Appendix A: Calculations and Formul

ROE: Earnings From Continuing Operations/[Total Equity(t)+Total Equity(t-1)/2]*100%

ROCE: Net Income to Common Excl. Extra Items/[(Total Common Equity(t)+Total Common
Equity(t-1)/2]*100%
Gross Margin= Gross Profit / Total Revenue*100%
Operating Margin =Operating Income/ Total Revenue*100%
Net Profit Margin=Net Profit/Total Revenue*100%

2.Evaluation

2.1 Return on Investment Aspect

2.1.1 ROE ( Return on Equity)

In 2021, H&M and ZARA (part of the Inditex Group) are almost even in

terms of profitability. Based on Return on Equity (ROE) data for 2021,

H&M's Return on Equity (ROE) is 19.2% and ZARA's is 21%. As a

profitability indicator, ZARA's financial situation in 2021 is better than

H&M's. Considering the actual development of different companies, The

Return on Equity (ROE) numbers for both companies indicate that they

are in a healthy financial position for 2021. Dupont analysis is a financial

analysis method that calculates a company's return on equity (ROE) by

breaking it down into several parts, allowing for a more detailed

understanding of the factors that influence ROE numbers. Dupont's

formula is :ROE= net profit margin x asset turnover x equity multiplier.

Through calculation, the Return on Equity (ROE) of H&M and ZARA is

related to the net profit margin and has a positive growth trend.
2.1.2 ROCE ( Return on capital employed)
When it comes to Return on Capital Employed (ROCE) , the two

companies are significantly different. ZARA's Return on Capital

Employed (ROCE) is almost twice that of H&M. In terms of capital

efficiency and management decisions, ZARA has shown better

profitability, which can bring good returns to the company and

shareholders. However, in terms of risk, a high Return on Capital

Employed (ROCE) also believes that ZARA will bear greater financial

risks, while H&M's performance is relatively stable.

In terms of Operating Profit Margin, ZARA reached 15.25% in 2021,

double H&M's 7.7%. Since the opm value is not affected by the

company's financial structure and non-operational factors, it means that

ZARA has a good ability to convert sales revenue into profits. For H&M,

high profit is a challenge, and it will also face many problems in the

company's business activities. Investors can intuitively understand the

profit level of the company through this data.

2.2 Profitability

2.2.1 Gross margin

Gross Profit Margin is an important indicator commonly used in financial

reporting, which can measure the profitability of a company in the

process of selling products or providing services.

In 2021, the Gross Profit Margin of ZARA and H&M will be 57.1% and

55.2%, respectively. Since the two companies have similar business

models, there is not much difference in this figure. Two relatively high

figures indicate higher levels of production and sales than comparable

companies. The Gross Profit Margin figure, which is higher than that of

the industry, is a positive sign that both companies are doing well in

production and retail sales. The variety of goods sold can be adjusted in

time according to seasonal changes.

2.3 Efficiency

2.3.1 Fixed Asset Turnover

By comparing the fixed asset turnover of the two companies, it can be

found that H&M is much higher than ZARA. H&M is as high as 84%

while ZARA is only 11%, which means that the number of fixed assets of

ZARA is lower than the industry average. In general, large companies

will invest more in fixed assets. ZARA's fixed asset turnover means that

management wants to use assets flexibly to deal with various problems.

2.4 Leverage

2.4.1 Debt Ratio

In terms of debt ratio, H&M's debt ratio is only 9.08%, which can be seen

that H&M's economic structure is relatively stable, its financial condition

is not easily affected by factors such as debt, and it is good at using its

own capital to expand its original scale. ZARA, on the other hand,

reached 44.9%, preferring to rely on debt to expand its business and make

investments.
2.4.2 Debt-Equity Ratio
By comparing the Debt-Equity Ratio of H&M and ZARA, it can be found

that H&M relies heavily on shareholders' equity, with a ratio of 27.2%,

which indicates that the company has a sound financial structure and can

effectively reduce financial leverage. In contrast, ZARA's ratio of 81.7%

means that the company relies too much on debt financing, and high

financial leverage brings high capital returns and increases investment

risks.
2.4.3 Time Interest Earned(Interest Cover)

For Time Interest Earned(Interest Cover), there is a significant difference

between the two companies, with an H&M value of 5.4%, indicating that

the company has some ability to repay interest. ZARA is only 0.5%,

representing insufficient profit in 2021, and there is a certain financial

risk. Consider the high interest rate environment in the market, and the

company's use of debt. ZARA relies too much on debt financing and

needs to adjust its financial strategy in time to cope with changes in the

market environment.
2.5 liquidity

2.5.1 Current Ratio

A Current Ratio provides information on a company's ability to service its

short-term debt. In general, a Current Ratio greater than 1 is good

performance because it means that the company has enough current assets

to cover its short-term liabilities. ZARA's ratio of 1.73 is higher than that
of H&M's 1.29, which means that he is more able to repay short-term

debts in the short term, and it also means that the funds are more liquid.

ZARA's higher Current Ratio means that the company pays more

attention to the liquidity of funds, while H&M's lower Current Ratio may

also be part of the financial strategy, conservative financial strategy can

effectively reduce short-term liabilities.

2.5.2 Quick(Acid Test) Ratio

Generally speaking, Quick(Acid Test) Ratio higher than 1 is a good

performance, and H&M's 1.27 and ZARA's 7.1 are both higher than 1.

ZARA's quick ratio is much higher than H&M, which means that ZARA

is more able to repay short-term debts in the short term, and the inventory

ratio in assets is relatively low.

2.6 market ratios

In 2021, H&M's Total Shareholders Return is only 26.4%, while ZARA's

is 82.2%. A higher value represents a better return for ZARA's

shareholders in 2021. ZARA performs better than H&M in the stock

market.