ASOS Plc Analysis

Executive Summary

ASOS Plc is a company in the United Kingdom it deals with online retailing. It offers a wide range of products in fashion and beauty. The report aims to discuss the company’s financial ratios in 2020 and 2021. The ratios are used to determine the company’s performance; however, some things could be improved in using the ratios. The profitability ratios indicate that the firm’s profitability dropped in 2021, the liquidity ratios indicated an improvement in liquidity, and the efficiency ratios showed improvement apart from the asset turnover ratio.

Introduction

ASOS Plc is one of the leading companies in the United Kingdom, and it mainly engaged in retaining fashion and beauty products through online retailing. The firm provides branded and own-label products; it includes women’s wear, men’s wear, accessories, beauty products, jewelry, and footwear. The firm was founded on June 2000, and its headquarters are in London, the United Kingdom. The paper will discuss the profitability, efficiency, and liquidity ratios. The financial ratios are for the year ending 31 August 2020 and 31 August 2021. Moreover, the limitations of using financial ratios will be discussed.

Findings

A firm may use financial ratios to analyze its financial performance. The ratios are used to evaluate the company’s performance over different periods. Moreover, the financial ratios can be used to compare the firm’s financial performance with other competitors. Sometimes, if there is an industrial average, the firm may use it as a benchmark or compare itself with the ratios of the best-performing company in the industry. However, financial ratios have some limitations, and financial users should also consider the drawbacks. The financial ratios are computed based on historical financial information and may fail to represent the firm’s current performance. Moreover, the financial ratios only measure the financial aspects and fail to capture non-financial performance such as environmental, sustainability, and governance Faello, 2015, p. 75). ASOS Plc’s profitability ratios and relevant financial data are shown in table A below. The table will be used to explain the financial ratios.

Profitability Ratios

A firm’s performance can be evaluated using the profitability ratios. If the profitability ratios are at a higher percentage, it indicates that the firm is more profitable. There are several profitability ratios, including the gross profit margin, net profit margin, and return on equity (ROE) (Rutkowska-Ziarko, 2015, p. 156). In 2020 and 2021, ASOS Plc had a gross profit margin of 47.415% and 45.426%, respectively. It indicates that the financial performance was better in 2020 than in 2021 since the ratio reduced in 2021. The net profit margin for ASOS Plc was 3.472% in 2020 and it declined to 3.283% in 2021. Again, it shows that ASOS Plc was more profitable in 2020 than in 2021. The return on equity (ROE) shows the proportion of net income to equity. It indicates how equity contributed to the generation of net income (Heikal, Khaddafi and Ummah, 2014, p. 101). In 2020 and 2021, ASOS Plc had a ROE of 13.982% and 12.418%, respectively. ROE indicates there was a decline in profitability in 2021. In summary, the profitability ratios show that there was a drop in profitability in 2021 as compared with the previous year.

Table A

Liquidity Ratios

A firm can use the liquidity ratio to assess its liquidity position. The liquidity ratios are used to determine the capability of the firm to pay the current financial obligation from the cash realized from current assets. The current ratio and acid-test ratios are the main ratios used to analyze the firm’s liquidity. ASOS Plc can find the current ratio by determining the proportion of current assets to current liabilities (Irman and Purwati, 2020, p. 40). ASOS Plc’s current ratio of 1.247 in 2020 increased to 1.563 in 2021. It indicates that the liquidity position of the company improved during the period. Moreover, the current ratio above 1 is satisfactory, and the firm’s current ratio is above 1. On the side, the acid-test ratio indicates the firm’s liquidity after eliminating the inventory from the current assets (Akinroluyo and Dimgba, 2022, p. 41). In 2020, the acid-test ratio for ASOS Plc was 0.596, which increased to 0.754 in 2020. Since the acid is less than 1, it can be concluded that the firm had cash flow problems in paying the current debts. In summary, the liquidity ratios show improved performance in 2021; however, the acid ratio indicates liquidity problems.

Efficiency Ratios

ASOS Plc can use the efficiency ratios to determine how its management has applied resources to generate profit. There are various efficiency ratios, including the days’ sales outstanding, account receivables turnover, and assets turnover ratios. The days’ sales outstanding ratio indicates the time it takes the firm to collect cash from the debtors (Filbeck. and Krueger, 2005). ASOS Plc took 7 days to collect cash from debtors in 2020, and time decreased to 5 days in 2021. It shows that efficiency improved in 202. The accounts receivables turnover ratio determines the number of times the account receivables will be converted to cash during a period. In 2020, the accounts receivables turnover ratio was 54 times, and the ratio improved in 2021 to 68 times. It indicates the firm was more efficient in 2021 than in 2020. The assets turnover ratio measures the efficiency of the managers in applying the firm’s assets to generate sales (Sunjoko and Arilyn, 2016, p. 81). In 2020, the firm had an asset turnover ratio of 2 times, and it decreased to 1 in 2021. The ratio indicates the firm’s efficiency declined in 2021 compared to the previous period.

Conclusions

ASOS Plc is a company that deals with online retailing in offers fashion and beauty products. The firm’s performance in 2020 and 2021 was evaluated using the financial ratios. The profitability ratios indicated the firm’s profitability declined in 2021 and it was measured using ROE, net income margin, and gross margin ratio. The liquidity ratios indicated an improvement in liquidity position, and it was evaluated using the acid and current ratios. In efficiency ratios, the performance improved as measured with the days’ sales outstanding and account receivables ratios; however, the assets turnover ratio indicated a deteriorated performance. Moreover, the paper discussed the limitations of using financial ratios in assessing the firm’s performance.

References

Akinroluyo, B.I. and Dimgba, C., 2022. Banks liquidity ratio and return on equity of Nigeria deposit money bank in Nigeria. International Journal of Management & Entrepreneurship Research, 4(1), pp.36-47.

Faello, J., 2015. Understanding the limitations of financial ratios. Academy of accounting and financial studies journal, 19(3), p.75.

Filbeck, G. and Krueger, T.M., 2005. An analysis of working capital management results across industries. American journal of business.

Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), p.101.

Irman, M. and Purwati, A.A., 2020. Analysis on the influence of current ratio, debt to equity ratio and total asset turnover toward return on assets on the otomotive and component company that has been registered in Indonesia Stock Exchange Within 2011-2017. International Journal of Economics Development Research (IJEDR), 1(1), pp.36-44.

Rutkowska-Ziarko, A., 2015. The influence of profitability ratios and company size on profitability and investment risk in the capital market. Folia Oeconomica Stetinensia, 15(1), pp.151-161.

Sunjoko, M.I. and Arilyn, E.J., 2016. Effects of inventory turnover, total asset turnover, fixed asset turnover, current ratio and average collection period on profitability. Jurnal Bisnis dan Akuntansi, 18(1), pp.79-83.