Inditex. a financial statement analysis. mario samuel camacho compressed

INDITEX
A FINANCIAL STATEMENT ANALYSIS
2017

1. INTRODUCTION 6
PART ONE
2. CAPITAL STRUCTURE OF INDITEX 8
2.1. INDITEX 8
2.2. CAPITAL STRUCTURE: DEBT VS EQUITY 8
2.3. EQUITY VALUATION OF INDITEX 9
2.4. PROFITABILITY AND RISKS 10
2.5. ADVANTAGES AND DISADVANTAGES OF THE CAPITAL
STRUCTURE
10
PART TWO
3. GENERAL ASSESSMENT OF THE FINANCIAL
PERFORMANCE
13
3.1. INDITEX FINANCIAL PERFORMANCE COMPARED TO
ITS RIVALS AND INDUSTRY
13
3.2. RETURN ON EQUITY (ROE) AND EARNING PER SHARE
(EPS)
14
3.3. MAIN FINANCIAL INDICATORS: INDITEX'S NET
SALES
15
INDITEX: A FINANCIAL STATEMENT ANALYSIS III
LIST OF CONTENT

NET PROFITS, COSTS AND LIQUIDITY
3.4. COMPANY'S GOALS AND STAKEHOLDER
EXPECTATIONS
15
4. CONCLUSIONS 17
5. REFERENCES 19
6. APPENDICES 21
INDITEX: A FINANCIAL STATEMENT ANALYSIS IV

FIGURE 1. Inditex 9
INDITEX: A FINANCIAL STATEMENT ANALYSIS V
LIST OF FIGURES

The purpose of the present report is
examining the financial statement of the
Spanish global company Industria de
Diseño Textil (Inditex), evaluating the capital
structure of the selected company, risks,
source of finances, advantages and
disadvantages of the capital structure and
decisions about strategic investments.
Secondly, it is considered the organisational
financial performance as a whole, the
financial performance of Inditex compared to
its rivals and its context and the company's
goals and stakeholder expectations in order
to critically evaluate its success or failure.
Lastly, the financial statements are
interpreted and discussed to explain the
relationship between the financial
statements and the organisational
performance.
Having considered this, it will be given
recommendations to validate of refuse the
decision-making of the organisation based
on the analysed financial information and
finally, it will be offered a brief conclusion.
On the other hand, it is noteworthy that the
report will only analyse the most notorious
characteristics of the financial statement of
Inditex. Therefore, it will be limited in its
purpose, leaving a more profound evaluation
for subsequent research.
INDITEX: A FINANCIAL STATEMENT ANALYSIS 6
INTRODUCTION1

2.1. INDITEX
Inditex is an important company in the industry of retailing and apparel and it has 8 different
brands: Zara, Bershka, Pull and Bear, Zara Home, Massimo Dutti, Oysho, Stradivarius and
Uterqüe, which, permits Inditex to be diversified and attract different age groups and market
segments (Surrador do Couto, 2014: 2).
2.2. CAPITAL STRUCTURE: DEBT VS EQUITY
In Inditex, the capital structure is funded from equity and its debt is insignificant.
In fact, “the debt ratio has been almost zero” caused by the fact that the company generates a
good cash flow and it is reinvested into the company, opening new stores, under a strategy of
expansion (Surrador do Couto, 2014: 31).
CAPITAL STRUCTURE OF INDITEX2

Concerning the equity strategy of Inditex, it “uses little debt in its capital structure as
supported by a debt to capital ratio of 0.26” (Financial Times, 2016), which, is small according
to Gallo (2015), who considers that some ratios are good if they are as high as possible, like
profit margins, “but with debt-to-equity, you want it to be in a reasonable range” and less than
1 is appropriate.
To contextualise this ratio, “companies have two choices to fund their businesses, borrow
money from lenders or get money from equity” and issuing equity with a small amount of debt
will reflect a financial stability.
It is considered that stable, “publicly traded companies have ratios between 2 and 5 […] any
higher than 5 or 6 and investors start to get nervous” (Gallo, 2015). The only exception is in
banking, in which, is common “to see a ratio of 10 or even 20”, but this is a special industry in
this regard (Gallo, 2015).
To further illustrate Inditex capital structure compared to other companies, it is relevant to
show that Apple or Google have ratios likely to be well below 1 and it is mostly considered to
be good (Gallo, 2015).
Thus, a 0,26 debt to equity ratio shows profitability and small debts, which, reaffirms that
Inditex “capital structure is characterized by the low debt/equity ratio as a result of the
practically non-existent financing and the strength of its equity” (Inditex, 2016: 227).
2.3. EQUITY VALUATION OF INDITEX
Similar to the debt to equity ratio, it is essential to evaluate the equity issued by Inditex and its
profitability.
In this manner, the stock price of Inditex is important and according to Bloomberg Markets
(2016), the current Inditex stock price is €30.73 (18 July 2016) per share and Inditex has
issued more than €3 billions shares with a market capitalisation of €95.76 billions.
SHARE PRICE 30.73
MARKET
CAPITALISATION
€95.76 billions
1 YR RETURN 0.56%
TABLE 1. Inditex (Bloomberg Markets, 2016)

In the light of the current Inditex's equity characteristics, it is decisive to analyse the long term
Inditex profitability for shareholders to evaluate if the company equity is seen as reliant and
successful. In 2001, when Inditex issued equity for the first time, the share price was €3.6 and
15 years later, in 2016, the share price is €30.75 (Google finance, 2016), which, involves a
754% increase for investors.
This is a definitely good investment for shareholders and it reinforces the trust in the financial
strategy of Inditex, even in times of crisis in Europe.
Considering this, Inditex stock prices have performed well and the equity is evaluated as very
profitable to attract investors.
2.4. PROFITABILITY AND RISKS
As the report's objective is appraising the financial statement of Inditex, it is critical to check
the profitability of Inditex and its external threats.
First of all, Inditex profitability is increasing every year and it presented a net profit of €2,882
in 2015, which, is positive after an important strategy of expansion and investments (Inditex
Annual Report, 2015). In fact, it provided a surplus to raise the confidence in the capital
structure of Inditex and its financial decisions.
On the other hand, there are threats from the global business environment that might affect
Inditex's capital structure like cotton price’ changes that affect Inditex and consequently,
Inditex’s strategy and its share price (Surrador do Couto, 2014: 3).
Additionally, Inditex capital structure is threatened by the “high degree of exposure to different
currencies” and it is well-known that currencies changes are “hard to forecast” (Surrador do
Couto, 2014: 3).
This is especially important for Inditex because it is present in almost 100 countries, which,
expose the company to changes in currencies that might affect the capital structure in case of
alterations in the currencies of Inditex's main markets.
2.5. ADVANTAGES AND DISADVANTAGES OF THE CAPITAL
STRUCTURE
As the company has taken on relatively little debt and thus, low risk, the cost of debt is
insignificant and financing the company by equities is a good investment for shareholders
(Tudó et al, 2011: 59).

For this reason, this is an advantageous capital structure supported by a successful financial
performance, which, provides sufficient resources to make sure that there is no risk of
bankruptcy and the debt is completely able to be handled.
On the other side, it is remarkable that most of the shares are in the hands of the company's
owner (59.294%) and the dividends paid out to shareholder in 2015 is €1,6 billions, which, is
a relative low amount to pay compared to suppliers, almost €13 billions (Inditex Annual
Report, 2015: 150).
As a final reflection, the capital structure of Inditex is appropriate for the company’s goals and
even, if it is limited to just one way of funding, it enhances the financial performance of Inditex
as most of the profits are reinvested.

3.1. INDITEX FINANCIAL PERFORMANCE COMPARED TO ITS
RIVALS AND INDUSTRY
Retailing industry, in which, Inditex takes part, is growing quickly in spite of the difficult times
that have been experiencing the global economy (Surrador do Couto, 2014: 31).
Nevertheless, in the particular case of Inditex, it has performed above the average in its
industry, which, is explained by various factors, such as: diverse age groups, diverse market
segments, “portfolio diversification with different brands” and a business model that
emphasises on international investments (Surrador do Couto, 2014: 54).
In detail, Inditex is ahead of its competitors like Hennes & Mauritz (H&M) or GAP, which, are
starting to struggle compared to Inditex (Chaudhuri and Kowsmann, 2016).
GENERAL ASSESSMENT
OF THE FINANCIAL PERFORMANCE
3

As an illustration, H&M has increased sales from €19 billions to €22 billions (Hennes &
Mauritz, 2016), which, is a well financial performance under the current global financial
circumstances. However, lnditex also increased its sales from €14 billions to €20 billions
(Inditex, 2016) and it means a 42% increase of profits, while the H&M's profits increase is just
15%.
Similarly, it is noteworthy that Inditex's shares remain stable in the stock markets over the
past years (over €30 per share), while competitors like GAP has experienced a fall that
surpasses 50% from 43,54 in 2014 to 17,43 in 2016 (Bloomberg Markets, 2016b) and H&M
has also experienced a decline of 30% fall from 341,27 Sweden Krona (SEK) in 2014 to SEK
260.40 in 2016 (Bloomberg Markets, 2016c).
As has been noted, the financial performance of Inditex in comparison to its competitors in the
retailing industry is superior and profitable for investors. In this regard, the performance of
Inditex in its industry is better than the average in the financial field.
3.2. RETURN ON EQUITY (ROE) AND EARNING PER SHARE (EPS)
Now, to analyse the specific characteristics of the Inditex's equity, it will be evaluated the ROE
and earning per share of Inditex.
The ROE “measures the amount of net income returned as a percentage of shareholders’
equity” and it indicates the company's efficiency at generating profits. (Tudó et al, 2011: 40),
while the EPS is obtained by dividing a company's profit by “its number of common
outstanding shares” (Nasdaq, 2011).
Considering both concepts, the ROE of Inditex “don’t have a clear trend and they are
fluctuating around the 30% approximately” (Tudó et al, 2011: 40).
In detail, in the last years it has been fluctuating around 30%, but in 2015 it reported a ROE of
26% (Inditex, 2016: 225) and it is considered to be good percentage according to Gallo
(2016) But, obviously, as an investor, “you want the ROE to be as high as possible” (Gallo,
2016).
In this aspect, it is noteworthy that H&M, the rival in the European market of Inditex has a
ROE of 38.97% in 2016 (Financial Times, 2016b), which, makes H&M win in some financial
spheres.
Having considered the Inditex's ROE, the EPS of this company is 0,934 in 2015 (Financial
Times. 2016) and it was 0,803 (Inditex, 2014: 4).
Thus, the EPS is increasing, but ROA and EPS vary widely in various companies and
industries, so it should be used accompanied by other measures (Menon, 2013).

3.3. MAIN FINANCIAL INDICATORS: INDITEX'S NET SALES,
NET PROFITS, COSTS AND LIQUIDITY
As ROA and EPS are not decisive measures by themselves and they should not be used in
isolation (Menon, 2013), it is relevant to evaluate other organisational measures like net
sales, net profits or liquidity.
In the first place, Inditex had net sales for €20,900 billions with a net profits of €2,882 in 2015
and a regular cash flow of €3,897 billions (Inditex, 2016: 20).
Inditex also had good liquidity cash or cash equivalents, more than €5 billions in 2015.
(Inditex, 2016: 227) and this way, the company is not exposed “to significant liquidity risk”, as
it keeps enough “cash to meet outflows” (Inditex 2016: 197).
In contrast, payments made to suppliers for the purchase of raw materials, goods and
services were €12,943 and employee´s wages €3,335 (Inditex, 2016: 150). Therefore, Inditex
costs were considerable, but the company is profitable after all, which, is a successful model.
To emphasise and explain the importance of these main financial indicators of Inditex, its
competitors net sales were as follows: “H&M with $20.2 Billion, Fast Retailing (Uniqlo) $16.6
Billion, Gap $16.4 Billion, Primark $7.5 Billion, Abercrombie & Fitch $3.7 Billion, Mango $2.1
Billion” (Loeb, 2015).
As noted above, Inditex net sales were bigger than its competitors, which, means that the
company is leading the industry today. However, H&M is very competitive as it had 19% sales
increase (Hennes & Mauritz, 2016: 1) and it will remain being an important competitor due to
its good financial results.
3.4. COMPANY'S GOALS AND STAKEHOLDER EXPECTATIONS
The relationship of Inditex with its stakeholders seems to be solid and reliable.
Inditex (2016b) states that dialogue with stakeholders is crucial. Indeed, “in order to respond
to the expectations of each different group, Inditex remains in constant communication with
them so that the issues that are of greater interest or concern to them can be identified”
(Inditex, 2016b).
Under those circumstances, the principal Inditex's stakeholders are shareholders, employees,
customers, environment, community and suppliers.
To illustrate this point and explain the company's goals and relationship with these groups'
expectations, it will be exemplified the relationship of Inditex with employees and

communities.
First, to meet employees expectations and Inditex's goal of keeping a “highly-motivated
team”, the company has hired 152,854 people of 90 diverse nationalities (Inditex 2016: 80)
and management's employees have access to shares plans (Inditex 2016: 117).
Moreover, there is no gender discrimination to keep a high morale in the work-team because
76% of workers are women and 24% are men (Inditex, 2016: 144).
Second, Inditex approach to communities is based on “ensuring the programmes developed
have the broadest possible reach and impact” (Inditex, 2016b) and to meet this goal, the
company has invested more than 35 millions in communities and have donated more than 1
million products and have supported 361 organisations (Inditex, 2016: 144).
As have been shown, Inditex relationship with its stakeholders is close and it includes various
groups.
In summary, it is successful but some of these indicators could be improved in the coming
years, for instance, it is possible to invest more than €35 millions in the communities with net
profits near to €3 billions, especially, in developing countries where working conditions could
be tougher.

The report has discussed the capital structure of Inditex, its benefits and possible flaws, the
debt to equity ratio and its impact in the organisation, the characteristic of the equity issued by
Inditex, the comparison of Inditex with other companies in the same industry, its alignment
with the organization's goals and certain features to measure the financial performance,
among others.
Following this, the most notorious findings are that the Inditex capital structure is, indeed,
successful and it has generated benefits for all stakeholders, which, allows the company to
pay dividends, even, in the circumstances of global crisis and when competitors were
struggling to maintain the growth.
In effect, the financial performance of the company is excellent as it has provided an interest
rate of 754% for Inditex's shareholder since the first time equity was issued and most of the
critics are non-financial, like critics to the management of Inditex in developing countries and
workers exploitation by outsourced companies.
In summary, “I strongly believe that Inditex has a huge growth potential and since the stock
CONCLUSIONS4

price is currently undervalued, it is a company to take into consideration and a good
investment opportunity” (Surrador do Couto, 2014: 54).
RECOMMENDATIONS
►It is suggested to raise the investment in communities as the quantity already invested is
still humble for the company revenues. It could be beneficial to the company because it would
increase the organisational reputation and corporate social responsibility perception.
► It is recommended to open a small percentage of the company's shares to diverse
shareholders because current shareholders mostly represent the same group. In effect, a
small percentage of shares to diverse groups will not affect the decision making in Inditex and
it would provide more investments opportunities and increase funds.
► It is advisable to continue the capital structure and equity strategy of Inditex as it has been
demonstrated to be financially successful and satisfy stakeholders' expectations.

Bloomberg Markets (2016) Industria de Diseño Textil SA. Online at:
http://www.bloomberg.com/quote/ITX:SM [Accessed: 18 July 2016].
Bloomberg Markets (2016b) GAP. Online at: http://www.bloomberg.com/quote/GPS:US
[Accessed: 19 July 2016].
Bloomberg Markets (2016c) H&M. Online at: http://www.bloomberg.com/quote/HMB:SS
Chaudhuri, S. & Kowsmann, P. (2016) Zara Owner Inditex Stays Ahead of the Competition.
The Wall Street Journal. Online at: http://www.wsj.com/articles/zara-owner-inditex-profit-
beats-forecasts-1465968167 [Accessed: 17 July 2016].
Financial Times (2016) Equities: Industria de Diseño Textil. Online at:
http://markets.ft.com/research/Markets/Tearsheets/Financials?s=ITX:MCE [Accessed: 17 July
2016].
Financial Times (2016b) H&M. Online at:
http://markets.ft.com/research/Markets/Tearsheets/Financials?s=HM+B:STO [Accessed: 17
REFERENCES5

July 2016].
Gallo, A. (2015) A Refresher on Debt-to-Equity Ratio. Harvard Business Review. Online at:
https://hbr.org/2015/07/a-refresher-on-debt-to-equity-ratio [Accessed: 18 July 2016].
Gallo, A. (2016) A Refresher on Return on Assets and Return on Equity. Harvard Business
Review. Online at: https://hbr.org/2016/04/a-refresher-on-return-on-assets-and-return-on-
equity [Accessed: 18 July 2016].
Google finance (2016) Inditex. Online at:
https://www.google.co.ve/?gws_rd=ssl#q=inditex+share+price [Accessed: 18 July 2016].
Hennes & Mauritz (2016) Full Year Report. Online at:
http://about.hm.com/content/dam/hm/about/documents/en/cision/2016/01/1642932_en.pdf
Inditex (2015) Annual report 2014. Online at:
https://www.inditex.com/documents/10279/175443/4.+Cuentas+consolidadas+2014versi
%C3%B3n+ingl%C3%A9s+COMPLETA.pdf/3db38f4d-5532-4eda-b8fa-1db72f9836dc
Inditex (2016) Annual report 2015. Online at:
https://www.inditex.com/documents/10279/18789/Inditex+Anual+Memory+2015+web.pdf/d8c
e551b-fad0-4294-b160-03160cde32dd [Accessed: 18 July 2016].
Inditex (2016b) Stakeholder engagement. Online at:
https://www.inditex.com/en/sustainability/managing_sustainability/stakeholder_engagement#p
anel_1 [Accessed: 19 July 2016].
Loeb, W. (2015) Zara Leads In Fast Fashion. Forbes. Online at:
http://www.forbes.com/sites/walterloeb/2015/03/30/zara-leads-in-fast-fashion/#7fb39a5061d7
Menon, C. (2013) The Limitations of Earnings Per Share. Morning Star. Online at:
http://www.morningstar.co.uk/uk/news/105269/the-limitations-of-earnings-per-share.aspx
Nasdaq (2011) Earnings per share. Online at:
http://www.nasdaq.com/investing/glossary/e/earnings-per-share [Accessed: 18 July 2016].
Surrador do Couto, G. (2014) Equity Valuation of Inditex. Catholic University of Lisbon.
Online at: http://repositorio.ucp.pt/bitstream/10400.14/15641/1/Equity%20Valuation%20of
%20Inditex.pdf [Accessed: 17 July 2016].
Tudó, N. Hernández, H. & López, A. (2011) Qualitative and Quantitative Analysis of Inditex.
University of Barcelone. Online at:
http://diposit.ub.edu/dspace/bitstream/2445/46831/1/Qualitative%20and%20Quantitative
%20Analysis%20of%20Inditex.pdf [Accessed: 17 July 2016].

APPENDIX 1
Source: Inditex´s income forecast (Surrador do Couto, 2014: 59)
APPENDICES6

APPENDIX 2
Source: Industria de Diseño Textil SA (Bloomberg Markets, 2016)

APPENDIX 3
Source: Inditex’s sales growth (Surrador do Couto, 2014: 33)

APPENDIX 4
Source: Historical Income Statement, Balance Sheet, and Cash Flow Statement (Surrador do
Couto, 2014: 56)

Mario Samuel Camacho
Sociologist
MSc. in Business & Management
camacho16@gmail.com

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