Conduct a detailed financial analysis of Lifestyle International Holding Company. The analysis should be based on some key ratios highlighting the profitability, efficiency, liquidity, gearing and investment potential of the company. Your report will act as a piece of investment advice to the investor.
Financial analysis of Company
Investment advice to investor
An investment analysis is done with the aim to analyse the financial and related non-financial situation of any organisation. This analysis helps the investors in deciding upon whether they should buy, sell or hold the shares of the given organisation. Depending upon the financial trend that persists in the organisation along with its comparison made with the industry, a proper analysis is framed. For the given financial analysis, the company chosen is Lifestyle International Holding Company. Certain ratios highlighting the profitability, efficiency, liquidity, gearing and investment potential are calculated. Based upon the results and trend highlighted by these ratios certain sort of investment advice is extended.
The foremost help that is extended in analysing the investment suitability is through these ratios. The dividend yield ratio, when compared for the company for three financial years being 2015, 2016 and 2017, shows that it has been constant. The total dividend that is paid per share every year is same. However, the payout ratio has significantly dropped down. A consistency is maintained though by the company by paying a constant dividend, but at the same time the payout is declined. This is because of the high profits that are earned in the year 2017. In 2016, the company had paid dividend beyond the overall profits. This might indicate that company is holding back in paying cash profit shares to its investors. There could be attached fear with which company looks its cash position stability. The earnings per share have risen, but the share of this rise that is extended to the shareholders (in form of dividend payout) has not. The price earnings ratio also shows a drop in the time the price that the investors could pay over the earnings to buy one share. As compared to the financial year 2016, the price earnings ratio has dropped by more than 50% (12.08 in 2016, while 5.81 in 2017). This shows that the investor confidence is falling. Based upon this, the shares must not be purchased at all. The investor must either sale, or if not that risk averse could wait for price to rise a bit until shares are sold.
The gearing ratio shows that the company’s debt has fallen in year 2017 as compared to year 2016. The ratio was 84.13% in 2016, while it is 76.94% for the year 2017. Although the position reflected is risky, but the risk has somehow come down. On the other hand, the interest cover ratio also shows certain positivity. The company’s ability to pay off the interest has risen from 5.16% in 2016 to 15.9% in 2017. This is a positive sign that is highlighting the improvement in the debt structure as well sound ability to pay off obligations. The investors are advised to at least hold the shares, if not buy to increase their returns by selling shares in future at higher prices. However, if seen along with the investment potential ratio, holding is certainly a good option than selling or buying new share (Reid, 2018).
The company’s quick assets depicting the finest layer of the liquid assets seem increased as seen from the quick asset ratio. It has been 1.15 in financial year 2016 as compared to 2.67 in financial year 2017. The current assets stating highly liquid as well other current assets have also improved in comparison to the current liabilities in year 2017. The company’s ability to pay the short term obligations seems better from this ratio. Based upon this ratio itself, the investors could think to buy the shares, or hold the shares they already have if not new purchases are made (Patel, et al. 2019).
These ratios are showing a completely different picture. The falling efficiency in the general operations is highly evident from the worsening efficiency ratios. Other than the sales revenue per employee, every other efficiency ratio has deteriorated. The company’s inventory is not sold with as much frequency as in year 2016, as well as the company seems to face trouble in making collections from debtors. Sales revenue to capital employed has drastically fallen. But the company has improved the time scale in paying of the creditors. Also, the rising sales revenue per employee could depict high employee turnover, rather than any significant improvement in sales (Easton, & Sommers, 2018).
The operating margin, gross profit margin, return on capital employed have all improved in 2017 as compared to 2016. Only the return on shareholder’s funds has fallen. It shows that the company has earned profit but is not distributing it to that extent to the shareholders. A positive sign is high profits hence future growth could be assumed. Shares could be purchased based upon this and should be held to wait for the prices to rise. The increase in the overall turnover is more than the inflation rate which is better for the company. Therefore, the profit outlook of company is positive and will be more beneficial for the investor (Penman, & Penman, 2017).
Based upon the overall analysis, it could be assumed that the lower payout is because of reinvestment plans and overall turnover is more than the inflation rate. One point is clear that the company is having high profitability which is good for its profit outlook. The financial soundness is reflecting positive and showing increasing positive growth. Based upon these ratios, the company’s stock could be taken on hold. The company has growth prospects as shown by rising profits and revenues along with sound credit worthiness. Therefore, it could be inferred that the investors could choose to buy new shares of the organisation. Also the shares already purchased could be held. There seems no reason to rush to sale the shares.