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HI5002 Company Performance Analysis Assessment Answer

Assessment Details and Submission Guidelines
Trimester
T2 2019
Unit Code
HI5002
Unit Title
Finance for Business
Assessment Type
Group Assignment
Assessment Title
Company Performance Analysis
Purpose of the   assessment (with ULO Mapping)
Students are required to form a group from   2 to 5 members to study, undertake research, analyse and conduct academic   work within the topics of financial management from week 1 to week9 . The assignment shouldexamine the mainissues, including underlying theories, implement performance measures   used and explain the firm financial performance. Your group is strongly advisedto reference professional
websites,   journal articles and text books in this assignment.
Weight
30 % of the total assessments
Total Marks
30
Word limit
Not more than   3,000 words

Assignment Tasks

ASSIGNMENT SPECIFICATIONS

This assignment task is a written report and analysis of the financial performance of one selected listed company on the ASX in order to provide financial and investment advice to a wealthy investor. This assignment requires your group to undertake a comprehensive examination of a firm’s financial performance based on update financial statements of the selected company.

Background

You’re a group of investment analysts who work for a large investment consulting firm based in Australia. There’s one big institutional investor from overseas that is interested in investing in the Australian market. You’ve been asked to choose one listed company the industry you think will have the most promising future for investment in Australia, then evaluate the performance of that company. Finally make a recommendation through your Report to the investor whether and why they should or should not invest in the company.

Create your group’s “business name” under which your group will be providing the financial advisory services. Choose one listed company that your group will investigate/analyse for the purposes of possible recommendation to your client. 

Requirements

Obtain copies of Annual Reports including Income Statements, Balance Sheets, and Statement of Changes in Equity, Cash Flows Statements and Notes for three (3) financial year 2016-2017, 2017- 2018 and 2018-2019. Your group can download these documents from the suggested web site using the firm’s code (example, BHP- for BHP Billiton Company, etc.). The assignment should cover the contents described in Part 1 to 7 bellows.


STAGES   TO BE COMPLETED
1
Description   of one key product or service offered by the selected company.
2
Identify and conduct a trend analysis with two groups of financial ratiosincluding liquidity
and capital structure of the selected company.
3
Perform   a non-current asset analysis
4
Perform a scenario analysis with data provided.
5
Identify and discuss any latest share or bond   issuance by the selected company.
6
Calculate and   discuss the PE ratios and share price movement of the selected company   through 3 years
7
Recommendation Letter

Final Submission of Complete   Assignment on Blackboard (Week 10)

Assignment Structure and Details of Assignment Tasks

Assignment structure and assignment tasks should be as the following:

Abstract

(no more than 200 words)

Introduction

Briefly introduction of you work: the purpose of assignment, the selected company, your findings and structure of your assignment

(not more than 300 words)

Financial Analysis of selected company

Description of one key product or service provided by the company

Prepare a brief description of one key product or area of service offered by the selected company. Describe and comment on the importance of the product or service in maintaining the comparative advantages of the company.

Calculation and analysis of selected performance ratios

Using financial data obtained from current financial statements of your selected companies for the past 3 years. Annual reports are accessible via company websites or ASX website. Your client requests a comprehensive analysis of two groups of financial ratios, including liquidity and capital structure of the company. Choose the relevant financial ratios for your analysis to meet your client’s requirement. Do a research to explain the trend of financial ratios of the selected company through 3 years to your client. You need to provide charts and/or tables for analysis and justification.

Perform a non-current asset analysis: Analyse the non-current assets of the company through 3 years. Identify the depreciation method applied by the company and discuss how depreciation is treated to identify operating cash flow of a project involving buying a long term asset. Tips: try to do a little research about depreciation and CAPEX to enrich your comments and analysis.

Perform a scenario analysis with data provided

Assume that your selected company is considering a potential project with a new product that is expected to sell for an average price of $25 per unit and the company expects it can sell 450 000 unit per year at this price for a period of 4 years. Launching this project will require purchase of a

$2 500 000 equipment that has residual value in four years of $500 000 and adding $ 800 000 in working capital which is expected to be fully retrieved at the end of the project. Other information is available below:

Depreciation method: straight line Variable cost per unit: $15

Cash fixed costs per year $450 000 Discount rate: 12%

Tax Rate: 30%

Do a scenario analysis with cash flows of the assumed project to determine the sensitivity of the project’s NPV to different scenarios that are defined in terms of the estimated values for each of the project’s value drivers. Please work on two scenarios corresponding to the worst- and best- case outcomes for the project. You need to provide your results in (a) relevant tables:

Worst case: Unit sales decrease by 20%; price per unit decreases by 20%; variable cost per unit increases by 20 %; cash fixed cost per year increases by $100 000

Best case: Unit sales increase by 20%; price per unit increases by 20%; variable cost per unit decreases by 20%; cash fixed cost per year decreases by $100 000

Based on the scenario analysis outcome, draw relevant conclusion about project NPV’s sensitivity.

Identify and discuss any latest share or bond issuance by the selected company:

Do a research about the latest share or bond issuance taken by the company. The following questions should be addressed: when was the issuance, what was the amount of issuance, was it a private placement or public offering, who were the underwriter and trust bank for this issuance, what is the type of underwriting or selling arrangement, how much was the floating cost of the issuance, was it a successful issuance or not? Discuss on how the securities issuance affect the capital structure of the company

Calculate and discuss the PE ratios and share price movement of the selected company through 3 years

Identify net profit and compute the PE ratio of the selected company through the 3 year time frame. Go to ASX website to find out the share price data of the company for the recent 3 years, construct a graph where you display the PE movement and share price movement in the same arena and time frame. Comment on any convergence and divergence between the trend of the company’s profit and share price. Do further research to explain any case where there is a divergence between profitability and share price.

Recommendation letter

Based on your analysis above, write a letter of recommendation to your client, providing an explanation as why you would like to include one of selected the companies in his/her investment portfolio. Please refer to the ratio results calculated earlier and any other trends or factors that you believe to be important.

Conclusion

Summarize the outcomes of your works (not more than 300 words)

Answer

Financial analysis 


 The current assignment is focused to undertake the financial analysis of the company listed on Australian Stock Exchange named Breville Group Limited. The financial analysis includes the analysis of the product information, liquidity position, capital structure, share price performance, non-current asset performance and the information about share issuance of company. Based upon the analysis, a recommendation letter is prepared on whether to add the share in investment portfolio or not. 

Breville group Limited is began business in year 1957 as homewares’ importer. Several acquisitions were made by the company over years. In year 2007, the company shifted towards electrical appliance business (Beran, et al. 2018). The growth of electrical business in year 2007 led to disposition of the housewares business. In the current scenario, the company is focused on its electrical business department alone and has grown business under many owned and co-owned brands.

Financial analysis of Breville Group Limited

1. Description of one key product or service provided by the company

In the Australian markets, the company sells the products offered under its company brands and also under other co-brands. The own brands of company include Kambrook, Ronson and Breville, and the co-brand with whom Breville had tied up includes Nestlé Nespresso. The current strategy of targeting market globally as well as in Australia is by sale of “premium kitchen products” by the company. Apart from this premium line, the company through its own brands sell a varied range of electrical appliances being, vacuums, irons, cooling products, heating products and etc. 

One main product sold by Breville in Australian markets is TOASTER. The toaster is a uniquely served product, as bread comes to be a staple food for almost everyone in the country. As bread is a necessity and hence, the toaster served by the company cannot be ignored by people. The types of toasters offered by the company are 13 in number. Every toaster is different from the in terms of the specifications provided by it and the kind of end results given. There are toasters sold by the company which can toast any kind of bread with multiple options. Upto 4 breads can be toasted maximum in many of the toasters offered (Liang, and Chen, 2018)

The toasters offered by Breville Group have been considered to be amongst the best and most innovative in the similar products offered by other companies. Breville has occupied a competitive edge in the market because of this product’s innovative and efficient capabilities than just simple toasting the bread brown. The company has associated a strong customer base with its organisation because of the toaster range of the products offered by it. This product is one of the most important products offered by it which have helped the organisation to grow (Palmeto, Belli, and Giardini, 2016)

2. Trend analysis with two groups of financial ratios, including liquidity and capital structure

The liquidity of the organisation is analysed with the help of the set of current assets and current liabilities of the company (Robinson, et al 2015). On, the other hand the analysis of the capital structure ratios is done by the help of the non-current assets, non-current liabilities and the shareholder’s equity of the company. 

The required information is as follows:

All numbers in AUD thousands



Period Ending6/30/20196/30/20186/30/20176/30/2016
Total Current Assets367,988315,705300,934258,512
Total Current Liabilities143,400108,801116,946108,204
Inventory152,32599,669116,562107,722
Cash And Cash Equivalents57,129103,31677,12459,978
Total Liabilities199,432162,114158,823123,962
Total stockholders' equity310,335283,235259,609246,005
Total Assets509m,767445,349418,432369,967
Earnings Before Interest and Taxes97,05887,29678,55272,539
Interest Expense1,5342,1411,1821,190
Quick assets215,663216,036184,372150,790


The computed ratios are as follows:

LIQUIDITY   RATIOS

PARTICULARSFORMULA201920182017
current ratiocurrent assets / current liabilities2.572.902.57
quick ratioquick assets / quick liabilities1.501.991.58
absolute liquidity ratio(cash + marketable securities)/ current liabilities0.400.950.66


The company’s liquidity

The company’s liquidity has been same for financial year 2017 and 2019. The company’s current assets were more than the required position in the year 2018. For year 2017 and 2019, the liquidity has been tried to bring down to the desired standards. The current ratio of 2.57 depicts current assets to be more than two and half times the current liabilities of the company (Crowther, 2018). This position could not be considered very well because it might show over stocking of inventory in company, and not actual current assets which can help in settling of current liabilities (Nambukara-Gamage, and Peries, 2020). 

The quick ratio too is more than 1, which shows availability of quick assets, i.e. the assets which can readily be converted into cash to be 1.5 times the current liabilities. Analysis current ratio and quick ratio together tells that the company’s liquidity is good enough. The ratios are high not because of overstocking, but because of readily cashable current asset components. The absolute liquidity ratio needs to be atleast 0.5, i.e. the absolute liquid assets need to be atleast half of current liabilities. Here, this ratio is 0.4, which is quite satisfactory.

CAPITAL   STRUCTURE RATIOS

PARTICULARSFORMULA201920182017
Debt - to - equity ratiototal debt/ total shareholder equity0.640.570.61
debt to total assets ratiototal debt/ total assets0.390.360.38
interest coverage ratioEBIT/ Interest expense63.2740.7766.46
proprietary ratiototal shareholder equity/ total assets0.610.640.62


The company’s capital structure

The company’s capital structure ratios show that the company’s leverage position is not well equipped. The company is not utilising the advantage available on raising debt to generate higher profits. The company can take benefit from higher debt application by reducing the tax expense due to interest deduction. 

Also the company’s proprietary ratio has declined. But the decline is not alarming. The proprietary ratio is moving in the same line only. The company’s assets are financed by shareholder equity more than the external debt. 

 The company’s interest coverage

The company’s interest coverage ratio has improved over the financial year 2017. This shows the improvement in company’s capabilities to finance its financing costs (Chandra, 2017)

3. A non-current asset analysis

The non-current assets of the company Breville Group Limited are as follows:

All numbers in AUD thousands



Period Ending6/30/20196/30/20186/30/20176/30/2016
Property, plant and equipment12,04311,37910,70611,789
Goodwill38,60338,57730,49430,494
Intangible Assets45,45945,30145,03641,118
Other Assets45,67434,38731,26228,054
Deferred Long Term Asset Charges6,3225,6776,7327,531
Total non-current Assets148,101135,321124,230118,986


The company’s non-current assets are growing from past three financial years to reach AUD 148,101 thousand in financial year 2019. The property, plant and equipment component of the non-current assets have risen, and so it the depreciation. 

Depreciation method

Depreciation method used by the company is straight line method of depreciation. The useful life of the different assets of the company ranges between 2 to 10 years (Revelli, and Viviani, 2015). The depreciation charged by the company is as follows:


All numbers in AUD thousands 

Period Ending6/30/20196/30/20186/30/2017
Depreciation4,8123,5762,996


Treatment of depreciation in computation of operating cash flows of an investment project

During computation of operating cash flows only cash transactions are considered. Depreciation being a non-cash expense should hence be ideally ignored. However, income tax is a cash transaction. Depreciation although is a non-cash expense, yet tax deduction is allowed on the same. Hence, depreciation does not directly impact the annual cash flows of a project, but indirectly impact upon the income tax deducted to reach after tax cash flows (Easton, and Sommers, 2017).

Resultant, during computation of annual cash flows of an investment project, the tax deduction allowed on depreciation expense is added to the annual cash flows. This is done by computing the net income after tax normally and then the amount of depreciation is added back. This eventually leads to addition of the tax on depreciation to get the amount of annual cash flows (Souza, Gimenes, and Binotto, 2019). 

4. Scenario Analysis

The net present value generated by the investment proposal in three cases, i.e. the base case, the worst case and the best case are presented here.

NPV IN BASE CASE
particularsyear 1year 2year 3year 4
sales price per unit25252525
variable cost per unit15151515
contribution per unit10101010
sales units450000450000450000450000
contribution 4500000450000045000004500000
less: cash fixed costs450000450000450000450000
less: depreciation500000500000500000500000
taxable profits3550000355000035500003550000
less: tax @ 30%1065000106500010650001065000
profit after tax2485000248500024850002485000
add: depreciation500000500000500000500000
add: after tax residual value   350000
add: working capital released   800000
annual cash flows $          2,985,000  $    2,985,000  $   2,985,000  $     4,135,000 
present value of future cash flows$      9,797,333.59 

 
less: initial investment $     3,300,000.00 

 
NPV IN BASE CASE $     6,497,333.59    


NPV IN WORST CASE 
particularsyear 1year 2year 3year 4 
sales price per unit20202020 
variable cost per unit18181818 
contribution per unit2222 
sales units360000360000360000360000 
contribution 720000720000720000720000 
less: cash fixed costs550000550000550000550000 
less: depreciation500000500000500000500000 
taxable profits-330000-330000-330000-330000 
less: tax @ 30%-99000-99000-99000-99000 
profit after tax-231000-231000-231000-231000 
add: depreciation500000500000500000500000 
add: after tax residual value   350000 
add: working capital released   800000 
annual cash flows $              269,000  $          269,000  $           269,000  $    1,419,000  
present value of future cash flows$       1,547,892.76 

  
less: initial investment $     3,300,000.00 

  
NPV IN WORST CASE $   (1,752,107.24)    

The NPV in worst case fell by 127 times the   base case NPV because of falling sales unit and sales price and rising   variable and fixed costs.
NPV IN BEST CASE
particularsyear 1year 2year 3year 4
sales price per unit30303030
variable cost per unit12121212
contribution per unit18181818
sales units540000540000540000540000
contribution 9720000972000097200009720000
less: cash fixed costs350000350000350000350000
less: depreciation500000500000500000500000
taxable profits8870000887000088700008870000
less: tax @ 30%2661000266100026610002661000
profit after tax6209000620900062090006209000
add: depreciation500000500000500000500000
add: after tax residual value   350000
add: working capital released   800000
annual cash flows $              6,709,000  $       6,709,000  $       6,709,000  $           7,859,000 
present value of future cash flows$          21,108,422.56 

 
less: initial investment $         3,300,000.00 

 
NPV IN WORST CASE $      17,808,422.56    










The analysis clearly represent rise in net present value by 174 times in the best case scenario. The reasons of positive growth of NPV are rising sales price, reduced variable cost, reduced fixed cost and rising sales price. 

5. Latest share or bond issuance by the selected company

During the period of last 5 years, no new issue has been affected by the company in the market. Neither shares nor bonds have been issued by the company. Share capital of the company had been constant as far as common stock is considered at AUD 140050 thousands since financial year 2016 (Loughran,and McDonald, 2016). The number of shares outstanding too is the same at 130,095 thousands. 

The company felt no need to issue new shares because of profiteering phase the company is in. the profits are rising continuously from AUD 50,172 thousands in financial year 2016 to AUD 67,385 thousands in financial year 2019. Keeping the issue at a constant level has allowed the company to raise EPS of its share. The rise in EPS and correspondent shareholder reactions has led to an exponential rise in the share price of the company’s shareholders from last 4 financial years (Damodaran, 2016). The company is focusing expansion with the current number of shares and building growth in them. 

6. PE ratios and share price movement of the selected company through 3 years

PRICE-EARNINGS RATIO
particulars30-Jun-1630-Jun-1730-Jun-1830-Jun-19
share price7.4910.4511.6216.36
profits available for shareholders (AUD '000)50,17253,83458,51967,385
number of shares (in thousands)130,095130,095130,095130,095
earnings per share0.38570.41380.44980.5180
price earnings ratio19.4225.2525.8331.58


The shareholders of Breville group limited are experiencing a continuous rise in the share price over the period of three financial years. The share price rose by 56% as on 30th June 2019 as compared to the share price on 30th June 2017. Along with the rising share price, the company’s price-earnings ratio too is rising (Shimeld, Williams, and Shimeld, 2017).

 The company’s shareholders have shown confidence in the risen profitability of the company. The profit is rising since these financial years and so is the company’s market performance (Williams, and Dobelman, 2017). The following chart shows the movement of company’s share price from financial year 2016 to 2019 along with the movement of price earnings ratio.


There is no divergence in the company’s share price movement and the movement of price earnings ratio. Both go hand in hand. Also the company’s share price is completely in line with the profitability. Every year the company’s profit is rising and so is the share price. 

Recommendation letter

The shares of Breville group Limited are on the top of their market performance currently. The share price has risen exponentially over the years and the performance is expected further rise in market. The liquidity of the organisation is analysed with the help of the set of current assets and current liabilities of the company which reveals that company needs to strengthen its current ratio by investing more funds in its current assets. Investing currently in the shares seems profitable as the share prices are in a bullish trend (Riley, et al. 2016). Share price today is less than what it would be tomorrow. Adding these shares in portfolio shall turn profitable as despite of market fluctuations, the share price of Breville has shown consistent growth and have managed to stay in rising trend. These shares on addition to the portfolio will lead to reduction in the entire risk of portfolio. The company is assumed to be on the bullish phase because of its strong financials. The strong liquidity position of the company has given a credible standing to the company in the market. 

Also even the company is not trading on equity well, but another perspective to look into this is the reduced risk in the form of lower debt and hence less external risk.

Conclusion

The financial analysis of Breville Group Limited has revealed the growth status of company over the different financial years. The company’s current strategy is growing the market of premium kitchen appliances. The net present value generated by the investment proposal in three cases which is used to identify the best results oriented outcomes in the given cases. The company’s liquidity position is strong, as well as the company is highly dependent upon its own money for financing the needs of business. The share price of company is rising in these financial years and the P/E ratio too is rising in the same line. Now in the end, it could be inferred that if company wants to sustain in the market then it will have to strengthen the liquidity position and debt structure in its financial.  The company is available as a good investment option for investors. Adding this share in the portfolio can provide with investors a good option of reducing overall risks of the portfolio. Therefore, company needs to increase the current assets and equity in order to build a strong viability in market. 

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