Company background
I.T Limited (0999.HK) is an investment holding company based in Hong Kong. It was listed on the main board of The Hong Kong Stock Exchange on 4-March-2005. The company offers a wide range of apparel products. It sells its products as well as offers a variety of national and international brands through its network of retail stores. As of February 28, 2011, it operated 392 stores in Hong Kong and Mainland China.

Objective
To undertake a comprehensive analysis on the financial performance of I.T. Limited. Detailed financial ratio analysis will be performed. An estimation of the firm’s cost of equity capital and weighted average cost of capital will also be provided.

Horizon of analysis
We will focus on its performance in …show more content…

Return on Equity (ROE)
The company has increased its ROE along the years despite the special year 2008/09. The latest ROE is actually a high return, 21.06%. So what are the main drivers of such high return? By utilizing DuPont analysis, the reason for return growth can be found:
ROE = Net Profit Margin x Asset Turnover x Financial Leverage

The net profit margin is increasing throughout the years. At the same time, since the financing ability of the company has increased, the financial leverage also increased. These two factors drove the ROE up, offsetting the diminishing effect on ROE by asset turnover. The asset turnover actually decreased in last two fiscal years, indicating the efficiency of turning asset to revenue decreased. It is a bit worry to see the ratio decreased from 1.6 to 1.17 in these 2 years. It may indicate that the asset size of the firm is too large, further expansion may not bring further increase in revenue. This may be an indicator of the firm has passed its optimum point and management must take extra care in evaluating whether the company should invest in expanding more retail stores or not.

Extended DuPont analysis breaks down net profit margin into tax burden, interest burden, and EBIT margin. Tax burden of the company is actually increasing, i.e. it has to pay more effective tax hence impacting the net profit margin. But it’s still fine as the effective tax rate is still at about 20%, which should be quite low when compared to