Foundation in Natural & Built Environment

April Intake 2014

Basic to Accounting

ACC30205

Assignment: Financial Ratio Analysis

Andrew Mah Koon Yan 0318798

Lu Siau Vay 0318567

Chong Hui Xin 0319363

The Swatch Group Limited

The Swatch Group Limited is a multinational holding group of companies that makes

luxurious watches. Originating from Switzerland, this international group was formed in

1983 by the late Nicolas George Hayek (1928-2010) through the merging of Swiss

watchmakers, Allgemeine Schweizerische Uhrenindustrie AG (ASUAG) and Société Suisse

pour l'Industrie Horlogère (SSIH) due to financial reasons. It was known as Swiss

Corporation for Microelectronics and Watchmaking Industries Ltd (SMH) before being

renamed to the current name, The Swatch Group in 1998.

With the children of the late Nicolas George Hayek as the current chairwoman of The Swatch

Group, Nayla Hayek, and the current CEO of The Swatch Group, Nick Hayek, The Swatch

Group continues to conduct research and development of watches while expanding the watch

manufacturing business worldwide with a few famous brands under them such as Tissot,

Omega, Swatch, and Calvin Klein watches.

One of its recent achievements, Omega, a Swiss luxury watch manufacturer owned by The

Swatch Group, introduced a mechanical watch movement resistant to magnetic fields greater

than 15,000 gauss with a soft iron shield to protect the watch movements. This is a ground-

breaking anti-magnetic technology produced by a company under The Swatch Group.

Another known famous story is that Harry Winston, a company also owned by The Swatch

Group, purchased the largest known flawless vivid blue diamond in the world for $23.8

million.

(CHF million)

Profitability Ratios Formulae 2012 2013 Interpretation

18.40% 21.20%

(1604/7796)

*100% =

(1928/8456)

* 100% =

(4157/7796)

* 100% =

(4656/8456)

* 100% =

(1097/7796)

* 100% =

(1261/8456)

* 100% =

(604/7796)

* 100% =

(703/8456)

* 100% =

(31/7796)

* 100% =

(36/8456)

* 100% =

Return on Equity

Net Profit Margin

Gross Profit Margin

Selling Expense Ratio

(1928/9073.5)

* 100% =

During the 2012 to 2013 period, the net profit margin increased from

20.6% to 22.8%. This mean the business is getting better at controlling its

expenses.

During the 2012 to 2013 period, the gross profit margin increased from

53.3% to 55%. This mean the business is getting better at controlling its

COGS expenses.

(New Profit /

Average Owner's

Equity) * 100%

53.30% 55%

7.70% 8.30%

Financial Profitability Ratio Analysis and Interpretations of

The Swatch Group Limited

20.60% 22.80%

(New Profit / Net

Sales) * 100%

( Gross Profit /

Net Sales) *

100%

(Total Selling

Expense / Net

Sales) * 100% 14% 14.90%

(Total General

Expense / Net

Sales) * 100%

During the 2012 to 2013 period, the selling expense ratio increased from

14% to 14.9%. This mean the business is getting better at controlling its

selling expenses.

During the 2012 to 2013 period, the general expense ratio increased from

7.7% to 8.3%. This mean the business is getting better at controlling its

general expenses.

General Expense Ratio

During the 2012 to 2013 period, the return on equity increased from

18.4% to 21.2%. This mean the return to the owner is getting more return

from his capital.

(1604/8707.5)

* 100% =

During the 2012 to 2013 period, the financial expense ratio increased

from 0.3% to 0.4%. This mean the business is getting better at controlling

its financial expenses.

Financial Expense Ratio

(Total Financial

Expense / Net

Sales) * 100% 0.30% 0.40%

(CHF million)

Stability Ratios Formulae 2012 2013 Interpretation

6.5:1 6.5:1

(1878/11222)*100% = (2065/11639)*100% =

365/(2356/4039) = 365/(2456/4916.5) =

365/(4228/1066.5) = 365/(3898/977) =

(3+1604)/3 = (4+1928)/4 =

537 times 483 times

Financial Stability Ratio Analysis and Interpretations of

The Swatch Group Limited

16.70% 17.70%

(Total Liabilities /

Total Assets) *

100%

365 days / (Cost of

Goods Sold /

Average Inventory)

365 days / (Credit

Sales / Average

Debtors) 92 days 91.5 days

(Interest Expense +

Net Profit) /

Interest Expense

During the 2012 to 2013 period, the business' debtor turnover ratio has

decreased from 92 days to 91.5 days. This means that the business is

getting faster at collecting its debts.

During the 2012 to 2013 period, the business' interest coverage ratio has

decreased from 537 times to 483 times. This means that the business's

ability to pay its interest has become worse. In addition, the business

satisfies the minimom requirement of 5 times.

Interest Coverage

During the 2012 to 2013 period, the business' working capital ratio has

no change which is 6.5 : 1. This means that the business' ability to pay its

current liabilities remained the same. In addition, the business satisfies

the minimum requirement of 2 : 1.

7827/1204 =

During the 2012 to 2013 period, the business' total debt ratio has

increased from 16.7% to 17.7%. This means that the business's total debt

has increased. On the contrary, the business does not exceeds the

maximum limit of 50%.

During the 2012 to 2013 period, the business' stock turnover ratio has

increased from 629.3 days to 730 days. This means that the business is

getting slower at selling their goods.

Total Current

Assets / Total

Current Liability

629.3 days 730 days

Working Capital

Total Debt

Stock Turnover

Debtor Turnover

8673/1338 =

Appendix 1 :

Price Earnings Ratio of The Swatch Group As of 08:23:09 ET on the 14th of January 2015

= Current share price / Earnings per share

= 459.400 CHF / 33.3800 CHF

= 13.8376

The Swatch Group has a current share price of 459.400 CHF per share. It’s earnings per share

(based on the group’s trailing 12 months) is 33.3800 CHF. The group’s price/earnings ratio is

13.8376

Appendix 2 :

Investment Recommendation

After a long discussion with my group, we decided that it is NOT worth investment into this

company.

There are a few factors behind this decision. One of it would be the instability of the

company based on the ratio analysis of the company for the past 2 years.

Even though the numbers on profitability ratio analysis calculation says that the company is

getting better at generating earnings and controlling its operating expenses. But this doesn’t

mean that the company will last through the next year or the next decade of business. This is

shown at the financial stability ratios calculated based on the 2 years.

It is clearly shown that the company’s debt has increased by 1% from 2012 to 2013. That 1%

of increased is a loss of profit for the company, and doesn’t attract investors when the

company is in debt.

According to the stock turnover ratio calculated, the company has increased 100 days slower

in selling their goods. This is bad news for investors as they want the company to prosper in

sales so that the money they invested in will not go to a waste or a loss.

In addition, the interest coverage ratio of the company has decreased to about 50 times. A

lower interest coverage ratio means less earnings are available to meet interest payments and

that shows the business is getting worse at paying its interest back.

Another factor is the price of a share and its earnings per share. The amount of money for a

share when the earnings obtained is not that high all in all. The P/E ratio is 13 close to 14.

In conclusion, the performance data quoted represents past performances and does not

guarantee future results. Even though the P/E ratio is below 15, it doesn’t mean that it is wise

to invest in this company that has a risk of failure or bankruptcy.

Reference

1. Omega and the Swiss Federal Institute of Metrology (METAS). (2014, December 9).

Retrieved January 15, 2015, from

http://www.swatchgroup.com/en/services/archive/2014/omega_and_the_swiss_federa

l_institute_of_metrology_metas

2. Swatch Group History (yesterday). (2005, October 21). Retrieved January 15, 2015,

from http://www.swatchgroup.com/en/group_profile/history/yesterday

3. Swatch Group History (today). (2005, October 23). Retrieved January 15, 2015, from

http://www.swatchgroup.com/en/group_profile/history/today

4. UHR:SIX Swiss Ex Stock Quote. (n.d.). Retrieved January 14, 2015, from

http://www.bloomberg.com/quote/UHR:VX