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Table of Contents 1. INTRODUCTION2 2. COMPANY AND MARKET OVERVIEW2 3. FINANCIAL STATEMENTS ANALYSIS OVERVIEW5 3. 1Revenues5 3. 2Total operational profits6 3. 3Current Assets7 3. 4Long Lived Assets7 3. 5Dividends8 4. RATIO ANALYSIS9 4. 1Liquidity Ratios9 4. 2Efficiency Ratios10 4. 3Profitability Ratios11 4. 4Gearing Ratios12 5. TREND ANALYSIS14 6. CONCLUSION15 Appendix 1: Balance Sheet Horizontal Analysis16 Appendix 2: Income Statement Horizontal Analysis17 Appendix 3: Balance Sheet Vertical Analysis18 Appendix 4: Income Statement Vertical Analysis19
Appendix 5: List of Ratios19 Appendix 6: Trend Analysis 2005-200919 References19 INTRODUCTION In the present report we will analyze the financial position of Forel S. A. as depicted in the company’s financial statements for the accounting period 2008-2009. Our selection of Forel S. A. is based on its dynamic presence in the women clothing industry in Greece. We believe that it would be quite interesting to analyze the financial situation of a local company that despite the current financial turmoil, it continues to maintain its good profitability.
We will begin our report with a brief overview of the company’s key characteristics in comparison with its main competitors. The main body of the report will cover Forel’s financial statements’ horizontal and vertical analysis of the accounts that are worth mentioning, followed by a trend analysis over a five (5) year period. We have selected to analyze the revenues, total operational profits, current assets, long lived assets, non-operational revenues and expenses and the dividends accounts. An analysis of the most important financial ratios will follow, classified and analyzed in respective groups.
Consequently, we will comment the liquidity, efficiency, profitability and gearing ratios. COMPANY AND MARKET OVERVIEW Greece, a small- to medium-sized textile and clothing producer, has suffered considerably in recent years from the removal of European quotas and other restraints, which have exposed it to the full force of low-cost competition from Asian exporters. Companies traditionally characterized by the quality of their products, are forced to transfer their operations in cheaper markets in the South East Europe or import products from the Asian market.
This business decision drives many times to low quality products not allowing Greek companies to successfully compete foreign companies represented in the Greek market. The forthcoming years are expected to be difficult for the clothing industry since the need for lower cost will be even stronger. Despite the difficult situation the Greek companies should overcome, there are companies that have been well positioned in the local market due to the products’ high quality as well as considerable low cost for the end users. Forel S. A. is considered one of those companies.
Forel S. A. operates in the women’s clothing industry. The parent company resides in Greece by exporting also in Cyprus, Lebanon, South Africa, Ireland, Switzerland and recently in Canada. Forel started its operations in 1986 in a partnership form and in 2006 Forel S. A. was created through the merger of two partnerships – Forel Businesses LLP and A. Chatzoulas LLP. The company currently employs 32 persons and owns three Forel retail stores in Greece and Cyprus. Their products are also distributed through 300 stores in Greece and abroad.
It plans to focus more on the retail business since till now it was focusing by 90% on wholesales and 10% on retail. Forel’s clothes are targeting to women at an age range from 25 to 50 years old, having different lines for casual as well as formal outwear following a moderate to high pricing tactic. By reviewing a survey made for the clothing industry operating in Greece, we have been able to gather various statistics for the industry. The survey titled “Analysis of financial statements of the Greek women clothing companies for the FYs 2005 – 2009” has been published in 2010 by George Panagopoulos.
Based on the aforementioned analysis, Forel’s revenues for 2008 amounted to €9. 869. 281 and for 2009 to €8. 582. 343. Its total assets were equal to €7. 975. 143 for 2008 and to €8. 666. 546 for 2009. In order to better understand the company’s volumes, in respect to those two figures, it is useful to compare it with its main competitors’ respective figures. By reviewing the aforementioned analysis we have identified four main competitors, namely Bill Cost, Toi&Moi, Lussile and BSB. The two charts below illustrate the revenues and total assets for 2008-2009 respectively. Revenues 2008-2009 [pic]
Assets 2008-2009 [pic] For the purposes of our assignment we will further analyze Bill Cost and Toi & Moi, since those two companies were stated as Forel’s main competitors during the interview conducted with one of the main shareholders. Bill Cost was founded in 1977 as a private enterprise while in 1994 the company became ABEE. Bill Cost products can be found through its retail stores located in the Attica area as well as in shop-in-shop and corners in well known department stores. The company’s goal is to maintain its high quality of products and to expand its sales in Athens and throughout Greece.
On the other hand, Toi&Moi was founded in 1988 as a company dealing in the manufacture and trading of women’s clothing. From 1988 until now, its trademark is registered in more than 55 countries all over the world. Nowadays, Toi ABEE already allocates 32 own label stores in Greece and abroad (corporate, shop-in-shop and franchise) while in the first half of 2010 a new own label store opened in Turkey and more specifically in Istanbul. FINANCIAL STATEMENTS ANALYSIS OVERVIEW By analyzing Forel’s financial statements we are able to evaluate the company’s past performance as well as its current financial position.
In this part, we will proceed with the horizontal and vertical analysis of Forel’s income statement and balance sheet over a two year period (i. e. 2008-2009) as well as the trend analysis over a five year (i. e. 2005-2009) accounting period. The horizontal analysis is a line-by-line comparison of all accounts year over year, providing us with valuable information about the accounts that experienced a material change, whereas vertical analysis of the accounts helps us identify the most important accounts for the company.
Forel’s vertical analysis over the income statement is made in respect to the net sales; whereas the vertical analysis over the balance sheet is made for the assets in respect to total assets and for equity and liabilities in respect to total liabilities. For the purposes of our assignment, we will focus on the revenues, total operation profits, current assets, long lived assets and the dividends accounts. 1. Revenues Revenues is one of the most crucial accounts because it is indication of the company’s market share, it determines the profits from the operational activities and the prospects of the company. REVENUES ACCOUNT BALANCE CHANGE 2008-2009 | |COMPANY |2008 |2009 |PERCENTAGE DIFFERENCE | |FOREL |EUR 9. 869281 |EUR 8. 582. 343 |-13% | |TOI & MOI |EUR 22. 924. 717 |EUR 18. 857. 966 |-17. 7% | |BILL COST |EUR 9. 06. 486 |EUR 8. 394. 064 |-9. 8% | Forel’s revenues decreased by 13% in 2009 compared to 2008. This is considered to be a logical decrease due to the economic recession in Greece following the global financial crisis. This is further enhanced by the fact that Forel’s main competitors’ revenues change follows the same pattern. Its main competitors- Bill Cost and Toi, – revenues’ decrease varies approximately from 9% to 17%.
Although, stand alone, Forel’s 13% decrease is a considerable percentage, the analysis that follows reveals that the overall financial performance of the company is satisfactory. 2. Total operational profits |TOTAL OPERATIONAL ACCOUNT BALANCE CHANGE 2008-2009 | |COMPANY |2008 |2009 |PERCENTAGE DIFFERENCE | |FOREL |EUR 2. 018. 068 |EUR 1. 920. 471 |-4. % | In order to analyze the 4. 8% decrease in total operational profits, we should take into consideration the change in the operational expenses of the company. First of all through the vertical analysis, we observe that Forel managed to decrease the COGS in respect to the net sales from 63. 2% in 2008 to 60. 6% in 2009. In addition, a decrease of 16. 6% year over year (YoY) in COGS is derived from the horizontal analysis, a percentage higher than the 13% decrease in net sales. Furthermore the company successfully reduced management expenses by 9. % which is a proportion of 9% in respect to the net sales over 8. 39% in 2008. In addition, a significant decrease in interest expenses by 60. 1%, as a result of a decrease in the short term bank liabilities by 10. 6% in the balance sheet statement is observed. 3. Current Assets |CURRENT ASSETS ACCOUNT BALANCE CHANGE 2008-2009 | |COMPANY |2008 |2009 |PERCENTAGE DIFFERENCE | |FOREL |EUR 7. 89. 143,76 |EUR 8. 089. 144,87 |9. 5% | Through current assets company’s liquidity can be evaluated. Forel’s 2009 financial statements indicate a restructuring of the accounts determining the current assets balance. To be more specific, company’s inventories decrease by 20. 7%, along with the increase of the current liabilities account by 21. 5% had a positive effect in cash accounts (+22. 6% YoY). The total current assets percentage change was of 9. 5% YoY.
This can also be depicted by the vertical analysis since cash accounts of 2009 represent a larger proportion of total assets (43. 3%) followed by a drop of inventories and claims proportion 6. 15% and 44. 05% respectively. 4. Long Lived Assets |BUILDINGS ACCOUNT BALANCE CHANGE 2008-2009 | |BUILDINGS |2008 |2009 |PERCENTAGE DIFFERENCE | |FOREL |EUR 56. 24,36 |EUR 203. 582,21 |262. 7% | |TRANSPORTATION MEANS ACCOUNT BALANCE CHANGE 2008-2009 | |TRANSPORTATION MEANS |2008 |2009 |PERCENTAGE DIFFERENCE | |FOREL |EUR 374. 645,17 |EUR 299. 475,98 |-20. 1% | Long lived assets are used by the company in order to assist its operational activities.
In 2009, Forel increased considerably the value of the buildings account (262. 7%). This increase might be a result of either purchases of new buildings or capitalization of restructuring expenses of current owned buildings. Further, we notice a decrease in transportation means (20. 1%) which can be analyzed as a probable sell of part of its fleet. These assumptions can be also drawn by the non-operational revenues account, which had an increase of 54. 5% in 2009. This might be due to the gains the company had from selling these trucks in a market value over the accumulated depreciation value. . Dividends |DIVIDEND PAYABLE ACCOUNT BALANCE CHANGE 2008-2009 | |COMPANY |2008 |2009 |PERCENTAGE DIFFERENCE | |FOREL |EUR 491. 611,47 |EUR 1. 616. 046,20 |228. 7% | Dividends are the part of the net income of the company that shareholders receive as a payment for their investment. Dividend policy depends mainly on the financial performance (net profit after taxes).
Analyzing the dividend payable account under current liabilities in the balance sheet, we observe the differentiation in its policy, which is most probably due to amendments in the taxation regulatory framework in respect to the taxation of corporate profits. In 2009, Forel offered an initial dividend of EUR 399K along with a complementary dividend of EUR 1. 217K which was deducted from the retained earnings account. On the horizontal analysis, this is interpreted as an increase of 228. 7%, a significant percentage taking into consideration the harsh financial environment in which the company operates.
It is worth mentioning that, based on the vertical analysis, current liabilities represent a percentage of 72. 17% out of total liabilities and owners’ equity, in comparison to 2008 that amounted to 64. 54%, indicating an important change in the capital structure of the company. In addition, the increase in current liabilities is rather unfortunate as it consequently increases the short term liabilities, thus affecting the working capital in a negative direction. The increase of the current liabilities over the total liabilities and owners’ equity mainly results from the differentiation in the dividend policy.
This is obvious from the increase in dividends payable account as a proportion of the total liabilities and owners’ equity from 6,16% in 2008 to 18,65% in 2009 as observed from the vertical analysis. The implications of the above mentioned dividends policy will be further stated in the ratio analysis. RATIO ANALYSIS Whereas a horizontal and vertical analysis of the financial statements is important, the overall of the company’s overall performance cannot be evaluated unless we conduct a ratio analysis.
Ratio analysis is considered to be a reliable tool to express the relation between two or more figures appearing in the financial statements and when different ratios are combined and evaluated together with the horizontal and vertical analyses, they provide adequate and more reliable information for the company’s performance. Ratio analysis is also used to compare companies of the same industry. Comparing solely numbers does not lead to trustworthy results given also the fact that each company has different volumes of operations, assets and liabilities.
With a ratio analysis we are able to overcome this limitation as we compare companies by using standardized ratios, which give us the opportunity to assess the company’s performance in terms of percentages. Forel’s ratios indicate that the company’s overall financial position was improved in 2009 in comparison to 2008. It is noticeable that all efficiency ratios as well as gearing and investment ratios were improved during this financial period. The only ratio category that showed a decrease is the liquidity and as mentioned before this is due to the dividends account.
In order to analyze Forel’s ratios and interpret the numbers, we will compare them to its two closer competitors in terms of total assets and revenues. 6. Liquidity Ratios Computing Forel’s liquidity ratios will enable us to comprehend whether the company has enough liquidity to cover its maturing obligations. In the below tables Forel’s and its main competitors’ current and quick ratios for 2008 and 2009 are depicted. |FOREL LIQUIDITY RATIOS |2009 |2008 | |CURRENT RATIO |Current Assets |1. 9 |1. 44 | | |Current Liabilities | | | | |Cash + Short Investments + Receivables |0. 82 |0. 83 | |QUICK RATIO | | | | | |Current liabilities | | | BILL COST LIQUIDITY RATIOS |2009 |2008 | |CURRENT RATIO |Current Assets |2. 30 |1. 58 | | |Current Liabilities | | | | |Cash + Short Investments + Receivables |2. 05 |1. 6 | |QUICK RATIO | | | | | |Current liabilities | | | |Toi&Moi LIQUIDITY RATIOS |2009 |2008 | |CURRENT RATIO |Current Assets |1. 13 |1. 1 | | |Current Liabilities | | | | |Cash + Short Investments + Receivables |0. 80 |0. 95 | |QUICK RATIO | | | | | |Current liabilities | | |
In Forel’s liquidity ratios we observe a decrease in the current ratio which even in 2008 was smaller than the benchmark of 2, a widely recognized indicator as successful. Due to the change in dividend policy, as mentioned above, total liabilities increased, but the current asset restructuring which led to an increase of cash & equivalents account was not enough to improve the ratio over 2009. The effect of the change of dividend policy on the current ratio is apparent if we compare it with Bill Cost’s that left its dividend policy unchanged during 2009 resulting in an amazing increase of the ratio. 7. Efficiency Ratios
Efficiency ratios indicate how well the company manages its resources. In 2009 the economic recession in Greece had just started to have its impact on the liquidity of the economy as a whole, consumer spending and disposable income. So the efficient management of the resources is of great importance in hard times. The tables below depict the main efficiency ratios for 2008 and 2009 computed per days. |FOREL EFFICIENCY RATIOS |2009 |2008 | |Average days sales uncollected |59. 55 |46. 4 | |Average days inventory on hand |37. 42 |39. 36 | |Average days payable |274. 23 |241. 15 | |Cash Conversion Cycle |-177. 26 |-155. 66 | |BILL COST EFFICIENCY RATIOS |2009 |2008 | |Average days sales uncollected |88. 23 |71. 8 | |Average days inventory on hand |30. 46 |38. 87 | |Average days payable |310. 07 |297. 85 | |Cash Conversion Cycle |-256. 60 |-234. 42 | |Toi&Moi EFFICIENCY RATIOS |2009 |2008 | |Average days sales uncollected |77. 79 |59. 7 | |Average days inventory on hand |101. 28 |63. 28 | |Average days payable |831. 24 |860. 02 | |Cash Conversion Cycle |-652. 17 |-736. 97 | From the tables derives that Forel managed to increase the cash conversion cycle by more than 20 days. This is a result from the improvement of its saleability of inventory as well as the increase of the days it pays its suppliers.
The increase of the average collection days from its credit customers is explained by the current economic situation in Greece. In comparison with its competitors it seems that Forel manages its resources more efficiently given the fact that it raises the cash conversion cycle by 13% followed by Bill Cost 9. 4% raise and a 11. 5%. decrease in Toi&Moi. This percentage reveals the negotiating power of the company in the industry. 8. Profitability Ratios Profitability ratios indicate how much income is generated by the operational revenues, the assets and the liabilities and are of great importance for the company’s assessment by investors.
The following tables include Forel’s profitability ratios, as well as its main competitors’ ones. |FOREL PROFITABILITY RATIOS |2009 |2008 | |Gross Profit Margin |0. 39 |0. 37 | |Net Profit Margin |0. 23 |0. 20 | |Return on Assets |0. 17 |0. 8 | |Return on Equity |0. 71 |0. 59 | |Earnings per Share |245. 16 |245. 55 | |BILL COST PROFITABILITY RATIOS |2009 |2008 | |Gross Profit Margin |0. 39 |0. 38 | |Net Profit Margin |0. 9 |0. 09 | |Return on Assets |0. 18 |0. 22 | |Return on Equity |0. 27 |0. 42 | |Toi PROFITABILITY RATIOS |2009 |2008 | |Gross Profit Margin |0. 46 |0. 5 | |Net Profit Margin |0. 06 |0. 08 | |Return on Assets |0. 05 |0. 09 | |Return on Equity |0. 05 |0. 09 | As the first table shows, Forel in 2009 improved its Gross Profit Margin due to the larger decrease of COGS in relation to the decrease of net sales.
The ratio that is of greater importance is the Net Profit Margin. Forel managed to improve this ratio to 23% in 2009 from 20% in 2008. This is remarkable because it shows the percentage of each euro of sales that is converted into income. Furthermore, we see an improvement of the Return on Equity ratio which shows the relationship between net income and shareholders’ investment. This improvement is due to the fact that during 2009 Owners Equity decreased but the Net income was almost the same as 2008. This is also noticeable in the Earnings per Share ratio.
Also note that Forel’s Return on Equity is considerably higher than its Return on Assets. The competitors at the same time did not manage to improve their profitability ratios which in most cases decreased, as depicted in the above tables. 9. Gearing Ratios Gearing ratios indicate how the company finances the assets it purchases and the coverage of the interest expense by the net income. In other words it is a ratios range that show the short and long terms loans of the company. For the analysis that follows it is useful to state that neither Forel nor Bill Cost have long term loans while Toi has.
This is very interesting because it shows that both companies have enough income to finance their investment activities. Moreover the interest expense paid in long term loans is much higher than the one paid for short-term ones. All these have an immediate effect on gearing of the company. In the tables that follow we can find Forel’s gearing ratios for 2008 and 2009 compared to the ratios of Bill Cost and Toi&Moi respectively. |FOREL GEARING RATIOS |2009 |2008 | |Debt to Assets |0. 6 |0. 06 | |Debt to Equity |0. 25 |0. 19 | |Interest Coverage Ratio |48. 07 |19. 80 | |BILL COST GEARING RATIOS |2009 |2008 | |Debt to Assets |0. 13 |0. 2 | |Debt to Equity |0. 20 |0. 23 | |Interest Coverage Ratio |36. 92 |39. 01 | |Toi&Moi GEARING RATIOS |2009 |2008 | |Debt to Assets |0. 03 |0. 02 | |Debt to Equity |0. 8 |0. 07 | |Interest Coverage Ratio |3. 54 |3. 52 | During 2009 Forel’s Debt to Assets ratio remained stable due to the fact that dividends increased accompanied by a similar increase in cash and equivalents. The increase of Debt to Equity ratio can also be interpreted by the same reasoning, because dividends increased liabilities and decreased owner’s equity. The most substantial accomplishment is the great increase of the Interest Coverage ratio.
In the balance sheet we recognize it by the decrease of the interest expense and of the short term bank liabilities. Not only Forel managed to increase its cash but it also decreased short term lending improving the coverage ratio. Compared to its competitors the ratios of Forel are considered to be better since it maintained the leverage in reasonable size but increased the interest coverage significantly. The competition on the other hand not only did not manage to improve the ratios but in most cases the ratios deteriorated.
TREND ANALYSIS [pic] By looking at the Trend Analysis, we can notice the developing process and the dynamic presence of the company in the women clothing industry in Greece over the years. Taking 2005 as a base year we notice a continuous growth until 2008 and a small decrease in 2009, resulting from the recession in the Greek economy Noticeable is that despite the economic recession and the decrease in revenues the company manages to keep its profits before and after taxes at almost the same level in 2009 respecting to 2008.
Finally, a good indicator of the performance of Forel SA over the years, is the fact that EBITDA is increased in respect to the base year by c. 56. 9%, showing the significant progress of the company’s overall financial performance. CONCLUSION Following the above analysis of the individual accounts chosen and based on the company’s overall financial statements’ assessment, we can observe that the company although the economic situation in a local as well as a global level, succeeded to stabilize its financial situation and in some cases to further enhance it.
By this means, Forel wins an even more dynamic position in the Greek clothing industry. Appendix 1: Balance Sheet Horizontal Analysis [pic] Appendix 2: Income Statement Horizontal Analysis [pic] Appendix 3: Balance Sheet Vertical Analysis [pic] Appendix 4: Income Statement Vertical Analysis [pic] Appendix 5: List of Ratios [pic] Appendix 6: Trend Analysis 2005-2009 [pic] References Bill Cost, 2010. Home Page. Available from: www. billcost. gr/ [Accessed 10 April 2011] Forel S. A, 2011. Home page. Available from: www. forel. gr/el-gr/Default. aspx [Accessed 28 March 2011] IOBE,2007.
Sectoral Study: Textiles and Clothing. Available from: www. iobe. gr/index. asp? a_id=161=355 [Accessed 10 April 2011] Panagopoulos, G. , 2010. Analysis of financial statements of the Greek women clothing companies for the FYs 2005 – 2009. Annual Sectoral Financial Studies. Athens: Panagopoulos Publications Toi, 2010. Home Page. Available from: www. toi-moi. com/ [Accessed 10 April 2011] ———————– [pic] May 2011 Prepared by Free Spirits: Forel S. A. Financial Analysis 2008-2009 A Group Project for the Financial Accounting Class ———————– 6