Inditex is one of the most famous fashion product retailers globally, but its name is not familiar to everybody. The organization consists of seven brands, including Pull&Bear, Zara, Zara Home, Bershka, Massimo Dutti, Oysho, and Stradivarius, and these are popular in numerous world countries. According to the business’s official website, it has more than 6,400 stores in 95 markets (Inditex, n.d.). However, such an advantageous position in the market does not guarantee that the company is extremely successful and achieves enormous profits from its activities. It is reasonable to conduct a thorough investigation of its internal processes to identify how successful and efficient the organization is. Thus, the report will perform vertical and horizontal analyses of Inditex, while the comparison of calculated financial ratios to the retail industry average values will help assess the business’s performance.
Inditex Vertical Analysis
In the beginning, it is reasonable to explain what a vertical analysis is. According to Grant (2022), this instrument “is a method of financial statement analysis in which each line item is listed as a percentage of a base figure within the statement” (para. 1). In other words, this tool considers what portion a single line in an income statement occupies relating to the total figure. For example, since the total liabilities are considered 100%, this analysis denotes that it is necessary to calculate the percentage of every liability that the organization has. This approach is effective in analyzing what expense or profit items are the most significant for an organization. One can state that this finding can be further used by the company’s management to make decisions to minimize losses and maximize benefits.
Now, it is possible to perform a vertical analysis for Inditex by focusing on the company’s assets, liabilities, and sales. According to its annual report, Inditex had 28,945 million euros of Total Assets as of the beginning of 2022 (Inditex, 2021). This figure allows for identifying that the Property, Plant, and Equipment line equals 25.84%, while the Cash and Cash Equivalents one is 24.26% of the total figure (Inditex, 2021). This information demonstrates that these items account for the most significant assets of Inditex. As for the smallest percentages, the Investment Property line is 0.07%, Goodwill accounts for 0.7%, while the Income Tax Receivable is equal to 0.76%. As for liabilities, the total amount was 13,187 as of the end of 2021 (Inditex, 2021). Thus, the Financial Debt accounted for 0.007%, and the most significant item was Trade and Other Payables with 47%. As for Net Sales, the Net Sales in Company-Managed Stores and Online was 91.3%, while the Net Sales to Franchises accounted for 7.76%.
All this information demonstrates that Inditex has diversified approaches to managing its assets, liabilities, and sales. This statement denotes that each category has some lines that are responsible for larger proportions, while others bring smaller percentages. The organization can use this finding to improve its management decisions. In particular, it is reasonable to draw more attention to those assets, liabilities, and sales items that are responsible for larger percentages.
Inditex Horizontal Analysis
The section is devoted to a horizontal analysis, and one should begin by defining it. As Tuovila (2021) mentions, this tool “is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods” (para. 1). For instance, this quotation denotes that this approach implies comparing a single financial indicator historically. This type of analysis can rely on the presented figures or calculate percentages (Tuovila, 2021). The following paragraph will rely on the horizontal analysis approach to assess the performance of Inditex in 2021.
This section will rely on the same financial performance indicators, including the organization’s Assets, Liabilities, and Net Sales. The data for 2021 and 2020 will be compared to make reasonable conclusions. By the beginning of 2022, the Total Assets were estimated at 28,945 million euros, while the Total Liabilities accounted for 13,187 million euros (Inditex, 2021). One year ago, these values were 26,418 and 11,867 million euros, respectively (Inditex, 2021). As for individual items from these categories, they changed differently over time. For instance, the Property, Plant, and Equipment and Trade and Other Payables increased, while the Cash and Cash Equivalents and Debt lines decreased. Simultaneously, the picture is more homogenous regarding the organization’s Net Sales. All the lines witnessed an increase in 2021 compared to 2020.
These findings allow for stipulating that Inditex had relatively good financial health in 2021. It is rational to focus on the total figures to prove this statement. It took one year for the Total Assets and Liabilities to grow significantly, meaning that the business was successful because its Assets outweighed its Liabilities. In addition to that, 2021 witnessed a dramatic rise in Net Sales since the figure increased by more than 7 million euros (Inditex, 2021). That is why one can admit that the horizontal analysis positively assesses the financial performance of the given organization.
Addressing the Ratios
This section is going to look at specific ratios that can describe Inditex’s performance. They are earnings per share (EPS), price-earnings (P/E), dividend-yield, and dividend-payout ratios. Firstly, it will be necessary to calculate or find these financial indicators. Secondly, one will compare them to average values for the retail trade industry. The latter indicators will be found online because some specific websites present this information.
A simple formula can be used to calculate an EPS ratio. In particular, it is necessary to divide the company’s net income by the number of shares outstanding. However, the annual report by Inditex clearly states its EPS ratio, and it was 1.042 euros in 2021 (Inditex, 2021). That is why it is not required to perform any calculations regarding this indicator. It is impossible to find an average value for this ratio for the retail trade industry. That is why a reasonable suggestion indicates that Inditex performs well according to this indicator.
If one wants to find a P/E ratio, it is necessary to divide the share price by the EPS. For Inditex (2021), the formula is: 26.74 / 1.042 = 25.66. According to Green (2021), the average P/E ratio for the retail industry was 64.65 in 2021. This information demonstrates that the selected company underperforms, as evident from this indicator. As a result, investors see the business as less attractive compared to some of its competitors.
As for the dividend-yield ratio, one should divide the dividend per share by the share price and multiply it by 100%. According to the Inditex’s (2021) annual report, the calculations will be as follows: (0.7 / 26.74) * 100% = 2.6%. The industry’s average value is 1.08%, meaning that the business shows decent performance. Finally, the dividend-payout ratio is found if one divides dividends paid by earnings after tax. This calculation is as follows: 2,180 / 3,250 = 0.67. According to the ReadyRatios (n.d.), the industry’s average value was 0.37 in 2021, denoting that Inditex also outperforms in this area.
One should also add that the nature of the company can explain the differences in the ratios. The rationale behind this statement is that the industry includes many companies that represent food, automobile, furniture, and other companies. There is no doubt that these businesses have different volumes of their operations. That is why it is challenging to state whether Inditex’s lower values demonstrate that the enterprise has economic problems compared to other market players.
Conclusion
The report has conducted a comprehensive analysis of Inditex’s internal performance. Firstly, the paper focused on the vertical analysis and identified that the organization had a diversified approach to its assets, liabilities, and sales. This statement denotes that some items are responsible for larger proportions of these economic indicators. Consequently, Inditex should draw more attention to those expense and profit lines that represent higher percentages. Secondly, the horizontal analysis helped assess the company’s performance historically. This approach demonstrated that the business’s financial health is optimistic because its assets and sales kept rising. Furthermore, it is worth admitting that Inditex’s assets were higher than its liabilities. Finally, the analysis of financial ratios produced controversial outcomes because some indicators were higher compared to the industry’s average values, while others were lower. However, further investigation demonstrated that the findings were overall good because the average values represented the retail industry. This area is large and includes automobile, furniture, and other retailers that impress with larger volumes. That is why the financial ratios that were below the average did not indicate that Inditex underperformed.
References
Demodaran. (2022). Dividend fundamentals by sector (US). Web.
Grant, M. (2022). Vertical analysis. Investopedia. Web.
Green, L. (2021). The average price-to-earnings ratio in the retail sector. Investopedia. Web.
Inditex. (2021). Inditex annual report 2021 [PDF document]. Web.
Inditex. (n.d.). Who we are. Web.
ReadyRatios. (n.d.). Retail trade: average industry financial ratios for US listed companies. Web.
Tuovila, A. (2021). Horizontal analysis. Investopedia. Web.