FINANCIAL ANALYSIS AND

REPORTING
Description of the company
The first store was opened in 1975.
The brands are: Zara, Massimo Dutti, Oysho, Bershka,
Stradivarius, Zara Home, Pull and Bear and Kiddys
Clas.
The first IPO was in 2001in Madrid.
 Clients

Most clients Inditex has are buying from Zara.

Zaras customer is young, price-conscious and
sensitive to the changing trends in fashion.
Massimos Dutti is offering more expensive clothes
than the other brands of Inditex.
Oyshos customers are 100% females.
Competitors

The three main competitors are:

H&M

Benetton

Gap

Inditex has a competitive advantage, being a

vertically integrated company.
Zara is considered to have more fashionable
products than the three competitors/
Suppliers

The supply chain of Inditex consists of 1725

suppliers and 6295 factories, located in over 50
countries.
Inditex owns 20 factories for internal manufacture,
applying just-in-time production
Ability to buy inputs from both Europe and Asia.
Benchmark analysis
Plunkett Research estimated the global retail clothing and footwear market at $1.3
trilion for 2015.
Inditex is representing a giant on the textile marked , its main competitor taking
into consideration the market targeting is H&M. The two companies have
influenced textile market for many years now, and are fighting for the biggest slice
of the market share of their sector. However, the strategy of the two are notable
different.
 Benchmark analysis
If we were to analyze the financial reports for
2015, we can easily observe that the financial year
is differently split for each of the companies

INDITEX: Q1 June August H&M: Q1 December February

Q2 September November Q2 March May
Q3 December February Q3 June August
Q4 March May Q4 September - November
Inditex
Inditex
Inditex
H&M
H&M
H&M
 Dec-14 Dec-15
Assets
CURRENT ASSETS 7.105.953 8.449.235
Cash and cash equivalents 3.797.930 4.225.527
Current financial investment 222.259 1.085.648
Trade and other receivables 861.811 668.807
Inventories 1.859.516 2.195.015
Other financial assets 168.947 45.751
Income tax receivable 68.284 89.086
Other current assets 127.207 139.401
NON-CURRENT ASSETS 8.271.047 8.907.913
Property, plant and equipment 6.040.573 6.597.467
Investment property 8.149 21.152
Rights over leased assets 531.115 504.447
Other intangible assets 152.995 190.324
Goodwill 197.901 193.488
Financial investments 151.253 183.804
Deferred tax assets 643.574 693.429
Other non-current assets 472.146 523.802
TOTAL ASSETS 15.377.000 17.357.148

Liabilities
CURRENT LIABILITIES 3.748.828 4.670.151
Trade and other payables 3.507.878 4.514.266
Financial debt 7.823 10.254
Other financial liabilities 83.222 68.536
Income tax payable 149.905 77.095
NON-CURRENT LIABILITIES 1.159.471 1.236.204
Financial debt 2.265 749
Deferred tax liabilities 240.825 285.195
Provisions 200.611 145.294
Other non-current liabilities 715.771 804.966
EQUITY 10.468.701 11.450.793
Net equity attributable to the parent 10.430.655 11.410.197
Net equity attributable to non-controlling interest 38.046 40.596
TOTAL EQUITY AND LIABILITIES 15.377.000 17.357.148
4. Financial analysis of the company
Vertical analysis of the balance sheet(simplified)
Totals Percentage
Current assets 7.105.953 8.449.235
46% 48%
Non-current assets 8.271.047 8.907.913
54% 52%
Total assets 15.377.000 17.357.148
100% 100%
Current liabilities 3.748.828 4.670.151
24,5% 27%
Non-current liabilities 1.159.471 1.236.204
7,5% 7%
Equity 10.468.701 11.450.793
68% 66%
Total E+L 15.377.000 17.357.148
100% 100%
P&L account
2014 2015
Net sales 18.116.534 20.900.439
Cost of sales (7.547.637) (8.811.139)
Gross margin profit 10.568.897 12.089.300
58% 58%
Operating expenses (6.457.569) (7.391.832)
Other expenses and income, net (8.256) 1.691
Operating profit (EBITDA) 4.103.072 4.699.159

Amortization and depreciation (904.887) (1.021.717)

Interest expense (1.958) (1.732)
Operating profit (EBIT) 3.198.185 3.677.442

Financial results 14.483 10.069

Equity accounting income 32.125 55.607
Income before tax 3.244.793 3.743.118

Income tax (734.643) (860.917)

Net income/profit 2.510.150 2.882.201
 Vertical analysis of P&L account
(simplified)
Totals Percentage
Net Sales 18.116.534 20.900.439
100% 100%
COGS (7.547.637) (8.811.139)
41,5% 42%
Gross Margin 10.568.897 12.089.300
58,5% 58%
Total expenses 8.058.747 9.207.099 44,5% 44%
Net profit 2.510.150 2.882.201
14% 14%
Cash Flow & Projected Cash Flow
Analysis
Financial ratio analysis
A) Liquidity ratios
Liquidity ratios measure the capacity of the firm, at a given moment, to cover its debts. Current
debts are debts that must be covered on a short period of time and have as main source of
payment current assets. In order to analyze the liquidity situation of Inditex, we compared the
three ratios over a period of 5 years.

Liquidity ratio Analysis

2.50

2.01 1.95
2.00 1.92 1.90
1.81

1.54
1.47 1.47
1.50 1.40 1.34
1.28
1.10 1.11
1.01
1.00 0.90

0.50

-
2011 2012 2013 2014 2015

Current ratio Quick ratio Cash ratio

Liquidity ratios (2)
Current ratio
Current ratio is one of the most important financial ratio of a company and it
measures the capacity of the firm to pay short-term debt using short-term assets
(cash, marketable securities, inventories, accounts receivable). It is calculated as the
ratio between Current Assets and Current Liabilities. When the Current Ratio of a
company is below 1, its liabilities are greater than its assets, thus the company would
be unable to pay its debts at that moment. The higher the current ratio is, the more
able the company is to pay its obligation, the value of assets being higher than the
value of its liabilities.
The current ratio of Inditex has decreased from 2014 to 2015 on a constant basis.
The only increase was registered in 2013, when the current ratio has increased with
2% compared to the previous years. Over the period analyzed, this ratio has
decreased with 10%. A decrease of this ratio does not necessarily mean a bad
thing. It has to take into account other factors, such as the period it takes Inditex to
collect its Accounts Receivable, or how easy it will be for them to convert current
assets into cash. Inditex has an accounts receivable turnover of 24 on average over
the five years, meaning it can collect its receivables on a short term
Liquidity ratios (3)
Quick Ratio
The Quick Ratio takes into account only the most liquid current assets, such as Cash and Cash-
Equivalents, Short-term investments and Accounts receivable. Inventories are not taken into account
when calculating this ratio, because of the difficulty to turn them into cash.
Over the period of 5 years, the Quick Ratio of Inditex has decreased with 13%.The decrease of the
Quick Ratio can be explained by the higher increase of the Current Liabilities compared to Current
Assets when subtracting Inventories. The same as the Current Ratio, it is not necessary to say that
having a higher Quick Ratio means Inditex has the ability to pay short-term debts more easily. It must
be taken into account also the time it takes for the company to turn Current Assets into cash.
Cash ratio
When being calculated, Cash ratio utilizes only Cash and other Marketable securities, divided by
Current Liabilities. This ratio only takes into account the most liquid short-term Assets, those that can
be used the most easily when covering Current Liabilities. It does not use Inventories and Accounts
Receivables, since there is no guarantee that it would be converted into cash on a short notice.
Although most companies would not have enough cash to cover its debts, Inditex has maintained over
the period a Cash Ratio near 1. In the last year analyzed, 2015, the ratio has gone beyond 1, being
0.90%. The decrease is not necessarily a bad one, holding large amounts of cash being seen as poor
utilization of the companys Assets. The decrease of this ratio can be explained also due to the fact
that although the amount of Cash of Inditex has remained almost constant through the period,
Current Liabilities have increased each year. The item that increased the most was Financial Debt
and Trade and other Payables.
B) Solvency ratios

2011 2012 2013 2014 2015

= total
Debt to debt/total
asset ratio assets 0,32 0,34 0,33 0,32 0,34
= total
Debt to debt/total
equity ratio equity 0,47 0,52 0,47 0,47 0,52

= long-term
debt/(long
Long-term term debt +
debt ratio equity) 0,10 0,10 0,10 0,10 0,10
 C) Profitability ratios
Profitability ratios are a class of financial metrics that are used to assess a business's
ability to generate earnings compared to its expenses and other relevant costs incurred
during a specific period of time. For most of these ratios, having a higher value relative
to a competitor's ratio or relative to the same ratio from a previous period indicates that
the company is doing well. Being in the retail industry, Inditex experiences higher
revenues and sales during holiday seasons.
Profitability ratio analysis
70%
59% 60% 59% 58% 58%
60%

50%

40%

30%
20% 22%
18% 20% 18% 18% 18% 18%
20% 17% 17%
14% 15% 14% 14% 14%
10%

0%
2011 2012 2013 2014 2015

Gross margin ratio Operating margin ratio Net profit margin ratio Cash flow margin ratio
 Profitability ratios (2)
Gross margin ratio
The gross margin number represents the portion of each dollar of revenue that the company retains as gross
profit. Inditex did not have any major differences in this ratio over the period, decreasing with 2% in 2015
compared to 2012. The average over the 5 years is 59%, meaning that for each euro of revenue
generated, Inditex retains 0.59 from each euro. The rest is spent on Cost of Goods Sold.

Operating margin ratio

The operating margin ration has remained constant at Inditex, being 20% only in 2012, the rest of the
analyzed years being 18%. The higher the operating margin ratio is, the better off Inditex is doing from
economic point of view. The value of 18% means that Inditex makes 0.18 euro for every dollar of sales, not
taking into account interest and taxes. Having a good operating margin means that Inditex is able to satisfy
creditors and create value for the shareholders. The reason why the operating margin ratio has increased in
2012 is because both sales and operating profit have increased compared to the previous years on a higher
level than that of the next three years.
Profitability ratios (3)
Net profit margin ratio
The net profit margin ratio for Inditex has remained almost constant over
the years at 14%. Having a 14% ratio, this means that for each euro of
total revenue earned, Inditex has a net income of 0.14 euro. The increase in
2012 compared to 2011 is related to a higher increase in sales and net
income compared to the previous year.
Cash flow margin ratio
The cash flow margin of Inditex has varied over the years analyzed,
starting from 2011 at 17%, increasing to 20% in the next year and then
decreasing again in 2013. The decrease in explained by the decrease in
the same year of the cash flow from operating activities, Inditex having that
year a decrease in inventories and an increase of its current payables. In
2014, however, the cash flow margin ratio started to increase, reaching
22% in 2015. This is explained by an increase in both sales and cash flow
from operating activities, the first one increasing with 15%, while the latter
increasing with 39% due to changes in working capital, current payables,
receivables and other current assets.
 Evolution of ROA, ROE and ROIC
0.30

0.25

0.20

ROE
0.15
ROA
ROIC (return on invested capital)

0.10

0.05

-
2011 2012 2013 2014 2015
 Efficiency ratios
=
Accounts Turnover/Ac
receivable counts
turnover receivable 21 31 31 21 31

Days of =
inventory on (Inventory/C
hand OGS)*365 (90) (91) (91) (90) (91)

Average = (Accounts
collection receivable/T
periodurnover)*365 17 12 12 17 12

Fixed assets = sales/fixed

turnover asstes 2,19 2,35 2,35 2,19 2,35

Total asset = sales/total

turnover assets 1,18 1,20 1,20 1,18 1,20
 Valuation ratios
As of 31st January 2016 the share capital of INDUSTRIA DE DISEO TEXTIL S.A. amounted to
Euros 93,499,560 and is represented by 3,116,652,000 registered shares of Euros 0.03 par
value each, subscribed and fully paid. All these shares belong to a single class and series, have
the same voting and profit sharing rights and are represented by book entries.

2011 2012 2013 2014 2015

Share price 9 16 21 24 24
Earnings per share
0,310 0,379 0,382 0,803 0, 923
Price to earnings 29 EUR 42,2 EUR 55 EUR 30 EUR 26 EUR
Statement of changes in Equity

(Amounts in
thousands of euros) 2014 2015 Variation

Profit of the year 2.510.151 2.882.201 14,82 %

Other movements -2.504 -2.368 -5,43 %
Other comprehensive 212.102 286.050 34,86 %
income for the year

Treasury shares -26.860 0 100 %

Share-based 8.123 14.259 75,54 %
payments
Dividends -1.510.674 -1.625.949 7,63 %

Other comprehensive income is related to

translation differences related to foreign operations
and cash flow hedges.
Strengths

Vertical integration.
Zara as the Brand Name.
Inditex has stores all over the world.
Weaknesses

Underdevelopment of other brands other than Zara.

Over-dependence on European and domestic
markets.
Opportunities

Online sales.
Continuous expansion
Threats

The fashion industry and the behavior of consumenrs

are always changing.
Other competitors try to duplicate Inditexs business
model.
 Conclusions & recommendations
Considering the fact that Inditex group has a diversified
portfolio and one of their strategies is positioning their
stores in the areas most frequented by clients, and due
to the analysis we performed, Inditex will continue
growing over the next few years. Even though the retail
market is constantly changing, Inditex showed that it can
adapt successfully to these changes in the past years.
Our recommendation would be that they try to
penetrate new geographic markets, especially with the
less-known brands like Uterque.