Topical Ratio Analysis for Prada

Statement of Analysis of Cash Flow…

Profitability Ratios
Profitability Ratios are a set of ratios that assess that are implemented to ascertain the capability of
a company to create earnings.

Profitability ratios are used by management and stockholders or investors to estimate or gauge the
capacity of the company to generate profit and shows well how the company makes use of its assets
to generate value and profit to shareholders.

We have analysed the profitability of Prada by calculating the following two ratios:

A) Gross Profit Margin

B) Operating Profit Margin

Gross Profit Margin ratio measures the profit the company has made after paying off its direct cost
of doing production or paying off the cost of goods sold. Whereas, the Operating Profit Margin ratio
measures the amount of profit the company has made after clearing its variable costs of production.

The Gross Profit Margin for Prada estimated at 75.68 as of 2021 percent has increased slightly by
about 4 percent. Year 2020 has recorded Gross Profit Margin of 71.95 per cent. The apparent
increase in the Gross Profit Margin of Prada from year 2020 to 2021 can attributed to a decline in the
cost of goods sold and increase in net revenues.

Such increase is favourable and indicates that Prada is financially stable and running more efficiently.

The Operating Profit Margin has increased considerably from being 0.83 percent in 2020 to rising to
14.54 percent in 2021. This growth can be ascribed to an increase in net sales or net revenues. The
users that are most affected by this ratio are managers who are in charge of operating profits. Other
users affected by this ratio also include shareholders, senior management, competitors, investors,
creditors, and suppliers.

Liquidity Ratios
Liquidity Ratios are important financial instruments used to measure the company’s ability to clear
off its current obligations of debt without the aid of additional funding.

Liquidity Ratios are used by the management, creditors, suppliers, stockholders to track whether the
company’s cash flow is improving or worsening.

We have analysed the liquidity of Prada by calculating the following two ratios:

A) Current Ratio
B) Quick Ratio
Current Ratio is the liquidity ratio that measures the competence of the company to pay off its short-
term debts and obligations within the period of a year. Whilst, Quick Ratio measures the potential of
company to use its quick assets or assets that are liquid to extinguish it liabilities.

The Current Ratio has increased marginally from being 1.34:1 in 2020 to roughly estimating at 1.52:1
in 2021. This increase can be credited to the company repaying off its debts and the decrease in the
company’s short-term debts. Such increase can also be traced to the rise in Prada’s current assets.

Increase in current ratio is favourable for Prada and indicative of sufficient amount of cash to clear
off its liabilities.

The Quick Ratio has also documented a conducive increase from 0.76:1 in 2020 to 1.04:1 in 2021.
This increase could mean that Prada has become more liquid than before and can therefore, provide
cash quickly in case of any unforeseen emergencies.

Such changes are beneficial to the company, will encourage more investors to invest in the company
and are an evidence of the company’s financial soundness.

The users that will be more impacted due to these ratios would be suppliers, creditors and
debt holders.

Efficiency Ratios
Efficiency Ratios are the ratios that are calculated to measure the company’s readiness to effectively
and skilfully uses it assets to create revenues and its potency to handle and maintain those assets
expertly.

Efficiency ratios are used by mostly by management and stockholders to ascertain whether the
company will productively utilize its resources such as its capital and company assets.

We have analysed Prada’s efficiency by calculating the following two ratios:

A) Inventory Holding Days

B)

Inventory Holding Days refer to the average time the company holds it inventory before selling it.

The Inventory Holding Days have depicted a slightly moderate decrease of average period from 358
days to 296 days. The reason behind this decline is that Prada has been able to convert its inventory
to sales quicker than before due productive and efficient inventory management and better
performance in sales.

Such a decline in the ratio of Inventory Holding Days is advantageous as it means less time is taken
for the stock in warehouse to be realised as sales.

The users much more afflicted due to these ratios are the management of the company.

Leverage Ratios
Leverage Ratios are the financial instruments that specify the level of the company’s acquired debt
and its power of repay it off.
Leverage Ratios are used by the management and the creditors to discover the company’s financial
strength with respect to assets, liabilities and equity.

We have analysed Prada’s leverage by calculating the following two ratios:

A) Liability to Asset Ratio

B) Equity to Asset Ratio

Liability to Asset Ratio is also known as debt to asset ratio and illustrates the amount of assets that
are financed through debt. On the other hand, Equity to Asset Ratio discloses the likeliness of the
company to settle its debt.

Year 2021 has witnessed a marginal reduction in the Liability to Asset Ratio of over one percent.
Such a change is convenient for Prada as it reveals that the financial risk for the company has
declined.

Equity to Asset Ratio has also reduced tediously in 2021 compared to 2020. This may be
unfavourable as it implies that a holding of assets of Prada by company and investors have increased
and can even come under the control of bank.

The severely afflicted users of these ratios would be creditors.

Investment Ratios
Investment ratios calculate the amount of profit made for every dollar invested.

Investment Ratios are used by the management, creditors and stockholders to determine if the
company is worth investing or not and also its profitability.

We calculated the following two investment ratios:

A) Return on Owners Equity

B) Return on Total Assets

Return on Owners Equity reveals the amount of money returned to the owners for the money they
invested or maintained in the company.

Return on Total Assets highlights the company’s total earnings or profits before taxes are levied and
interests are charged.

The ROOE for Prada has shot up but very mildly. This is due to increase in gains and revenues along
with lower expenses.

Whereas, the ROTA has also gone up but slowly. The reason behind this is the increasing net income
and because the company has utilized its assets productively to bring in more sales.

The users most affected due to these two ratios are stockholders.