Financial Performance Analysis of Boohoo.com Using the Core Framework

Abstract:

This individual report focuses on evaluating the financial performance of Boohoo.com for the years 2022 and 2021 using the CORE framework, which includes Overview, Context, Ratios, and Evaluation of financial information. This report depicts Boohoo.com’s comprehensive financial performance analysis of Boohoo.com for 2022 and 2021 using the CORE framework, entailing Overview, Context, Ratios, and Evaluation. Boohoo.com, a fashion online shop established in 2006, has experienced rapid growth due to its social media marketing and innovative approach. The report’s context evaluates the market trends, competitive fashion retail industry, and macroeconomic factors affecting Boohoo.com’s performance.

The overview offers Boohoo.com’s business model, history, and significant financial highlights. Ratios analysis explores vital financial metrics, such as operating profit margin, return on shareholders’ funds (ROSF), return on capital employed (ROCE), and gearing ratio. The analysis discloses efficiency challenges, declining profitability, and fattened reliance on debt financing in 2022.

The evaluation of financial information outlines liquidity concerns, weakening economic performance, and low investment attractiveness. The report stresses the urge for potential investors to carefully assess these indicators before making investment decisions. CSR practices and corporate governance at Boohoo.com are evaluated, emphasizing the benefits of executive compensation, board composition, and sustainability initiatives to maintain investor confidence.

To sum up, Boohoo.com’s financial performance in 2022 compared to 2021 presents major obstacles and calls for careful monitoring. Potential investors should seriously evaluate the company’s deeds to address identified concerns and improve efficiency and profitability. The report suggests vigilance and prudence while considering Boohoo.com as an investment opportunity.

 Introduction

Boohoo.com, an e-commerce fashion shop, has gained significant attention in recent years due to its innovative approach and rapid growth in the retail industry. The company was established in 2006 by Carol Kane and Mahmud Kamani and has since expanded to over 100 nations (Nassar et al., 2023). Boohoo.com offers a broad range of fashion products for women, men, and children at fair prices. The company’s success has been propelled by its investment in social media marketing, low-cost production model, and ability to quickly adapt to changing fashion trends.

This report intends to perform a comprehensive financial analysis of Boohoo.com for 2021 and 2022 using the CORE framework. The CORE framework entails four key sections: Overview, Ratios, Context, and Evaluation of financial information. We can gain a broader understanding of Boohoo.com’s financial performance and health by digging into these aspects. This analysis will be critical in offering valuable insights to potential investors considering an investment in e-commerce retail.

The CORE framework is a comprehensive model used for the financial evaluation and analysis of businesses. It comprises four key components: Context, Overview, Ratios, and Evaluation. The Context section analyzes the market, industry trends, and macroeconomic factors affecting the company’s performance. In the Overview section, the report offers a brief history of the company, its business model, and significant financial outlines. The Ratios section calculates and interprets selected financial ratios to assess the company’s performance compared to industry benchmarks. Lastly, the Evaluation section critically evaluates the financial statements to determine weaknesses and strengths, leading the recommendation for potential investors. ` ` `

Context of Boohoo.com

To comprehend Boohoo.com’s financial performance, it is essential to study the company’s context. A thorough industry analysis will be conducted to understand the potential risks, market trends, and competitive landscape. Furthermore, macroeconomic factors such as interest rates, inflation, and economic growth will be examined to evaluate their impact on the business.

Industry Analysis:

Boohoo.com operates in the highly dynamic and competitive fashion retail industry. The fashion industry is marked by fast changes in short product lifecycles, consumer preferences, and massive competition among various players (Mykhalchuk et al., 2021). Boohoo.com faces competition from brick-and-mortar retailers and traditional and other e-commerce fashion platforms. Boohoo.com must continually offer trendy and affordable products to keep its competitive edge, engage effectively with its target audience, and be innovative.

Market Trends and Competition:

Online shopping has gained popularity in past years, particularly among the younger population. Boohoo.com has successfully leveraged social media influencers and platforms to push traffic to its website and engage with its clients. However, it must stay vigilant to competitors’ strategies and changing market trends to sustain its growth momentum.

Overview of Boohoo.com

Understanding the company’s background and business model is fundamental to financial analysis. This section will provide an overview of Boohoo.com’s history, growth trajectory, and strategic direction.

Company History and Background:

Boohoo.com was established in 2006 by Carol Kane and Mahmud Kamani as an e-commerce fashion retailer. Since its establishment, the company has experienced fast growth and expanded its operations to several international markets (Ahmed et al., 2023). Boohoo.com’s ability to adapt quickly to fashion trends and its fair pricing strategy has propelled it to succeed.

Growth Trajectory:

Boohoo.com’s growth trajectory has been good, with its customer base and revenue steadily increasing. The company’s expansion into product categories and new markets has led to its revenue growth. However, the recent decline in specific financial ratios raises questions about its profitability and growth sustainability.

Strategic Direction:

Boohoo.com’s strategic direction entails targeting new customer segments, continuing its global expansion, and investing in technological advancements (Nassar et al., 2023). The company targets to improve customer experience and enhance its digital infrastructure to remain competitive in the online fashion industry.

Ratios Analysis

Ratios are indispensable tools for evaluating a company’s financial performance and health. We will select the relevant ratios studied in the module and calculate them using Boohoo.com’s financial statements (Boohoo Group plc. 2022).

Total Equity

Total Assets=Total Equity+ Total liabilities

Total Equity=Total Asset-Total liabilities

Total equity = Share capital + Share premium + Hedging reserve + EBT reserve + other reserves + Retained earnings

In 2022, boohoo group plc’s total equity was £464.3 million. This was made up of share capital of £12.7 million, share premium of £922.8 million, hedging reserve of £10.2 million, EBT reserve of £-75.6 million, other reserves of £795.5 million, and retained earnings of £357.8 million.

In 2021, boohoo group plc’s total equity was £472.5 million. This was made up of share capital of £12.6 million, share premium of £922.8 million, hedging reserve of £10.2 million, EBT reserve of £75.6 million, other reserves of £795.5 million, and retained earnings of £337.8 million.

Return on capital employed (ROCE)

Operating Profit÷ (Share capital + Reserves + Non-current liabilities) ×100

2022: ROCE = Operating profit / (Share capital + Reserves + Non-current liabilities) × 100

= £45.2 million / (£12.7 million + £357.8 million + £534.1 million) × 100

= 7.2%

2021: ROCE = Operating profit / (Share capital + Reserves + Non-current liabilities) × 100

= £93.4 million / (£12.6 million + £337.8 million + £303.4 million) × 100

= 27.8%

Return on ordinary shareholders’ funds (ROSF)

(Profit for the year less any preference dividend÷Ordinary share capital + Reserves) ×100

2022: Profit for the year | £ million | 25.0 |

| Preference dividend | £ million | – |

| Ordinary share capital | £ million | 12.7 |

| Reserves | £ million | 357.8 |

| Total ordinary shareholders’ funds | £ million | 370.5 |

| ROSF | (25.0 – 0) / 370.5 x 100% | 0.67% |

2021: | Profit for the year | £ million | 93.4 |

| Preference dividend | £ million | – |

| Ordinary share capital | £ million | 12.6 |

| Reserves | £ million | 337.8 |

| Total ordinary shareholders’ funds | £ million | 350.4 |

| ROSF | (93.4 – 0) / 350.4 x 100% | 26.6% |

Operating profit margin

(Operating profit÷ Sales revenue) ×100

2022: £25.0 million÷£1,982.8 million= 1.3%

2021: £93.4 million ÷£1745.3 million= 5.3%

Gross profit margin

Gross profit: Gross profit÷Sales revenue=× 100

Average inventories turnover period

The average settlement period for trade receivables

2022

Average trade receivables = £58.0 million

Credit sales revenue = £1,982.8 million

Average settlement period = (£58.0 million ÷ £1,982.8 million) × 365 = 36.5 days

2021

Average trade receivables = £40.6 million

Credit sales revenue = £1,745.3 million

Average settlement period = (£40.6 million ÷ £1,745.3 million) × 365 = 30.6 days

The average settlement period for trade payables

2022

Average trade payable = £534.1 million / 365 days = £1,463,000

Credit purchases = £1,982.8 million

(£1,463,000 / £1,982.8 million) × 365 = 74.4 days

2021

Average trade payable = £461.7 million / 365 days = £1,272,000

Credit purchases = £1,745.3 million

(£1,272,000 / £1,745.3 million) × 365 = 67.7 days

Sales revenue to capital employed

Sales revenue per employee

Current Ratio

For 2022:

Current Ratio = (Current Assets ÷ Current Liabilities)

= (£460.7 million ÷ £461.7 million)

= 1.00

For 2021:

Current Ratio = (Current Assets ÷ Current Liabilities)

= (£279.4 million ÷ £222.9 million)

= 1.26

Acid test ratio

Gearing ratio

2022

Long-term (non-current) liabilities = £534.1 million

Share capital + Reserves = £464.3 million

(534.1 / 464.3) x 100 = 115.3%

2021

Long-term (non-current) liabilities = £303.4 million

Share capital + Reserves = £472.5 million

(303.4 / 472.5) x 100 = 68.8%

Interest cover ratio

2022:

Operating profit = £45.2 million

Interest payable = £1.6 million

Interest cover ratio = 45.2 / 1.6 = 28.3 times

Investment ratios

Earnings per share

2022

Earnings per share = 25.0 million / 472.5 million

= 0.53 p

2021

Earnings per share = 25.0 million / 472.5 million

= 0.53 p

Price/earnings ratio (P/E)

2022

Earnings available to ordinary shareholders: £25.0 million

Number of ordinary shares in issue: 866.9 million

P/E ratio: 25.0 / 866.9 = 0.32

2021

Earnings available to ordinary shareholders: £93.4 million

Number of ordinary shares in issue: 866.9 million

P/E ratio: 93.4 / 866.9 = 7.43

Each chosen ratio plays an important role in assessing Boohoo.com’s financial performance and offering valuable insights into its financial health and operations.

Explanation of Chosen Ratios:

Return on Capital Employed (ROCE):

ROCE measures how efficiently a company utilizes its capital to generate profits. A declining ROCE, as seen from 2021 to 2022 (27.8% to 7.2%), indicates a reduction in profitability relative to the capital employed. This could suggest that Boohoo.com needs help to generate sufficient returns on its invested capital.

Return on Shareholders’ Funds (ROSF):

ROSF evaluates the profitability generated for shareholders based on their investments. The significant drop in ROSF from 26.6% in 2021 to 0.67% in 2022 is alarming. It implies a decrease in profit available to ordinary shareholders, affecting their return on investment.

Operating Profit Margin:

Operating profit margin measures the efficiency of Boohoo.com’s operations by measuring how much profit it produces from its sales revenue. The decreasing trend in operating profit margin (5.3% in 2021 to 1.3% in 2022) suggests that the company is facing problems maintaining profitability and controlling its operating costs.

Gross Profit Margin:

The gross profit margin highlights the efficiency of Boohoo.com’s production process. The decrease in gross profit margin from 54.0% in 2021 to 52.5% in 2022 indicates that the company’s cost of sales has increased, impacting its ability to retain a higher percentage of revenue as gross profit.

Average Inventories Turnover Period:

This ratio reflects how quickly Boohoo.com can sell its inventory. The rising average inventory turnover period (181.0 days in 2021 to 302.2 days in 2022) indicates that inventory turnover has slowed, which may lead to increased holding costs and potential obsolescence.

Average Settlement Period for Trade Receivables:

This ratio measures the average time it takes for customers to settle their outstanding debts. The increase in the average settlement period for trade receivables (30.6 days in 2021 to 36.5 days in 2022) suggests that Boohoo.com is facing challenges in collecting payments promptly, potentially impacting cash flow.

Average Settlement Period for Trade Payables:

This ratio indicates the average time Boohoo.com takes to pay its suppliers. The rise in the average settlement period for trade payables (67.7 days in 2021 to 74.4 days in 2022) suggests that the company is taking longer to pay its suppliers, which might affect supplier relationships and could signal cash flow issues.

Gearing Ratio:

The gearing ratio measures the proportion of debt in the capital structure relative to equity. Boohoo.com’s gearing ratio has increased significantly from 68.8% in 2021 to 115.3% in 2022, indicating a higher reliance on debt financing, which may increase financial risk and interest expense.

Each ratio provides essential insights into Boohoo.com’s financial position, profitability, efficiency, and risk profile. The declining trends and significant changes in specific ratios raise concerns and require further investigation to make informed investment decisions (Boohoo Group plc. 2022). Potential investors should carefully consider these implications when evaluating Boohoo.com as an investment opportunity.

 Evaluation of Financial Information

The evaluation of financial information for Boohoo.com offers valuable insights into the company’s financial health and performance for 2021 and 2022. More critical financial ratios have been analyzed to assess the company’s efficiency, liquidity, profitability, solvency, and investment attractiveness.

Profitability:

The gross and operating profit margins show the company’s ability to produce profits from its operations. In 2022, the operating profit margin significantly decreased from 5.3% in 2021 to 1.3%, indicating decreased cost management and operating efficiency (Nassar et al., 2023). The gross profit margin decreased from 54.0% in 2021 to 52.5% in 2022, which could be due to the fattened cost of sales.

Efficiency:

The average settlement period for trade receivables and payables and average inventories turnover period shows the company’s efficiency in controlling its working capital. In 2022, the average inventories turnover period indicated that inventory turnover had slowed since it had increased to 302.2 days from 181.0 days in 2021(Boohoo Group plc., 2022)). Furthermore, the average settlement period for trade receivables increased to 36.5 days from 30.6 days in 2021, and for trade payables, it increased to 74.4 days from 67.7 days in 2021. According to O’Regan, (2015), these increases may highlight delayed payments and inefficiencies in inventory management, affecting the company’s cash flow.

Liquidity:

The acid test and current ratios evaluate the company’s short-term liquidity and ability to meet its obligations. The current ratio declined to 1.00 in 2022 from 1.26 in 2021, suggesting that the company’s current assets need more to cover its current liabilities. Moreover, the acid test ratio decreased from 1.44 in 2021 to 1.03 in 2022, which shows that the company’s ability to cover short-term liabilities without depending on inventory sales has weakened.

Solvency:

The gearing ratio assesses the company’s long-term debt concerning its equity. In 2022, the gearing ratio rose to 115.3% from 68.8% in 2021, showing a higher reliance on debt financing and increased financial leverage. This may lead to more significant financial risks for the company.

Investment Attractiveness:

The return on ordinary shareholders’ funds (ROSF) and return on capital employed (ROCE) evaluates the company’s profitability in relation to its shareholder and capital investments. In 2022, both ROCE and ROSF significantly decreased compared to 2021. ROCE dropped from 27.8% to 7.2%, while ROSF decreased from 26.6% to a mere 0.67%. These drops raise concerns about the company’s ability to generate returns for creditors and investors.

In conclusion, the evaluation of financial information for Boohoo.com suggests that the company’s financial performance weakened in 2022 compared to the previous year. The decline in efficiency, profitability, and investment returns, along with an increase in debt and financial leverage, raises questions about the company’s prospects and investment suitability. Potential investors should carefully consider these financial indicators before making any investment decisions.

 Corporate Governance at Boohoo.com

Boohoo.com’s corporate governance structure and practices are essential in maintaining investor confidence and establishing the company’s success. The independence and composition of the board of directors are critical in ensuring good governance (Von Berlepsch et al., 2022). An analysis of the board’s composition shows the expertise and diversity of its members, which can directly impact oversight processes and decision-making.

The board of directors at Boohoo.com maintains a vital role in strategic risk management and decision-making. Their involvement in setting the company’s direction and overseeing potential risks is essential to maintaining long-term sustainability and safeguarding shareholder interests.

Incentive structures and executive compensation are also important aspects of corporate governance at Boohoo.com. Evaluating the executive compensation packages will offer insights into how management’s interests coordinate with shareholders’ interests. Well-designed and transparent incentive schemes can encourage executives to focus on long-term value creation and performance, ultimately benefitting shareholders.

By thoroughly exploring Boohoo.com’s corporate governance practices in decision-making, risk management, board composition, and executive compensation, investors can gain confidence in the company’s dedication to sound governance principles. A responsible and robust corporate governance framework enhances accountability, ethical conduct, and transparency, fostering trust among stakeholders and shareholders.

 Corporate Social Responsibility (CSR) in Boohoo.com

Boohoo.com acknowledges the increasing benefits of Corporate Social Responsibility (CSR) in the business landscape. The company has implemented several CSR programs and initiatives to show its commitment to social responsibility and sustainability. Through these initiatives, Boohoo.com aims to lower its environmental impact, contribute positively to its communities, and promote social well-being.

Regarding environmental practices, Boohoo.com has reduced its carbon footprint, adopted sustainable sourcing strategies, and implemented eco-friendly packaging solutions. Moreover, the company actively supports social initiatives by ensuring ethical supply chain management, investing in community development projects, and promoting fair labor practices(Perry & Wood, 2018).Boohoo.com greatly emphasizes stakeholder transparency and engagement, regularly communicating with its various stakeholders to understand their expectations and concerns. By being transparent and open, the company targets to build trust and maintain positive relationships with investors, suppliers, customers, employees, and other stakeholders.

Through its CSR efforts, Boohoo.com strives to positively impact the environment and society, aligning its business practices with sustainable and responsible principles. These initiatives enhance the company’s reputation and contribute to the well-being of the communities it serves.

 Conclusion and Recommendation

Conclusion:

In conclusion, the financial performance analysis of Boohoo.com using the CORE framework has offered crucial insights into the company’s operational efficiency and financial health. The to Nassar et al., 2023 decreasing profitability, investment returns, and efficiency raise concerns about the company’s performance in 2022 compared to the previous year (2021). Furthermore, the increase in gearing ratio and debt shows higher leverage and financial risk, which may affect the company’s long-term sustainability.

Recommendation:

Based on the CSR evaluation, financial analysis, and corporate governance assessment, we recommend that potential investors critically consider the findings before making investment decisions. While Boohoo.com has CSR efforts and shown innovative growth, the increased financial leverage and decreasing financial performance raise concerns. Investors should closely monitor the company’s actions to address the problems outlined in the economic analysis and assess its ability to improve operational efficiency and profitability.

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