Financial Analysis – Case Study

FINANCIAL ANALYSIS – CASE STUDY

1. PROFITABILITY

• Fast Retailing has a higher gross profit margin than Gap meaning that Fast Retailing’s cost of sales was relatively lower. Indeed, the company was probably able to buy its products and material at cheaper prices reducing its costs of sales. Thanks to the biz size of the company and large quantities orders we can suppose that the company was able to negotiate its purchase contract well and maybe achieved discounts. This higher ratio could also be linked to higher selling prices but knowing the group’s positioning and mass market target it seems less likely.

• Gap’s operating profit margin decreased and became smaller than Fast Retailing’s meaning that not only were they less efficient at setting and negotiating prices but they also struggled to manage their other expenses. Indeed, the decrease in operating profit was sharper than the one in gross profit margin meaning other factors increased the operating expenses compared with the sales revenue in 2015. It could also be linked to the fact that Gap’s sales decreased over the period due to an unfavourable impact of foreign exchange which made the expenses relatively higher compared to revenue. (information found in the annual report). On the other hand, Fast Retailing managed to keep its operating expenses compared to its sales revenue almost stable.

•  GAP has a much higher return on equity ratio, meaning the firm is able to generate more profit from its shareholder’s investments than Fast Retail’s. It also has a much higher return on capital employed. This means that the operating profit generates a higher return on the capital employed. The company is able to generate relatively more profit from its main retail activity.

• However we can observe a sharp decline in both the ROSF and ROCE for Gap. This can partly be explained by a decrease of the company’s profit. At first glance investor’s may be more interested in buying Gap share’s but this negative downward trend may prevent them from doing so. Gap will have to reassure its investors and find ways of increasing its profit. Otherwise the investors may lose faith in the Company which could have negative consequences such as massive share sales leading to a loss of market value.

• Fast Retailing has weak figures for its ROSF and ROCE which have also decreased. The company is planning to expand and open new stores in the year so it will have to convince investors that profit will increase soon.

• Conclusion on profitability:  Fast Retailing’s strongest asset is its relatively lower cost of sales. It must however strive to employ its capital more profitably just like Gap to reassure investors. Gap has faced a sharp increase in operating expenses compared to sales which it must try to solve.