the state of liquidity we have calculated the current ratio of the company. The most appropriate liquid ratio for the company is 2. The current ratio is around 1.5 that is not efficient; however it is not harmful for the company. The liquidity is in a moderate state (Northington, 2011). Efficiency The efficiency of ASOS has been ascertained considering the EPS of the company. A good improvement is seen in the EPS of the company in the past five years. The company has correctly. The EPS of the company has enhanced by dint of higher profit and this has strengthened the company. Investment: the investment refers to the capital structure of the company. ASOS structures entirely on equity and does not contain any element of debt. Every activity of the company is supported by the funds raised through issue of shares. The solvency part is balanced by the capital structure of the company (Northington, 2011). The equity ratio of the past five years projects that ASOS has a stable position in terms of equity structure. The company has properly maintained the investment pattern in shares and the equity ratio of .50 is an apt example of the performance. Conclusion As per the research and financial analysis it can be commented that ASOS Plc has shown an impressive run considering the fact that its existence pertains to 16 years. It has attained huge success in a very short span of time. The management policies prove that the strength of the company is strong and fundamentals are justified. Therefore, it should be on the radar list of the investors as it is having a strong run and clocking better results. Moreover, the ratios are in tune with the performance of the company and near to the industry standards. References ASOS 2015, ASOS Annual Report and accounts 2015, viewed 17 August 2016, https://www.asosplc.com/investors/results-reports/2015.aspx Choi, R.D. and Meek, G.K 2011, International accounting, Pearson . Christensen, J 2011, Good analytical research, European Accounting Review, vol. 20, no. 1, pp. 41-51 Deegan, C. M 2011, In Financial accounting theory, North Ryde, N.S.W: McGraw-Hill. Fields, E 2011, The essentials of finance and accounting for nonfinancial managers, New York: American Management Association. Libby, R., Libby, P. Short, D 2011,Financial accounting, New York: McGraw-Hill/Irwin. Melville, A 2013, International Financial Reporting A Practical Guide, 4th edition, Pearson, Education Limited, UK Merchant, K. A 2012, Making Management Accounting Research More Useful, Pacific Accounting Review, vol. 24, no.3, pp. 1-34. Needles, B.E. Powers, M 2013, Principles of Financial Accounting, Financial Accounting Series: Cengage Learning. Northington, S 2011, Finance, New York, NY: Ferguson's.