Debt Securities of Myer Holding Limited - Example

Debt Securities (FIN5DBS) Case Study of Myer Holding Limited Contents Debt Securities (FIN5DBS) 1 Case Study of Myer Holding Limited 1 Contents 2 Executive Summary 4 Introduction 4 Purpose 5 Methodology 5 Limitation 5 Industry Fundamentals 6 7 Industrial trend 7 Key economic drivers 7 Supply Industries 7 Demand Industries 8 Industry Performance 8 Company strategy 10 Competitive potion; SWOT Analysis 10 Strengths 10 Weaknesses 10 Opportunities 10 Threats 11 Financial Analysis 11 Profitability Analysis 11 Growth in income 11 Gross profit 11 Net Profit 12 Cash flow ratio 12 Return on Asset (ROA) 12 Interest coverage 13 Efficiency Analysis 13 Return on Equity (ROE) 13 Asset turnover 14 Account payables turnover 14 Accounts receivable turnover 14 Stability Analysis 15 Current Ratio 15 Debt to asset 15 Gearing ration 15 Cash Interest 16 Rating Model and Z score 17 Altman Z score analysis 17 Explanation of the Altman Z Score Result for Myer Limited 18 Conclusion 19 References 21 Executive Summary The aim of this report to undertake a credit worthiness for Myer holding limited which is the leading departmental so in Austrlia. The credit analysis is on the basis of Annual report (2010/16) inclusive of implication of the worldwide economic as well as local market for financial situation of Myer holding limited. There are many approaches undertaken in appraising the financial performance for MYER limited such as the Altman Z score model and the capacity analysis. furthermore, the credit rating for Myer limited is determine by making a contrast with its key depaetmental stores like the Harvey Norman. The report is executed to provide a comprehensive assessment of the credit rating for MYER Holding limited. The firm is operating under the department stores in Australia. We will extract the data from the annual report of the company (2010/16) with reference to data from the Morningstar. The financial situation will be appraised equally with regards to industrial average; furthermore, other methodologies like the use of Altman Z score model and fulmer H model will be important for our Analysis in order to have a comprehensive analysis and depiction of the Myer’s credit worthiness. Introduction Myer Holdings Limited is a public corporation and it was incorporated in the year 1990. The net income for the business is realized from its 68 department al sorts in Australia. The company produces an assortment of from clothes, home ware, beauty toys and electrical. The company register head office is in Declan, Melbourne with almost 13500 full time workers and the company is the leading amongst the 130 firms in Australia. Purpose the aim of this report to examine the credit worthiness of Myer holding by basing on the company’s financial, performance from 2010 to 2016 under the appraisal of median rating model, the atman Z score model, character analysis as well as capacity analysis methodology. The financial forecast will provide support in appraising and making a venture verdict on the firm. The report focus on presenting credit rating for Myer holding which is amongst the four leading departmental stores in Australia. The credit analysis is on the basis of annual report inclusive of the implication of the worldwide economic as well as local market. Methodology The financial assessment of the macroeconomic as well as industrial environment, the financial position are used in providing support to the application of the credit rating , crediting scoring model as well as the credit risk model, Altman Z score model and the rating model (Brigham, 2016). The quantitative as well as qualitative factors will be integrated to more precisely examine the creditworthiness. Other than the appraisal of past data, hypothesis on prospect business performance is vindicated to rationally predict the prospect credit rating, with comprehensive assessment. Limitation The reports experienced from the above constraints The steady use of the revised AASB standards, replacing the AGAAP leads to inconsistency in the financial reports, which might inhibit the quality of the report and make it less contrastable. The report appraises the credit rating of some firms; nevertheless, there is inadequacy of information of collateral hence there is n o assessment engaged with these C constituents. Industry Fundamentals Each industry depict distinct layout that shape the nature of the competitive association that unfolds. Comprehending the fundamental layout of the company’s industry at the present and if the prospect is a core disciple in formulating strategy for the company (Brigham, 2016). Myer falls in the department stores, which buys products from wholesalers and manufacturers and sell them to clients, generally devoid of changing the product. The company as well undertakes activities like client services, product merchandise, promotion, inventory management, as well as cash handling. There is a specific supply chain that is exclusive to the departmental sorts as depicted below. Industrial trend This approach tries to establish the worth of the security by appraising the firm’s financial statement. Ratio analysis is an efficiently approach to appraise the firms financial performance since, it entails the five diverse kind of financial rations (Ganguin, 2004). The fundamental analysis is vital since it aids an investor in comprehending the financial situation of Myer holding limited and ascertain the attitude of its shares (Joseph, 2006). Key economic drivers The key economic drivers is constantly growing in Australia, income per capital, the demand for online shopping as well as the consumers and demand from many sectors like footwear, clothing, furniture and electronic retail. Supply Industries The many supply industries are Clothing wholesalers Cosmetic and toiletry wholesalers Furniture and flow covering wholesalers Household wholesalers Infant clothing and underwear pants manufacturing Demand Industries The Consumers are the demand industries and are linked to Industries garments retailing Footwear retailing furnishings Retailing Computer and software retailing Local electrical device retailing Cosmetic and toiletry retailing Industry Performance The main drivers outline above is the key contributors to the industrial performance and impacts trend in the industry. The departmental stores has move violently for the last five years on back of unresponsive retail situations, unstable economic situations as well as increasing industry rivalry. Unsteadiness in the worldwide financial market leads to customer response to change and extensive economic unsteadiness has forced the demand for the product. The household have scaled back discretionary spending price-mindful customers concentrating on paying the debt and growing their saving. In these times, the bargain has turn to be common. Customers have turn to anticipate goods at selling price (Ranganatham, 2006). The industry have fight back to fine-tune the change in customer attitudes which has had a negative implication on the industry income, more specifically since industry players mainly retail unrestricted products. The two kind of players depicted in the market are the up market departmental like the Myer holding and David Jones and the mid market discount department al stores lime Kmart and BigW. The Myer Holding limited operates in the department stores industry in Australia, positioning itself in the up market of the departmental stores industry. The company’s only equivalent competitor is Harvey Norman, which is a department al stores firms registered in the Australian stock market (ASX). In the lower market, Woolworth ltd is engaging with Big W stores, competition with target stores chain owed by wesfarmers limited. In spite of the market slump in the year 2008, the average income of Myer limited grew each year by 2.1% and the growth rate is anticipated to growth in the future due to improved global economy. As the every economic crisis is passing away, the retail industry is anticipated to realize a positive trend. The retail revenue experienced drastic growth (0.9%) in sales and its revenue as been growing for the past seven years after the 2008 economic crisis. In this regards, the performance of many key firms in departmental stores in Australia were comparatively strong (Tracy, 2012). Woolworth experienced a growth (13%) in profit for the last financial period. Company strategy Competitive potion; SWOT Analysis Strengths Myers holding as committed as well as experienced executive team with more than 250 years of combined experiences. This is what has been vocal in Myer’s transformation fir the least six years. The company is dedicated to be an employer of choice with kre and 13000 workers, the company’s marketing strategy puts its information of its competitors (Warren, 2006). The company depicts an assessment of products with differentiated prices that permits its clients to have an assortment of alternative to makes; the company also has the capacity of retaining its clients. Weaknesses The company has been lagging in terms of change o supply chain. The company’s sales growth has not been good enough (Joseph, 2006). The company’s shares as well declining and the competition increased unlike in the past. In contrast with Woolworth, Myer holding limited have not been in a position of promoting its liquor as well as food department. Opportunities There have been many chances for takeover in building a strong association with strong charter and management. These will aid Myers in having a sustainable competitive edge, appealing expansion opportunities as well as defensible market position. Acquisition will make Myer company significant assets in its strategic location. Threats The key threats are the Myers competitors more specifically the Dow Jones, Harvey Norman and the Woolworth. The company has been experiencing fierce competition (Joseph, 2006). The company has the biggest market portion and the profit margin is very competitive. Financial Analysis This refer to the attitude of deeming the viability, steadiness as well as [profitability of a firm and the business mode. the key process entails the use of definitive ratio that is created through acceptable financial information as well as other related statement. the statement develop the basis of operational as well as financial verdicts. the key aims of this report is to undertake ratio analysis for Myer limited and financial design with regards to credit worthiness of the company. Profitability Analysis Growth in income The general approach in evaluating the extent of some index is the use of percentage ratio. With regards’ to ration Analysis for Myer Holding limited, the extent of growth in income attains 26% for the financial period 20009/16 (Brigham, 2016). The expansion is mainly because of market growth and wide acceptance of the company’s product and services standards. Gross profit The gross profit margin, which evaluates the association between the gross profit and revenue, depict an increasing trend from 39.26% in the 2009 t0 45.77% in year 2016. It this is an index of coverage of cost of goods sold by imposes. Net Profit The net profit margin depicts a declining trend from 3.19% to 2.18%. The ne t expense has been growing each year with a drastic reduction in selling and administrative cost due to strict managed policies towards the managerial and sales payout. The table of profitability ratio of Myer Holding (2009-2016) 2009 2010 2011 2012 2013 2014 2015 2016 Net Margin % 3.19 2.29 5.75 5.11 4.65 3.59 1.08 2.18 Asset Turnover (Average) 1.76 1.54 1.41 1.4 1.42 1.42 1.45 1.48 Return on Assets % 5.61 3.53 8.12 7.15 6.59 5.09 1.56 3.23 Financial Leverage (Average) 2.51 2.28 2.32 2.21 2.17 2.16 2.18 1.69 Return on Equity % 14.09 8.42 18.7 16.19 14.42 11.01 3.4 6.14 Return on Invested Capital % 14.6 7.99 14.6 12.48 11.28 8.67 3.33 5.58 Interest Coverage 2.61 3.1 6.83 6.98 7.26 7.04 3.09 6.22 Cash flow ratio This is another index used in many instances, which signify a correct estimation of the price of stocks. Cash flow standard for the capacity of the company to generate more cash flow and ascertain the extent to which the cash flow is created which eventually act because of firms financial situations. It chiefly identifies if a specific stock is over or under approximated. The cash flow ratio for Myer limited changed from 3.64% in the year 2009 to 3.49% in the year 2016.this implies that there is decline in the ability of the cash creations. Return on Asset (ROA) The return on asset explains the capacity of the firm’s asset to create more income. Ti portrays the size of income created from asset in the company. This index is mainly important for contrast between competing firms in the same industry. As per return on asset, it is evident that Myers depict declining trend from 2009 (5.61%) to 2016 (3.23%) this implies that less income is generated with assets. Interest coverage The interest coverage appraises the exact number of income is existing to meet the need of paying interest cost. Low interest coverage ratio implies that fettered amount of earning is prepared to pay off the interest realized by external debt and loan. This will render the company susceptible to prompt payment of liabilities and hence getting the firm engaged in the predicament of financial risk (Joseph, 2006). From the table above, it is evident that the there is growth interest coverage for Myer from 2.61 in the year 2008 to 6.22 in the year 2016 which implies that the firm’s financial risk is declining each year. In general, it is evident that the profitability of Myer holding limited is improved each year. This improvement is because of declining in operating cost and growth in income because of the boom in economy more specifically in the departmental stores in Australia because of the great in worldwide economic falling the global recession of 2008. Efficiency Analysis Return on Equity (ROE) The Return on Equity counts the rate of return on the amount of equity. An effective index evaluates the capacity of the profit creation stemming from net assets. The return ob equity manifests the ability of using the venture capital to grow the income. From the table above, it can be observed that the return one equity for Myer holding limited has been declining from the year 2008 (14.09) to 6.47 in the year 2016 (Peterson, 1999). Which implies that the ability of the company to use invested capital to generate income to shareholders of Myer holding limited is less effective? Asset turnover This quantifies the effectiveness in yielding profits. A loss in turnover values might implies an overstock or ineffectiveness in production efforts. Nonetheless, it is normally high value that guarantees improved performance (Ranganatham, 2006). From the table above, it is evident that the asset turnover for Myer limited is declining from 1.76 in the 2008 to 1.48 in the year 2016. This implies that the ability of the company yield more income is declining possibly due to more inventory system or inefficient production. the accountable turnover for the company is declining each which implied that the company is having poor creditors control system and thus it will led to ineffectiveness in the working capital of the company. Account payables turnover The account payable turnover evaluates the effectiveness of the company’s debtors control system. Long account payable is deeming as the best options. The decline in the value implies that the collection effectiveness is improving. From the table below it is evident that the debt turnover is declining each financial period from 2009 to 2016, which implies that the ability of the company to collect its debt is improving, and hence an indication do an effective working capital. Accounts receivable turnover In addition, measures the efficiency via the ratio between income and account receivable and measures the possibility of reinvesting for next period of production (Swansburg, 1997). A decrease of this value gives hint that the collection efficiency is improved. It is usually combined with accounts payable turnover value in order to gain a schematic overview of the cash utilization. For Myer, AR turnover increases from 2008 to 2009 while AP turnover decreases from 2008 to 2009. 2009 2010 2011 2012 2013 2014 2015 2016 Accounts receivable turnover 1.78 1.02 1.06 0.5 0.71 0.87 0.72 1.55 Account payables turnover 25.3 11.08 10.7 10.49 9.79 10.53 10.16 10.1 Stability Analysis Current Ratio The current ratio evaluates the capacity of the Myer holding to pays its debt with the company’s assets. It is the ratio involving the current asset and the current liability. The ratio is a sign of liquidity as well as capacity to fit the demand of the creditors and hence, it is deem as one of the key index for short-term financial strength. the current ratio of two is deem as the accepted norm but the ratio will be deferent for industries of the ratio amount is very high, the firm might not use the current assert effectively implying that excess asset are to correctly ventured to increase operational and non operational income (Brigham, 2016). Debt to asset The debt to asset is important in ascertain the solvency ability of the firm. It evaluates the ratio involving the liability and asset. Its formulae resemble the equitation of current ratio. The higher the value, the greater the risk. It draws many of the creditors an investors focus since it depicts the amount of debts one company that is willing to hold to incur the function of leverages instead of operating equity. Gearing ration The gearing ration equates the value of debt to shareholder’s equity, which aims at financing assets. The ratio is important in calibrating the firm’s capacity to assume long-term debt and loan that mainly is deem risky due to fixed interest. For Myer Holding limited, the debt burden is reassured which eventually corroborate an enhanced circumstance of financial statues fir the gearing values declining from 2010 to 2016. 2009 2010 2011 2012 2013 2014 2015 2016 Current Ratio 0.77 0.87 0.81 0.88 0.92 0.91 1 0.9 Debt to Asset Ratio 0.56 0.49 0.49 0.49 0.47 0.47 0.51 0.13 Gearing Ratio 2.51 2.28 2.32 2.21 2.17 2.16 2.18 1.6 Cash Interest The cash interest evaluates the amount of cash that is existing to make interest payments after getting rid of non-operating income and cost. The ratio is considered as significant appraisal of the firms credit worthiness sine it depicts the capacity to use the cash to meet the fixed interest commitment (Tracy, 2012). The information depicts a lessening of weight of interest payment for Myer holding limited. With the financial period ending 2016, Myer Holding experienced financial distress, specifically for the amount of selling cost, which had the biggest portion of the cost as observed in the income statement (2016). It can be observed from the rate of gross profit margin and the net profit margin. The firm bears the negative effect inflicted by the increasing cost (Peterson, 1999). The high inventory turnover leads to extra cost and accounts payable turnover recommends low capability in delaying the creditors payments and the cash interest coverage implies that existing amount of cash for MYER holding’s existing is less to cover its interest cost when concentrates with Harvey Norman (Joseph, 2006). The debt ratio depicts a hard times for engagement in huge amount of liabilities. In summary, the financial performance for Myer holding render a potential financial risk and costs a low venture value and credit worthiness contrasting with Harvey Norman. Rating Model and Z score Altman Z score analysis The Z score model is a precise forecaster of failure up to two years before the distress. It might be deem the appraisal of the distress of Industrial Corporation. Myer Holding Altman Z score is worked out as follows. Z= {1.2*X1+1.4*X2+ 3.3*X3 +0.6*X4+1*X5+ Z= {1.2*0.16+1.4*-0.244+3.3 *0.043+0.6*1.787+1*1.462} =2.53 The Altman Z score for Myer holding is 2.53. This implies that the firm is in grey zone and thus the company is experiencing some kind of financial distress (Joseph, 2006). Id the Altman Z is below 1.81, then firm will be facing bankruptcy risk, which is to the case for Myer. The figures above are millions other than the per share data as well as the ratios 1= {Working Capital/Total Assets} = {Total Current Assets -Total Current Liabilities)/Total Assets} = {141.151 -79.312)/381.684=0.16 X2= {Retained Earnings/Total Assets}+{-93.06/381.684}=-0.244 X3= {Earnings before Interest and Taxes/Total Assets} = {Pretax Income + Interest Expense) /Total Assets} = {7.995 + -8.173}/381.684}=0.042 X4= {Market Value Equity/Book Value of Total Liabilities} = {Market Capitalization/Total Liabilities} ={515.860/288.651}=1.7871 X5= {Revenue /Total Assets} ={558.062/381.684=1.46 The zones of discrimination were as follows 1.8 Read More