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200821 Financial Analysis of Kathmandu Holdings Limited: Part B Assignment Answer

200821 Financial Reports for Decision Making 

Quarter 1 2019 Assignment – Part B  

Topic: Analysis of Financial Position / Performance  

Length: 1 500 words maximum 

Part B requirements

Part B requires relevant financial analysis of Kathmandu Holdings Ltd for the financial years 2017 and 2018. This involves answering the following questions in your own words (i.e. do not simply “cut and paste” information from the Annual Report or any other source). As with Part A, you must applying critical thinking concepts when explaining and justifying your choices. Make sure all answers are fully referenced using the Harvard WesternSydU referencing system and include a reference list at the end of your assignment. Guidelines on using the Harvard WesternSydU referencing system are available from: http://library.westernsydney.edu.au/main/guides/referencing-citation (also see note on page 2). 

Question 1: 

The following quote, regarding Kathmandu Holdings Ltd, appeared in an article in the Sydney Morning Herald on 19 September 2018 (a copy of the full article is available on vUWS): “...... a huge jump in sales that has boosted its annual profit by more than a third. The 165-store chain on Tuesday revealed its Australian sales grew 11.6 per cent in the second half of the 2018 financial year on a same-store basis (which removes the impact of opening or closing stores) - well ahead of most retailers in a market where clothing and apparel sales are growing at only 2.7 per cent annually....” Consider the quote plus the financial statements (and supporting notes) from both the 2017 and 2018 Annual Reports when answering the following questions. (a) Which “profit” figure is the quote referring to? Justify your answer with supporting information from the financial statements. Do you think this is the profit figure shareholders would be most interested in? Be sure to provide supporting discussion to justify your decision. (maximum 300 words) (b) We know sales growth does not always equate to a good overall performance for an organisation. Using four ratios, compare the performance of Kathmandu in 2017 to that of 2018. Which year appears to have the better performance? Why? Ensure you justify why the ratios you have chosen are the most relevant and ensure you analyse the results, don’t just describe the ratio values.  (maximum 700 words) 

Question 2: 

(a) Identify what you consider to be the one most important operating capability ratio for a retailer and justify why you have selected this ratio. (maximum 200 words) (b) Using the ratio identified in part (a), compare operating capability for Kathmandu from 2017 to 2018. Which year appears to have better managed operating capability with regard to this one area? Be sure to analyse and explain why, not just describe the ratio value. (maximum 300 words) 

NOTES: 

1. Where relevant, ensure the notes to the financial statements are read in conjunction with the financial statements themselves. 2. Ratios must be selected from those identified by Cunningham et al (2019). Use of ratios other than those identified in the textbook and discussed in class will not gain any marks. 3. Include all supporting ratio calculations in an Appendix, not in the body of your assignment. This is not included in the word count.

Answer

CLOTHING; OUTDOORS

Question 1

(a) The analysis has been done on the Australian company Kathmandu Holdings Limited. The sales aspects of the company have been focused on. The article referred to the profit figure of sales, as the sales of Kathmandu Holdings Limited grew by 11.6% in Australia.

There is an increase in the same store sale by 4.4%. Increase in the sales margin has contributed to more profit margins. Gross margin of the group increased to 63% and gross margin of Kathmandu was 64.1% in 2018 (Kathmandu holdings, 2018). Improvement in the profit can be attributed to the increased sale of fuel. From the financial report of 2018, it is clear that the sales of the company have made a significant improvement. The sales have increased by 11.7% in 2018 from the previous 2017. In 2017, the sale was $445.3m and in 2018 this sale figure increased to $497.4m (Kathmandu holdings, 2018).

The shareholders of Kathmandu are interested in improvement in sales. The shareholders of the company get benefited from increased profit generation.

Thus, improvement in sales of Kathmandu can help the company to increase its profit. Thus, the shareholders are bound to get a dividend from a better profit figure. According to Holsapple et al. (2014), the share of the company also increases with improvement in sales performance. There is a dividend of 11% per share for the shareholders. Increased share margin has helped the company to improve its dividend by 15.4% in 2018 from the previous year 2017.  

Improvement in sales is believed to contribute to the enhanced shareholder value. Thus, the ability of the organisation to increase sales leads to an increase in dividends and it can further encourage better capital gains for the equity owners. The shareholders are equity owners and they are benefited from increased sales. 

Shareholders of the company also are likely to benefit form return on equity generated. In 2017 the Kathmandu Holdings have been able to generate a ROE of 8.67% in 2017 and 8.23% in 2018. This means the Kathmandu holdings is generating a profit of $8.67 for every $100 of sales in 2017 and $8.22 for $100 of ales in 2018. As shareholders equity is total assets less debts owed by the company the ROE can be viewed as the return on the net assets employed by the company. As can be seen the Kathmandu Holdings is not able to grow the ROE in 2018 and in spite of a general growth revenue by 11.7%. both EBIT and Net income of the firm has increased sizably in 2018 but despite the same the ROE has declined in the most current year. Also, in comparison the ROE is slightly lower than the peer group in 2018. However, the ROE is not too conservative in both 2017 and 2018 and if the management can reduce the unemployed assets in the coming years the return on equity can be increased significantly in the coming 2-3 years (KathmanduHoldingsLimitedAR, 2017-2018)

It can be finally said that there is a strong correlation between improvement in sales and shareholders' Value created. Thus, management of Kathmandu needs to be careful in this respect and a better ROE coupled with an improving generation of revenue growth can be more value enhancing. 

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