Cash flow statement analysis

Table #1 presents Inditex’s cash flow statement. Funds from operations increased by 2,317 mln
euros, comparing to 2018, and comprised 6,695 mln euros in 2019. Most of the change was caused
by the increase in amortization, which was a result of the acquisition of assets related to stores.
There was also a significant change in working capital; it grows by 159%, from -349 mln euros in
2018 to 205 mln euros in 2019, due to sharp increase in inventories and receivables. As for the
investing activity of the company, in 2019 Inditex invested more in current financial investments,
933 mln euros (204 %) higher than in 2018. Furthermore, in 2019 payments related to lease, which
were the part of cash outflows from financing activities, appeared.
Table #1. Cash flow statement.
(AMOUNTS IN MILLIONS OF EUROS) 2019 2018 Absolute change

PROFIT BEFORE TAXES AND NON-CONTROLLING INTEREST 4,681 4,428 253

Amortisation and depreciation 2,826 1,100 1,726

Foreign exchange translation differences (19) (33) 14

Provisions for impairment 244 20 224

Results from companies consolidated by equity method (61) (54) (7)

Lease financial expenses 142 -

Other 90 (14) 104

Income tax (1,207) (1,070) (137)

FUNDS FROM OPERATIONS 6,695 4,378 2,317

Variation in assets and liabilities    

Inventories 201 (70) 271
Receivables and other current assets (10) (142) 132

Current payables 14 (137) 151

CHANGES IN WORKING CAPITAL 205 (349) 554

CASH FLOWS FROM OPERATING ACTIVITIES 6,900 4,029 2,871

Payments relating to investments in intangible assets (238) (230) (8)

Payments relating to investments in property, plant and equipment (914) (1,391) 477

Collections relating to divestments of property, plant and equipment 40 159 (119)

Collections relating investment in other financial investments 70 24 46

Payments relating investment in other assets (7) (23) 16

Collections relating investment in other assets 63 43 20

Changes in current financial investments (1,390) (457) (933)

CASH FLOWS FROM INVESTING ACTIVITIES (2,377) (1,875) (502)

Collections relating to non-current financial debt - 4 (4)

Payments relating to non-current financial debt (3) (2) (1)

Changes in current financial debt (49) 73 (122)

Payments related to leases (fixed rents) (1,836) - (1,836)

Dividends (2,741) (2,335) (406)

CASH FLOWS USED IN FINANCING ACTIVITIES (4,629) (2,260) (2,369)

Net increase in cash and cash equivalents (106) (106) 0

Cash and cash equivalents at the beginning of the year 4,866 4,931 (65)

Effect of exchange rate fluctuations on cash and cash equivalents 20 41 (21)

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 4,780 4,866 (86)

Sources and uses of funds

Table #2 presents sources and uses of funds in Inditex for 2019 year. Rights of use, current financial
investments and other non-current liabilities present the main users of funds. The specificity of the
industry suppose the leases of commercial premises, which allows the company to be engaged in
business activities. Primarily new leases and the impacts associated with the revaluation of
extension or exit options that have been exercised as well as the renegotiation of agreements that
modify the term and/or future rent cause the changes for the year. Changes in Current Financial
Investments are mainly associated with the increase in investments in money market investment
funds and fixed-income securities, with maturities ranging from three to twelve months. As for the
sources of funds, the main ones are current and non-current lease liabilities.

Table #2. Sources and uses of funds.

User Source
(AMOUNTS IN MILLIONS OF EUROS) 31/01/2020 31/01/2019
s s
ASSETS  
NON-CURRENT ASSETS 16,977 11,064
Rights over leased assets - 464 464
Rights of use 6,043 - 6,043
Other intangible assets 410 346 64
Goodwill 207 206 1
Property, plant and equipment 8,355 8,339 16
Investment property 21 20 1
Financial investments 249 267 18
Other non-current assets 456 564 108
Deferred tax assets 1,236 858 378
CURRENT ASSETS 11,414 10,620
Inventories 2,269 2,716 447
Trade and other receivables 780 820 40
Income tax receivable 174 108 66
Other current assets 78 162 84
Other financial assets 14 20 6
Current financial investments 3,319 1,929 1,390
Cash and cash equivalents 4,780 4,866 86
TOTAL ASSETS 28,391 21,684
   
EQUITY AND LIABILITIES  
EQUITY 14,949 14,682
Equity attributable to the Parent 14,913 14,653 260
Equity attributable to non-controlling interests 36 30 6
NON-CURRENT LIABILITIES 6,136 1,618
Provisions 217 229 12
Other non-current liabilities 380 1,072 692
Financial debt 6 5 1
Lease liability 5,163 - 5,163
Deferred tax liabilities 370 312 58
CURRENT LIABILITIES 7,306 5,383
Financial debt 32 84 52
Other financial liabilities 40 47 7
Lease liability 1,649 - 1,649
Income tax payable 142 153 11
Trade and other payables 5,443 5,099 344
TOTAL EQUITY AND LIABILITIES 28,391 21,684
TOTAL 8,733 8,733

Capital structure
Capital structure of the company in 2018, 2019 and 2020 is presented in the Table #3.

Table #3. Capital structure.

(AMOUNTS IN MILLIONS OF EUROS) 31/01/2020 % of total 31/01/2019 % of 31/01/2018 % of total
total
EQUITY AND LIABILITIES          
EQUITY 14,949 0.53 14,682 13,522 0.67
0.68
Equity attributable to the Parent 14,913 0.53 14,653 13,497 0.67
0.68
Equity attributable to non-controlling interests 0.00 30 25 0.00
36 0.00
NON-CURRENT LIABILITIES 0.22 1,618 1,536 0.08
6,136 0.07
Provisions 0.01 229 259 0.01
217 0.01
Other non-current liabilities 0.01 1,072 1,005 0.05
380 0.05
Financial debt 0.00 5 4 0.00
6 0.00
Lease liability 0.18 - - - -
5,163
Deferred tax liabilities 0.01 312 268 0.01
370 0.01
CURRENT LIABILITIES 0.26 5,383 5,173 0.26
7,306 0.25
Financial debt 0.00 84 12 0.00
32 0.00
Other financial liabilities 0.00 47 105 0.01
40 0.00
Lease liability 0.06 - - - -
1,649
Income tax payable 0.01 153 151 0.01
142 0.01
Trade and other payables 0.19 5,099 4,906 0.24
5,443 0.24
TOTAL EQUITY AND LIABILITIES 28,391 1.00 21,684 20,231 1.00
1.00

The most part of the capital accounts for equity, especially for equity attributable to the Parent. As at
31 January 2020, Inditex’s share capital amounted to €93,499,560.00 represented by 3,116,652,000
shares. Although the share of equity declines during the considered period from 0.67 % in 2018 to
0.53 %, the absolute amount remains practically the same over the period (see Graph #1).

Graph #1. Capital structure.

 ca pita l structure, mln euro s
2020 2019 2018
14,949 14,682
13,522

7,306
6,136
5,383 5,173

1,618 1,536

Equity Non-current liabilities Current liabilities

The reason of this fact lies in a sharp increase in current and non-current liabilities in 2020, from
about 5,300 and about 1,500 mln euros in 2018-2019 to 7,306 and 6,136 mln euros in 2020
correspondingly. There are lease liabilities, already mentioned above, that contribute to the
significant growth. With the release of IFRS 16 “Leases”, Inditex has adopted the modified
retrospective transition method with the cumulative effect of the initial application of the standard,
recognized as an adjustment to reserves at 1 February 2019. This enables the asset to be valued
retroactively as if the standard had applied since the beginning of the lease or, for an amount equal
to the liability adjusted by the prepaid or accrued payments. Hence, these changes affected the
capital structure.

According to the Table #3, the greater part of the liabilities, except the lease liabilities, accounts for
trade and other payables (19 % of the total capital). The detail of Inditex's bank borrowings and
obligations under other financial operations is as follows:

31/01/201 31/01/201 31/01/201 31/01/201

(AMOUNTS IN MILLIONS OF EUROS) 31/01/2020
9 8 7 6
8 1
61,4 8,5
Loans 26 2 2
8 1
61,4 8,5
Current 26 2 1

- - - -
Non-current 1
1
0,8 2,5
Other Financial operations 13 3 4
0,3 1,7
Current 7 8 1
0,5 0,8
Non-current 6 5 3
Total 9 1 62,2 1
 39 0 6 1

We can see that although the amount of debt fluctuates during the period from 2016 to 2020, its
share of total liabilities stays insignificant. The company mostly uses current loans. Inditex possess
also other financial liabilities that suggest finance leases. The debt to equity ratio equals to
39/14,949=0,0026 in 2020, which is quite low. It can be concluded that capital structure is funded
from equity, while its debt is negligible. The equity strategy of the company consists of reinvestment
of generated cash flows, the amount of which is quite good. The company concentrates on the
expansion, opening new stores.

Market position

Inditex shares closed at 30.37 euros per share on 31 January 2020, which is 24.7% higher than last
financial year. The average daily trading volume was approximately 6.1 million shares in the year to
that date. In the same period, the Dow Jones Stoxx 600 Retail rose by 17%, while the Ibex 35 gained
3%. Inditex's market capitalization stood at 94.653 billion euros at the end of the period, up 933%
on 23 May 2001, when its shares were admitted to trading, while the Ibex 35 fell by 3% in the same
period. The dynamics of market capitalization is presented in Graph #2. It can be seen that there was
a decline in the 4th quarter of 2018.
Graph #2. Market capitalization.

Ma rket Ca pita liza tio n, bln euro s Graph #3 presents the

110.00 company’s market
100.00 capitalization, averaged
90.00 by quarters, and cost of
80.00
equity in the period from
70.00
2016 to 2019. In the case
60.00
of Inditex the cost of
50.00
equity is practically
40.00
15 15 15 15 16 16 16 16 17 17 17 17 18 18 18 18 19 19 19 19 equals to cost of capital,
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
as the equity share is
almost 100%. Although
the structure of the capital does not significantly change over the period, cost of equity declines. It
reaches it minimum in 2017, which is the highest point for market capitalization.

Graph #3. Market capitalization and cost of equity in 2016-2019.

 Market capitalization and cost of equity
110 11.00%

100 10.00%

90 9.00%

80 8.00%

70 7.00%

60 6.00%

50 5.00%

40 4.00%
2016 2017 2018 2019

Market capitalization, mln euros Cost of equity