UMACLK-15-M Financial Statement Analysis: Burberry Plc. Resit Exam

This document presents a student's solution to a Financial Statement Analysis exam focused on Burberry Plc. The analysis includes calculations and interpretations of profitability, gearing, efficiency, and investor-related ratios to assess the company's financial position. Furthermore, it identifies and evaluates the impact of political, macroeconomic, socio-cultural, and technological factors on Burberry's performance using PEST analysis. Finally, it discusses the potential impact of Porter’s Five Forces, specifically the bargaining power of buyers and suppliers, on the fashion industry and evaluates Burberry’s strategic responses. Desklib offers a wide range of study resources including past papers and solved assignments for students.

UMACLK-15-M FINANCIAL STATEMENT ANALYSIS
RESIT Exam Answer Sheet
Please enter your student number below.
Student No:
Please type your answers below.
1. Analyse, comment on, and interpret (i) three profitability, (ii) two gearing, (iii) one
efficiency, and (iv) two investor related ratios which you feel will help you to assess the
position and performance of the company for the years ending 27 March 2021 and 28
March 2020 only from the perspective of an equity investor.
In your analysis you should include the ratios you have calculated.
Maximum word count: 800 words
Answer:
Answer:
Calculation of ratios
Three Profitability ratios
Ratio Formula 2020 2021
Gross profit
margin
Gross profit / Revenue from
sales * 100
1705.5 / 2633.1 * 100
= 64.77%
1662.5 / 2343.9 *
100
= 70.92%
Net profit margin Net profit / Revenue from sales
* 100
121.7 / 2633.1 *100
= 4.62%
375.7 / 2343.9 *
100
= 16.02
Return on capital
employed
Operating profit or EBIT / (Total
assets – Current liabilities) *100
473.6 / (3292.2 –
730.5) *100
432.2 / (3502.2 –
702.8) * 100

= 18.48% = 15.43%
Analysis, comment and Interpretation of the ratios
Gross profit margin indicates a company’s financial health and in the given case it can be
said that the financial health of the company has improved from 2020 to 2021. So, it a good sign for
investing more in Burberry (Easton and et.al., 2018). Another ratio that is net profit margin has also
increased in the current year as in the year 2020 there was a huge amount of abnormal losses
incurred along with higher amount of assets has been written down. An increase in the net profit
indicates greater returns to the shareholders and thus good for an equity investor to go for
investment in this company. However return on capital employed has reduced in the current year
from 18.48% to 15.43% due to incurring higher overhead costs. so, these costs must be kept under
control.
Two gearing ratio
Ratio Formula 2020 2021
Interest coverage
ratio
Operating profit or EBIT /
Finance cost or interest
expenses
473.6 / 1.4
= 338.28
432.2 / 6.6
= 65.48
Gearing ratio Non – current liabilities /
(Equity + Non - current
liabilities)
1342.9 / (1342.9 +
1218.8)
= 0.524
1239.7 / (1239.7 +
1559.7)
= 0.443
Analysis, comment and Interpretation of the ratios
Interest coverage ratio indicates how many times a company can be able to make payments towards
its interest obligations out of the operating earnings. Here in case of Burberry the ratio has reduced
very much due to higher expenses borne towards interest payments but still the ratio is good
indicating nil financial risk for the company (Robinson, 2020). Gearing ratio indicates the degree at
which the debt funds has been included in the total capital of the company and a reduction in this
ratio indicates that the company is moving towards using more of equity capital over debt capital,
thus less risk for equity investors.
One efficiency ratio
Ratio Formula 2020 2021
Receivables
turnover ratio
Account receivables / Total
revenue from sales * 365
107 / 2633.1 * 365
= 14.83 days
146.9 / 2343.9 *
365
= 22.87 days
Analysis, comment and Interpretation of the ratios
Receivables turnover ratio indicates the company efficiency in extending credits and
collecting debts that are outstanding (Benrqya and Jabbouri, 2021). Here in the case of Burberry the
receivables has increased in 2021 as compared to 2020 which indicates that the company is finding it
difficult to recover its outstanding debt in the current year. Such kind of situation may create
liquidity issues for the company. Therefore, there is a need to tighten the credit policy.

Two investor’s related ratio
Ratio Formula 2020 2021
Earnings per
share
Net profits available to equity
shareholders / Number of
equity shares outstanding
0.30 0.93
Return on equity Net income / Shareholder’s
equity * 100
121.7 / 1218.8 * 100
= 9.98%
375.7 / 1559.7 *
100
= 24.08%
Analysis, comment and Interpretation of the ratios
Earnings per share has increased in the year 2021 as compared to 2020 from 0.30 to 0.93
due to higher profitability in the current year. Also, return on equity has increased substantially
which indicates positive sign for the investors to go for investing in Burberry Plc. to get good returns
on their equity investments.
2. Identify one political, one macroeconomic, one socio-cultural and one technology factor
that affect the company, and evaluate their impact on the company’s financial position
and performance.
Maximum word count: 800 words
Answer:
The PEST analysis is a tool which helps in identifying the factors that are basically external
in nature and also affects the performance and financial position of the Burberry company.
The factors of PEST are as follows:
Political Factors:

This is a factor which state the rules and regulations set by the government of the
country for the businesses operates in their place. The political factors include government
policy, political stability, corruption, foreign trade policy, tax policy, labour law and trade
restriction imposed by the government of specific country. This also involve the rules and
regulations related to international trade. Brexit is basically one of the political factor
impact that affects the financial position of the Burberry Group Plc. It is because, the
company have its presence in different countries including the countries which are part or
member of EU. Because of the Brexit, the profitability of the Burberry is highly get affected
as they are now unable to sale its luxury products to customers of EU. The impact of which
the international sales of the company reduces along with that they are also unable to get
cheap financial and physical resources. Investors of EU has stopped investing in the company
after the Brexit (Saiz-Alvarez, 2021).
Economic Factors:
Another factor of PEST is economic which is also known as macroeconomic. This
factor includes the economic growth, change in exchange rates, interest rates, inflation rates,
disposal income of consumers and unemployment rate. The decrease in disposal income is a
factor which affects the performance of Burberry company. This factor involves the decrease
in the disposal income of the consumers after the salary cut because of Covid-19 situation.
Because of this factor, the spending pattern of the consumers are shift from the luxury items
to basic and affordable products. As Burberry company offer luxury items to the customers
which are basically high in price so the customer unable to afford it and its sales are highly
get affected. The decrease in the sales of the company is because of its pricing policy such as
premium pricing policy. That's why it can be said that the economic factor such as Covid-19
and decrease in the disposal income of the consumers have put negative impact on the
performance and financial position of the Burberry (Larson, 2020).
Social Factors:
Further, the social also known as socio-cultural factor indicate the impact of the
society of the country over the businesses that exist in the same market. This factors include
population growth rate, age distribution, career attitudes, safety emphasis, health
consciousness, lifestyle attitudes and cultural barriers. The lifestyle attitude is a factor
which affects the business of the company to the large extent. It is because Burberry is a
premium brand which offer the high quality products to its customers and their customers

also expect trendy and on demand products. If the company fails to adapt themselves against
the demand and preference of the society than this will affects its profitability and
performance to large extent. Beside this, the cultural barrier is also one factor which affects
the Burberry performance. It is because different people have different culture and beliefs and
it is the duty of the company to identify and understand the cultures and produce the product
accordingly. For this, Burberry company can adopt the social media platforms for
understanding the demand of customers. The social media sites has provided the feedback
and comment sections for the people so that they can write their experience with the
company's product over there (Wenjing, 2021).
Technological Factors:
The technological criteria of PEST state that the changes in the technology and
innovation and its impact over the firms. The technological factors include technological
incentives, level of innovation, Automation, research and development activity, technological
change, technological awareness. One of the technological factor that affects the financial
position of the Burberry company are Digital marketing (level of innovation). The digital
technology and social media marketing helps the company in improving their sales and
Market share. For example, Burberry company always keep themselves up to date about the
new technological and e-commerce platforms. The impact of which the company able to
provides their products to the local and international customers via both online and offline
channel. Because of the online channel of the company, they able to increase their customer
base and make them satisfied with their products. Beside this, the company also put their
focus on providing high online payment facility to its customers. It is because for this
company, customers satisfactions is their first priority for which they will never compromises
(Noto La Diega, 2019).
3. Discuss the potential impact of the following Porter’s 5 forces factors on the industry
and evaluate the company’s strategy in response to those forces:

(i) Bargaining power of buyers;
(ii) Bargaining power of suppliers;
Maximum word count: 400 words
Answer:
(a)
Bargaining power of buyers:
This is one of the force out of the five forces given by the Porter. This indicates the
bargaining power of the customers is strong or week in the fashion industry. The products
offered by the companies under the fashion industry is relatively sold by all companies at
their own pre-determined prices. The impact of which the buyers can easily shift to other
firms if they get the same products at low price from different companies. This indicates
that the bargaining power of the buyer in the fashion industry is strong force. As this is
a strong force so it is a challenge for the company to maintain its competitive position in the
market. Because of the strong bargaining power of the buyer in fashion market, its potential
impact over the strategy of Burberry is high. The impact means the chance of losing their
customer base is high for the company and in this manner they have to provide the high-
quality product. Beside this, the company also need to launch middle and low range products
so that they can also cover lower and middle customer segment (Niu and et.al., 2018).
(ii) Bargaining power of suppliers;
It is one of the forces of Porter’s five forces which entails the pressure that the suppliers are able to
put on the companies operating in a particular industry such as fashion industry here (from which
Burberry plc. belongs to). Suppliers generally put pressure by increasing the prices of raw materials
that they are supplying to the particular industry or say fashion industry. Also, they can do so by
lowering the quality of raw materials and reducing the availability of unique materials in the market.
With regards to the fashion industry in which Burberry Plc. is operating, the power of supplier is
relatively low or small which makes this force insignificant. Most of the companies into this industry
are sourcing their raw materials from third party manufacturers who are the recipient of just a
fraction of the total amount of profit. Therefore, input prices in this industry is low and suppliers are
having no control over the industry and generally gets swapped out.

REFERENCES
Books and Journals
Saiz-Alvarez, J. M., 2021. Entrepreneurship in the Fashion Industry: The Case of Carolina
Herrera. In Entrepreneurial Innovation for Securing Long-Term Growth in a Short-
Term Economy (pp. 90-110). IGI Global.
Larson, S., 2020. ENTREPRENEURSHIP AND SUSTAINABILITY IN PRACTICE:
TRIPLE BOTTOM LINE IN THE FASHION INDUSTRY.
Wenjing, Z., 2021, May. Analysis on the Operating Condition of the Foreign Fast Fashion
Company in China. In 2021 The 6th International Conference on E-business and
Mobile Commerce (pp. 88-92).
Noto La Diega, G., 2019. Can the law fix the problems of fashion? An empirical study on
social norms and power imbalance in the fashion industry. Journal of Intellectual
Property Law & Practice. 14(1). pp.18-24.
Niu, B. and et.al., 2018. Does buy-back induce more fashion sub-sourcing? Contract property
and performance analysis. Transportation Research Part E: Logistics and
Transportation Review. 113. pp.22-37.
Easton, P. D., and et.al., 2018. Financial statement analysis & valuation. Boston, MA: Cambridge
Business Publishers.
Robinson, T. R., 2020. International financial statement analysis. John Wiley & Sons.
Benrqya, Y. and Jabbouri, I., 2021. Performance evaluation of European grocery retailers: a financial
statement analysis. International Journal of Logistics Economics and Globalisation, 9(1),
pp.24-39.