Financial Analysis of Primark: Strengths, Weaknesses, & IPO

This report offers a comprehensive financial analysis of Primark, a major clothing retailer. It begins with an overview of Primark's current financial situation, analyzing key financial ratios like profitability, liquidity, solvency, efficiency, and investment ratios from 2014 to 2016. The report then evaluates Primark's performance against key competitors such as New Look, Next plc, and M&S, comparing their financial ratios and assessing their impact on Primark's market position. A critical appraisal of Primark's strengths (e.g., strong interest payable ability, increasing profitability) and weaknesses (e.g., poor liquidity, weak dividend payout ratio) is provided. The report concludes with recommendations for a suitable share price range for a potential IPO, emphasizing the use of the discounted cash flow method for valuation, along with suggestions for improving corporate governance. The analysis highlights the importance of strategic financial planning for Primark's continued success in the competitive retail market.

Financial Analysis of Primark

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Analysis of current situation and financial situation of Primark........................................1
2. Researched evaluation and financial competitor analysis..................................................2
3. Critical appraisal and strengths and weaknesses of Primark..............................................4
4. Recommendation of price range for the shares of Primark for using in IPO.....................5
5. Factors impacting valuation of share price.........................................................................6
6. Critical evaluation of the finance techniques.....................................................................7
7. Recommendations for corporate governance structure......................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial analysis is important to be carried out by the organisation as provides clear
picture about the financial situation in the best possible manner. The enclosed report deals with
financial analysis of Primark which is clothing giant and a market leader (Cucchiella and Rosa,
2015). Various competitors' are available in the market which eventually have impact on it. As
such, financial analysis is important for it so that it may work upon weaknesses and maximises
strengths in the best possible way. For carrying out the financial analysis, financial ratios play a
vital role to the company and as a result, Primark is able to carefully analyse its strengths and
weaknesses quite effectively with much ease. It may be said that ratios are vital to organisation
to have an eye on the financial position in effectual manner.
1. Analysis of current situation and financial situation of Primark
Primark plc
Particulars Formula 2014 2015 2016
Profitability ratio
Gross profit margin Gross profit / net sales * 100 24.30% 23.60% 23.40%
Liquidity ratios 2014 2015 2016
Current ratio Current assets / current liabilities 0.42 0.05 0.73
Quick ratio Quick assets / current liabilities 0.05 0.08 0.13
Solvency ratio 2014 2015 2016
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Interest coverage ratio EBIT / Interest Expense 15.17% 12.95% 19.61%
Debt to equity ratio
Long term debt / shareholders
equity 2.43% 3.20% 2.30%
Efficiency ratio 2014 2015 2016
Stock Turnover ratio COGS ÷ Average Inventory 6.10% 5.65% 5.05%
Fixed assets turnover
ratio Net sales / Average fixed assets 2.81% 2.80% 2.60%
Investment ratio 2014 2015 2016
Dividend payout ratio Dividends / Net income 0 0 36.70%
Earnings per share Net income/ Outstanding shares 0.96% 0.67% 1.03%
2. Researched evaluation and financial competitor analysis
The Primark has 3 competitors such as New look, Next plc and M & S (Marks and
Spencer). These competitors have great impact on Primark as market share are divided in these
companies as well. The financial ratios calculated above will provide clarity about the Primark
plc of its financial performance (Kallala and et.al, 2015). The financial performance of Primark
has increased from past years considerably and as a result, it is performing well in the market.
New look plc, Next plc and M & S are performing well in the market and as a result, Primark has
to perform well so that it may outreach them in the most proficient way. Below are the financial
ratios of three plc's :
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New look
plc Next plc M & S plc
Particulars Formula 2016 2016 2016
Profitability ratio
Gross profit margin Gross profit / net sales * 100 34.80% 77.40% 39.10%
Solvency ratio
Interest coverage ratio EBIT / Interest Expense 27.21% 5.24% 5.84%
Efficiency ratio
Stock Turnover ratio COGS ÷ Average Inventory 6.03% 2.80% 8.05%
Fixed assets turnover
ratio
Net sales / Average fixed
assets 8.03% 1.12% 2.10%
Investment ratio
Dividend payout ratio Dividends / Net income 73.50% 69.70% 68.50%
Earnings per share
Net income/ Outstanding
shares 2.21% 0.81% 0.49%
By analysing the financial ratios of these companies, it may be conveyed that all the
companies are performing well in the market. They have good dividend ratio as well as good
earnings on share. Primark has to implement well- structured strategies so that it may beat them
and gain more market share (Cucchiella, D’Adamo and Gastaldi, 2015). This way, it will be a
market leader in clothing industry. Primark main competitor is M & S which has a good market
share. Primark should be able to form and implement competitive strategies so that it may gain
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market share and become ahead of it. The dividend payout ratio of M & S is 68.5 % and of
Primark is 36.70 % only. It clearly shows that dividend ratio of Primark is not at all good and it
is not paying better dividends to its shareholders'. It has to make better strategies so that better
profits may be earned by it and in turn more dividends be paid to shareholders' and as a result, it
can beat M & S which has a remarkable dividend payout ratio which shows that it is able to
make good profits and this is directly reflected in the dividends paid to shareholders'. New look
and Next plc has 73.50 % and 69. 70 % of dividend payout ratio which is just doubled of
Primark.
The gross profit margin of New look, Next, M & S plc are 34.80 %, 77.40 %, 39.10 %
which is much better than Primark having only 23.40 %. It has to formulate well- structured
strategies so that profit margin may be increased and it may be more profitable than its
competitors. Primark is facing liquidity issues as current as well as liquid ratios are not ideal and
it is not favourable to it as it will be unable to pay off obligations and liabilities which is to be
paid within one year. Now analysing interest coverage ratio of Primark is 19.61 % which is
better than other three companies which has 27.21 %, 5.24 %, 5.84 %. Lower than 1.5 % is not
favourable to company as it will be unable to meet its interest expenses and as a result, higher
than 1.5 % is better and ideal interest coverage ratio which is good of Primark. While, Next and
M & S companies are not having good interest coverage ratio (Dewachter and et.al, 2015).
It may be interpreted that financial situation of Primark is good but it has to make better
strategies to beat its competitors so that market share may be gained by it and customers' may be
satisfied in effective manner.
3. Critical appraisal and strengths and weaknesses of Primark
The financial ratios clearly shows strengths and weaknesses of Primark. It is described
below :
Strengths
1. Strong interest payable ability -
The interest payable ability of Primark is good. It is able to make timely interest
payments on the loans taken by it. As, it can be seen in the interest coverage ratio which is 19.61
% in the year 2016. The interest payable by it is better and it is strength of Primark. The interest
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expenditures of Primark is low which shows that it has strong interest ability. The ideal interest
coverage ratio should be more than 1.5 % and Primark has better ratio and is able to make quick
interest payments with much ease.
2. Increase in profitability -
The profitability position of Primark is constantly increasing from the past years which
shows that it has formulated and implemented better strategies which has given proficient results
in the form of profit and increased market share. In the year 2016, it has gross profit ratio of
23.40 % which is not fluctuated from the past years (Rigamonti and et.al,2015). It can be
analysed that Primark is able to make good and consistent revenue, thereby deteriorating costs
significantly. In relation to this, stock turnover ratio is also become efficient which has resulted
in more profits at its disposal. M&S has 39.10 % which is good and Primark should increase it.
Weaknesses
1. Poor liquidity -
The main weaknesses of Primark is that liquidity position is not good which should be
increased otherwise, it will be unable to pay its liabilities. The current ratio is 0.73 : 1 which is
not good as ideal current ratio is 2 : 1. It clearly shows that Primark will be unable to meet short-
term liabilities. In relation to this, quick ratio is 0.13 : 1 which is also not good as it will not be
able to meet extreme short-term obligations. Ideal quick ratio is 1 : 1 and which implies that it
has poor liquidity position and it should increase the liquidity aspect of it (Atoom, Malkawi and
Al Share, 2017).
2. Weak dividend payout ratio -
Primark is not able to provide better dividends to shareholders'. The dividend payout ratio
is 36.70 % which should be increased so that it may provide good dividends to shareholders. The
dividend payout ratio should be better so that organisation may be able to increase shareholders'
as it ultimately increases financial funds which are most required by it. Higher the dividend ratio,
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better for the company as it shows concern of the company to its shareholders' and gradually
revenue increases as more shareholders' subscribe shares of organisation. As compared to other
three companies, dividend payout ratio of Primark is not good and it should transform this
weakness into strength by providing better dividends to shareholders'.
4. Recommendation of price range for the shares of Primark for using in IPO
The share price of company is vital factor as it should be effectively done else, company
may not be profitable. IPO (Initial Public Offerings) is a mechanism by which shares are issued
to public for the first time. The price range of shares is important factor which should be
carefully analyzed by the company and should be quoted to public (Delen, Kuzey and Uyar,
2013). It is recommended that Primark should analyze critically the market and then shares
prices should be set accordingly. The valuation methods should be used by it so that IPO may be
offered by it with much ease.
Valuation methods such as income valuation and discounted cash flow methods should
be used by the organization. Discounted cash flow method is recommended to be used by
Primark to value the shares and accordingly IPO may be offered to the public. This method
considers time value of money. Moreover, all future cash flows are estimated and are then
accordingly discounted by the cost of capital which ultimately gives present value of cash flows.
It is recommended that Primark should use discounted cash flow method to have fair prices of
shares (Buchman, Harris and Liu, 2016).
IPO is decided by analyzing that how much amount company is looking for raising the
capital and number of shares offered by it and also percentage of shares it is selling to the
shareholders'. It is important to note that price shares is also based on price earnings ratio of
organization. If earnings are good then, good value of shares may be offered by it in the market.
The price of shares must be in relation to price earnings ratio and consecutively shares must be
offered at competitive price range by Primark.
5. Factors impacting valuation of share price
1. Earnings per share -
It impacts valuation of share price too much extent. Primark company is impacted by
earnings per share. The share price is much hiked when firm has more earnings per share. It can
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be said that shares are directly impacted by earnings on it. If company is performing good then,
share prices are consecutively increased and this is beneficial for it.
2. Return on investments -
Return on investments also impacts share prices up to much extent. The required rate of
return will automatically adjust price that an investor is looking to pay for. This impacts share
price. When investor makes changes in return on investment, then maximum price of shares will
also be changed drastically (Schönbohm, 2013). This implies that shares are much affected by
return on investment.
3. Dividend per share -
When dividend per share of Primark company is hiked, then share prices also gradually
increases. Shareholders' are paid more dividends and this leads to more value of shares of it. In
contrary to this, when dividends are not paid adequately then price of shares is undervalued. As
such, Primark should provide adequate dividends to shareholders' so that it may be able to
enhance shareholders' satisfaction and it ultimately leads to maximum valuation of shares price.
4. Exchange Rates -
Foreign exchange rates have a direct impact on company's share prices. It impacts share
prices of Primark as if foreign currency rates does not remain stable. The changes in foreign
currency rates goes up or down, consecutively share prices also goes upward or downward. The
stock value has immediate effect on the exchange rates of the company doing business in that
country (Gunawardena and et.al, 2015). This initiates changes in share prices of the company at
large basis. It is external factor and company cannot handle it in either way. Hence, share prices
is impacted by foreign exchange rates.
5. Supply & Demand -
When price of the shares are less, investors will buy more and as a result, share prices gos
up. In contrary to this, when prices are more quoted by Primark, then investors will not be
attracted towards it and hence, demand for shares decreases, which leads to low valuation of
share. Company should quote low price so that investors are attracted towards it and ultimately
invests in company leading to more availability of funds for operation with much ease.
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Afterwards, when share prices rises as supply decreases as investors are ready to pay for
successful shares and are ready to pay more prices.
6. Critical evaluation of the finance techniques
The financial ratios are vital part of the company as it shows financial position of it in the
best possible way. Financial ratios take into account past figures and data which forms basis for
the financial information of the company in effective manner. The advantages of financial ratios
are numerous such as it provides financial viability of the business and as a result, it shows
accurate interpretation of company (Meriç, Kamışlı and Temizel., 2017). The financial ratios are
depicted with the help of financial statements such as income statement, balance sheet and cash
flow statement which are pillars of finance and it shows accurate results of the entity in the most
proficient way.
Moreover, financial ratios are helpful for comparing companies in the same industry with
much ease. The comparison help company to evaluate on the basis of liquidity, efficiency and
profitability position. One company may easily compare with another on the basis of profitability
ratios and efficiency ratios which are calculated from the financial statements. Further, it helps
company can create benchmark for better performance and this helps it to be effective enough in
the market and market growth can be analyzed by it in the best possible way. Stock valuation is
also accomplished by organization with the help of ratios. Investors are delighted by the effective
performance of the company by analyzing financial ratios and as a result, share prices of
organization is valued more and increase funds availability to it. Hence, it is advantageous to
Primark in the most proficient way (Davidson III and Dutia, 2017).
In contrary to this, financial ratios have limitations as well to the company. The financial
ratios are based on historical facts and this may be manipulated. If the financial facts are
manipulated, then results drawn are not accurate and lack much efficiency. Financial ratios are
not reliable as it draws out improper conclusions which are irrelevant to the company. On
analyzing and comparing with another company also is not worth as company charges different
methods for stock valuations and thus, comparison is irrelevant and does not provide concrete
conclusion. This can be articulated that Primark is using FIFO and other company is using LIFO
method and as such, valuations are different and hence, not comparable with each other.
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Moreover, inflation may lead to difference in financial statements. The historical cost
based balance sheets and accounting figures do not reflect accurate figures. The financial ratios
are misleaded as different firms purchase assets at different dates (Limitations of financial
ratios). As adjustments are not recorded balance sheets and other financial statements in
reference to the inflation and as such, false information is provided which is not useful at all. As
a result, despite of certain limitations, financial ratios are calculated by organization effectively
to analyze correct financial position.
7. Recommendations for corporate governance structure
The purpose of corporate governance structure is to support companies to impart success
by effective management so that organization may be able to sustain in the market in the best
possible way (Liang and et.al, 2016). The main recommendations for Primark is that it may be
able to provide ownership rights to shareholders' as they are entitled to it. Moreover, it is
recommended that transparency be initiated so that share prices are not high and investors may
be attracted to company for investing and this helps it to have effective availability of funds
which are required for successful operations in the best possible way.
It is also recommended that Primark should use suitable share valuation method such as
discounted cash flow which is allows adequate offering of initial shares to public and is a useful
method for valuation of shares in effective way. IPO may be offered by company which is
analyzing the number of shares it is offering for subscription. The appropriate corporate
governance structure is required to be followed by Primark so that it may enhance shareholders'
up too much extent and as a result, long term survival may be achieved by it in the best possible
way (Najjar, 2013).
CONCLUSION
Hereby it can be articulated that financial analysis plays important role in valuing
company and extracting its financial strengths and weaknesses in the best possible way. It is
important for the company so that it may analyse weaknesses and implement well structured
strategies by which weaknesses are transformed into strengths. For carrying out financial
analysis, ratios play vital role to the organisation. Ratios are calculated with the help of balance
sheet and income statement which provide accurate results to organisation. Primark is able to
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carry out the ratios by referring to the financial statements and as a result, accurate conclusions
are drawn out of it which provides financial position of it in the best possible way.
REFERENCES
Atoom, R., Malkawi, E. and Al Share, B., 2017. Utilizing Australian Shareholders' Association
(ASA): Fifteen Top Financial Ratios to Evaluate Jordanian Banks'
Performance.Journal of Applied Finance and Banking. 7(1). p .119.
Buchman, T. A., Harris, P. and Liu, M., 2016. GAAP vs. IFRS Treatment of Leases and the
Impact on Financial Ratios.
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