ACC601 Accounting For Management Decisions: Financial Statement Analysis Assessment Answer

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:

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:

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:

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.

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.