Fundamental analysis of INDITEX

INDUSTRIA DE DISEÑO TEXTIL, S.A.

CIF A15075062 Spain Textile IBEX35 seen 1434 times Analysis date 04 May 2020

Inditex is a textile company that owns multiple brands such as Zara, Massimo Dutti, Pull & Bear, Bershka, Oysho, Lefties and others. It has a surface area of stores that exceeds 5 million square metres and it is also improving its online business by selling 23% more than the previous year (14% of the total).


Inditex has been a very internationalised company for years, the percentage of sales by area is as follows:
  • Europe (excluding Spain) 46% of the sales
  • Asia 22.5% of the sales
  • Spain 15.7% of the sales
  • America 15.8% of the sales
The general vision of the business that the company gives in its presentations and reports is quite optimistic. We'll see about that.


The aim of this analysis is to understand what Inditex's business is like, how it is managed and whether it is an option to be incorporated into a Buy&Hold portfolio. We usually divide the analysis into 3 sections in order to organise ourselves better: the balance sheet, the income statement and the final valuation.


All the data shown in this analysis has been obtained from the CNMV website. You can consult other analyses such as this one in the list of all fundamental analyses.


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1 Balance Sheet Analysis

To begin with, we will outline the capital structure of INDUSTRIA DE DISEÑO TEXTIL, S.A., that is, what it spends the money on (and how much) as well as to whom it is owed (and how much). We will calculate some ratios and see their progression over time. We are going to organize it in the following points:
  • 1.1 Asset analysis
  • 1.2 Analysis of liabilities and equity
  • 1.3 Indebtedness
  • 1.4 Safety margin
  • 1.5 Liquidity/Treasury
  • 1.6 Working capital



1.1 Asset analysis

The structure of the assets will indicate the degree of immobilization of the resources of INDUSTRIA DE DISEÑO TEXTIL, S.A. That is, how much of its total assets are fixed assets (real estate, investments, goodwill, etc). In this case:
Immobilization = Fixed Assets / Total Assets = 59,80%



Inmovilization

Inditex's fixed assets remain between 50 and 60%, with no major variations except for the effect of including the rights of use on the balance sheet (IFRS 16). Broadly speaking, it unifies criteria for accounting for leases, and we should recall that Inditex has more than 5 million square metres of stores, most of which are leased. In the breakdowns of the balance sheet we will see which items are affected. In any case, it is only a change in the way of accounting for leases, it does not affect the quality of the business or our valuation.


We are going to break down the asset according to time, so we will make visible which part is current asset and which part is fixed asset. Its variation over time can give us information on profound changes in the company:


Breakdown of Total Assets

No deep changes, little can be said when you find a chart of this kind. A priori, Inditex is growing impeccably. Let us continue to break down fixed and current assets.


Breakdown of Fixed Assets

As we said, the asset is affected by IFRS 16 and the item of intangible assets is increased. Otherwise, a perfect graph. The current composition is as follows:


  • Tangible fixed assets (49,21%)
  • Other intangible assets (38,01%)
  • Deferred tax assets (7,28%)
  • Other assets Non-current (2,68%)
  • Investments accounted for using the equity method (1,45%)
  • Goodwill (1,22%)
  • Real estate investments (0,12%)
  • Non-current financial assets (0,02%)



We do the same with the current assets:


Breakdown of Current Assets

Exemplary growth also in Inditex's current assets. There is an increase in the item 'Other current financial assets' which corresponds to temporary financial investments, or what is the same, investments in investment funds, in money market assets and fixed income securities. This is where Inditex invests its liquidity while waiting to find strategic opportunities. The current breakdown of items is as follows:


  • Cash (41,88%)
  • Other current financial assets (29,20%)
  • Stocks (19,88%)
  • Customers by sales (6,84%)
  • Current tax assets (1,52%)
  • Other current assets (0,68%)



1.2 Liability Analysis

In this section we will see the structure of the liabilities of INDUSTRIA DE DISEÑO TEXTIL, S.A., which gives us information about the origin of the resources available to the company. It tells us where the money comes from and to whom it is owed. In order to know the proportion of the capital that belongs to the company against the one that belongs to others we have the following formula:
% Equity = Own Capital / Total Capital = 52,65%



Own capital

The equity ratio is very stable over the years. It has always sought to maintain healthy asset/liability ratios and has succeeded in doing so.


As with the assets, we will break down the items that make up each part of the liabilities. We will start with a grouped chart and then break it down:


Breakdown of Liabilities

Needless to say, the company's growth is enviable, making the net worth grow in a greater proportion. Despite this, it is interesting to see what it is made up of:


Breakdown of Equity

Most are reserves, which have stagnated slightly after growing year on year, possibly due to increased payout and a smaller increase in profits. We will continue to review this data in future analyses. The current breakdown is as follows:


  • Reserves (77,77%)
  • Profit attributable to the parent company (24,34%)
  • Issued capital (0,63%)
  • Minority interests (0,24%)
  • Share premium (0,14%)



We continue with the current liabilities:


Breakdown of Current Liabilities

In this case, the already mentioned effect of the rents appears, but apart from that, practically everything is debts with suppliers and almost no debts with credit institutions. The most important items that compose it are:


  • Suppliers (74,50%)
  • Other current liabilities (22,77%)
  • Current tax liabilities (1,94%)
  • Short term debts to credit institutions (0,44%)
  • Other short term financial liabilities (0,35%)



As for the fixed liabilities:


Breakdown of Fixed Liabilities

Fixed liabilities are increasing steadily and we see the effect of IFRS 16 again. The most important items in it are:
  • Other non-current liabilities (90,34%)
  • Deferred tax liabilities (6,02%)
  • Provisions Non-current (3,54%)
  • Long-term debt with credit institutions (0,10%)



1.3 Debt Analysis

Once we have seen the composition of the balance sheet in general terms, we are going to review some key figures. A very important concept in the valuation of a company is the debt, since a company that does not have debts cannot go bankrupt. The progression of the debt ratio tells us how big a company's debts are in relation to its equity:
Indebtedness = Outside Capital / Equity = 89,92%



Indebtedness

The rate of indebtedness is very controlled, but even better is its stability over time. There are no stages of more or less indebtedness. To put it in context, the average debt of the IBEX35 is 880%, 8 times higher than that of Inditex. We are going to represent the indebtedness on EBIT to put the data into context:


Indebtedness on EBIT

It has always been below 200% and now that the rights to use rent are included in the liabilities, it increases somewhat more. In principle it seems controllable, but this will be better shown in the EBIT graph together with the financial expenses that we will see a little further down.


1.4 Safety Margin

In order to operate properly, companies normally need their fixed assets to be covered by their own capital plus long-term debts. This is known as the safety margin. Otherwise it would mean that part of the company's fixed assets (offices, land, machinery, financial assets...) have to be paid for with short-term debt, which can be quite dangerous. Like everything else, this is not something that has to be complied with yes or no, but it is a sign of good health.
Safety Margin = Fixed Assets / (Equity + Fixed Liabilities) = 124,20%



Margin of Safety

The safety margin remains above 100% without any problems.


1.5 Liquidity/Treasury

Liquidity = Current Assets / Current Liabilities = 156,22%
If we represent him over time:


Liquidity

Liquidity must always be close to 100%, otherwise there may be problems in paying debt maturities or short term payments. In the case of INDUSTRIA DE DISEÑO TEXTIL, S.A., it has more than adequate liquidity, it can deal with short-term debts without any problem.


1.6 Working capital

The working capital indicates the amount of current assets that are financed with permanent resources. The higher it is, the fewer financing problems there will be if there are quarters with less turnover. To evaluate working capital we relate it to current assets and sales:
Working Capital on assets = (Net Worth - Fixed Assets) / Current Assets = 35,99%
Working Capital on sales = (Net worth - Fixed assets) / sales = 14,52%



Working Balance

More of the same, positive and very constant background. No problems are foreseen for Inditex on this side.


2 Analysis of the Income Statement

When studying the income statement, we will calculate the following ratios and their progression over time:
  • 2.1 Analysis of income, expenses and profit.
  • 2.2 Return on Equity (ROE) y Return on assets (ROA)
  • 2.3 Margin on sales



2.1 Analysis of income, expenses and profit




In Fundamental Analysis we like to show the FGO (funds generated by operations) together with the net profit, which is the money the company has managed to earn. To calculate it, we add the amortizations to the net profit and thus avoid possible adjustments by decreasing this concept. Some companies may be forced to make up the profit in this way if they have not done particularly well.
FGO = Net Profit + Depreciation



Profit vs Funds from Operations

Profit continues to grow year on year, but it seems that in the last few quarters it has grown somewhat less, we will see later that margins have decreased very slightly. On the other hand, FGO has shot up in these last two quarters due to the effect of increasing the amount amortised. According to Inditex's report, "Fixed rental costs have been replaced in the profit and loss account by amortisation and financial costs, while variable rental costs remain in the line of operating costs". In summary, the items have been changed but the expense is the same and therefore the increase in FGO is not due to an improvement in business.


Inevitably, for a company to make money it needs revenue, so let's see how it looks:


Sales

Sales are growing continuously, a sign that the business is doing well and that despite their size they manage to continue to reach more customers and generate more income.


In the breakdown of the expenses we can see if any item shoots up more than it should or if there are changes in its proportion:


Expenses

Expenses remain very stable, except for the effect mentioned above, which changes operating expenses to amortization expenses. Otherwise there is nothing unusual.


In addition to the operating costs, we have to take into account the financial costs. A company can have a very large debt, but if the expenses it generates are bearable with the EBIT there is no problem. Therefore, we will represent both data:


Financial Expenses vs EBIT

Financial expenses are negligible compared to EBIT, another point in Inditex's favour.


2.2 Return on equity (ROE) y Return on assets (ROA)

The ROE, or Return on equity, measures the profits of INDUSTRIA DE DISEÑO TEXTIL, S.A. by comparing them with its own funds. It is a way of measuring the profitability and quality of business management. It only makes sense to see it that way when it is a sustained ROE over time. A high ROE in an isolated financial year can be caused by an increase in debt, which gives a greater capacity to buy assets and therefore an increase in profit. The problem comes later, when that debt has to be paid off and expenses skyrocket:
ROE = Net Profit / Equity = 24,40%



ROE

The ROE of inditex is quite high and also sustained over time. It is a fact that indicates that the business is good and well managed. As a curiosity, the average ROE of the IBEX35 is 7.68%. As for the ROA, it is very similar except that it is affected by variations in the size of the asset and the ratio decreases. In any case, it is a good figure.


ROA = Net Profit / Assets = 12,82%



ROA

2.3 Margin on Sales

We are going to calculate the margin on sales of INDUSTRIA DE DISEÑO TEXTIL, S.A., that is to say, what proportion of the sales ends up being a constant and significant profit:
Margin on Sales = Net Profit / Sales = 12,87%



Beneficio over Sales

The margin on sales remains very stable and relatively high. In the last 3-4 years we have seen a slight but progressive fall in the ratio, this is another way of seeing the gentle slowdown in profit growth and one that will have to continue to be monitored.


We can also see how Inditex's margins behave. On the one hand, we have the operating margin, which tells us what proportion of sales ends up being EBIT. On the other hand, the operating margin, which tells us what proportion of sales ends up being profit before tax.


Margins

In this graph we see the same thing, the margins are very stable, but they decrease slightly. If we look at the proportion of expenses, there is no particular item to blame for this. It is simply that Inditex's business is not as good as it was 4 or 5 years ago. However, this does not mean that it has stopped being excellent, only that it is beginning to run into a brake, nothing can grow indefinitely. When companies begin to be very large it is increasingly difficult to maintain the same rhythm of growth and that of Inditex was high.


3 Dividend and general valuation




INDUSTRIA DE DISEÑO TEXTIL, S.A. currently has 3,116,652,000 shares in circulation, with a treasury stock of 0.38%. It has a EPS of 1.17 and is currently paying a dividend of 0.88 per share per year, i.e. a payout of 0.75%. A figure that is somewhat high, but very reasonable considering the company's track record. In conclusion, at current prices (23.25) it gives a dividend yield of 3.78%, the book value is 4.80 per share and the PER is 19.87. We believe that it is a good time to increase positions in Inditex, but be careful, always in moderation and maintaining an adequate diversification that will make us sleep peacefully.


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Balance, Income Statement, Cash Flow...
Employees 2,177 (55.90% women)
Profit 3,639M €
Earnings per share 1.17 €
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