The goal, parameters, and structure of the study, establish the parameters for an extensive assessment of the business's financial performance. The study will be divided into stages, with a thorough look at profitability ratios coming first, and then an investigation of effectiveness and liquidity measures. In order to provide a comparative evaluation of Asos Plc's financial achievements and tendencies over the two years in question, the financial study will encompass the fiscal years 2022 and 2021 (asosplc.com, 2023).
Comparably, the Operating Profit Margin of ASOS PLC decreased from 4.86% in 2021 to -0.25% in 2022. This unfavourable margin indicates a loss because operational costs were higher than operating earnings. A decline in sales volume, price pressures, growing costs, or other reasons might all be to blame for the decline. To identify and address the issues causing the reduction, a detailed examination of the expenses and income sources is essential. By comparing the percentage of gross profit to sales revenues, the gross profit margin determines how profitable a business's primary activities (Pattiasina et al. 2018). Gross Profit multiplied by Sales Revenues is the formula. ASOS PLC's Gross Profit Margin had a small reduction from 45.43% in 2021 to 43.63%, in contrast to the other measures.
The financial performance study of ASOS PLC indicates that there will be difficulties in turning a profit and keeping operations running smoothly in the 2022 fiscal year. The company's operating and financial strategies require a thorough examination, as evidenced by the significant drop in ROCE and negative Operating earnings Margin. As cited by Musallam (2018), to determine the underlying reasons for the decrease in profitability, management needs to look at things like capital allocation, revenue generation, and cost control. The slight decline in Gross Profit Margin demonstrates that ASOS PLC could be dealing with challenges in its core business, highlighting the significance of a comprehensive strategy for cost containment and operational effectiveness. To achieve long-term monetary stability and return to profitability, ASOS PLC must take corrective action based on this study.
The Typical Inventory Turnover Period for ASOS PLC increased in 2022, going from 138.04 days in 2021 to 177.38 days in 2022. This suggests that during the fiscal year, the company's sales of inventory performed longer on average. ASOS PLC should think about enhancing the effectiveness of its supply chain, recognizing and solving slow-moving items, and optimizing its inventory levels to solve this. The Average Clearance Period for Trade Receivables increased for ASOS PLC in 2022, rising from 5.39 days in 2021 to 8.18 days in 2022. As cited by Bitar et al. (2018), an extended amount of time for collection might be a sign of problems with managing receivables, which could be caused by loose credit conditions, payments that are late from clients, or adjustments in client payment patterns.
With a small decline from 163.52 days in 2021 to 163.39 days in 2022, ASOS PLC's Average Collection Period for Trade Receivables was comparatively constant in 2022. This implies that during the two years, the company's payment policies to suppliers stayed the same. Even though alignment is typically a good thing, ASOS PLC must continue to have positive connections and outstanding communication with its suppliers. The Average Inventory Turnover Length has increased noticeably, which may indicate problems with the management of inventory and supply chain effectiveness (Ichsan et al. 2021). Extended payment terms might sour relations and hinder the business's future capability to get advantageous arrangements. The research on ASOS PLC's efficiency ratios reveals both its advantages and disadvantages.
Analysis of Liquidity Ratios
ASOS PLC saw a notable decline in its Current Ratio in 2022, falling from 2.78 in 2021 to 1.49. This decline implies that throughout the fiscal year, the company's current financial obligations were more than its current assets. Even though a ratio above 1 usually denotes short-term financial stability, this kind of drop raises doubts about the company's capacity to pay its debts on time. A decline in current assets, a rise in short-term obligations, or adjustments to working capital might all be the cause of the decline. A decline in the Acid-Test Ratio could indicate difficulties paying short-term debts without turning to inventory sales (Akinroluyo and Dimgba, 2022). Reduced money, marketable securities, or receivables from previous transactions might be the cause.
Important questions regarding ASOS PLC's near-term financial situation are brought up by the study of its liquidity ratios. The notable reduction in the Current Ratio and Acid-Test Ratio indicates possible financial difficulties in 2022 as compared to 2021. The Acid-Test Ratio's steep decrease highlights the need for a more cautious evaluation of liquidity (Andarwati, 2022). In order to increase its fast ratio, ASOS PLC could need to investigate ways to strengthen its liquid assets that are most liquid or assess its current liabilities. This can include going over credit conditions again, handling receivables more skilfully, or making the best use of short-term borrowing. Moreover, to address the highlighted liquidity concerns, proactive steps such as working capital optimization, financing options exploration, and maintaining excellent cash flow management will be crucial.
Limitations of Ratios
Ignoring Non-Financial Factors
Furthermore, to make thoughtful and sophisticated financial judgments, it is important to comprehend the limitations of ratio analysis. Ratios may not take non-financial aspects like governance, social, and environmental issues into account and instead primarily concentrate on financial measures (Thiam et al. 2019). Ignoring these elements might lead to an inadequate evaluation of the general efficiency and sustainability of a business.
Dependency on Financial Statements
Financial statements that are accurate and trustworthy are essential to the evaluation of ratios (Chen et al. 2018). Inaccurate ratio computations can result from mistakes or inaccuracies in financial statements, which might mislead analysts and investors.
No Consideration of Timing
Ratios offer a moment-in-time view of the financial status of a business. They can miss the departure time of cash flows, which is important to consider when evaluating a company's capacity to fulfil short-term commitments (Platonova et al. 2018).
Conclusion and Recommendations
Based on the above discussion it can be concluded that species is evident from the rise in the Average Settlements Period for Trade Receivables that receivables management requires more focus. Moreover, to guarantee on-time payments, ASOS PLC has to think about adjusting credit conditions, putting aggressive collection tactics into place, and encouraging consumer communication. Maximize payment terms without jeopardizing these partnerships; ASOS PLC must maintain good contact with its suppliers.
Reference list
Akinroluyo, B.I. and Dimgba, C., 2022. Banks liquidity ratio and return on equity of Nigeria deposit money bank in Nigeria. International Journal of Management & Entrepreneurship Research, 4(1), pp.36-47.
Andarwati, A., 2022. The Effect of Ownership, Expense Ratio, Capital Ratio and Liquidity on Financial Performance Commercial Banks (Study on Issuers on IDX). In Journal of International Conference Proceedings (Vol. 5, No. 4, pp. 430-438).
asosplc.com, 2023, About us. Available at: https://www.asosplc.com/investor-relations/results-centre/ [Accessed on: 16th November, 2023]
Bitar, M., Pukthuanthong, K. and Walker, T., 2018. The effect of capital ratios on the risk, efficiency and profitability of banks: Evidence from OECD countries. Journal of international financial Markets, Institutions and Money, 53, pp.227-262.
Chen, C.W., Collins, D.W., Kravet, T.D. and Mergenthaler, R.D., 2018. Financial statement comparability and the efficiency of acquisition decisions. Contemporary Accounting Research, 35(1), pp.164-202.
Ichsan, R., Suparmin, S., Yusuf, M., Ismal, R. and Sitompul, S., 2021. Determinant of Sharia Bank's Financial Performance during the Covid-19 Pandemic. Budapest International Research and Critics Institute-Journal (BIRCI-Journal), 4(1), pp.298-309.
Musallam, S.R., 2018. Exploring the relationship between financial ratios and market stock returns. Eurasian Journal of Business and Economics, 11(21), pp.101-116.
Pattiasina, V., Fajar, R. and Yohanes, C.S., 2018. The impact of financial ratios towards profit changes. International Research Journal of Management, IT and Social sciences (IRJMIS), 5(5), pp.1-16.
Platonova, E., Asutay, M., Dixon, R. and Mohammad, S., 2018. The impact of disclosure on financial performance: Evidence from the GCC Islamic banking sector. Journal of Business Ethics, 151, pp.451-471.
Thiam, M.E.B., Liu, J. and Aston, J., 2019. Ignoring personal moral compass: factors shaping bankers’ decisions. Journal of Financial Regulation and Compliance, 27(3), pp.357-379.
