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ACC601 Accounting for Management Decisions: Financial Statement Analysis Assessment Answer

International College of Management, Sydney

Subject Title
Accounting for Management Decisions
Subject Code
ACC601
Assessment
Group Assignment
Assessment total
25%

ACCOUNTING FOR MANAGEMENT DECISIONS – ACC601

Group Assignment – Date due: End of Week 12 Financial Statement Analysis

This assignment involves analysing the financial statements and other information relating to a number of Australian public companies. These companies are listed below.

Your group of a minimum of 3 and no more than 6 students must allocate these companies within the group to a group member and that group member is responsible for the calculations and analysis of that individual company. Some group members may be responsible for more than one company if you have less than 6 people in your group.

The assignment is divided into several tasks, some of which must be completed individually, that is, each member of the team is responsible for drafting an answer in respect of at least one of the listed companies. Other tasks require that the team come together to analyse the results provided by individual group members on each of the listed companies to provide a group answer.

Please note: it is a group assignment - so prior to submission - it is the responsibility of every member of the team to confirm that they agree with the answers provided by the team in relation to all companies. This provides an opportunity for all team members to help each other develop some analytical and interpretative skills.


Listed Company Name

Stock Code

Student Name

Student ID
Initial to confirm that you contributed a fair share to this assignment and agree
with all answers provided.
API Limited
API



Retail Food Group Limited
RFG



JB Hi Fi Limited
JBH



The Reject Shop Limited
TRS



Super Retail Group Ltd
SUL



Blackmores Limited
BKL



FACT SET

  • Go to the website for your allocated company and obtain the Income Statement and Balance Sheet for the company for the 2015/16 (Year 0) and 2017/18 (year 3) financial years. You will find this information in the relevant Annual Reports. I have provided links to some of these Reports.

TASKS

  1. Based on the information contained in these statements calculate for each company for the relevant financial years. You must show the formula used and your calculations.
  2. The Net Profit Margin;
  3. Current Ratio;
  4. Inventory Turnover;
  5. Asset Turnover Ratio;
  6. Leverage Ratio;
  7. Return on Equity;
  8. Return on Total Assets;
  9. Earnings per share (EPS);
  10. Net Debt to Equity Ratio; and
  11. Total Return to Shareholders. [40 Marks]
  12. Demonstrate and explain what would happen to the 2018 Return on Equity and the Net Debt to Equity Ratios if your allocated company just prior to the end of the 2018 financial year raised an additional $200 million loan from the bank, which it invested entirely in new plant and equipment. Assume that the immediate effect on sales and net profit was zero. [10 marks]
  13. Using the ratios calculated in Task 1 of this case study, compare and contrast the financial performance of the companies over the period of your analysis. [Provide a single agreed answer per team.] [15 marks]
  14. Use your analysis of the financial performance of the companies over the past 3 years to explain any differences in the Total Return to Shareholder between the companies over the past 3 years. [Provide a single agreed answer per team.] [15 marks]
  15. Compare and contrast the current market value of each company. Use the ratios you have collected, other information from the media to provide observations about the value of these companies (i.e. cheap or expensive?) [Provide a single agreed answer per team.] [20 marks]


TOTAL MARKS

  • 100 marks

Answer

Accounting for Management Decisions

Group Assignment

ACC601

Financial Statement Analysis

Introduction

This Financial Analysis Report analysis the financial statements of six listed companies of ASX. The financial reports for the year ending 2015-16, 2016-17 and 2017-18 have been used to perform the three year ratio analysis on these six companies. The ratios are then analyzed and compared to each other to comment on the following things:

  1. The effect on Equity and Net Debt to Equity Ratio if all the companies raise an additional $200 million loan from bank and invest it into new plant and equipment.  
  2. Comparing and contrasting the financial performance of the companies over the period of analysis.
  3. Analysis of the Total Return to Shareholders between the companies over the past three years.
  4. Comparing and contrasting the market value of each company.

The six companies used for calculation and comparisons are as follows:

  1. API Limited – API
  2. Retail Food Group Limited – RFG
  3. JB Hi Fi Limited – JBH
  4. The Reject Shop Limited – TRS
  5. Super Retail Group Ltd – SUL
  6. Blackmores Limited - BKL

The companies belong to a variety of industries like food and beverages, pharmaceuticals, electrical appliances, variety store chain, and nutritional supplements. Thus the trends can be compared across the industries to observe the market wide trend. 

Calculation of Ratios:


API LimitedYear 1Year 2Year 3

Ratio2015/16 (Ending 31 Aug 2016) 2016/17 (Ending 31 Aug 2017)2017/18 (Ending 31 Aug 2018)
a.The Net Profit Margin1.35%1.29%1.20%
b.Current Ratio1.341.321.33
c.Inventory Turnover8.648.778.88
d.Asset Turnover Ratio2.752.802.73
e.Leverage ratio0.630.620.67
f.Return on Equity9.92%9.60%5.99%
g.Return on Total assets6.07%6.16%5.57%
h.Earnings Per Share (EPS)0.110.110.10
i.Net Debt to Equity Ratio1.701.622.03
j.Total Return to Shareholders12.96%-12.99%30.95%


 Retail Food Group LimitedYear 1Year 2Year 3
 Ratio2015/16 (Ending 30 June 2016) 2016/17 (Ending 30 June 2017)2017/18 (Ending 30 June 2018)
a.The Net Profit Margin32.13%25.19%-103.01%
b.Current Ratio1.921.480.36
c.Inventory Turnover5.417.618.25
d.Asset Turnover Ratio0.220.290.39
e.Leverage ratio0.500.500.74
f.Return on Equity14.51%14.72%-98.42%
g.Return on Total assets0.120.12-0.48
h.Earnings Per Share (EPS)0.320.36-1.70
i.Net Debt to Equity Ratio1.001.002.80
j.Total Return to Shareholders6.91%-9.63%-88.51%



JB Hi Fi LimitedYear 1Year 2Year 3

Ratio2015/16 (Ending 30 June 2016) 2016/17 (Ending 30 June 2017)2017/18 (Ending 30 June 2018)
a.The Net Profit Margin3.85%3.06%3.40%
b.Current Ratio1.571.321.32
c.Inventory Turnover6.036.266.15
d.Asset Turnover Ratio4.193.272.77
e.Leverage ratio0.590.650.62
f.Return on Equity40.70%27.40%25.90%
g.Return on Total assets0.240.160.14
h.Earnings Per Share (EPS)($)1.541.542.03
i.Net Debt to Equity Ratio1.451.871.63
j.Total Return to Shareholders28.85%1.87%2.01%


 The Reject Shop LimitedYear 1Year 2Year 3
 Ratio2015/16 (Ending 3 July  2016) 2016/17 (Ending 2 July 2017)2017/18 (Ending 1 July 2018)
a.The Net Profit Margin2.14%1.55%2.07%
b.Current Ratio1.491.631.96
c.Inventory Turnover4.654.784.62
d.Asset Turnover Ratio3.493.533.54
e.Leverage ratio0.410.380.35
f.Return on Equity12.67%9.13%11.59%
g.Return on Total assets0.110.080.11
h.Earnings Per Share (EPS)0.590.430.57
i.Net Debt to Equity Ratio0.700.620.54
j.Total Return to Shareholders138.70%-64.66%44.95%


 Super retail Group LimitedYear 1Year 2Year 3
 Ratio2015/16 (Ending 2 July 2016) 2016/17 (Ending 1 July 2017)2017/18 (Ending 30 June 2018)
a.The Net Profit Margin2.39%4.07%4.94%
b.Current Ratio1.701.681.38
c.Inventory Turnover2.722.782.76
d.Asset Turnover Ratio1.541.581.55
e.Leverage ratio0.470.520.55
f.Return on Equity7.74%8.87%11.03%
g.Return on Total assets6.80%10.08%11.67%
h.Earnings Per Share (EPS)0.320.520.65
i.Net Debt to Equity Ratio1.141.071.21
j.Total Return to Shareholders-2.29%-1.20%4.76%



BlackMores LimitedYear 1Year 2Year 3

Ratio2015/16 (Ending 30 June 2016) 2016/17 (Ending 30 June 2017)2017/18 (Ending 30 June 2018)
a.The Net Profit Margin16.71%10.51%11.52%
b.Current Ratio1.531.811.73
c.Inventory Turnover2.762.352.46
d.Asset Turnover Ratio1.631.291.37
e.Leverage ratio0.590.570.58
f.Return on Equity64.28%33.17%25.55%
g.Return on Total assets27.64%20.16%23.17%
h.Earnings Per Share (EPS)5.813.434.06
i.Net Debt to Equity Ratio1.461.301.40
j.Total Return to Shareholders80.01%-25.00%51.87%




Effect of Bank Loan of $200 million on the companies’ Return on Equity and Net Debt To Equity Ratios

Assuming that the Loan of $200 million is taken from bank at the end of 2018 and the amount is investing in purchase of plant of equipment, the total assets and total liabilities of the companies will increase by $200 million. Since the purchase is made at the end of the year there wil be no immediate effect on sales and net profit. The return on Equity will not change as there will be no change in net profit after tax as well as net equity of the companies. The debt to equity ratios of the company will increase as the liabilities will increase by $200 million but there will be no increase in Equity. The new ratios will be as follows:

 

 Year ending 2018 After LoanYear ending 2018 Before  Loan
 Return on equityNet Debt To Equity RatioReturn on equityNet Debt To Equity Ratio
1.      API Limited – API5.99%2.445.99%2.03
2.      Retail Food Group Limited – RFG-98.42%4.07-98.42%2.80
3.      JB Hi Fi Limited – JBH25.90%1.8425.90%1.63
4.      The Reject Shop Limited – TRS11.59%1.86811.59%0.54
5.      Super Retail Group Ltd – SUL11.03%1.4611.03%1.21
6.      Blackmores Limited - BKL25.55%2.4425.55%1.40


Comparison of the financial performance of the companies

The review of the financial ratios calculated above of the six companies shows that the profitability of five companies is showing a declining trend over the last three years. Except for the Super Retail group the Net profit Margin and Return on equity of all other five companies have decreased over the period. The return on total assets has also declined. This shows that the companies are not able to utilize their assets properly. Also there is increase in the total assets of the companies. This means that companies are expanding their operations and assets base and it will take some time for them to bring the new assets to utilization. It is expected that gradually the revenues and profit of the companies will increase with the expansion of operations.  However there has been observed very less increase in total assets of Super Retail Group and hence the revenues and profit of the group has increased slightly showing a slow growth. The total assets of Reject Shop Limited declined in 2016-17 from previous year and increased in 2017-18 again. The Net profit margin and Return on equity and return on assets shows that similar trend. The profitability ratios decrease in 2016-17 from previous year and again increase in 2017-18.

It is concluded form the above observation that when the assets of the companies are increased there is sudden decline in profitability ratios and increase in the debt equity ratios because the liabilities and assets are increased however the revenues and profit do not increase proportionally over the short period of time. If the Assets are funded form equity as well the return on equity are reduced due to issue of new capital.

Review of Total return to shareholders of the six companies

The total return to shareholders measures the capital gain on increase in share price of the stock as well as the short term gain on distribution of dividends to the shareholders. The total return to shareholders of the six companies shows large variations as follows:

 Total Return to Shareholders
 Year 1Year 2Year 3
1.      API Limited – API12.96%-12.99%30.95%
2.      Retail Food Group Limited – RFG6.91%-9.63%-88.51%
3.      JB Hi Fi Limited – JBH28.85%1.87%2.01%
4.      The Reject Shop Limited – TRS138.70%-64.66%44.95%
5.      Super Retail Group Ltd – SUL-2.29%-1.20%4.76%
6.      Blackmores Limited - BKL80.01%-25.00%51.87%


It is observed that the returns to shareholders of all the companies have decreased except for Super Retail Group Limited.  The decline is due to the decrease in the share price of the shares in year 2 i.e. 2016-17. The share prices of Super Retail Group Limited have also decreased but  the decline in share price in each following year is less than the previous year and hence the increase in the Return to shareholders. 

It can be concluded that the decrease in profitability ratios due to the increase in liabilities and interest cost the expectations of the investors were not met and they started selling the shares resulting in decline in share price of the companies. Since the profitability ratios of Super Retail Group increased marginally, the share price of the company also started to increase gradually resulting in higher returns to the shareholders.  It can be concluded that share price and returns to shareholders bear the relationship with the profitability of the company. The investors are hopeful of better returns if the company shows increasing trend in profitability ratios and hence the prices of the stock increases increasing the returns to the shareholders and vice-versa.

Current market value of the companies

The Current market value of the companies is observed form the SX stock exchange website and information.

CompanyMarket CapitalizationNet Equity (in Books) ending F. year 2018
API $662.46 million$536.7 million
RFG Limited$30.15 million$158 million
JBH Limited$3.07 billion$.947billion
TRS Limited$59.84 million$151million
SUL$1.82 billion$799 million
BKL$17.36million$193million


Comparing the market capitalization of the six companies  with the net equity value in the books for the financial year ending 2018, it is observed the market value of Super Retail Group JB Hi Fi limited  and API are more than the book value while the other three companies it is less than the book value. If we recollect the profitability and returns trend it was observed that profitability ratios of Super Retails group and JB Hi Fi and API limited has shown positive trends and revival in the third year after decline in second year, while the other three companies the return declined in the third year as well. 

The market value of SUL (Super Retail group) is highest which did not show any decline in profits and had a slow and steady growth. It can be concluded from this that companies showing steady but slow improvement are preferred by investors more than the company which show sharp decline or change in their performance.

Conclusion

The ratio analysis of the six companies belonging to various industries over the period of three years shows that the company profitability ratios of the company decreases when it invests in the assets of the company and plans expansion. The increase in liabilities without the immediate increase in revenues and profit leads to low profitability and hence the decline in returns to the shareholders. On the other hand the companies showing slow and steady growth without making huge investment in expansion of operations or assets are viewed as more stable companies and the return to shareholders show increasing trend.  The low profitability over this short term reduced the short term returns of the investors and hence causes panic and reduction in market price of the stock. Thus the investors prefer the equity investment which provide them slow and regular returns as compared to fluctuating returns.  

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