Introduction
ASOS plc is an online British retail company that deals with fashion and cosmetic items. This company was established in London in 2000 and primarily targeted the young adult audience. However, during its growth phases, ASOS endorsed a kids’ wear fashion line, which did not thrive as expected due to high competition from other established brands. As a result, this fashion line was dropped two years later, and the company decided only to concentrate on young adults’ fashion items. Over the years, ASOS plc has experienced massive growth in the fashion industry, leading to market expansion to other countries, including Australia, China, Spain, and Italy. Digital marketing strategies such as using social media platforms and emails have significantly contributed to sales growth. For instance, in 2008, 10% of the total sales were directly linked to email marketing through active email subscribers. Recently, ASOS plc has partnered with DPD Delivery Company and endorsed three of the former Arcadia Group brands as its subsidiaries.
Interpretation of Ratios
The ratios indicate the financial well-being of a company and its ability to generate wealth for its shareholders. ASOS Company has an inconsistent return on the capital employed ratio (ROCE), which is below the recommended 15% (Walters & Helman, 2020). The company performed well in 2018 but reported below-average returns in the rest of the years (Walters & Helman, 2020). The stock turnover ratio has been within the average number of five for the first three years but dropped below it in 2021. Hence, ASOS is struggling to convert its inventory into sales or its products have declining demand in the market (Walters & Helman, 2020). However, ASOS has excellent debtor collection performance as its customers pay their credits in under five days. The company is within the credit payment days of between 30 and 60 as it has paid within this range for the four years analyzed (Walters & Helman, 2020). Overall, ASOS is not generating optimum wealth for shareholders but is properly managing its debtors and creditors.
From the financial information given in the instructions, ASOS Company is cash-strapped and has serious liquidity problems. The document shows that its current ratio has been below the recommended figure for the first two years but improved in the last two years (Walters & Helman, 2020). This ratio indicates that ASOS was struggling to pay for its short-term debts using current assets in those years. However, it has indicated a recovery in the latter years with the ratio going as high as 1.56 in 2021 (Walters & Helman, 2020). Nevertheless, the company’s inability to pay off its short-term loans is better indicated by the liquidity ratio. Ordinarily, healthy companies have high liquidity ratios of between two and three but ASOS has recorded a ratio of below one for the four analysis years (Walters & Helman, 2020). Such a value indicates a liquidity crisis in the organization and a negative working capital balance. Since the gearing ratio shows how much debt against assets a company has, ASOS has been increasing its debt sharply in the analysis years. Therefore, the company must have been experiencing problems in sales leading to issues with liquidity.
Conclusion
In conclusion, ASOS is not financially stable for investment or financing from banks. Potential investors may not want to buy its shares because the ratios reveal problems with the management of resources and the generation of an income. The company has below-average liquidity ratios, indicating that it is struggling to pay short-term debts and working with negative capital. While performance ratios are not bad, they are not promising due to inconsistency. Overall, ASOS is not in the best financial position in its industry or market.
References
Bailey, W. J., & Samuels, J. A. (2018). Analyzing Two Investments—An Instructional Case to Introduce Basic Financial Accounting Concepts. Issues in Accounting Education, 33(4), 47-56.
Easton, P. D., McAnally, M. L., Sommers, G. A., & Zhang, X. J. (2018). Financial statement analysis & valuation. Boston, MA: Cambridge Business Publishers.
Walters, D., & Helman, D. (2020). Profitability: Interpretations and Considerations. In Strategic Capability Response Analysis (pp. 99-139). Springer, Cham.