Performance and sustainability

Part A: Performance and sustainability

Freshly armed with your new MBA, you have recently joined Asos plc in a management position. Your CEO regards competitor analysis as very important, and the company regularly produces internal reports on the companies regarded as key competitors. He passes you in the corridor one day and observes “Boohoo is nearly as big as us in terms of their market cap and they have a high PE ratio – maybe we need to keep a very close eye on them!”
Write a report for the CEO comparing the broad financial strengths and weaknesses of BooHoo as a competitor with those of Asos. You should focus on the financial performance and position of the companies, as well as a brief comment on the stock market’s view of both.
Given the current circumstances of Covid-19, the CEO is particularly interested in how the two companies compare in terms of financial performance, financial stability, and job security post Covid-19.

Required
Write the requested report comparing the financial performance and position of both companies as well as commenting on their future sustainability. Ensure that you make clear conclusions.
Note that your CEO is a busy executive with a strong marketing background but has limited experience of accounting. He will expect a clear and concise report. Some general guidance on acceptable report style follows:

Notes on general report style.
• Use the most recent full year accounts of Asos Plc and BooHoo Plc
• Give your report a title & provide an Executive Summary,
• Give a brief introduction to cover the issues to be analysed and the approach you will consider.
• Within the report don’t just show lots of calculations, explain what you infer from the numbers and ratios and how they support your conclusions and recommendations.
• Define any non-standard ratios used but demote detailed calculations, etc. to an appendix.
• Cite references, state assumptions made, mention other information that might be useful or further investigations you would have liked to conduct. Fully consider both financial and non-financial factors.
• Reach a conclusion and give clear advice. Make your report “as concise as is consistent with clarity”.
• Make use of supportive diagrams – especially those that emphasise the comparisons between companies.

Part B: Risk and return on equity of Asos Plc and BooHoo Plc

Your CEO is also interested in the cost of equity capital of Asos and Boohoo. He asks you to provide a comparison of the two companies in terms of equity risk and return, based on monthly prices between February 2016 and March 2021.

Required

Write a separate report that summarizes the results of your calculations, describes what you did to obtain them and what your thoughts are on how to interpret them against the background of the risk-return trade-off in financial markets. Please use stock price data mentioned above and the FTSE AIM 100 index to answer the following questions:
(a) What is each company’s return volatility over the sample period? What is each company’s compounded annual growth rate (of its stock price) over the sample period? How would you interpret that growth rate? (10 marks)
(b) What is each company’s beta with respect to the FTSE AIM 100 Index? How would you interpret your estimated betas? (10 marks)
(c) What is each company’s cost of equity capital? Please use the Capital Asset Pricing Model (CAPM). How would you explain any difference in the cost of equity capital to your CEO? (9 marks)
(d) How would you identify the amount of systematic risk and the amount of unsystematic risk in each stock, using the CAPM? You do not have to perform that calculation, but your CEO is curious about how this identification works. (6 marks)
(e) Are historical data suitable for judging the future development for these two stocks? (5 marks)