Financial Analysis Report for Hugo Boss: Accounting and Management

This report provides a detailed financial analysis of Hugo Boss, a leading multinational apparel company. It begins with an introduction to accounting and management, emphasizing its role in conveying financial performance and facilitating comparisons. The report then delves into the concept of creative accounting, defining it and providing examples like Enron and Microsoft. It includes a vertical analysis of Hugo Boss's income statement for 2017 and 2018, interpreting the trends in gross profit, selling expenses, administration expenses, and operating profit. Furthermore, it presents a financial analysis using ratio analysis, including liquidity and profitability ratios such as current ratio, quick ratio, net profit margin, and gross profit ratio, comparing Hugo Boss's performance to the Inditex Group. The report also discusses capital structure and investment appraisal techniques, advising the company on potential acquisitions and optimal capital structures. The analysis aims to provide insights into Hugo Boss's financial health, performance, and strategic decisions.

Accounting and management

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Creative account meaning with example.....................................................................................3
TASK 2............................................................................................................................................4
a. Vertical assessment of an income statement ...........................................................................4
b. Financial analysis of an enterprise by using the ratio analysis tool ........................................6
TASK 3..........................................................................................................................................11
a. As per retained earnings ........................................................................................................12
b. As per scenario where 100 Mio of the Debt and 40 Mio of an Equity .................................12
Advising the company towards making an acquisition in Italy.................................................14
Suggesting the capital structure that facilitates a better result of NPV and the maximum cost of
capital that could be afford by HB.............................................................................................14
CONCLUSION..............................................................................................................................15
REFERENCES................................................................................................................................1

INTRODUCTION
Accounting of the management relates to the measurement, communication and the
processing of the financial and the non-financial information in relation to an economic entities
like business corporations. Accounting helps the management in conveying its financial
performance and position within an industry and also helps in making comparison of the firm
with its competitors is that it could gain a competitive advantage within the business. The present
study is based on Hugo Boss, a leading multinational company deals in the premium segment of
an apparel market. The company along with its larger employees around 14700, sells and
develops high quality accessories in both women and men segment under its brand called as
HUGO brands. Further, the study includes concept of the creative accounting, vertical analysis of
an income statement. Moreover, it also involves financial analysis of the company's final reports
and application of investment appraisal technique in knowing the feasibility of the project.
TASK 1
Creative account meaning with example
Creative accounting refers to the accounting practices that follows a required regulations
and the laws but deviates from about those standards are intended to accomplish. It capitalizes on
the loopholes within the accounting standards for falsely portraying a better brand image of the
company. It means when an organization presents or organizes its accounts in a manner that they
would be gaining the money for their own or in giving the false impression regarding their
profits. It is been characterized by an excessive complication and a use of the novel ways in
order to characterize the assets, income and the liabilities. It includes framing of the final reports
with an intention to misleading the readers relating to those statements which is seen as primary
form of lying to the stakeholders. It is also known as aggressive accounting which means
manipulation of the financial figures mainly within one letter of law and an accounting standards
but is very much against its spirits and particularly not facilitating true and fair picture of an
entity's accounts.
Examples of creative accounting -
Enron was seen as the world's leading energy trader who uses an internet for buying and
selling the natural gas and supply of electric power for the utilities and an users of industrial
power. This has been done for helping them in hedging against the fluctuations in the power
prices. However, Enron was been undone by the shaky accounting, where too much of the

borrowed funds and an unwillingness in providing an information to the investors who had been
grew for doubting their financial reports. In order to fuel an enterprise growth, Enron had shifted
billions of the dollars in the debt off in its balance sheet statement and also into an array of the
complex partnerships. SEC began the investigation and an Enron restated the 5 years of an
earnings, wiped out nearly $ 600 million in the profits.
Microsoft was been investigated for the creative accounting by SEC in respect of its
misconduct in determining or recognising the revenue (Annual report of Hugo Boss, 2018). It is
been a centre of an investigation in relation to its use of more and more financial reserves for the
purpose of shoring up its earnings.
WorldCom Inc has also founded as using a creative accounting in 2002 by way of
making the use of reserves in boosting their earnings. Largest amount of the reserves are been
misused in a same manner as provisions were increased for the projected expenses and used it for
increasing the amount of earnings. It had filed for a largest bankruptcy case in US as the
company had hid $ 3.9 billion in the expenses since the year 2001. CEO and the CFO of the
company were been arrested with the criminal charges that is filed for a fraud in the year 2002.
Dell was also been accused in the year 2010 with a fraudulently reporting of its financial
earnings in giving an impression that it exceeded the earnings projections or estimations made by
analyst. Using a creative accounting, Dell had made use of an undisclosed payments from an
Intel to smoothing out a volatility from the poor earnings. Dell had paid an amount valuing as
$100 million as the penalty due to its misconduct.
TBW corporation executives were been sentenced to imprisonment for several year for
playing their roles in nearly $ 3 billion of the fraud that took down a big lender and a major bank.
The fraud had ran for more than the 7 years till the August 2009 when a TBW had collapsed
after a US market has imploded. Bank officials and the company were been accused for trying to
covering up an enormous or large amount of losses by moving the money between an accounts at
the Colonial Bank and in selling the mortgage loans that do not present and are worthless or has
been sold already.
TASK 2
a. Vertical assessment of an income statement
Income statement of Hugo Boss

Particulars 2017 2018
Revenue 2732573 2795963
Cost of goods sold -924278 -972241
Gross profit 1808295 1823722
S&D expenses -1195453 -1173523
Administration expenses -280275 -290457
Other operating income and the
expenses 8487 -12933
Operating profit (EBIT) 341054 346809
Financial cost -9762 -10139
Earnings or profits after taxes 331292 336670
Income taxes -100091 -100470
Net profit 231201 236200
Vertical analysis
Particulars 2017 2018 % change
Revenue 100.00% 100.00%
Cost of goods sold -33.82% -34.77% -0.95%
Gross profit 66.18% 65.23% -0.95%
S&D expenses -43.75% -41.97% 1.78%
Administration
expenses -10.26% -10.39% -0.13%
Other operating income
and the expenses 0.31% -0.46% -0.77%
Operating profit
(EBIT) 12.48% 12.40% -0.08%
Financial cost -0.36% -0.36% -0.01%
Earnings or profits after
taxes 12.12% 12.04% -0.08%
Income taxes -3.66% -3.59% 0.07%

Net profit 8.46% 8.45% -0.01%
Interpretation- From the above results generated, it has been reflected that the gross
profit has decline in the year 2018 with around 0.95% of change that resulted from reducing
66.18% from 65.23% that depicts the percentage of the gross profit earned in the year 2017 and
2018 (Rachmawati, 2018). This indicates that cost of sales of Hugo Boss during the year 2018
tends to be increasing with against its sales. The selling and the distribution expenses of an
enterprise is increasing by 2% that is 43.75% accounted during 2017 and 41.97% in the year
2018. This shows that S&D expenses of Hugo Boss is decreasing from one period to another that
in turn considers as a good sign for the firm as lower the expenses, higher is the profitability
(Weygandt, Kimmel and Kieso, 2019). However, administration expenses of an entity is
increasing with very little points that 0.13% resulted by subtracting 10.26% from 10.39%
attained in the year 2017 and 2018 over its sales. Operating profit margin of Hugo boss is seen as
decreasing in 2018 by very smaller points that is 0.08%. This reflects that company needs to take
appropriate measures like controlling the cost and increasing the sales in order to attain higher
profitability in the coming years. Moreover, financial cost of Hugo Boss seems as decreasing or
declining in the year 2018 evaluated as 0.36% as compared to 2017 ascertained as 0.37% and the
change in the percentage cost attained as 0.01%. This shows a better sign for company in getting
an increased value of the profits and a better interest coverage (Shima, 2017). Earnings after
taxes showed a decline of very smaller points that equates to 0.08% and income taxes also
decreases of the value 0.07% . Net profit margin with respect to sales has also shown a decline of
only 0.01% that means in the year 2017 the net profits accounted as 8.46% and in 2018 it
attained as 8.45%. Overall the performance of the company has remain stable over the 2 years
and need to take corrective action for controlling the expenses so that profits could increased
with a greater amount in future periods.
b. Financial analysis of an enterprise by using the ratio analysis tool
Ratio analysis

Particulars Formula Hugo Boss (2018) Inditex Group (2018)
Liquidity ratio
Current assets 1172204 10147
Current liabilities 652756 5173
Current ratio
Current
assets/Current
liabilities 1.80 1.96
Current assets 1172204 10147
Inventory 617947 2685
Quick assets 554257 7462
Current liabilities 652756 5173
Quick ratio
Quick assets/Current
liabilities 0.85 1.44
Profitability ratio
Net profit 236200 3448
Net sales 2795963 26145
Net profit margin
Net profit/Net
sales*100 8.45% 13.19%
Gross Profit 1823722 14816
Net sales 2795963 26145
Gross profit ratio
Gross profit/Net
sales*100 65.23% 56.67%
Operating profit 346809 4357
Total assets 1858557 20231
Current liabilities 652756 5173
Capital employed 1205801 15058

Return on capital
employed
Operating
profit/Capital
employed*100 28.76% 28.93%
Net income 236200 3448
Shareholders funds 980997 13522
Return on equity
Net
income/Shareholders
funds 24.08% 25.50%
Leverage ratios
Long term borrowings 82775 1536
Owners funds 980997 13522
Debt-equity ratio
Long term
debts/Equity funds 0.08 0.11
Earning before interest
and taxes 346809 4357
Interest expense 5232 17
Interest coverage ratio
EBIT/interest
expense 66.3 256.3
Efficiency ratio
Cost of goods sold 972241 11329
Average inventories 617947 2685
Inventory turnover
ratio
COGS/Avg.
Inventory 1.57 4.22
Net sales 2795963 26145
Average total assets 1858557 20231
Asset turnover ratio Net sales/Avg total 1.50 1.29

assets
LIQUIDITY RATIOS
Current ratio- It means the ratio that measures an ability of the company in paying its
current obligations that become due in a period of one year. It reflects an investors and the
analysts regarding the way company could maximise its short term assets on balance sheet for
satisfying or meeting payables and the current debts adequately (Mota, A., 2017). An ideal
current ratio is said to be 2:1 which means assets must be resulted as doubled the liabilities in an
organization. Higher ratio depicts that firm is having too much of the current assets or the
working capital while lower ratio reflects that company faces cash problems. As the current ratio
of Hugo Boss and Inditex Group resulted as 1.80 and 1.96 which equates to an ideal ratio, this in
turn states that both the companies are making effective use of their current assets and has
sufficient cash in paying off their short term liabilities.
Quick ratio- It is represented as an indicator of an organization's ability in generating
immediate cash funds for meeting its most liquid liability. As this ratio indicates the capability of
an enterprise for making instant use of their near cash related assets which could be converted
into the cash on a quicker basis so it also known as Acid test ratio (Dizkirici, Topal and Yaghi,
2016). A quick ratio that resulted higher than 1, states that corporation is having enough cash or
assets in paying back its current obligations. The quick ratio of Inditex is considered as better
because it evaluated greater than 1 that is 1.44 in comparison to Huge Boss that accounted as
0.85. This shows that liquidity position of Inditex is better than Huge Boss.
PROFITABILITY RATIO
Net profit ratio- It means the ratio that depicts the relationship between profit after tax
and the sales. It is been calculated by dividing the net profit with that of the net sales and reveals
the details about the profit remaining after reducing the all the expenses relating to production
cost, financing, administration, interest expense and the tax obligation (Simlai and Guha, 2019).
It measures ability of an entity in paying off all its cost and the expenses through the use of the
profits. Higher the NP ratio better is the profitability performance of the company. The net profit
ratio of the Inditex Group is higher as 13.19% in comparison to Huge Boss equates to 8.45% .
This indicates that after paying off all the expenses, Inditex is generating larger profits than Huge
Boss that in turn results a better profitability position of the former company.

Gross profit margin- It is the profitability ratio which represents a relationship between
the net sales and the gross profit. It is the most useful tool that helps in evaluating an operational
performance of an enterprise. It is been computed by dividing value of the gross profits to that of
the sales. It has been stated that higher the gross margin, better is the performance of the
company and this means that it is performing well in management of its cost incurs in relation to
production activity (Edem, 2017). It tells the way in which a company covers its operating, other
costs and the financing cost. From the analysis it has interpreted that gross margin of Huge Boss
is better or greater valuing 65.23% in comparison to its competitors that is Inditex Group as
56.67%. Thsi clearly shows that after meeting the cost in relation to the producing the product or
variable cost, Huge Boss has earned higher profitability than Inditex.
Return on capital employed- It means reviewing the ways in which firm is generating
profits through the use of its capital by making comparison of the net operating margin to that of
capital employed. A higher return on capital employed ratio reflects a larger chunk of the profits
that could be plough back into the business for the benefit or sake of the stakeholders (Sari,
Nurlaela and Titisari, 2018). By evaluating the ratio of both the companies it has been identified
that that initex has generated higher ratio of the value 28.93% whereas the ROCE ratio of Hugo
Boss seen as 28.76% so there results a very little amount of the difference between both the
companies ROCE. This means that both the entities are using their capital in an efficient and
effective way and this leads to generate higher returns.
Return on equity- It is the measure of the financial performance that is been computed by
dividing the net profit with that of the shareholders funds. It is counted as the measure which
depict the use of company's assets by the management for creating or earning profits. It referred
as firm's ability in generating the profits from the investment made by the shareholders within
an organization. Higher the ratio of return on equity reflects larger earnings are resulted from an
investment made by shareholder. ROE of Inditex resulted as greater 25.50% than Hugo Boss
24.08% and this summarizes that overall profitability position of Inditex is good than Hugo Boss.
LEVERAGE RATIOS
Debt-equity ratio- It means the financial ratio that states relative proportion of the
shareholder funds and debt utilised fro financing an assets of the company. It shows the amount
of the borrowed funds has been used by an enterprise in funding its assets or investments. This
ratio is been used for evaluating leverage position of the corporation and is considered as an

important metric in the corporate finance (Mota, A., 2017). Higher the value of debt-equity ratio
reflects higher risk to the shareholders. In accordance with analysing the ratios, it has been
presented that D/E ratio of the Hugo Boss is better than its rivalry as it results a lower ratio
valued as 0.08 than its competitor Inditex as 0.11. This means better leverage position of Hugo
Boss in comparison to Inditex.
Interest coverage ratio- It determines an ability of the firm in meeting off its interest
related obligations or the financial burden. This ratio is evaluated by dividing Earning generated
by an entity before paying interest and taxes with that of the interest expenses. A high ICR
represents that companies are paying their interest obligation for large number of time while the
lower ratio is the strong indicator that an entity might default in respect of making payment of
their loan. The ICR for Hugo Boss and Inditex ascertained as 66.3 & 256.3 which clearly depicts
that Inditex has very lower amount of interest bearing and earns a high proportion of profits
against its interest liability so that it could meet its interest expenses appropriately than Hugo
Boss.
EFFICIENCY RATIO
Inventory turnover ratio- It means an efficiency ratio that states the ways in which
corporate can effectively manage its inventory by comparing the cost of sales along with an
average value of an inventory for the particular period. This in turn measures the number of
times an average inventory is been sold or turned during a specific period. Higher ITR are seen
as the positive indicator of an effective management of the stock but too high ITR does not seen
as better because it shows inadequate level of inventory that may result to decrease in the sales
revenue (Annual report of Inditex group, 2018). ITR of Inditex is said to good as 4.22 because it
lies between a good ratio that is 4 to 6 while Hugo Boss resulted as very low ITR which
indicates it is not maintaining its inventory level optimally.
Asset turnover Ratio- This efficiency ratio measures an ability of the corporate in
generating larger amount of revenue by making use of its assets (Edem, 2017). It helps in
making the comparison between the net sales and the average of the total assets. Greater ratio the
reflects for an efficient use of the assets however, lower ratio states that company is not making
efficient use of its assets. An ATR of Hugo Boss is higher equating to 1.50 than its competitor
equates to 1.29 so this means that Hugo Boss is more good at using or utilizing its assets
efficiently in order to attain or gain larger sales revenue.

TASK 3
Calculation of cost of equity
Particulars Formula % value
rf 1.30%
rm 7.00%
Beta 0.86
(Rm-rf) 5.70%
Cost of equity (ke) rf+(rm-rf)*Beta 6.20%
Weight of Equity
Equity 40000
Total Capital 140000
Weight 28.57%
Cost of debt 3.55%
After tax debt (1 – 30%)
Cost of debt(kd) 2.49%
Weight of Debt
Debt 100000
Total Capital 140000
Weight 71.43%
Cost of equity (ke) 6.20%
Weight of Equity 28.57%
Cost of debt 2.49%