Financial Analysis of H&M

This assignment requires a comprehensive business analysis of H&M's financial statements. The focus is on evaluating the company's performance and its implications for investors making future investment decisions. The report draws upon various financial ratios and analyses to provide a clear understanding of H&M's financial position.

FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK A...........................................................................................................................................1
Overview of company............................................................................................................1
Financial statement analysis...................................................................................................2
Sales performance of H&M....................................................................................................2
Gross profit and margin .........................................................................................................3
Profit and loss statement analysis...........................................................................................4
Balance sheet..........................................................................................................................5
Cash flow statement analysis .................................................................................................6
Ratio analysis .........................................................................................................................7
Limitations .............................................................................................................................8
Recommendations..................................................................................................................8
TASK B...........................................................................................................................................8
Pricing methodologies............................................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Finance is an essential aspect for every business organisation. It is required by companies
to manage their daily financial transactions. Without sufficient amount of finance, managers are
not able to manage and plan their project in an effective and efficient manner. This particular
project report is based on the financial analysis of H&M Company. It consists of useful
statements like profit and loss, balance sheet and cash-flows. In order to ascertain outside
investors to analyse the profitability and interest of a business. Investors can use to identify
performance of H&M during the year for the purpose of determining current position of the
company (Bäuerle and Rieder, 2011). H&S expansion planning is to capture maximum market
both online and offline mode. They want to make sustainable product to get effective growth in
near future. This particular analysis covers various analysis by using ratios. It will also examine
various risks and opportunities about company and take measures to resolve uncertainties. On the
basis of financial information, evaluation is done to provide necessary suggestions that are
beneficial for decision-making in business.
TASK A
Overview of company
H&M is a leading group in fashion industry by offering plenty of attractive brands and
home care products to the customers. Every products those are develop by the company is having
their own unique identity All brands are connected by a feeling for fashion and superior quality.
They derive to make customers feel in a sustainable manner so that they look more pleasant in
there dress. It was started with a single women's wear store in Sweden. It was established in 1947
and now, in the current scenario, group is having various availability of fashion brands and large
international presence. There long term expansion is made by targeting both online and offline
customers. The main aim is to make deliver the best quality of products and services to
customers so that they can enhance their productivity. With 13000 new colleagues in 2016, they
are planning to expand their business at every place. According to the last year of sales which is
recorded as SEK 223 billion. They are having 43 online markets and approximately 4500 stores
in 69 markets.
1

Financial statement analysis
H&M group's sales consists of certain rate which is increased from 7% in local currencies
during the year. By converting it into SEK, sales increased from 6% to SEK 222,865m. Gross
profit of company enhanced to SEK 106,177m. Because of the same, gross margin of 55.2% is
recorded during one accounting year.
Profit after including items is amounted to be SEK 24,039m. This entire PAT is subjected
to SEK 18636m which is corresponding to 11.26% per share. The profitability of company is
affected by increase in mark-downs while, it is having higher purchase cost from the US dollar.
With the expansion of 427 new stores and 11 online market they are generating more effective
results for the company to establish their position at national or international level.
According to Karl Johan Persson, CEO of company has provided necessary information
about the performance of company in an effective manner. It is a tough challenges for them to
generate more effective outcomes for the company. They are more focused on targeting there
online customers and by digitalisation, they can sell plenty of brands to them in order to increase
profitability as well as productivity of company. It is also a positive sign for them to develop a
well and effective platform for the industry towards going into a new era.
Sales performance of H&M
H&M group’s sales in local currency includes 7% increase in the year 2016. I In 2017, it
was recorded with 4% increase to SEK 231744 m. in local current it increase by 3% only. The
comparison among total sales enhancement is increase from the last year. Currency translation
effects are increasing when sales and profits in domestic market are translated in the reporting
value of national currencies.
Currencies translation risk: It is develop because of the company net assets that
consists of equity investment and debt those are represented in international currency (Chen,
2012).
Particular Net Asset position Net liabilities position
Weakness (SEK m) Gain Loss
Strength (SEK m) Loss Gain
Sales including VAT by Market as per the number of stock
2

2016 2015 Changes in %
30th November,
2016 Full year
SEK
M SEK m SEK
Local
Currency No. of stores
New
stores Close stores
Sweden 10151 9495 7 7 176 11 11
UK 15058 16001 -6 3 281 22 5
Challenges:
This particular research aim at determining whether any difference translation techniques
that can be useful tool to convert currencies of other countries (Ross, 2011). In order to provide
more suitable idea about the consolidate financial statement because to reach at their set
objectives. The two major issues those are related with H&M is have to handle various
translation of foreign currency in financial statement. Some of them are:
 Selection of right method for conversion
 Adjustment of outcomes resulting from consolidation financial statements.
Gross profit and margin
According to the financial performance of company, gross profit and margin are having
various impacts on internal as well as external management of company. It can affect decision-
making that is made by H&M which takes in line with its strategies to have suitable customer
offering in every segment of the marketplace. It is based on the combination of total fashion,
price, quality and sustainability. The gross profit has increased to SEK 30027m in last quarter
with the margin of 57%. The enhancement in GP with 10.6177m in financial year was more
profitable for company.
3

From the above chart, it has been clearly stated that profit generated by H&M is about
106177 SEK with the profit margin of 55.2%. In comparison to last year, it increased gradually
which is a positive sign for company.
Profit and loss statement analysis
It is important for company to make use of valuable statements to take effective decision
regarding current position of H&M. Profit and loss statement is a detail summary about total
revenue, costs and expenses those are incur by the company during a specific period of time. It is
essential for company to measure a company's sales and expenses in order to make critical
decision for the coming projects. The performance can be analysed through examining overall
transactions that are made in an accounting year. Following are the essential aspects that are
mostly used during preparation of income statement.
Particular 2016 2015 Differences
Gross profit 510059 490568 19491
Operating profit 51817 51769 48
Retain profit 20839 6379 14560
4

According to data collected from financial transactions which are done by the company
during the year. After analysis, it has been seen that from the last year performance, results are
more effective and positive. By combining collection of total revenue from national and
overseas, they are getting gross profit of 510059 in 2016. It is much higher than the last year.
Likewise, the operational incurred during the time was about 51817. Such type of expenses are
making huge impact on the performance of company. With the help of income statements, total
revenue and profitability can be determined for H&M. It has been evaluated that after making
total payment of dividends out of total profit, they made sufficient amount of cash to meet out
the outstanding debts. The overall performance of company is providing positive outcomes to
business.
Balance sheet
In every organisation, it is important to have perfect analysis by the help of balance sheet
statements. It is a complete summary of H&M performance during the year. The assets and
liabilities or shareholders equity are the primary aspects of the statements that will be helpful in
recording transaction at a particular period of time. It is prepared in order to ascertain the
position of organisation at a particular point of time. Further its uses are given below:
 It is a statement showing the assets and liabilities of the company.
 It helps in checking financial position of business which is important for an organisation.
 It helps in determining the working capital of business. Company can determine the
working capital of business so that it can identify after deducting loan the remaining
resources for running the business.
 It helps in checking the net worth of business. Its formula is total assets less total
liabilities.
 It checks that whether company can continue in the future or not. It helps in checking
value of non-current assets and if its value is more than current assets then it can continue
in future.
It will be helpful in analysing company's account at a particular period of time. It is an
important techniques for the account managers or investors to take necessary decision about the
performance of the company. The investor used to gain insight into a company and its core
operations. As a shareholders of a company, it is necessary to have proper information about
their current and non-current position.
5

Particular 2016 2015 Difference
Fixed assets 166768 142928 23840
Current assets 217241 207675 9566
Current liabilities 123960 124951 -991
Net assets 142199 121360 20839
Shareholders capital 142199 121360 20839
From the above information, it has been analyse the performance of H&M. The fixed
assets of the company is increase from 23840 from the last year. Whereas, current assets are also
recovery in sufficient amount within the time frame. The current debts of the company has come
down to 991 as compared to last year. But, they still have enough amount to pay off their debts
and make further, investment decision-making. In comparison to expansion of their business it is
crucial to have sufficient amount of capital to manage their resources. The shareholders capital
are in positive stage to make necessary planning for the future. The most essential aspects of
financial statement analysis provides effective idea to the investors regarding any investment of
their capital in a specific company.
Cash flow statement analysis
It is known as a systematic list of cash inflows and cash outflows that are done by the
company during the year. Cash is an essential component for H&M in order to make payment
for things that would help the business to grow and operate. Basically, positive cash flow is
always favourable for the company to take necessary decision for the future growth and
sustainability. An examination of a company's cash-flows is necessary for the company to make
future decision-making. There are mainly three best sources by which cash can be collected such
as operational, investing and financing activities. The analysis started with a starting balance and
incurring an ending balance after financing for all cash revenues and expenses those are occur
during the period of time.
It is mostly used for financial reporting of company in order to reach out a valuable
solution. According the cash-flows statement of H&M company they are generating a cash-flows
of 11686 in 2016 which is higher as compare to the last year. The operating net cash-flows incur
6

by during the time is about 99199. Whereas, total cash collected as return on investment is -1482
because the last year performance was not having any cash amount. The overall performance of
the company is sufficient enough to meet out there motive which is to increase the profitability.
Cash-flows from investment is used to examine level of net capital expenses those are required
to maintain and grow the performance of H&M group. Interest paid is a cash outflows that is
included in order to get a valuable cash-flows that is presented to every suppliers of capital
amount to the company.
Ratio analysis
It is a form of financial statement evaluation that is useful in order to gain a quick and
fast indication of a firm's current time position. The ratios are divided into various categories
such as:
Short term solvency ratio: It is known as one of the important ratio's which is used to
measure the capability of H&M to meet its long term debts of the company. It is said the the
lower will be the solvency ratio the greater will be the chance of profitability. In the mention data
of H&M, they are incur solvency ratio of 58% in 2016 which is much higher the expectation. It
will make huge impact on the productivity of the company.
Particular Ratio
Current ratio 1.75
Liquidity ratio 1.2
Gearing ratio 106.1
Asset management ratio: It is used to measure the firm’s success in analysing and
managing total assets in order to generate total sales for company. The net assets turnover ratio is
4 time rotating in an accounting year.
Profitability ratio: Such ratio is useful in detecting and analysing current year
performance of H&M. It can help them to identify efficiency of an organization with the help of
available resources. Total turnover percentage is 2.73 % in 2016.
Particular Ratio
Turnover 2.73%
7

Gross margin 49.00%
Profit margin 4.84%
Return on shareholder capital 35.00%
Return on total assets 13.00%
From the above table, it has been found that profitability ratios of H&M is in best
position to manage their company's resources. Total gross margin is about 49% more than
expected in order to make future decision for the company.
Market value ratio: These are used to analyse the current market price of a public
limited company inventories. These ratios are essential for employed in order to analyse current
and potential investors of the company.
Limitations
As, it has been observed that financial statements are prepare on an estimation because of
which the outcomes are not more effective enough for the company. It is used to compare two
year information which is collected to gain a general solution in order to determine financial
position of H&M. Because of inflation it can affect the balance sheet of the company. Some of
the financial ratios that are generally used by investors to assess H&M financial risk.
Recommendations
After analysing performance of H&M company through its financial statements. It has
been found that income gain from total investment are sufficient enough to make valuable
decision-making. The investor can make use of balance sheet review and ratio analysis in order
to reach at certain solution. Because, profitability and liquidity position of the company is more
effective in order to make necessary decision. With proper evaluation, investors need to make
their capital investment plans in more profitable manner.
TASK B
Pricing methodologies
There are various type of pricing methodology are used to ascertain the cost of products
and services in general business context.
8

Cost plus pricing – This pricing method is used to set desired profit margin and
percentage of profit on cost of the product. This is one of the convenient and simplest method
used in manufacturing and production companies. Profit margin is set on cost of the product. As
sale price of products are ascertained after adding profit percentages or profit margin. There is
following formula is used to ascertain the cost of product.
Price = Average variable cost + Average variable cost with markup percentage
= AVC + AVC(M)
Where mark up percentage remain fixed and net profit margin is covered.
AVC (M) = AFC + NPM
Markup pricing – This is one of the common method which used to decide the selling
price of product and services. Selling price and profit margin is set in the basis of amount of
sellers and retailers. There is a specific share is set upon the cost of the product. For example a
retail price of shirt is £250 and retails keep the share as £20 per shirt then the overall cost of the
shirt would be £270. there is a formula used to calculate the markup percentage:
a. Markup percentage of cost = (Markup / cost) * 100
b. Markup percentage at selling price = (Markup / Selling price) * 100
Target return pricing – a specific amount of profit is estimated and target set to achieve
that desired profit. In simple words the price of product is decided on the basis of expected or
estimated amount of profit.
Going rate pricing – Price of product is decided on the basis of market trends and
demand of product. This pricing methodology is used when company has large product market
and monopolistic situations.
CONCLUSION
From the above information, it has been concluded that finance is an effective aspects for
any business organization in order to manage their business operations. The report provide
complete business analyses of financial statement of H&M. It has been evaluated that
performance of the company is more effective for the investors in order to make their future
investment planning.
9

REFERENCES
Books and Journals
Gatti, S., 2013. Project finance in theory and practice: designing, structuring, and financing
private and public projects. Academic Press.
Gundlach, M. and Lehrbass, F. eds., 2013. CreditRisk+ in the banking industry. Springer Science
& Business Media.
Harvey, C. R., 2011. Report of the Editor of The Journal of Finance for the Year 2010. The
Journal of Finance. 66(4). pp.1439-1452.
Kim, J. H. and Ji, P. I., 2015. Significance testing in empirical finance: A critical review and
assessment. Journal of Empirical Finance. 34. pp.1-14.
Salzmann, A. J., 2013. The integration of sustainability into the theory and practice of finance:
an overview of the state of the art and outline of future developments. Journal of business
economics. 83(6). pp.555-576.
Schaub, M., 2013. Latin American ADR performance: how do issue type and issue date affect
long term excess returns? International Journal of Managerial Finance. 9(1). pp.4-12.
Shiller, R. J., 2013. Finance and the good society. Princeton University Press.
Taani, K., 2014. Capital structure effects on banking performance: A case study of Jordan.
International Journal of Economics, Finance and Management Sciences. 1(5). p.227.
Taylor, J., 2011. The assessment of research quality in UK universities: Peer review or metrics?
British Journal of Management. 22(2). pp.202-217.
Wilmott, P., 2013. Paul Wilmott on quantitative finance. John Wiley & Sons.
Bäuerle, N. and Rieder, U., 2011. Markov decision processes with applications to finance.
Springer Science & Business Media.
Chen, S.H. ed., 2012. Genetic algorithms and genetic programming in computational finance.
Springer Science & Business Media.
Ross, S.M., 2011. An elementary introduction to mathematical finance. Cambridge University
Press.
Online
Key Ratios to Analyze Business Risk. 2011.[Online]. Available through:
<https://www.stocktrader.com/2009/06/22/business-risk-analysis-calculate-ratios-debt-
equity-earnings-interest/>.
10

11