Financial Analysis for One of the Leading Specialists in Quality Clothing - Report Example

ACCOUNTING FOR MANAGERS Group Assignment Financial Analysis for Kathmandu Student Name: ID: Student Name: ID: Student Name: ID: Student Name: ID: Executive Summary This report conducts the financial analysis for one of the leading specialists in quality clothing and travel and adventure equipment in New Zealand, Kathmandu Holdings Limited. In this report, by analysing the company’s annual reports between 2012 and 2015, the trend analysis and ratio analysis for the company will be conducted, for helping the users of the company’s financial reports to have a better understanding of the information it provides. Through the analysis of the trend, Kathmandu Holdings Limited shows great increasing in the volume of its sales, EBIT, as well as the profit attributable to equity holders of the parent entity which is an indication of the growth of the financial performance of the company. Nevertheless, because of the increasing size of business operations, Kathmandu Holdings Limited has its assets, liabilities, and owner’s equity accounts all increased during the period between FY 2012 and FY 2015. Based on the ratio analysis, the report found out that Kathmandu shows a reduction in profitability, since both its ROE and ROA experienced a slight decrease during the time period between FY2012 and FY 2015. The reduction in the day’s debtors ratio and asset turnover ratio show that Kathmandu Holdings is less efficiently using its assets now, and it would spend less time to collect its debts. The liquidity for Kathmandu Holdings Limited has seen a slight improvement during the time period, however, the low value in its quick ratio and current ratio showed that Kathmandu Holdings could face serious liquidity risks, if things do not change. Even after reducing its financial leverages during the recent years Kathmandu Holdings, however, would still depend on debt financing as its major source of funds for the company. The long term financial stability of Kathmandu Holdings limited could as a result be a problem. The increasing of the price to earnings ratio for Kathmandu Holdings indicates that the investors would have stronger confidence over the company. Table of contents 6.0. References 12 1.0 Introduction The financial reports of the company could contain useful information that could be relevant to the users of the financial reports in making proper decisions depending on their relation and utility of the operations of the company. This report will conduct the financial analysis for one of the leading specialists in quality clothing and travel and adventure equipment in New Zealand, Kathmandu Holdings Limited, based on the annual reports of the company between 2012 and 2015. The financial analysis will be carried out in three parts. In part one of the processes, the report will provide the general background information for Kathmandu Holdings Limited. In the second part, the paper will conduct the trend analysis for assessing the pattern in both of the balance sheets and the income statements of the company. In the third and the last segment, the report will conduct a ratio analysis for Kathmandu Holdings Limited to finding out the current liquidity, profitability, capital structure, efficiency, and market performance of the organization. The report will give a summary of all the key points and findings at the end. 2.0 Kathmandu Holdings Limited This report will carry out the analysis of Kathmandu Holdings Limited, one of the leading specialists in quality clothing and travel and adventure equipment in New Zealand. The company has its business operations in quality clothing and equipment for travel and adventure in New Zealand, Australia, and the United Kingdom. Since the foundation and emergence of operation of the company in the year 1987 in New Zealand, the expansion of Kathmandu emerges from a greater outlay of marketing activities, a new loyalty program, an expansion of the range of products and the rejuvenation of its product mix. The company’s excellent service quality was vital in the achievement of great success during the past. Kathmandu has a listing on the New Zealand Stock Exchange (NZX) and the Australian Stock Exchange (ASX). The Kathmandu Holdings has since then grown to become the leading retailer in clothing and travel and adventure equipment in New Zealand and Australia, with a small presence in England. The company operates a total of 46 stores in New Zealand, 110 stores in Australia and four stores in the United Kingdom. The company did report a sound financial result for FY2014 in comparison with the other retailers in New Zealand and Australia. It did record the sales growth of 2.3% to $392.9m; Gross margin of 63.1% (FY2013:63.0%); increase in earnings before tax and interest of 1.4% from NZ$63.4m to NZ$64.3m and Earnings per share of 21.0 cents per share, down 1.1c during the 2014 financial year (Contents 2014). The positive result is primarily attributable to the growth of the company in Australia where unchanged gross margins and same-store sales growth of 6.9% led to the growth of EBITDA by A$4.8m or 13.3%. Therefore, it can conclude that Kathmandu has become a very successful company in the industry, with the large size of the business operation. 3.0 Trend Analysis The trend analysis could be helpful to the users of the financial reports to properly understand the alterations among the financial report's accounts of the company during the past period. Therefore, such horizontal analysis could help businesses to understand better how those statements have changed over the time, and what the trends for such changes are. In this report, the trend analysis found that Kathmandu shows the great increasing in its sales, EBIT, as well as the profit attributable to equity holders of the parent entity, which indicate the growth of the company’s financial performance. On the other hand, Kathmandu has its assets, liabilities, and owner’s equity accounts all increased during the period between FY 2012 and FY 2015, as the result of the increasing size of business operation. 3.1 Income statement The trend analysis for the company’s income statements for the period between FY 2010 and FY 2014 indicates the strong growth for the company’s business operation and profit. Although the company results in the FY2015 are not up to the expectations and is viewable as disappointing, Kathmandu has been able to develop over the last few years a strong network of profitable stores and still holds strong market share in the in quality clothing and travel and adventure equipment in New Zealand and Australia. As the diagram above shows, it is apparent that during the period between FY 2012 and FY 2015, Kathmandu was capable of increasing its sales revenue by 4.19% and the EBIT and profit attributable to shareholders of the parent entity have been reduced by 48.37% and 51.66% respectively. Such large improvements in the sales revenue and the profit earnings of the company would be remarkable, considering the large size of the business operation that the firm has. While the weak economic condition, which let customers have more demand for the cheap products from the supermarket could be one of the reasons that lead to such improvements in the company's sales and profit. The strategic development of the company’s abilities to better meet the customer’s demands, such as its launch of the online retailing, could also be the reason that contributed to such growth, as the company’s 2015 Annual report stated (Content 2015). 3.2 Balance sheet The trend analysis for the balance sheet of Kathmandu indicates that the company has its total assets, total liabilities, and total owner’s equity all increased during period between FY 2012 and FY 2015. As the diagram left shows, the total asset for Kathmandu has been increased by 6.08%, from the $372.85 million in FY 2012 to $ 433.53 million in FY 2015. There has been an increment in the total liability by 12.81 %, from the $ 93.22 million in FY 2012 to $ 120.21 million in FY 2015. The shareholder’s equity for Kathmandu has seen an increase by 6.08 % from the $ 372.85 million in FY 2012 to the $ 433.53 million in FY 2015. It appears that the massive increase in the sales revenue, as it was discussed in previous part, could mean that the company has a large size of the business operation. Therefore, to invest more in the assets would be reasonable for the enterprise, and this could justify its growth in asset base. Since Kathmandu has the proper growth in its profit, its accumulated retained earnings could help the company to finance the major parts of its new capital investment. Therefore, the growth rate of the company’s shareholders’ equity would be much faster than the growth rate of the company’s total liability. Total Current Assets($million) 1 1.203259 1.234467 1.14379 Non-Current Assets($million) 1 0.918072 1.023893 1.00833 total Assets($million) 1 1.010353 1.084919 1.060754 current liability($million) 1 1.006197 1.11573 1.083717 Non-Current liabilities($million) 1 0.799229 1.44845 1.158687 total liabilities($million) 1 0.885218 1.291323 1.128097 shareholder's equity($million) 1 1.010353 1.084919 1.060754 By further looking for the detail changes in the company’s balance sheet, it appears that the non-current assets for Kathmandu would grow faster than its current assets, shows that the increase in the company’s asset base would mainly occur due to its long-term investments. While on the other hand, since the company extend its borrowing to the longer time during the FY 2012, the company’s current liability has the positive growth coupled with the general increase in the company’s total liabilities. 4.0 Ratio Analysis Ratio analysis for Kathmandu shows a reduction in the profitability of the company, as it’s ROE and ROA both decreased slightly during the period between FY2012 and FY 2015. The decline in the day’s debtor’s ratio and the asset turnover ratio is a clear indication that Kathmandu now is less efficiently using its assets, and it would spend less time to collect its debts. The liquidity for Kathmandu has experienced a slight improvement during the period, however, the small value of its current ratio and quick ratio show that Kathmandu could face severe liquidity risks if things do not change. Although the company decided to reduce its financial leverage during the recent years, the debt financing would still be the primary sources of the funds for the enterprise. The long-term financial stability for Kathmandu could also be the problem. The increasing price to earnings ratio for business shows that the investors would have stronger confidence in the company. 4.1 Profitability FY2012 FY2013 FY2014 FY2015 ROE 13.04% 15.40% 14.14% 6.64% ROA 9.78% 11.79% 10.75 4.87% The table above shows that Kathmandu has the reduced profitability, as its ROE and ROA both decreased slightly during the time period between FY2012 and FY 2015. As the table above shows, it appears that over the four year period, the ROE for Woolworths has been reduced from 13.04% to 6.64%, this means Kathmandu now has less ability to earn profit for every dollar worth of the company’s equity. The amount of profit that the company could earn for every one dollar worth of equity is now reduced from $12.67 to $11.15. The negative change for company’s ROA shows the similar story, where the company’s ROA has been reduced from 9.78% to 4.87%, means for every one dollar worth of the company’s assets, it could now earn $0.0487 dollar less. As it was discussed in trend analysis section, Kathmandu shows fast growth in its sales revenue and its profit. During the period between FY 2012 and FY 2015, Kathmandu was capable of increasing its sales revenue by 4.19% and the EBIT and profit attributable to shareholders of the parent entity have been reduced by 48.37% and 51.66% respectively. However, due to the current economic downturn in the country, the company may face the great price pressure, which therefore lowers the profitability of the company. 4.2 Efficiency 2012 2013 2014 2015 Asset turnover 0.97 1.03 1.00 0.89 Days debtors 3.07 3.41 3.46 3.35 As the table above shows, during the period between FY 2012 and FY 2015, Kathmandu has its asset turnover ratio and days debtors ratio both reduced, shows the different changes of the efficiency for the company. The asset turnover ratio could measure how efficient the company could use its assets to generate the sales revenue. During the past four years, such figure for Kathmandu has been reduced from 0.97 to 0.89, which is a slightly decrease. The major reason for such change would be the company’s increased asset base. As it was discussed before, the total asset for Kathmandu has been increased by 6.08%, from the $372.85 million in FY 2012 to $ 433.53 million in FY 2015. Therefore, although the company also has its sales revenue increased, the larger asset base would reduce the company’s efficiency in using its assets to generate sales revenue. On the other hand, the day’s debtor’s ratio for the company has been slightly increased by 0.28 days; meaning that the company now could collect its debts at a slower rate. The large percentage of the cash sales for the company’s total sales revenue would be the major reason for such short day’s debtor’s ratio. 4.3 Liquidity FY2012 FY2013 FY2014 FY2015 Current Ratio 2.03 2.42 2.64 2.89 Quick Ratio 0.14 0.36 0.25 0.42 As the table above shows, liquidity for Kathmandu has been improved slightly during the period. The current ratio for Kathmandu has been increased from 2.03 in FY 2012 to 2.89 in FY 2014, which means for every one dollar worth of the current liabilities, the company would now have $0.86 dollar worth current assets more to cover. Such change would mainly be due to the large reduced short term borrowing that the company needs to repay, as the company rearrange its borrowing to long term borrowing, in order to take the advantage for the current low interest rate in the market. On the other hand, by subtracting the large amount of the inventory from the company’s current assets, the quick ratio indicates that the company has very small percentage of the non-inventory short term assets to cover its current liabilities. Although the quick ratio for the company has been increased from 0.14 to 0.42, however, such low value in this figure could let the company faces the great liquidity risks. Kathmandu has the low value in its current ratio and quick ratio show that the firm could face serious liquidity risks, if things do not change. In this case, the company may face the situation which its current assets cannot cover its current liabilities. Although the organization could sell its long term assets or make addition borrowing from outsides to provide more liquidity in the short term, however, this could be costly to the company. Thus, such issues should be carefully dealt with by the management of Kathmandu. 4.4 Capital structure FY2012 FY2013 FY2014 FY2015 Debt Ratio 31.83% 25.11% 29.35% 32.9% Debt coverage Ratio 1.33 1.28 1.35 1.37 Interest Coverage 9.55 13.84 13.3 8.25 The table above shows that Kathmandu has its debt ratio reduced from 31.83% in FY 2012 to 29.35% in FY 2014. The reason for this change is that the company’s good profitability during recent years enable the company to accumulate large amount of retained earnings, which could help the company to finance the major parts of its new capital investment. Therefore, the growth rate of the company’s owner’s equity would be much faster than the growth rate of the company’s total liability, and the debt financing now become less significant in the company’s capital structure. Nevertheless there was an increase of 3.55% in the fall of FY2015 because of instabilities in the market and asset acquisition. However, since the debt ratio for Kathmandu is still lower than 50%. Debt financing would still be the major sources of the funds for the company, which shows the high financial leverage that the company uses. On the other hand, the growing profitability enables the company to have its interest coverage to increase from 9.55 to 13.30, means the company has its EBIT enough to pay 13.30 times of the interest expenses it incurs during the year. Therefore, although the company uses the high financial leverage, its strong profitability would make the long term financial stability for Kathmandu to be acceptable. 4.5 Market performance FY2012 FY2013 FY2014 FY2015 Earnings per share $1.72 $2.19 $2.08 $1.01 Price $1.70 $3.33 $2.68 $1.59 Price to earning 0.99 1.52 1.29 1.57 As the table above shows, Kathmandu has its earnings per share, share price, and price to earnings ratio all increased. The increasing earnings per share are due to the company’s strong growth in its profitability. Therefore, the investors would have the stronger confidence for investing in the company. As a result, this leads to even faster growth speed for the company’s share price, and the price to earnings ratio for Kathmandu has been increased due to such reason. 5.0 Conclusion In conclusion, it was found that Kathmandu shows the great increasing in its sales, EBIT, as well as the profit attributable to equity holders of the parent entity, which indicate the growth of the company’s financial performance. On the other hand, the company has its assets, liabilities, and owner’s equity accounts all increased during the period between FY 2014 and FY 2014, as the result of the increasing size of business operation, but there was a decline in the first quarter of FY2015. Through the ratio analysis, it was found that Kathmandu shows the reduced profitability, since it’s ROE and ROA both decreased slightly during the time period between FY2012 and FY 2015. The reduced asset turnover ratio and day’s debtor’s ratio show that the firm now less efficiently using its assets and it would spend less time to collect its debts. The liquidity for Kathmandu has been improved slightly during the time period. The low value in its current ratio and quick ratio show that Kathmandu could face serious liquidity risks, if things do not change. Although the business reduced its financial leverage during the recent years, however, the debt financing would still be the major sources of the funds for the company. Therefore, the long term financial stability for Kathmandu could also be the problem. The increasing price to earnings ratio for Kathmandu shows that the investors would have stronger confidence over the company. 6.0. References Bruce, V. (1994). Stability from variation - the case of face recognition. Quarterly Journal of Experimental Psychology Section A-Human Experimental Psychology, 47(1), 5-28. CONTENTS (2014) Available at: http://www.kathmanduholdings.com/wp-content/uploads/2014/10/Kathmandu-AR-2014.pdf (Accessed: 28 December 2016). MarketWatch (2016) Kathmandu holdings Ltd. ADR. Available at: http://www.marketwatch.com/investing/stock/kthdy/financials/cash-flow (Accessed: 28 December 2016). Stocks, Rating, S., Cap, M., Type, S., Funds, I.M., Style, I., Assets, T., Holdings, T., Sectors, T., ETFs, N., Articles, N., Categories, P.I., Indicators, K., Interest, U., Stocks, I.P., Independent, I., fund, mutual, research, E., tools, portfolio, fund, hedge, k, 401, research, 529 plan and data, O. reliable (no date) Income statement for Kathmandu holdings Ltd (KMD) from Morningstar.com. Available at:http://financials.morningstar.com/incomestatement/is.html?t=KMD®ion=aus&culture=en-US (Accessed: 28 December 2016). Stocks, Rating, S., Cap, M., Type, S., Funds, I.M., Style, I., Assets, T., Holdings, T., Sectors, T., ETFs, N., Articles, N., Categories, P.I., Indicators, K., Interest, U., Stocks, I.P., Independent, I., fund, mutual, research, E., tools, portfolio, fund, hedge, k, 401, research, 529 plan and data, O. reliable (no date) Income statement for Kathmandu holdings Ltd (KMD) from Morningstar.com. Available at:http://financials.morningstar.com/incomestatement/is.html?t=KMD®ion=aus&culture=en-US (Accessed: 28 December 2016). Appendix Trend Analysis for Kathmandu (Income Statement) FY2012 FY2013 FY2014 FY2015 Sales revenue (NZD millions.) 347.1 383.98 392.92 409.37 EBIT (NZD millions.) 67.34 74.09 73.69 47.4 Profit attributable to equity holders of the parent entity (NZD millions.) 34.9 44.2 42.2 20.4 FY2012 FY2013 FY2014 FY2015 Sales revenue ($ millions.) 100% 110.62% 102.33% 104.19% EBIT ($ millions.) 100% 111.23% 10.42% 51.63% Profit attributable to equity holders of the parent entity ($ millions.) 100% 126.65% 95.48% 48.34% Trend Analysis for Kathmandu (Balance Sheet) FY2012 FY2013 FY2014 FY2015 Total Current Assets($million) 80.39 96.73 119.41 136.58 Non-Current Assets($million) 173.69 159.46 163.27 164.63 total Assets($million) 372.85 376.71 408.7 433.53 current liability($million) 38.73 38.97 43.48 47.12 Non-Current liabilities($million) 54.49 43.55 63.08 73.09 total liabilities($million) 93.22 82.52 106.56 120.21 shareholder's equity($million) 372.85 376.71 408.7 433.53 Total Current Assets($million) 1 1.203259 1.234467 1.14379 Non-Current Assets($million) 1 0.918072 1.023893 1.00833 total Assets($million) 1 1.010353 1.084919 1.060754 current liability($million) 1 1.006197 1.11573 1.083717 Non-Current liabilities($million) 1 0.799229 1.44845 1.158687 total liabilities($million) 1 0.885218 1.291323 1.128097 shareholder's equity($million) 1 1.010353 1.084919 1.060754 Profitability Ratios Return on Asset (ROA) EBIT x 100 = x%=net profits/average total assets Average assets Return on Equity (ROE) Profit available to owners x 100 = x% Average owners’ equity Kathmandu FY2012 FY2013 FY2014 FY2015 ROE 13.04% 15.40% 14.14% 6.64% ROA 9.78% 11.79% 10.75 4.87% ROE2012= (64.34/493.40)x100%=13.03% ROE2013= (74.09/481.10)x100%=15.40% ROE2014= (73.69/521.15)x100%=14.14% ROE2015= (47.4/713.86)x100%=6.64% ROA2012= (34.85/356.34)x100%=9.78% ROA2013= (44.17/374.64)x100%=11.79% ROA2014= (42.15/392.09)x100%=10.75% ROA2015= (20.42/419.30)x100%=4.87% Efficiency Ratios Asset Turnover Sales revenue = x times Average total assets Days Debtors Average accounts receivable x 365 = x days Sales revenue Kathmandu 2012 2013 2014 2015 Asset turnover 0.97 1.03 1.00 0.89 Days debtors 3.07 3.41 3.46 3.35 Asset Turnover 2012=371.1/357.84=0.97 Asset Turnover 2013=383.98/372.80=1.03 Asset Turnover 2014=392.92/392.92=1.00 Asset Turnover 2015= 409.37/459.97=0.89 Days Debtors2011= (365x2.92)/347.1=3.07days Days Debtors2012= (365*3.587)/383.98=3.41days Days Debtors2013= (365x3.714)/392.92=3.46days Days Debtors2014= (365x3.757)/409.37=3.35days Liquidity Ratios Current Ratio Current assets = x times Current liabilities Quick Ratio Current assets – inventory = x times Current liabilities Kathmandu FY2012 FY2013 FY2014 FY2015 Current Ratio 2.03 2.42 2.64 2.89 Quick Ratio 0.14 0.36 0.25 0.42 Current Ratio2012=80.39/38.73=2.03 Current Ratio2013=96.73/38.97=2.42 Current Ratio2014=119.41/48.48=2.64 Current Ratio2015=136.58/47.12=2.89 Quick Ratio2012= (80.39-74.97)/38.73=0.14 Quick Ratio2013= (96.73-82.63)/38.97=0.36 Quick Ratio2014= (119.41-108.54)/48.48=0.25 Quick Ratio2015= (136.58-116.79)/47.12=0.42 Capital Structure Ratios Debt Ratio=(Total liabilities/total assets)x100% Debt Coverage ratio= Non-current Liabilities Net Cash Flows from Operation Activities Interest Coverage= EBIT Net finance costs Kathmandu FY2012 FY2013 FY2014 FY2015 Debt Ratio 25.01% 21.91% 26.07% 27.73% Debt coverage Ratio 1.33 1.28 1.35 1.37 Interest Coverage 9.55 13.84 13.3 8.25 Debt Ratio2012= (93.22/372.85)x100%=25.01% Debt Ratio2013= (82.52/376.71)x100%=21.91% Debt Ratio2014= (106.56/408.7)x100%=26.07% Debt Ratio2015= (120.21/433.53)x100%=27.73% Debt coverage Ratio2012=54.49/40.97=1.33 Debt coverage Ratio2013=43.55/34.02=1.28 Debt coverage Ratio2014=63.08/46.73=1.35 Debt coverage Ratio2015=73.09/53.35=1.37 Interest Coverage2012=67.34/7.05=9.55 Interest Coverage2013=74.09/5.35=13.84 Interest Coverage2014=73.69/5.54=13.3 Interest Coverage2015=47.7/7.75=8.25 Market Performance Ratios Price to Earnings Ratio= (current market price/earnings per share) Kathmandu FY2012 FY2013 FY2014 FY2015 Earnings per share $1.72 $2.19 $2.08 $1.01 Price $1.70 $3.33 $2.68 $1.59 Price to earning 0.99 1.52 1.29 1.57 Price to earning2012=1.70/1.72=0.99 Price to earning2013=3.33/2.19=1.52 Price to earning2014=2.68/2.08=1.29 Price to earning2015=1.59/1.01=1.57 Read More