Hermes International Societe Anonyme - Essay Example

Hermes financial analysis Table of Contents Company background 3 Share price analysis of Hermes 3 Financial analysis 5 Profitability ratios 5 Liquidity ratios 6 Gearing ratio 7 Investment ratios 8 Working Capital 9 Current business position 10 Conclusion and Recommendations 11 Reference list 12 Appendices 14 Balance sheet 14 Income statement 16 Company background Hermes International S.A is a renowned apparel and accessories manufacturing company, with its headquarters in Paris. The company has 315 stores across the globe (Hermes annual report, 2013). Hermes tries to set a distinctive image of itself in the market by promoting traditional craftsmanship styles amidst a fashion industry which is rapidly modernising. The company tries achieving competitive advantages in the fashion industry by maintaining their human touch and diversifying itself through providing a number of different products. The main competitors of Hermes are Louis Vuitton and Gucci. Gucci and Louis Vuitton are seen to embrace modern fashion more than traditional garment and accessory designs. This creates a distinctive advantage for Hermes. The current paper focuses upon analysing the financial ratios. The ratios have been constructed on the basis of the information procured from the company’s financial statements. The analysis reveals whether the company is in a suitable financial position to expand and enhance their activities (Hermes annual report, 2013). Share price analysis of Hermes Year (as on 31st December) 2009 2010 2011 2012 2013 Share price 18.20 21.20 30.05 30.04 35.94 (Source: Morningstar, 2014) (Source: Bloomberg Business, 2015) The share price of Hermes has been depicting an upward rising trend. Share price can be considered to be an essential indicator of the financial health of a company, the same reason due to which share prices of Hermes has been included in the current study. The company has been seen to invest in profitable expansion and growth projects since the last five years. This has facilitated Hermes to maintain a significantly high share prices, as compared with other close competitors of the firm, especially during the crisis period. During the crisis period many retail firms were seen to face issues with asset management and maintaining adequate cash reserves, as support from external financial institutions was limited. However, the strong operating policies and the adequate financial stability of Hermes had facilitated the company to maintain continuity of operations without being dependent on external finance. The sales volume of Hermes had also not been affected majorly. All such factors facilitated maintaining adequate returns to shareholders and maintain rising share prices. In the following sections of the current paper, in depth analysis has been conducted in respect of the financial condition of the firm, considering the financial years 2012 and 2013. This is expected to give more insight regarding the reasons behind the company’s ability to maintain high share prices. Financial analysis Profitability ratios Gross profit ratio measures the amount of profits earned by the company before allocating for selling and administrative expenses. The ratio indicates whether the earned profits are able to suitably cover direct production expenses or not. Hermes Group has reported a very high level of gross profit indicating a favourable profitability position. The net profit position of the company is also positive. A high net profit indicates that the business operations are being carried out effectively and there exists adequate levels of income to pay off interests, taxes and other expenses. The return on equity ratio measures the capability of an organization to generate profits from acquired investments. Investors are seen to use this ratio for comparing the profit generating ability of different companies. Although the return on equity of the company is high, the rate has declined in the year 2013, as compared with 2012. Return on capital employed display similar profitability related indications as the return on equity ratio. The return on capital employed assists in comparing the earnings before interests and taxes with the capital employed in the business. The return on profitability ratio indicates the long term profitability position of the organization. It is generally essential to calculate such returns for more than one year period so that it becomes possible to gauge the profitability aspects over a longer term and accordingly predict future profit earning capabilities. On the basis of the profitability ratios calculated, it can be seen that the earnings and revenue position of the company are more than satisfactory. However it must be noted that the profitability for the year 2013 had slightly declined as compared with 2012. The recent growth related activities can be considered as important reasons due to which there was a slight rise in operational expenses and accordingly a decline in profits (Nissim and Penman, 2001). Liquidity ratios The current ratio depicts the extent to which the current assets cover the current liabilities of a firm. It shows the firm’s ability to repay the debts over a period of 12 months. It is generally considered that a current ratio of 2 is essential for achieving adequate liquidity. Current ratio figures are usually measured against the industry figures. A current ratio of 1 is essential so that the debts of a firm can be adequately paid off. In case of Hermes, there exist satisfactory levels of current ratio. This indicates that the firm has the capacity to repay its debts on time. A high current ratio also portrays that the firm is able to manage its working capital cycle profitably. It is essential for firms to maintain a satisfactory level of current ratio as the ratio is closely monitored by short term creditors and suppliers. If the current ratio position of the organization is not satisfactory, suppliers would doubt the repayment capability of firms and withdraw themselves from investing in the same (Burns, Sale and Stephan, 2008). Quick ratio depicts the availability of cash and other highly liquid assets in comparison with the current liabilities. It facilitates measuring the extent to which the current assets can be easily converted into cash so that debts can be paid off sooner. On the basis of the size of operations, it is essential for companies to maintain adequate levels of quick ratio so that the liquidity risks can be avoided. Usually firms operating in the apparel retail sector have a lower quick ratio position. In case of Hermes however, the quick ratio position is seen to be adequately satisfactory. The firm maintains strict terms with debtors which facilitates it to receive back investments on time and thereby acquire stable liquidity (Gitman and Zutter, 2011). Gearing ratio Debt equity ratio measures the long term liabilities of an organization as compared with its level of equity. The ratio is a measure of the leverage position of a firm. It is generally preferred that the debt equity ratio remains low. A low debt equity ratio indicates that the proportion of debt in an organization’s capital structure is lower than equity. When debt capital position is low, the firm assumes a less risky position. This is likely to attract more investors. The debt equity ratio of Hermes is adequately low. The presence of long term debt in the company’s financial statements is significantly low. Although low debt facilitates having lower risks, it ultimately reduces the firms leverage (Revsine, et al., 2005). Interest coverage ratios portrays whether a firm earns sufficient amount of revenue to pay off interest liabilities. A high interest coverage ratio shows that the company is able to pay interests several times from its earnings. Financial institutions that advance loans to companies critically analyse the interest coverage ratio to ascertain whether the profits earned by a company are adequate so that timely interests payments can be received. A low interest’s coverage ratio indicates strong chances of loan and interests default, making suppliers of loan remain cautious regarding providing debt capital. Hermes is seen to have high interest coverage ratios, which is likely to make it easier for the company to obtain loans (Palepu and Healy, 2007). Investment ratios Earnings per share indicate the returns which are provided to each share out of the net earnings of the firm. It facilitates depicting the net revenue earned by a firm from the shareholders point of view. The earnings per share of Hermes are seen to be adequate high as compared with the industry averages. Moreover the company has been successful at enhancing their earnings per share by a small margin in the year 2013 as compared with 2012. This indicates that the company has remained successful at enhancing their efficiency in operations so that greater returns can be provided to shareholders. Dividends per share ratio indicate the dividends payable to shareholders on the basis of each share held by them. This ratio is usually used by investors to gauge the value of profits retained by the company and that which the company pays out. Hermes maintains a moderate dividend per share. The recent growth and expansion activities of the firm have led to allotting more profits as retained earnings. Dividend coverage ratio indicates the number of times a firm can pay dividends from the profits earned. Hermes tries to maintain an average dividend cover ratio. Similarly the price earnings ratio of the company has also remained stable and comparably higher than the industry standards. Price earnings ratio indicates the relationship between firm’s earnings and the stock prices (Garrison, Noreen and Brewer, 2003). Working Capital Debtor’s collection period indicates the time lag in which payments are realised from debtors. It is essential to receive payments from debtors on a timely basis so that an adequate working capital cycle can be maintained. It becomes possible for a firm to meet operational expenses in a timely manner only when payments are realised on time from debtors. Similarly creditor’s payment period indicates the time lag followed by a firm to pay off their creditors. Hermes is seen to maintain a longer credit period and a shorted debtor period. This facilitates recovering cash from debtors within a short duration and retaining the same with the business to earn interests, before making payments to creditors. Stock turnover ratio indicates the time lapse in which finished goods are converted into sales revenue. When stock turnover rates at swift, it becomes possible to covert inventory into cash and cash equivalents at a faster pace. This is essential to maintain adequate liquidity and to prevent revenue from remaining trapped in stock. Hermes maintains a stock turnover period which is compatible with the demand conditions existing in the external market, so that large closing stock values can be avoided (Hung, 2000). Current business position Hermes has been able to enhance their revenues by an average rate of 7.8% from 2012 to 2013 (Morningstar, 2014). The company has recently undertaken a number of business expansion projects. Despite increased operational expenses the company has remained successful in achieving suitable revenues for growth. Hermes managers understand that in order to be able to operate successfully and attain a suitable financial position, it is essential that the firm maintain adequate liquidity through an efficient operating cycle. The working capital ratios indicate the manner in which business transactions are converted into revenue which ultimately impacts the liquidity position of the firm. The company also gives much importance to their profitability ratios which indicate their revenue generation capacity, Hermes believes in proper management of resources so that profitability remains positive. The company tries to effectively manage their assets and liabilities so that adequate returns to shareholders as well as growth can be achieved. From the ratio analysis conducted, it can be understood that the financial position of the firm is adequately strong. This is likely to benefit the future growth prospects of the firm. However the low debt presence in the balance sheet makes Hermes lose much of its leverage position. Moreover high dependency upon equity share capital is likely to make the firm’s ownership become rapidly scattered. From the profit earning capacity, it can be expected that increasing debt capital slightly is likely to provide more benefits to Hermes in the long run (Nissim and Penman, 2001). Conclusion and Recommendations From the ratio analysis conducted, it can be inferred that Hermes is able to manage its financial resources properly. Positive ratios facilitates Hermes to obtain easy debts, investments and for convincing suppliers to partner with the firm in their activities. It is essential that the firms maintain a positive financial position so that it is possible to undertake expansion activities more conveniently. The financial ratios are also used by government officials so as to impose suitable taxes and for testing the efficiency existing in the financial statement. Using the ratio analysis reports, credit rating agencies provide suitable ratings and recommendation which investors refer to before taking financing related decisions. Considering the current financial condition of the firm, it is essential that Hermes considers expand the size of business through acquiring debt and investing the same in fixed assets. Reference list Bloomberg Business, 2015. Hermes International. [Online] Available at: [Accessed on 21 January 2015]. Burns, D. C., Sale, J. T. and Stephan, J. A., 2008. A better way to gauge profitability: systematic ratio analysis using the advanced DuPont model. Journal of Accountancy, 206(2), p. 38. Garrison, R. H., Noreen, E. W. and Brewer, P. C., 2003. Managerial accounting. New York: McGraw-Hill/Irwin. Gitman, L. J. and Zutter, C. J., 2011. Principles of Managerial Finance 13th Edition. New Jersey: Prentice Hall. Hermes annual report, 2013. 2013 Annual Report: Overview of The Group - Review Of Operations. [Online] Available at: [Accessed on 21 January 2015]. Hung, M., 2000. Accounting standards and value relevance of financial statements: An international analysis. Journal of accounting and economics, 30(3), pp. 401-420. Morningstar, 2014. Hermès International ADR. [Online] Available at: [Accessed on 21 January 2015]. Nissim, D. and Penman, S. H., 2001. Ratio analysis and equity valuation: From research to practice. Review of accounting studies, 6(1), pp. 109-154. Nissim, D. and Penman, S. H., 2001. Ratio analysis and equity valuation: From research to practice. Review of accounting studies, 6(1), pp. 109-154. Palepu, K. and Healy, P., 2007. Business analysis and valuation: Using financial statements. Connecticut: Cengage Learning. Revsine, L., Collins, D. W., Johnson, W. B., Collins, D. W. and Johnson, W. B., 2005. Financial reporting & analysis. New Yor: Pearson/Prentice Hall. Appendices Balance sheet HERMES INTERNATIONAL- BALANCE SHEET Fiscal year ends in December. EUR in millions 2012-12 2013-12 Assets Current assets Cash Cash and cash equivalents 697 1054 Short-term investments 54 67 Total cash 751 1121 Inventories 727 813 Other current assets 324 315 Total current assets 1803 2249 Non-current assets Property, plant and equipment Land 167 143 Fixtures and equipment 520 598 Other properties 1064 1099 Property and equipment, at cost 1751 1840 Accumulated Depreciation -743 -815 Property, plant and equipment, net 1008 1025 Goodwill Intangible assets 181 160 Deferred income taxes 218 242 Other long-term assets 197 260 Total non-current assets 1603 1688 Total assets 3406 3938 Liabilities and stockholders equity Liabilities Current liabilities Short-term debt 15 32 Accounts payable 346 Taxes payable 124 95 Other current liabilities 380 753 Total current liabilities 864 880 Non-current liabilities Long-term debt 24 25 Deferred taxes liabilities 23 26 Pensions and other benefits Minority interest 14 16 Other long-term liabilities 137 166 Total non-current liabilities 198 232 Total liabilities 1062 1112 Stockholders equity Additional paid-in capital 50 50 Retained earnings 740 790 Treasury stock -313 -314 Accumulated other comprehensive income 1882 2315 Total stockholders equity 2358 2841 Total liabilities and stockholders equity 3420 3953 Income statement HERMES INTERNATIONAL ADR Fiscal year ends in December. EUR in millions 2012-12 2013-12 Revenue 3484 3755 Cost of revenue 1111 1170 Gross profit 2373 2584 Operating expenses Sales, General and administrative 1131 1215 Other operating expenses 124 151 Total operating expenses 1255 1366 Operating income 1119 1218 Interest Expense Other income (expense) -19 -22 Income before income taxes 1100 1196 Provision for income taxes 349 398 Minority interest 11 9 Other income 10 9 Net income from continuing operations 750 799 Other -11 -9 Net income 740 790 Preferred dividend Net income available to common shareholders 740 790 Earnings per share Basic 0.71 0.76 Diluted 0.71 0.75 Weighted average shares outstanding Basic 1041 1041 Diluted 1047 1049 EBITDA 1236 1354 Read More