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Company Overview

The company ASOS Plc as founded in the year 2000 has headquarters in London, the United Kingdom (Yahoo Finance, 2021). The company is engaged in operations as an online fashion retailer and has global scale of operations. The products of the company range from both women’s wear and menswear products. The company has varied range of brands through which the company sells its products, namely the ASOS 4505, ASOS Design, ASOS Edition, Topman, Collusion, Topshop, Miss Selfridge Reclaimed Vintage, and HIIT brands. In addition, the company makes use of the third party brands. In addition, the company is also engaged in the payment processing businesses and as a employer of marketing staff (Yahoo Finance, 2021). As per the official website of the company, the company has 168 suppliers using 713 factories around the world (ASOS Plc, 2021). 

Profitability Ratios: These group of ratios shed light on the ability of the business to generate earning in relation to the revenues. The earnings are analysed at varied stages to assess the overall business environment of an entity. As assessed from the profitability ratios of the entity ASOS Plc, while there is a slight overall decline in the gross profit margins, the overall net profit margins have increased from 4.22 percent in year 2018 to 4.53 percent in year 2021. This indicates an unfavourable business environment of the entity or a possible fall in revenues, but curb on the indirect expenses, leading to net profit increase in spite of gross profit fall. This is together with the fall in the return on shareholder funds, return on total assets and return on capital employed. This indicates while the company is engaged in expanding its business operations with the help of introduction of new share capital, and expanding the asset base, the revenues and profits are not moving at the same pace. The return on shareholder funds declined from 23.25 percent in year 2018 to 17.13 percent in year 2021. Apart from the above profitability analysis, the figures of year 2019 are worth noting as all the profitability metrics were lowest in the said year except gross profits. This indicates a major charge to income statement which could be loss on sale of an asset or undertaking or amortization or other expense. The company was able to regain its profitability in year 2020 as indicated by the increasing trends in the following years. Thus, it can be stated that the overall profits of the company are stable.

Operational Ratios: This group of ratios indicate a combination of asset and revenue or expenses movements. The net asset turnover ratio of the entity has been showing a declining trend after the year 2019. This ratio is an indication of the efficiency of a company's assets in generating revenue or sales. The decline in ratio indicates the expansion of asset base but the turnover not increasing at the same pace. The similar declining trends are observed in the fixed asset turnover ratio as well over the period 2018 to 2021 which means the company has been investing in the fixed assets over the last four financial years. It is a positive point from the point of view of shareholders. The turnover may not show immediate increase, but such an investment would be fruitful in upcoming years. The key number to be observed here is the interest cover which indicates the ratio of profits before interest to the interest payments. The interest cover has fallen for the company which means the company has been shifting its capital structure with lesser reliance on the equity, and the net profits have lesser sufficiency to address the increasing interest payment charges on the income statement. The stock turnover is the measure of movement of stock in relation to the cost of goods sold indicating how soon a company is able to sell its goods and products and replace its inventories in a set duration. The said ratio has been fluctuating for ASOS Plc. The fall in stock turnover ratio from 6.13 times in year 2020 to 4.85 times in year 2021 indicates a more closing inventory in hand. The debtors collection period of the entity has increased from 2.13 times in year 2018 to 3.88 times in year 2021, which means the company is not able to realise payments as efficiently from debtors as earlier times. This together with the slow stock turnover may be indicative of liquidity issues for the entity. However, the creditors payment period has also increased from 14.8 times in year 2018 to 36.81 times in year 2021. This means the company management is maintaining the cash flows by making late payments to creditors.

Profitability Ratios

Structure Ratios: An improvement in liquidity has been observed from the considerable increase in the current ratio from 0.9 times in year 2018 to 1.56 times in year 2021. This is a positive sign, as improvement in liquidity is key for day to day business operations. This is together with the improvement in the liquidity ratio. Like profitability, the current ratios and liquidity ratio were lower in year 2019, however, the company has managed to improve the same which is a positive sign. The gearing ratio indicates the proportion of long term loans to the share capital in the capital structure and thereby indicating the leverage in the capital structure. The gearing ratio has been showing an increasing trend with numbers 2.32, 20.88. 42.86 and 85.13 in year 2018, 2019, 2020 and 2021 respectively. Thus, the company management has completely shifted its policy from major equity funding policy in year 2018 to major debt funding in year 2021. While this is an indication of increase in the financial risk, the overall cost of capital of the entity would also have been reduced. This is because the coupon payments must be regularly paid unlike dividends, and the former are subjected to tax deductions. Thus, it has been assessed that the entity ASOS Plc. is using new funds to invest in fixed as well as liquid assets, for long term objectives.

Per Employee Ratios: The profits per employee as well as turnover per employee has increased as per the ratios and this indicates a decrease in the work force of the entity over the four financial years, and a possible shift to new business model based on digitalisation requiring lesser manpower. Thus, if the similar trends continue, the indirect expenses owing to salaries to employee shall also decrease, which is a positive sign from the point of view of the company

Conclusions

On the basis of the analysis conducted in the previous parts, it has been observed that there have been considerable strategic changes in the business functioning of company ASOS Plc over the period 2018 to 2021. The company has been expanding its business through long term borrowings and liquidity has also improved. The profits do not show the significant results of the policy changes as yet, but the profits have been stable over the years.

Income Statement (For The Year Ended On 31 December 2020) 

Description

Amount in £

Sales revenue

2,85,000.00

Total Revenues

2,85,000.00

Less: Cost of goods sold

Opening Inventory

14,000.00

Add: Purchases

1,60,000.00

Less: Closing inventory

18,000.00

1,56,000.00

Gross profits

1,29,000.00

Less: Expenses

Audit and accountancy

500.00

Advertising

900.00

Bank interest

200.00

Directors remuneration

8,500.00

Electricity

3,050.00

Insurance

1,300.00

Office Expenses

5,700.00

Rent and rates

7,500.00

Wages and salaries

21,000.00

Depreciation

22,365.00

Total expenses

71,015.00

Net Profit/Loss

57,985.00

Balance Sheet as at 31 December 2020

Description

Amount

Amount

Total

Fixed Assets

Motor Vehicles

25000.00

Furniture

80000.00

Total Fixed Assets

105000.00

Depreciation

Motor Vehicles

3715.00

Furniture

60000.00

Total Depreciation

63715.00

Value of fixed assets

41285.00

Current assets

Bank Account

1500.00

Prepaid Insurance

400.00

Accounts Receivable

41350.00

Stock

18000.00

Total Current Assets

61250.00

Less Current Liabilities

Accounts Payable

8900.00

Loan

2200.00

Electricity provision

250.00

Total Current Liabilities

11350.00

Net Assets

91185.00

Equity

Share capital

20000.00

Retained Earnings

71185.00

Total Equity

91185.00

The five accounting concepts that have been used in the preparation of the above financial statements are as follows.

Accrual Concept: According to this concept, the recording of revenue or expenses is done when a transaction occurs as opposed to when payment is received or made. This means the expenses and revenues are recorded as per the accounting period in consideration irrespective of cash flow of the same.

Matching Concept: A matching of expenses as well as revenues is done in this concept, whereby the revenues are recognised for an accounting period and relating expenses provided for.

Going Concern Concept: It is assumed that the business would function in long run and beyond the current accounting period and therefore assets and liabilities are accounted for accordingly. It is based on assumption that the business would not be shut in near future.

Consistency Concept: The consistent accounting policies are applied from one accounting period to another to enable comparison as well as true and fair representation. For instance the provision of the accumulated depreciation in these financial statements.

Conservatism Concept: This is based on the idea that expenses and liabilities should be recognised as soon as possible and incomes must be recorded only when they have actually occurred.

Statement of Cash Flows

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2021

Cash flows from operating activities

Profit / (Loss) before taxation

            6,000.00

Adjustments for:

Depreciation

            2,000.00

Working capital changes:

(Increase) / Decrease in trade and other receivables

        (12,000.00)

(Increase) /Decrease in inventories

        (17,000.00)

Increase / (Decrease) in trade and other payables

            4,000.00

Cash generated from operations

        (17,000.00)

Net cash from operating activities

        (17,000.00)

Cash flows from investing activities

Realisation of investments

           15,000.00

Net cash used in investing activities

           15,000.00

Cash flows from financing activities

Payment of long-term borrowings

        (10,000.00)

Net cash used in financing activities

        (10,000.00)

Net increase in cash and cash equivalents

        (12,000.00)

Cash and cash equivalents at beginning of period

            2,000.00

Cash and cash equivalents at end of period

        (10,000.00)

The following observations have been noted from the cash flow statement for the period ended on 31 December 2021. The liquidity position of the company in relation to the flow of cash has not been efficient over the period of one year. This is primarily due to the cash used in operations. This is together with the cash used in financing activity owing to the payment of long term borrowings. The result is that the overall cash balance has become zero and the business is forced to take support of bank overdraft. It is recommended to extend the creditors payment period and shorten the debtors payment period for improvement of cash flows. Further it is recommended to make changes in business model to ensure movements of the stock leading to cash realisation.

References

ASOS Plc (2021) Who we are [online] Available from: https://www.asos.com/about/who-we-are/?ctaref=aboutus|whoweare [Accessed on: 04 January 2022]

Yahoo Finance (2021) ASOS Plc (ASC.L) [online] Available from: https://finance.yahoo.com/quote/asc.l/ [Accessed on: 04 January 2022]

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My Assignment Help. (2022). ASOS Plc - Online Fashion Retailer With Global Presence, Essay.. Retrieved from https://myassignmenthelp.com/free-samples/ac4052-financial-accounting/interpretation-of-the-ratios-file-A1D1DA0.html.

"ASOS Plc - Online Fashion Retailer With Global Presence, Essay.." My Assignment Help, 2022, https://myassignmenthelp.com/free-samples/ac4052-financial-accounting/interpretation-of-the-ratios-file-A1D1DA0.html.

My Assignment Help (2022) ASOS Plc - Online Fashion Retailer With Global Presence, Essay. [Online]. Available from: https://myassignmenthelp.com/free-samples/ac4052-financial-accounting/interpretation-of-the-ratios-file-A1D1DA0.html
[Accessed 02 March 2024].

My Assignment Help. 'ASOS Plc - Online Fashion Retailer With Global Presence, Essay.' (My Assignment Help, 2022) <https://myassignmenthelp.com/free-samples/ac4052-financial-accounting/interpretation-of-the-ratios-file-A1D1DA0.html> accessed 02 March 2024.

My Assignment Help. ASOS Plc - Online Fashion Retailer With Global Presence, Essay. [Internet]. My Assignment Help. 2022 [cited 02 March 2024]. Available from: https://myassignmenthelp.com/free-samples/ac4052-financial-accounting/interpretation-of-the-ratios-file-A1D1DA0.html.

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