With operations in over 70 countries, Prada group specializes in the production of clothes, footwear, leather goods (such as bags, luggage carriers and accessories), eyewear and women’s fragrance. These are sold under the brand names Prada, Miu Miu, Church’s and Car Shoe. Mr. Mario Prada created the Prada band in 1913. It consists of exclusive handbags crafted in different designs. Miu Miu came into being in 1993 and derives the name from that of the company’s president Ms. Miuccaia Prada. Church’s is prestigious English footwear. It was acquired by Prada in 1999. Car Shoe is an authentic Italian range of driving shoes. The shoes were once popular with drivers of racing cars. Since Prada acquired Car Shoe control in 2001, these shoes have been produced and sold for leisure or luxury driving. Licencing agreements entered into between Prada and The Luxottica in 2003 led to production of eyewear to accessorize Miu Miu and Prada brands. In 2004 Puig Beauty & Fashion Group launched the Prada Woman fragrance following a partnership agreement. This completed the full range of Prada Group products.

Deloitte & Touche Spa was the company’s independent auditors for the period ended January 31, 2012. In their report, the auditors highlighted their scope of work which was to audit the group’s consolidated financial statements. They stated that the extent of responsibility which “…is to express an opinion…” The report further states the purpose of an audit thus, “An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements…assessing the accounting principles used…” In their opinion, the accountants said that the statements gave a “true and fair view” of the group’s financial position. Such an opinion is referred to as unqualified. It means that those financial statements reviewed by the auditors are accurate and users such as shareholders or investors can base their decisions on them. It also means that the financial statements do not contain errors or misstatements of a huge magnitude that would serve to mislead users.

In the near future, the company intends to pursue a strategy of opening new stores in markets situated in Brazil, UAE, Morocco and Ukraine. These are considered to be growing markets. Stores will also be opened in markets that are considered mature; with a high flow of foreign travellers. Improvements to existing stores are set to continue.

Horizontal analysis of income for the years 2010 - 2011

2010

2011

ANALYSIS

('000' €)

('000' €)

 ('000' €)

Revenues

  2,046,651.00

  2,555,606.00

 Revenues increased by €508,955 representing a 24.9% positive change.

Expenses

    969,501.00

  1,199,090.00

 Expenses rose by €229,589 representing a 23.6% rise.

Gross Profit

  1,387,888.00

  2,555,606.00

 There was a significant rise in gross profit of €1,167,718 which is an 84.1% rise.

Income from Operation

    253,551.00

    436,425.00

 A 72.1% rise in income occurred. This amounts to €182,874

Net Income

    250,819.00

    431,929.00

 Net income rose by 72.2% as represented by an increase of €181,110

The revenue recognition policy identifies the point at which proceeds from the sale of goods get recognition in a company’s income statement. Thus, revenue is recognized under the following conditions:

-        When ownership has shifted from seller to buyer

-        When the seller ceases to have any control over the goods sold

-        The value of the proceeds is measurable in monetary terms

-        The company can enjoy the proceeds from such transactions

-        Costs related to the transaction can be measured

Inventory, also called stock, refers to items like raw materials, finished goods and work in progress. The inventory policy provides that these be recorded at a value less the cost of acquisition, cost of production and the net realizable value. In this context, “costs” are all amounts incurred towards changing the stock items or bringing them to their present state. A provision should be made for obsolete stocks and those that are slow moving. Inventory values for affected items should be adjusted based on this provision.

The value of property, plant and equipment is shown at cost, that is, the value they were bought at. In the financial statements, they are shown less accumulated depreciation. Depreciation is calculated on the useful life of an asset. Every financial year, a firm is supposed to review its methods of depreciation and the useful lives of assets under its custody. During the disposal of an asset, its cost and accumulated depreciation are removed. A gain or loss is subsequently recognized in the income statement. These movements must be captured in a fixed assets schedule. For land, the value of buildings is shown separately from that of land. Only the buildings are subjected to depreciation. Impairment tests are supposed to be carried out annually. Losses from impairment are recorded in the income statement.

Calculation of ratios and interpretation of results for the years 2010 - 2011

RATIO

2010

2011

COMMENT

A.

Current ratio

Current assets / Current liabilities

845,557 / 855,292 = 0.989 ≈ 0.99

1,089,823 / 865,245 = 1.26

 At a ratio of 1, the current assets were sufficient to meet current liabilities. There was a marginal rise in 2011.

B.

Acid test ratio

(Current assets - Inventory - Prepayments) / Current liabilities

(770,025 - 280,409 - 31,842) / 659,166 = 457,774 / 659,166 = 0.694 ≈ 1

(1,117,503 - 374,782 - 39,049) / 716,584 = 703,672 / 716,584 = 0.982 ≈ 1

With a ratio of 1, the company was in a good liquidity position for the two years. 

C.

Receivables turnover ratio

Net credit sales / Average accounts receivable

2,046,651 / {(224,198 + 274,175) / 2} = 2,046,651 / 249,186.5 = 8.213 ≈ 8.2

2,555,606 / {(274,175 + 266,404) /2} = 2,555,606 / 270,289.5 = 9.455 ≈ 9.5

 The company was able to collect receivables 8 times in 2010 and 10 times in 2011. A positive growth in efficiency

D.

Inventory turnover ratio

Cost of goods sold / Average inventory

658,763 / {(231,476 + 280,409) / 2} = 658,763 / 255942.5 = 2.574 ≈ 2.6

727,581 / {(280,409 + 374,982)/2 = 727,581 / 327,695.5 = 2.222 ≈ 2.2

 There was a slight drop in 2011.

E.

Average collection period

(Trade debtors x No. of working days) / Net credit sales

(274,175 * 360) / 2,046,651 = 98,703,000 / 2,046,651 = 48.23 ≈ 48 days

(266,404 * 365) / 2,555,606 = 95,905,440 / 2,555,606 = 37.53 ≈ 38 days

 Debtors days reduced to 38 in 2011which is an improvement.

F.

Average days in inventory

365 days / Inventory turnover

 365 / 2.574 = 141.81 ≈ 142 days

 365 / 2.221 = 164.34 ≈ 164 days

There was an increase of 22 days in 2011.Shows a slack in demand. 

Inventory turnover = Cost of goods sold / Average inventory

 658,763 / (231,476 + 280,409 / 2) = 658,763 / 255,942.5 = 2.574

727,581 / (280,409 + 374,782 / 2) = 727,581 / 327,595.5 = 2.221

G.

Debt to equity ratio

Total liabilities / Shareholders' equity

1,155,877 / 2,366,015 = 0.488 ≈ 0.49

1,112,601 / 2,943,568 = 0.377 ≈ 0.38

 The values are lower than 1.Shows that the assets financed by debts are minimal.

H.

Profit margin

Gross profit / revenue

1,387,888 / 2,046,651 = 0.678 ≈ 0.68

1,828,025 / 2,555,606 = 0.715 ≈ 0.72

 The efficiency of production remained the same for both periods.

I.

Return on assets

Annual net income / Average total assets

253,551 / (2,147,481 + 2,366,015 / 2) = 253,551 / 2,256,748 = 0.112 ≈ 0.1

436,425 / (2,366,015 + 2,943,568 / 2) = 436,425 / 2,654,791.5 = 0.164 ≈ 0.2

 The increase from 0.1 to 0.2 shows an improvement in profitability.

J.

Asset turnover

Net sales / Average total assets

2,046,651 / (2,147,481  + 2,366,015 / 2) = 2,046,651 / 2,256,748 = 0.907 ≈ 0.91

2,555,606 / (2,366,015 + 2,943,568 / 2) = 2,555,606 / 2,654,791.5 = 0.963 ≈ 0.96

 The ratio did not change for the two periods.

Prada Group is a good company to invest in. The two year analysis shows growth in profitability supported by a strong asset base. The company deals with brands that are recognized worldwide, in a highly competitive industry.  Another pointer is the strong cash flow position which is a sign that the company may not go into bankruptcy in the near future.

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