Company Evaluation - Case Study Example

Company Analysis College: Name: Students ID: Date: Course Name: Unit Code: Time: Instructor: Name of the Company and its Registered Office This report will perform a general financial analysis of Clover Corporation Limited (ASX: CLV). The company has its headquarters in Sydney, Australia. Its registered office is located along 160 Pitt Street, Sydney N.S.W 2000 1st floor (Clover Corporation Limited Annual Report 2011, p.1; Appendix 1). Information about the Company Clover Corporation Limited was started in Australia in 1988 as a family venture. Its primary operations were to offer quality lipid products which boost the health and welfare of the community through research. The company became publicly listed on the Australian Stock Exchange (ASX) on November 25, 1999 as a company offering health care services (Clover Corporation Limited, 2014). The company has evolved in its operations; from focusing on research and development, manufacturing and marketing to a more strategic company focused on technology, product development as well as commercialisation. Its main operations nowadays include refining along with the sale of omega-3 oils, children’s food, encapsulated constituents for baby formula, supplements as well as therapeutic foods. It too pretenders an assortment of micro-encapsulated powders, which facilitate the addition of Hi-DHA tuna and/or alga oils to a range of products in a dry powder form; called Driphorm (Clover Corporation Limited, 2014). Clover Corporation Limited runs its operations from five locations in Australia. The headquarters are based in Sydney. The plant for manufacturing tuna oils along with other related products is located in Altona. Its product research and development facility, industrial support and marketing branch are located in Brisbane. The finance and information technology divisions are found in Gladstone Park. Also, Clover Corporation Limited operates a logistic and customer service office in the United Kingdom. The company employs close to 45 people (Businessweek.com, 2014). Auditor Details Clover Corporation Limited’s audit and non-audit services are performed under the Australian Accounting Standards as well as the Corporation Act 2001. The company’s 2011 financial and remuneration reports were audited by Lawler & Partners Chartered Accountants located in Sydney, N.S.W 2000 level 9 along 1 O’Connell Street. Clayton Hickey was involved in the audit as a partner. Their independent audit report was signed on October 11, 2011 (Clover Corporation Limited Annual Report 2011, p.55, 56, 57). 2011 Consolidated Report Analysis a) Amounts of Cost of Sales for the year Cost of sales is the amount of cash the company incurred to produce its products. Clover Corporation Limited’s 2011 sales cost $21,869,000. b) Amounts of Profit or loss before tax for the year, and how this compares with the previous year Profit or loss before tax is the amount of incomes generated by the company less all other expenses apart from income tax expense. In 2011, Clover Corporation Limited generated $6,133,000 weighed up against $1,567,000 generated in 2010. In 2011, the company generated more profit before tax compared to 2010 by $4,566,000. This represented a massive increase of close to 291 per cent (Clover Corporation Limited Annual Report 2011, p.20; Appendix 2). Table 1: Profit before Tax in 2011 and 2010 The increase in profit before tax was due to the following: I. A decline in expenses. In 2010 the company’s expenses exceeded the expenses incurred in 2011 by $4,501,000. Expenses not incurred in 2010 but not incurred in 2011 were management expense, impairment of investment, impairment of receivable, and share of net loss of associate accounted for by means of equity accounting. II. Increase in sales revenue. In 2011 Clover Corporation Limited generated $35,635,000 compared to $34,937,000 generated in 2010. There was an increase of $698,000 representing a 2 per cent increase in revenue. c) Amounts of Income tax expense Income tax expense is the amount of tax Clover Corporation Limited paid to the authorities for activities conducted in 2010. The company’s income tax expense was $1,530,000 (Clover Corporation Limited Annual Report 2011, p.20; Appendix 2). d) Amounts of Each Item of Net Accounts Receivable (Net Trades Receivable) for the year Accounts receivable are usually the amounts the company expects to receive after selling goods to debtors. Current debtors Debt amount Provision for impairment Net amount Trade debtors $10,244,000 - $10,244,000 Other debtors $122,000 - $122,000 Interest receivable from associate $724,000 $724,000 - Interest receivable from related parties $149,000 $62,000 $87,000 Non-current debtors Interest receivable from associate entities $1,918,000 $1,918,000 - Source: Clover Corporation Limited Annual Report (2011, p.36; Appendix 3) e) Method for Bad Debts used by the Company Bad debts are debts that fail to be paid by debtors. Clover Corporation Limited recognises trade debtors along with other receivables at the amount outstanding. After reviewing all outstanding amounts at the end of a reporting period, the company sets up a provision for doubtful debts. As soon as the company spots bad debts, it writes them off (Clover Corporation Limited Annual Report 2011, p.31). f) Amounts of each type of Property, Plant and Equipment for the year, the amount of Depreciation Expense for Each Type of Property, Plant and Equipment, and the depreciation Method used for Each Type of Property, Plant and Equipment Item Amount for the year Depreciation expense Depreciation method Plant and equipment $1,933,000 $319,000 Reducing balance Furniture and equipment $155,000 $54,000 Reducing balance Source: Clover Corporation Limited Annual Report (2011, p.39; Appendix 4) g) Amounts of Each Type of Long-term Liability Long-term liabilities are liabilities the company is expected to pay after a period exceeding one year from the current period. Clover Corporation Limited’s long-term liabilities in 2011 were: Liability Amount Deferred tax liabilities $153,000 Long-term provisions $143,000 Source: Clover Corporation Limited Annual Report (2011, p.21; Appendix 5) h) Amounts and Nature of any Contingent Liabilities Contingent liabilities are liabilities a company is expected to face in the future depending on whether an event occurs or does not occur. Clover Corporation Limited invests in associate companies. These are companies where Clover Corporation Limited exercises considerable influence either through holding, directly or indirectly, a 20 per cent or more of the associates voting power. Clover Corporation Limited has got to account for these investments in its financial statements. The company applies the equity method to account for these investments. This is where the investment is at first recognised at cost then adjusted for post-acquisition change in the company’s portion of the net assets in the associate company. Clover Corporation Limited also includes its share of profit or loss from the associate in its consolidated profit or loss (Clover Corporation Limited Annual Report 2011, p.29). The amounts recognised in these respect (carrying amount) include the goodwill as relates the associate. If there is a surplus amount of Clover Corporation Limited’s portion of the net fair value of the associates’ identifiable assets, liabilities as well as contingent liabilities over and above the cost of investment, this amount is taken away from the carrying amount of the outlay. This surplus amount is taken in as income in settling on the investor’s part of the associate’s profit or loss in the period in which the venture is undertaken (Clover Corporation Limited Annual Report 2011, p.29). In 2011, Clover Corporation Limited jointly and severally decided to underwrite the loans (in form of contingent liabilities) cropping up from its associate Future Food Ingredients Pty Limited (FFI) Company plus its joint venture partners provided to it by financial providers amounting to $2,981,000 as at July 31, 2011. The directors had guesstimated that the amount of sales income generated from this venture was substantially enough to care for these obligations (Clover Corporation Limited Annual Report 2011, p.53). i) Value of Issued Capital Issued capital is the amount of capital the company obtains through trading its shares in the Australian Stock Exchange. In 2011, Clover Corporation Limited’s value of issued capital was $32,920,000 (Clover Corporation Limited Annual Report 2011, p.21; Appendix 5). Ratio Analysis Financial ratios form the toolbox used to perform the financial analysis of a company. Ratios are easy to understand and interpret considering that the final statements of accounts are not easy to interpret (Steven, 2006). Even as financial ratio analysis can supply us with vital insight into a company’s performance, there are various limitations that have to be acknowledged when making use of financial ratios as an investigative means. Ratios are apparatus of quantitative investigation and do not take into account a number of essential qualitative factors which can be crucial in decision making. Also since they rely of financial statement information, these statements merely show historical data (Steven, 2012). Below are the key rations indicating Myer Limited’s performance in 2013. Ratio Formula Working Result Liquidity Current ratio 6.83 Quick ratio 4.64 Efficiency Inventory turnover 1.43 Accounts receivable turnover 3.92 Source: Clover Corporation Limited Annual Report (2011) Liquidity ratios evaluate the ability of the company to meet up its short-term obligations using its current assets (Edmonds et al 2006). Clover’s current ratio was 6.83 in 2011 that was way above the conventionally required 2:1. This means that the company has a sufficient amount of liquid assets which it can employ to meet its short term obligations. The quick ratio was also 4.64, also above the conventionally required 1:1. This indicates that without inventory, the company could be able to meet its short-term obligations sufficiently. However, this could also indicate that the company is not pursuing extra investment activities to put its money into; it adopts a conservatory approach (Steven, 2006). Efficiency ratios are measures of how well assets (investments) are made use of by a company. The ratios can be used to assess the gains produced by specific assets such as inventory, assets or debtors or all a company’s assets together. The measures generally assist parties to evaluate how successfully the company is engaging its investments (Smith, 2007). Clover’s inventory turnover for 2011 was 1.43. This shows that the company is generating good returns from its inventory. The company’s debtor’s turnover was 3.92 indicative of good debt engagement (Martin & Fernando, 2002). References Businessweek.com, (2014). Clover Corporation Limited. Viewed 4 May 2014, . Clover Corporation Limited, (2014). Company History. Viewed May 3, 2014, . Edmonds, C. Edmonds, T. Olds, P. and Schneider, N. (2006). Fundamental Managerial Accounting Concepts, New York, McGraw-Hill Irwin Martin, S.F. and Fernando, A. (2002). Financial Statement Analysis: A Practitioner's Guide, 3 edn, John Wiley & Sons. Smith, J. (2007). Handbook of Management Accounting, Amsterdam, Boston Cima Publishing. Steven, M.B. (2006). Financial Analysis: A Controller's Guide. 2nd edn. Wiley. Steven, M.B. (2012). Business Ratios and Formulas: A Comprehensive Guide. 3rd edn. Wiley. Appendices Appendix 1 Appendix 2 Appendix 3 Appendix 4 Appendix 5 Read More