Q$1$: $($Refers to Homework Question $1$ in Week $5)$

Required $($rounding up numbers to $2$ decimal places $0.$ or $x\%,$ and using the closing balance to calculate ratios$)$:

Using the financial information provided in last week, evaluate H&M and Inditex's financial management. If you need further information, please collect this from DatAnalysis Premium.

$($a$)$ List and calculate three ratios used to evaluate the short$-$term liquidity.

$\backslash$table$[[$FY $2020,$H&M $2014,$Inditex $2014],[$Current Ratio,,$],[$Quick Ratio,,$],[$Operating Cash Flow Ratio,,$]]$

$($b$)$ Compare the liquidity position of H&M and Inditex. Provide explanation based on the calculated ratios.

$($c$)$ List and calculate four ratios used to evaluate the long$-$term solvency.

$\backslash$table$[[$FY $2020,$H&M $2014,$Inditex $2014],[$Interest Coverage Ratio,,$],[$Liabilities to Equity Ratio,,$],[$Debt to Equity Ratio,,$],[$Net Debt to Equity Ratio,,$]]$

$($d$)$ Compare the solvency position of H&M and Inditex. Provide explanation based on the calculated ratios.

Question $1$

H&M is an internationally operating apparel retailer. In $2014,H$&$M$ derived about $76\%$ of its total revenues from selling apparel within Europe. Sales in North and South America, and Asia and Oceania accounted for $11$ and $13\%$ of total revenues, respectively. The apparel retailer also sold its products through the internet in $13$ countries including France, Germany, the UK$,$ the US$,$ and China. Inditex is H&M$\text{'}$s largest industry peer. It operated stores in $88$ countries under eight different brands including Zara. It also sold its apparel online in $27$ countries. Inditex earned $65\%$ of its total revenues in Europe, $14\%$ in the Americas, and $21\%$ in the rest of the world.

$H$&$M$ and Inditex pursue a differentiation strategy, focusing on "fast fashion" retailing. Both retailers sell trendy and affordable products, and are able to respond quickly to changing trends by maintaining short production and lead times. To keep their prices affordable, H&M outsources production to about $900$ independent manufacturers. Inditex relies less on outsourcing and manages its own production facilities. To optimize logistics and minimize inventory costs, Inditex makes use of local suppliers, one central logistic centre from where it ships its products across the world, and a sophisticated inventory management system.

H&M$\text{'}$s focus on the low$-$priced segment of the market makes the retailer vulnerable to competition from general merchandise retailers or discount apparel retailers. To count this risk, the company had started to introduce new brands that focus on the higher priced segments of the market. By doing so$,$ H&M followed the example of Inditex, which sells its apparel under different brands in varying price segments.

Both H&M and Inditex are pursuing a growth strategy. By the end of $2014,$ H&M had plans to open $400$ new stores worldwide and start internet sales in nine new markets. Inditex planned to open $420$ to $480$ stores worldwide and start internet sales in three new markets.

Below are extracts of H&M$\text{'}$s income statements for $2013$ and $2014,$ H&M and Inditex's financial statements for $2014.$

Income Statements for H&M $($in millions$)$

$\backslash$table$[[,$H&M $2014,$H&M $2013],[$Sales$,151419,128562],[$Cost of sales,$-63367,-51529],[$Gross profit,$88052,77033$