H&M - Burberry

Problem 4: H&M and Burberry’s non-current assets

Question 1
(a) Ratio of land, buildings and equipment to sales
H&M: (420+222+7134) / 78346 = 9.9%
Burberry: (58.2+99.2) / 995.4 = 15.8%

(b) Ratio of depreciation to sales
H&M: (14+1750) / 78346 = 2.25%
Burberry: (1.9+27)/ 995.4 = 2.9%

The above ratios can be used to measure the efficiency of a firm’s investment policy. Burberry has a higher land, buildings and equipment to sales ratio as well as a higher depreciation to sales ratio. The higher the ratio of land, buildings and equipment to sales, the smaller the investment required to generate sales revenue and therefore the higher the profitability of the firm. Moreover, the ratio of depreciation to sales provides a measure of the level of non-cash expenditure in relation to total sales. Consequently, Burberry appears to be relatively more efficient in managing its assets in relation to the revenue generated than H&M.

Question 2
Depreciation = Book value x depreciation rate
H&M: Depreciation rate = 1750 / 7134 = 24.5%
Burberry: Depreciation rate = 27 / 99.2 = 27.2%

Question 3
(a) Adjustments to the beginning book value of H&M’s equipment
The necessary adjustment is equal to: original minus adjusted depreciation rate x average asset age x initial asset cost.
Equipment cost, 1/1/2007 13605
Depreciable cost 13605
Accumulated depreciation, 1/1/2007 6471
(accumulated depreciation= Cost- Book value= 13605- 7134= 6471)
Accumulated depreciation/ Depreciable cost 47.56%
Depreciable life 7.8 years
Average age of equipment 3.7 years (47.56% * 7.8)

If H&M used the Burberry’s depreciation rate, the decrease in the beginning book value would be original minus adjusted depreciation rate x average asset age x initial asset cost = (24.5% - 27.2%) * 3.7 * 13605 = 135914.

(b)