Kathmandu Holdings Limited Financial Analysis - Case Study Example

Kathmandu Holdings Limited Financial Analysis Name Course Institution Date Introduction Kathmandu Holdings limited is the leading retailer specializing in quality clothing and equipment for adventure and travelling in Australia, New Zealand and the United Kingdom. The first retail outlets of the company were set up in Australia and manufactured its clothing in New Zealand. It opened its mail and online order operations in the year, 2008 and was listed on the Australian Securities Exchange (ASX) and New Zealand Exchange (NZX) in 2009 and currently indexed ASX300 and NZX50. By 31 July 2012, it had a total of over 120 stores (Kathmandu Holdings 2014). Kathmandu Business Trend Analysis Business trend analysis presents a way for determining future company’s results. It is done by reviewing past information of the company. Trend analysis is important to a company like Kathmandu Holdings Limited as it provide important information about the current business situations. The result of this trend analysis for Kathmandu Holdings Limited is to identify current product trends, determine its strengths and to provide ways of capturing new emerging markets. This trend analysis will be effective in comparative analysis of the Kathmandu Holdings financial performance over the period from 2010 to 2013. Figures 1 and 2 provide the Kathmandu trend analysis. Income Statement Trend Analysis Sales Revenue Trends Kathmandu holdings has since saw growth of its sales from NZ $ 245,812 to 383,983 which represents a huge increase. The company has been expanding sales in order to increase its profit. This sales revenue translated to the growth of the company’s gross profit from NZ$ 155,289 to 254,025. Earnings before income tax and after tax The company’s profit before income tax increased from NZ$38,798 in 2010 to NZ$58,982 in 2013 but it decreases from in 2012. The decrease of the profit before income tax in 2012 from that realized in 2011 is attributed to those increase expenses such as sales and administration. The earnings after tax increased substantially in 2011 compared to that of 2010 because the costs associated with the IPO decreased the 2010 profits. The company has since been registering profits from the 2010 to 2013. Figure 1 Consolidated Income Statements 2010 2011 2012 2013 Sales revenue Cost of sales Gross profit Selling expenses Administration expenses Finance income Finance expenses Finance costs-net Profit before income tax Costs associated with IPO Profit/(loss) before income tax Income tax (expense)/ Profit/ (loss) after income tax Figure 2 Consolidated Balance Sheets (2010) 2010 2011 2012 2013 Cash and cash equivalents Trade & Receivables Derivatives instruments Inventories Total current assets Non-current assets Property, plant and equipment Intangible assets Derivative instruments Deferred tax Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Derivative instruments Interest bearing liabilities Current tax liabilities Total current liabilities Non-current liabilities Derivative financial instruments Interest bearing liabilities Total current liabilities Total liabilities Net assets Equity Contributed equity-ordinary shares Reserves Retained earnings Total equity Balance Sheet Trends Assets The company’s total assets showed increased trends from 2010 to 2013. The total assets value increased from NZ$319,414 to NZ$376,217. The assets increase by a small margin in 2013 from that of 2012. Liabilities The Kathmandu Holdings Company liabilities showed an upward trend from 2010 to 2012 but decreases in 2013. However, the increases in all the three years were minimal. The total liabilities of Kathmandu Company decreases from NZ$ 93,193 to NZ$ 82,028. The decrease can be attributed to decrease in interest bearing liabilities of the company in 2013. Equity Kathmandu Company equity rises from NZ$ 239, 127 in 2010 to NZ$294,189 in 2013. Rise in the total equity is aided to a large extent by the increase in retained earnings of the company. It is apparent that the company has been increasing its amount of retained earnings to boost its total equity. Financial Ratio Analysis Profitability Analysis In assessing profitability of a company, profitability ratios are normally used. Profitability ratios indicate the amount of profit a company generates in every one unit of revenues or sales (Palepu & Healy 2008). These ratios are used in assessing a company’s ability in generating earnings compared to its expenses over a specific period of time. In analyzing profitability of Kathmandu Holdings Limited, gross profit margin, operating profit margin, return on assets and return on equity ratios are calculated. Gross profit margin ratio This ratio is a benchmark for indicating control of inventory by a company. The rationale here is the higher the gross profit margin ratio a company has, the better its position. Gross profit margin= Gross profit/ Net sales (Revenue) 2010: 155289/245812= 63.17% 2011: 200583/306143= 65.52% 2012: 219545/347104= 63.25% 2013: 245025/383983=63.81% Operating profit margin ratio This ratio takes into account earnings before interest and tax as sales percentage. It incorporates all the daily business activity ordinary expenses measuring the company’s overall efficiency. Operating profit margin=operating profit/Net sales (Revenue) 2010: 12577/245812= 5.12% 2011: 18151/306143= 5.93% 2012: 16274/347104= 4.69% 2013: 14808/383983= 3.86% Return on assets ratio This ratio measures the company’s efficiency in managing its assets management and using them in profit generation. In essence, return on assets ratio measures profit earning level in relation to a firm’s investment level in total assets (Helfert 2001). The higher the return on assets ratio the company has, the better for a company because this indicates that a company is utilizing its assets well in generation of sales. Return on assets= Net income/Total assets 2010: 9387/319414=2.94% 2011: 39066/339890= 1.15% 2012: 34852/372820= 9.35% 2013: 44174/376217= 1.17% Return on equity ratio This is a measurement of shareholders return on the money they invested in the company. The higher the return on equity ratio, the better shareholders equity efficiency use because this is an indicator of the company’s efficiency in generation of profits from its shareholders’ equity. Return on equity= Net income/Shareholders equity 2010: 93807/239127= 39.23% 2011: 39066/254926= 15.32% 2012: 34852/279635= 12.46% 2013: 44174/294189= 15.02% Asset Efficiency analysis Total asset turnover This ratio is a measurement of the company’s ability in generation of its sales provided its total assets investment. Total asset turnover=Net sales/Average total assets 2010: 245812/ {(349385+319414)/2} = 0.7351 2011: 306143/ {(319414+339890)/2} =0.9287 2012: 347104/ {(339890+372830)/2} =0.9740 2013: 383983/ {(372830+376217)/2} =1.0253 Fixed asset turnover In this ratio, only fixed assets are taken into account when the ability of the company in generating its sales is measured. Fixed asset turnover=Net sales/Average net fixed assets 2010: 245812/ {(271124+273359)/2} =0.9029 2011: 306143/ {(273359+279974)/2} =1.1065 2012: 347104/ {(279974+294221)/2} =1.2090 2013: 383983/ {(294221+282286)/2} =1.3321 Equity turnover This ratio is a measurement of a firm’s ability in generating sales provided its preferred stockholders and common shareholders’ investment. Equity turnover=Net sales/Average total equity 2010: 245812/ {(132686+239127)/2} =1.3222 2011: 306143/ {(239127+254926)/2} =1.2393 2012: 347104/ {(254926+279634)/2} =1.2987 2013: 383983/ {(279634+294189)/2} =1.3383 Liquidity analysis Liquidity ratios are important in determination of a firm’s ability in meeting the short-term obligations it has. These ratios provide an overview of whether a company will continue undertaking its operations comfortably as a going concern (Palepu & Healy 2008). Current ratio Current ratio measures the firm’s current assets and compares it with its current liabilities. The higher the current ratio a firm has, the better the company’s position in paying off its short- term debts. Current ratio=Current assets/Current liabilities 2010: 46055/26007= 1.7709 2011: 59916/38183= 1.5692 2012: 78609/38709= 2.0308 2013: 93931/38820= 2.4197 Quick ratio This ratio is more conservative as it takes into account the most liquid assets a company has such as cash, accounts receivable and its short-term investments (Needles, Powers & Crosson 2010). It provides a better measure of the company’s ability in meeting its short-term debts than the current ratio. Quick ratio= Current assets-inventories/current liabilities 2010: (46055-37416)/26007= 0.3322 2011: (59916-54001)/38183= 0.1549 2012: (78609-73295)/38707= 0.1373 2013: (93931-80031)/38820= 0.3581 Cash ratio Cash ratio measures the cash and equivalents a company has against its liabilities. Capital structure analysis Capital structure analysis of a company is done using three ratios, that is, debt ratio, debt to equity ratio and capitalization ratio. It assesses the capital position of a company. Debt ratio Debt ratio is a comparison of total liabilities a company has to its total assets. A more leveraged position a company has occurs when it has more liabilities and therefore less equity (Schroeder, Clark & Cathey 2005). Debt ratio=Total debt/Total assets 2010: 80287/319414= 0.2514 2011: 84964/339890= 0.2500 2012: 93195/372830= 0.2500 2013: 82028/376217= 0.2180 Debt to equity ratio This ratio is measurement of a company’s total liabilities against its shareholders equity. Debt to equity ratio=Total liabilities/Shareholders Equity 2010: 80287/239127= 0.3358 2011: 84964/254926= 0.3333 2012: 93195/279635= 0.3333 2013: 82028/294189= 0.2788 Capitalization ratio Capitalization is a comparison between the company’s debt capital structure, that is, debt and shareholders’ equity against the equity component. Capitalization ratio=Total Debt/Total Capitalization Market performance analysis The market performance of a company is analyzed using earning per share and price earnings ratio. Earnings per share Earnings per share is the net income available to common shareholders divided the number of common shares outstanding. The Kathmandu Company has a basic earning share of 0.3cps in 2010, 19.5cps in 2011, 19.5cps in 2012 and 17.4cps. Price earnings ratio This ratio measures the current market price of a company’s stock against its earnings per share of stock. References Helfert, E. A. (2001). Financial analysis: tools and techniques: a guide for managers. Boston [etc.], McGraw-Hill Kathmandu Holdings, Investor relations, accessed 5 April 2014, http://www.kathmanduholdings.com/investor-relations/reports/ Needles, B. E., Powers, M., & Crosson, S. V. (2010). Financial and accounting. Mason, OH, South-Western Cengage Learning. Palepu, K. G., & Healy, P. M. (2008). Business analysis & valuation: using financial statements. Mason, OH, Thomson/South-Western. Schroeder, R. G., Clark, M., & Cathey, J. M. (2005). Financial accounting theory and analysis: text readings and cases. Hoboken, NJ, Wiley. Read More