General Information about the Company
Hennes & Mauritz (H & M) is a multinational clothing-retail corporation of Swedish origin. The company is well known for its fast fashion clothing that targets a wide client base including men, women, children, and teenagers. H & M and the associated companies have an operation in 62 countries across the world. It operates more than 4,500 clothing retail stores and employs approximately 140,000 employees in various countries where it operates. Currently, it is the second largest retailer of clothing in the global market after the Inditex from Spain. H & M has a significant online marketing platform and presence in more than 33 countries where the customers can purchase its products online. H & M was founded in 1947 by Erling Persson when he opened a shop in Vasteras, Sweden. Ever since the company has experienced a rapid growth both in terms of products offered and the number of retail stores. In 1974, H & M was listed in the Stockholm Stock Exchange. In 2016, the annual revenue of the company was the US $ 25.191 billion; operating income was the US $ 2.692 billion while net income was the US $ 2.106 billion.
Analysis of Accounts
The performance of a company can be determined by its financial performance. Organizations can know how they compare with their competitors in an industry based on their financial performance ( Brigham et al., 2016) . In addition, comparing the performance of an organization in over the years requires an assessment of its financial performance. As in the case of H & M Group, the assessment of its performance can be achieved by examining its financial performance over the years.
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In the analysis of the account of H & M Group, it is important to asses the various financial metrics. The analysis of the accounts of the company should consider the assessment of all the financial statements and the metrics used to measure the performance ( Scott, 2015) . In essence, it should incorporate the calculation of the financial ratio using information obtained from the financial statements that include income statement, balance sheet, and cash flow statement.
The analysis of the accounts can be achieved by calculating and comparing different financial ratios of the H&M Group. The main financial ratios that will be analyzed are categorized into three that include liquidity ratios, profitability ratios, financial leverage ratios, and efficiency ratios.
Liquidity Ratios
Liquidity ratio measures the ability of a firm to pay its debt obligation using its current assets. The liquidity ratios can be determined through the calculation of various financial ratios that include working capital, quick ratio, current ratio and cash ratio ( Warren & Jones, 2018) . In order to calculate the liquidity ratio for H&M Group, two financial ratios are considered that include working capital ratio and cash ration.
The working capital ration is used to compare the current assets to the current liability of an organization. The working capital ratio serves as a measure of the reserve that is available to satisfy the uncertainties and contingencies ( Weygandt et al., 2015) . The ratio shows the ability of a firm to pay its current liabilities when due. The formula for calculating working capital =Current Assets – Current Liabilities. The Working capital for H&M group for 2016 and 2017 is calculated as shown in the table below.
Year |
2017 |
2016 |
Current Assets |
55,746,000 |
50,663,000 |
Current Liabilities |
40,723,000 |
31,705,000 |
Working Capital |
15,023,000 |
18,958,000 |
The cash ratio is another financial ratio that can help measure the liquidity of a company. The cash ratio is calculated using the following formula. Cash ratio = Current assets/ Current Liabilities. The calculated cash ratio for the company is shown in the table below.
Year |
2017 |
2016 |
Current Assets |
55,746,000 |
50,663,000 |
Current Liabilities |
40,723,000 |
31,705,000 |
Cash Ratio |
1.37 |
1.60 |
The two liquidity ratios are used to determine the ability of the company to pay its short-term debts obligation using the c urrent assets. The working capital of the company is positive while the cash ratio is more than one. This indicates that the company is in a position to pay its short-term debts obligation using the current assets ( Schaltegger & Wagner, 2017) . As a result, the suppliers of the company can be willing to offer their products on credit due to the high liquidity ratio.
The Profitability Ratios
The profitability ratio is one of the important financial metrics that is used to determine the ability of a firm to generate income related to its associated expenses. There are many measures that can be used to determine the profitability of an organization and include a net profit margin, return on assets, return on investment, operating income margin, and return on equity ( Aastveit et al., 2018) . To analyze the profitability ration of H&M Group, two financial metrics are considered and include return on assets and return on equity. The return on equity can be determined by the following formula. Return on Equity = Net Income/Equity. The table below shows the calculation of the return on equity for H&M Group.
Year |
2017 |
2016 |
Net Income |
16,184,000 |
18,636,000 |
Equity |
59,713,000 |
61,236,000 |
Return on Equity |
0.2710298 |
0.3043308 |
The return on assets is another financial metric used to measure the liquidity ratio. The formula for calculating return on assets is given as follows. Return on assets = Net income/Average Assets. The calculated return on assets for the two consecutive years is as shown in the table below.
Year |
2017 |
2016 |
Net Income |
16,184,000 |
18,636,000 |
Average Assets |
59,031,000 |
60,456,000 |
Return on Assets |
0.274161 |
0.3082572 |
The two profitability ratios calculated for H&M Group indicates that the return on equity and the return on assets. From the calculation, the return on equity for the company is above 20 % for the two years. Similarly, the return on assets for the company is above 20 % for the two years. The two financial ratios show that the company has a favorable return on equity. This implies that the shareholders are able to earn 20 % profit from their investments. Besides, the assets invested in the company are productive and contribute high return to the shareholders. As a result, H&M Group is profitable and thus can attract potential investors as well earn high dividends to the shareholders. The high profitability ratio also increases the confidence of lending institutions to provide credit facilities to the company.
Financial Leverage Ratios
The financial leverage ratios can be calculated using various financial metrics that include total debts to total assets, capitalization ratio, debt to equity ratio, and interest coverage ratio (Hamilton & Webster, 2015). The H&M financial leverage ration is analyzed using the total debts to total assets ratio and the debt to equity ratio. The total debt to asset ration is determined by the following formula. The total debt to assets ratio = Total liabilities/Total assets. The calculation of the total debts to asset ration is shown in the table below.
Year |
2017 |
2016 |
Total Assets |
59,031,000 |
60,456,000 |
Total Liabilities |
46,849,000 |
37,343,000 |
Total Debt to Asset ratio |
0.79363385 |
0.617688898 |
The debt to equity ratio indicates how well a company's creditors are protected when the company become bankrupt or face insolvency. The calculation of the debt to equity ratio is shown in the table below.
Year |
2017 |
2016 |
Total Debts |
46,849,000 |
37,343,000 |
Total Equity |
59,713,000 |
61,236,000 |
Total Debt to Equity ratio |
0.7845695 |
0.609821 |
From the total debt to equity ratio it is evident that the equity of the company exceeds its debts. The debts are below 1 and this shows that the creditors of the company that can include lending institutions and suppliers are partly covered by the company in case of insolvency. The leverage ration increased from 2016 to 2017 and this shows that the organization continues to borrow some funds from the creditors to invest in its business operation.
Efficiency Ratios
The efficiency ratios can be calculated using several financial metrics that include cash turnover sales to working capital, total assets turnover and fixed assets turnover ( Hoskin et al., 2014) . The analysis of the efficiency ratios of the H&M Group considers cash turnover and total assets turnover.
The cash turnover is a financial metrics that indicate the effectiveness of a company in its use of cash. It can be calculated using the formula indicated below. Cash Turnover = Net Sales/Cash. The calculated cash turnover of the H&M Group is indicated in the table below.
Year |
2,017 |
2,016 |
Net Sales |
200,004,000 |
192,267,000 |
Cash |
9,718,000 |
9,446,000 |
20.5807779 |
20.35432988 |
The total asset turnover measures the ability of an organization to generate sales through the use of its assets. It is given by the following formula. The Total Asset Turnover =- Net Sales/ Average Total Assets. The calculated total assets turnover is shown in the table below.
Year |
2,017 |
2,016 |
Net Sales |
200,004,000 |
192,267,000 |
Average Total Assets |
59,031,000 |
60,456,000 |
Total Asset Turnover |
3.38811811 |
3.180279873 |
The efficiency ratios calculated indicates how effectively an organization uses its resources (Brigham et al., 2016). From the calculation of the efficiency ratios, it is evident that H&M efficiently uses its assets to generate income. This implies that the assets invested in the company are profitable and contributes to the improved financial performance of the company.
The Analysis of the Cash Flow Statements
The cash flow is a financial statement that shows cash revenues and cash expenditure of an organization over a given period of time. Statement of cash flow only records expenses when cash is exchanged as opposed to when the transaction occurs ( Adam, 2014). It does not include any non-cash payment thus deals with only the cash transaction received or spent by a company. The cash flow statement is important in understanding the ability of a firm to pay for its activities and operations as well as fund its future growth.
The cash flow statement is categorized into three major sections that include cash flow from operating activities, cash flow from financing activities and cash flow from investing activities (Valickova et al., 2015). Each section of the cash flow statement is used to inform the management and other stakeholder’s information regarding the use of cash. In analyzing the cash flow statement of H&M, the three sections that include cash from operating activities, cash flow from investing activities and cash flow from operating activities are considered.
The Cash Flow from Operating Activities
The cash flow from operating activities is used to show the amount of cash generated from the sales of goods and services of a firm (Sarlin, 2015). The investors normally prefer the firms with positive cash flow from the operating activities. The rapidly growing companies such as those in the technology sector often have a negative cash flow from the operating activities (Sarlin, 2015). The cash flow from operating activities of the company is shown in the table below.
Cash flow numbers in thousands | ||
Period Ending |
11/30/2017 |
11/30/2016 |
Net Income |
16,184,000 |
18,636,000 |
Operating Activities, Cash Flows Provided By or Used In | ||
Depreciation |
8,224,000 |
7,451,000 |
Adjustments To Net Income |
-1,437,000 |
924,000 |
Changes In Accounts Receivables |
-1,115,000 |
-1,817,000 |
Changes In Liabilities | - | - |
Changes In Inventories |
-2,414,000 |
-6,511,000 |
Changes In Other Operating Activities |
1,881,000 |
4,938,000 |
Total Cash Flow From Operating Activities |
21,587,000 |
23,775,000 |
Evidently, the cash flow from operating activity of the company is positive and this is an indication that the income of the company is healthy ( Lee et al., 2015) . However, it should be noted that the cash flow from operating activities decreased between 2016 and 2017. This shows that the company increased the number of investment activities.
Cash Flow from Investing Activities
The cash flow from investing activities shows the cash that an organization spends on capital goods such as machines and new equipment. It can also include the capital expenditure towards acquisitions of other companies as well as a monetary investment on areas such as fund markets. The cash flow from investing activities of H&M is shown in the table below.
Cash flow numbers in thousands | ||
Period Ending |
11/30/2017 |
11/30/2016 |
Investing Activities, Cash Flows Provided By or Used In | ||
Capital Expenditures |
-10,311,000 |
-11,731,000 |
Investments |
-25,000 |
-152,000 |
Other Cash flows from Investing Activities | - | - |
Total Cash Flows From Investing Activities |
-12,496,000 |
-13,498,000 |
The total cash flow from investing activities is negative and this suggests that the firm is spending a huge amount of money in investments. Notably, the amount of capital expenditure of the company is high in both 2016 and 2017. However, H& M Group reduced its investment in capital expenditure between 2016 and 2017.
Cash Flow from Financing Activities
The cash flow from the financing activities indicates the amount of cash that the company used to finance its outside activities (Zietlow et al., 2018). T his can include the cash flow raised by selling the bonds and shares re bank borrowings. The H&M cash flow from financing activities is shown in the table below.
Cash flow numbers in thousands | ||
Period Ending |
11/30/2017 |
11/30/2016 |
Financing Activities, Cash Flows Provided By or Used In | ||
Dividends Paid |
-16,137,000 |
-16,137,000 |
Sale Purchase of Stock | - | - |
Net Borrowings |
7,620,000 |
2,068,000 |
Other Cash Flows from Financing Activities | - | - |
Total Cash Flows From Financing Activities |
-8,517,000 |
-14,069,000 |
Effect Of Exchange Rate Changes |
-302,000 |
288,000 |
Change In Cash and Cash Equivalents |
272,000 |
-3,504,000 |
The cash flow from financing activities is positive in 2017 while negative in 2016. The negative cash flow from financing activit y in 2016 is due to the low borrowing in 2016. In essence, the company significantly increased its net borrowing between 2016 and 2017.
Economic Conditions
`The analysis of the economic conditions can be achieved through the assessment of various external and internal environmental factors that affect the operation of the company in the market (Aastveit et al., 2018). The economic condition of an organization is basically made up of external environmental factors that can have a significant influence on its business (Schaltegger & Wagner, 2017). In many cases, the economic conditions are beyond the control of the organizations and thus should be assessed to determine the effective strategies that can help mitigate their impacts on companies. The main economic conditions that can affect the operation of H&M Group include the gross domestic product, the inflation rates, the interest rates, the level of income and the foreign exchange rates.
The gross domestic product is an important economic factor that can have a significant influence on the performance of an organization ( Hamilton & Webster, 2015) . The high gross domestic income can lead to an increase in the general income in an economy thus cause a high demand for goods and services. Sweden has been experiencing a growth in the level of its gross domestic income over the years; this has led to an increase in the general income of consumers and thus causes a high demand for its products. Due to the high level of income in Sweden and other countries where H&M Group operates, it has enjoyed an increase in revenues over the years.
The other notable economic factor that has a significant impact on the operation of H&M is the level inflation rates. When there is a high level of inflation rates, the purchasing power of the consumers will decline to lead to low demand for goods. This is because a high level of inflation is a condition that leads to a rise in the general level of prices in an economy. H&M Group operates across different countries that have varying economic conditions. However, in Europe where it has the majority of its retail stores, there is a favorable level of inflation rates and this promotes its business activities.
Foreign exchange rates also affect the business activities of the H&M Group since it trades across many countries in the global market. The varying foreign exchange rate can be a risk to its business (Schaltegger & Wagner, 2017) . However, the company has appropriate policies that it uses to reduce and mitigate the impact of changes in the foreign exchange rates across different countries. It should also be noted that the rate of interest can have an impact on the operation of companies. High-interest rates imply that the cost of capital is high and this can eventually lead to high costs of products or low-profit margin.
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