The Performance of ASICS - Case Study Example

Table of Contents Introduction 1 Financial analysis 2 Profitability ratios 2 Return on Capital Employed 2 Net Profit Margin 3 Efficiency Ratios 5 Receivable Turnover 5 Payable Turnover 6 Gearing/ Financial Risk Ratios 7 Gearing ratios 7 Interest cover 8 Liquidity Ratios 9 Current Ratio 9 Operating Cash Flow to Current Liabilities 10 Investors’ ratios 12 Dividend per Share 12 Dividend Cover 13 Conclusion 14 References: 15 Appendix 16 Introduction This report examines the performance of ASICS a top dealer with sporting apparel. In this regard, selected ratios have been calculated as shown in the attached appendix and then compared with the company’s top competitors and industry leaders including Nike, Adidas and Puma SE with an aim of understanding the company’s financial performance as presented in its financial statements. By comparing the company with the industry, the report successfully provides a balanced and transparent overview of the company’s financial performance. The report thus provides an informed insight into how the company is performing financially thus which is essential in making informed decision as to whether to acquire the company. Financial analysis Profitability ratios These are ratios that give us an insight as to how well the company performed as far as generating profit is concerned. In this regard, ASICS’ return on capital employed (ROCE) as well as net profit margin for the last five years have been analyzed. Return on Capital Employed This is a ratio that is easy to calculate with the results being given in percentage which makes it easy to compare among different companies. The ratio is concerned with how much profit is generated for every dollar of the capital employed (Barnes, 2007). The company’s ROCE initially increased from 12.87% in 2011 to 13.62% in 2012 before declining to 11.33% in 2013 and eventually declining to 7.01% in 2015. This kind of performance is attributed to the prevailing market conditions with sharp increase in procurement costs in the company’s key markets being blamed from the sharp decline in the company’s ROCE in 2015. It is however worth noting that the industry averages also follow a similar trend although the decline for the industry in 2015 is not as sharp as that of ASICS. However, the general trend is associated with the prevailing market conditions especially increasing procurement costs in key markets (Asics.com, 2017). Net Profit Margin This ratio is an indication of how much profit the company generates for every sales dollar and is given as a percentage. In 2010, the company’s net profit margin was 9.2 cents for every sales dollar while the industry average was 8.59 cents for every sales dollar. This was the peak performance for the company as well as for the industry. Since then the company’s net profit margin has declined to the 2015 levels of 6.4% which was slightly below the industry average. “Asics Corp. reported its sales in the Americas slumped 17.3 percent in the first half, ended June 30, to ¥59.3 billion ($578.8 million). The drop was blamed on “the effect of changes in the retail market and intensifying competition in the U.S., in addition to the effect of foreign exchange rates,” according to the Japanese sports giant’s corporate statement. On a currency-neutral basis, sales were down 11.8 percent. The region’s income tumbled 84.4 percent in the period to ¥717 million ($7 million), mainly due to the impact of lower gross profit margin reflecting the weaker Brazilian real and a recording of allowance for doubtful receivables, presumably largely tied to the Sports Authority bankruptcy. The profit decline came despite efforts to reduce advertising expenses and other expenses. On a currency-neutral basis, America’s income was down 83.4 percent (sgbonline.com, 2016) Efficiency Ratios Receivable Turnover Also known as debtor’s turnover ratio, the ratio tells us how effective the company is in correcting the debts it has issued. When the company has more of its debts uncollected then the ratio will be higher. However, the ratio is computed in relationship to the amount of credit sales the company makes since if more credit sales are waiting receipt, then it will be higher. Over the five years, the company took between 66.56 days in 2015 and 95.74 days to correct its accounts receivables. This is far much higher than the industry average that ranged from 50.89 days in 2015 and 63.55 days. This is an indication that the company is a little less efficient in correcting its debts compared to the industry and hence a weakness in the company’s accounts receivables policy. ‘A very high accounts receivable turnover number can indicate an excessively restrictive credit policy, where the credit manager is only allowing credit sales to the most credit-worthy customers, and letting competitors with looser credit policies take away other sales’ (accountingtools.com, 2016). Thus, there is need for the company to review its credit policy with an aim of ensuring that debts are corrected at a more reasonable time thus releasing the cash to be used in generating more sales and company development. Payable Turnover This ratio indicates how long the company takes to pay off its suppliers during a given accounting period. The company performs better as far as paying its payables is concerned in comparison to the industry. The company took 66.97 days to settle its payables in 2012 which was the longest time over the five years period while the shortest time was in 2015 when it took 41.29 days to pay supplies. This is lower than the industry average which was the longest in 2011 at 78.52 days and the shortest in 2015 when it was 68.91 days. Gearing/ Financial Risk Ratios Gearing ratios The ratio measures how much the company is indebted by looking at debt and equity proportions for the company. It shows the company’s capital structure by looking at the mix and how the company utilizes debt and equity capital. ASICS has adopted the traditional capital structure by having an optimal capital structure with the cost of capital decreasing within the reasonable debt limit and increasing with average. Though the company’s gearing has been above 50%, it has gradually reduced from 2011 level of 89% to 2015 level of 71.83% with an aim of reducing the cost of capital. This is centrally to the industry trend whose gearing ratio rapidly increased to 79.78% in 2015. In this regard therefore, the company seems to be geared towards shareholder wealth maximization by keeping finance costs down through gradual reduction in gearing. Interest cover The ratio gives an indication of how much cash the company has to meet its interest payment obligations. ASICS interest cover is very low compared to the industry average. This is an indication of the company’s prudent use of cash resources by ensuring that the company does not have idle cash but it maintains sufficient cash to meet its interest obligations. Liquidity Ratios Current Ratio The ratio measures the company’s ability to pay its short term debts and it gives an indication how much protection the company has over every dollar of short term debt. The company’s current ratio is relatively higher than the industry average thus indicating that it has maintained desirable debt levels for the investors. The company’s current debt ranges from 2.25 to 3.43 over the five years period. This is despite the amount of revenue the company generates significantly declining. This is an indication that the debt is adequately protected while still leaving room for accumulation of more current liabilities which is a factor that should inspire investor confidence (Heritage.org, 2017). Operating Cash Flow to Current Liabilities This ratio gives an indication of whether the company is generating enough cash from its operations to meet its current liabilities. If the ratio is less than 1, it implies that the company has not generated enough cash to meet its current obligations. Therefore in this case, both the company and the industry are far from generating enough cash to cover their current liabilities over the five years period. However, it is possible that the companies could have re-invested the cash back into the company although the company should come up with a strategy to ensure enough cash is generated to reduce the resultant liquidity risk. From the graph, it is clear that although the company performed worse than the industry, its cash flow from operations position is gradually increasing having been the highest in 2017. Investors’ ratios Dividend per Share Dividend per share represents the total cash payment made to shareholders for each share held every year. The graph above show that despite the company’s dividend being lower than the industry average, it has been stable over the years gradually increasing to the 2015 level. The company seems to have adopted a stable dividend policy that is constant which ensures that the shareholders are given dividend even when the company’s revenue has declined. This is aimed at inspiring confidence among the shareholders especially given that the 2014 dividend was retained in 2015 in spite of the decline in the company’s earnings. It is however worth noting that the company’s level of dividend is far much below the industry average. Dividend Cover This ratio shows the number of times the company can cover its dividend payments with a dividend cover of less than 1.5 being viewed as a threat to shareholders investment since it has the potential to significantly affect dividend payment. A dividend cover of above 2 times is preferable. The industry average of dividend cover was above for each of the five years under consideration and this is a good factor for a potential acquirer. ASICS dividend cover was higher than that of the industry throughout the period with exception of 2015 when it greatly declined to just above 2 owing to the decline in earnings registered in 2015. On the other hand, the industry recorded a significant increase in dividends in 2015 thus signaling declining risk to investors. It is worth noting that investors use the dividend cover in gauging the level of risk they are exposed to with the receipt of dividends on their capital investments. In this case, investors ought to have confidence that ASICS will be able to cover dividend payment in the case of profitability falling as was the case in 2015 as it has been above 2 and hence this has little likelihood of affecting share valuation (Paul, 2017). Conclusion This report has looked at ASICS financial statements for the five years period between 2011 and 2015 and important conclusions have been drawn regarding the company’s profitability, financial risk, efficiency and investment (Brown, 2017). These were compared to the industry averages who included Nike, Adidas and Puma SE. On the basis of the analysis conducted, it was not possible for one to recommend acquisition of ASICS despite its being a major sports apparel company operating in various regions of the world and with considerably good revenue and dividend history. This is because in most of the aspects examined, the company has performed far much worse than the industry. Furthermore, there has been a significant decline in the company’s performance in 2015. Thus, this report recommends that the company puts in policies to improve efficiency and hence performance in a bid to make it more suitable for acquisition by making it perform better in future. References: Barnes, P. (2007) The analysis and use of financial ratios: an article review, Journal of Business Finance & Accounting, vol.4, no. 4, pp. 23-28. Asics.com (2017) Annual reports 2011-15, [Online]. Available at; http://corp.asics.com/en/investor_relations/library/annual-reports [accessed 12 May 2017] Heritage.org (2017) 2017 index of economic freedom: Japan, [Online]. Available at; http://www.heritage.org/index/country/japan [accessed 12 May 2017] Paul, C. (2017) Factors that affect a multinational corporation, [Online]. Available at; http://smallbusiness.chron.com/factors-affect-multinational-corporation-75252.html [accessed 12 May 2017] Brown, J. (2017) Making well informed investment decisions, [Online]. Available at; https://www.questia.com/newspaper/1G1-309935814/making-well-informed-investment-decisions [accessed 12 May 2017] Appendix Calculations Profitability Ratios Net Profit Margin = (Net profit/Sales)*100 2011 = (21574/235,349) 100 = 9.2% 2012 = (19629/247793) 100 = 7.9% 2013= (18633/260199) 100 = 7.2% 2014= (30467/354052) 100 = 8.6% 2015= (27449/428496) 100 =6.4% Return on Capital Employed (ROCE) = (Operating profit/capital employed) 100 2011= (18959/147,267)100 =12.87% 2012 = (21299/156374)100 = 13.62% 2013=(21486/180697)100 = 11.33% 2014=(34947/278489) 100 = 12.55% 2015= (18240/260160)100 = 7.01% Efficiency Ratios Receivable Turnover = Account receivables/Sales * 365 (Days) 2011= (55049/235,349)*365 = 85.37 2012 = (21681/247793)*365 =87.50 2013= (70600/260199)*365 = 99.04 2014 = (80992/354052)*365 =83.50 2015 = (75372/428896)*365 = 64.20 Payable turnover = (Account payables/ cost of sales) 365 2011 = (21121/132226) 365 = 58.30 2012 = (21681/140244)365 =56.43 2013 = (26981/146361)365 =67.29 2014 = (27266/198864)365 = 50.04 2015 =(27871/246342) 365 =41.30 Gearing Ratios Gearing ratio = Total debt/Equity *100 2011 =(94421/106369) 100 =88.77% 2012 = (97029/115315) 100= 84.14% 2013 =(106647/138078)100 = 77.24% 2014 = (153896/201941)/100 =76.20% 2015 = ((143585/199883)100 = 71.83% Cash interest cover = (Cash flow generated from operations+dividends received Interest received)/Interest 2011= (18959/463) = 40.95 times 2012 = (21299/649) = 32.82times 2013 = (21486/683) =31.46 times 2014 = (34947/764) =45.74 times 2015 = (18240/971) = 18.78 times Liquidity ratio 2011 =(136629/53523) = 2.55 times 2012 =(148434/55970) = 2.65 times 2013 = (176698/64028) =2.76 times 2014 = (264969/77348) = 3.43 times 2015 = (260586/83308) =3.13 times Operating cash flows to current liabilities = Net cash flow from operating activities/Current liabilities 2011 = 9553/53523 = 0.18 2012 = 10240/55970 = 0.18 2013 =14296/64028 = 0.22 2014 = 10720/77348 = 0.14 2015 = 18301/83308 = 0.22 Investor Ratios Dividend per share =Total Dividend paid/No. of Ordinary Shares 2011 = 0.12 2012= 0.15 2013 = 0.13 2014 =0.20 2015 = 0.20 Dividend cover =EPS/DPS 2011= 0.7/0.12 =5.83 2012 = 0.81/0.5 = 5.4 2013 = 0.78/0.13 = 6 2014 = 0.98/0.2 = 4.9 2015 = 0.45/0.2 = 2.25 Net Profit Margin ASICS Nike Adidas AG Puma SE Industry 2011 9.2% 10.31% 7.2% 7.66% 8.59% 2012 7.9% 9.21% 8.0% 3.46% 7.14% 2013 7.2% 9.77% 8.7% 2.09% 6.94% 2014 8.6% 9.62% 6.6% 4.31% 7.28% 2015 6.4% 10.71% 6.5% 2.84% 6.61% Return on Capital Employed 2011 12.87% 26.16% 13.91% 19.12% 17.84% 2012 13.62% 25.74% 12.64% 6.56% 14.64% 2013 11.33% 23.99% 17.20% 3.86% 14.10% 2014 12.55% 26.36% 10.98% 7.41% 14.33% 2015 7.01% 27.73% 13.27% 5.53% 13.39% Gearing ratio 2011 89% 52.27% 54.37% 60.84% 64.12% 2012 84.14% 48.97% 52.59% 36.87% 55.64% 2013 77.24% 58.33% 52.75% 35.14% 55.87% 2014 76.21% 71.78% 54.76% 36.53% 59.82% 2015 71.83% 72.83% 136.24% 38.20% 79.78% Interest cover (times) 2011 40.95 Times 722 times 8.29 times 23.97 times 198.90times 2012 32.82 times 995.33 times 8.76 times 75.47 times 278.10times 2013 31.46 times 1086.33 times 12.56 times 6.25 times 284.15 times 2014 45.64 times 108.39 times 13.18 times 20.65 times 46.97 times 2015 18.69 times 151.18 times 15.81 times 8.60 times 48.57 times Current Ratio 2011 2.55 2.85 1.44 2.04 2.22 2012 2.65 2.98 1.57 2.04 2.31 2013 2.78 3.44 1.45 2.19 2.47 2014 3.43 2.72 1.68 2.05 2.47 2015 3.13 2.46 1.40 1.91 2.23 Operating Cash flow to Current Liabilities 2011 0.18 0.46 0.19 0.15 0.25 2012 0.18 0.49 0.22 0.20 0.27 2013 0.22 0.75 0.13 0.16 0.32 2014 0.14 0.60 0.16 0.15 0.26 2015 0.21 0.74 0.20 -0.04 0.28 Receivables turnover (days) 2011 90.93 days 54.89 days 43.71 days 64.67 days 63.55 days 2012 84.29 days 49.59 days 41.38 days 56.59 days 57.96 days 2013 95.74 days 44.95 days 46.50 times 51.77 days 59.74 days 2014 84.58 days 45.06 days 48.86 times 55.17 days 58.42 days 2015 66.56 days 40.07 days 44.89 days 52.05 days 50.89 days Payables turnover (days) 2011 58.59days 53.21 days 98.38 days 103.90 days 78.52 days 2012 66.97days 45.34 days 83.90 days 84.69 days 70.22 days 2013 56.41days 45.17 days 92.41 days 85.28 days 69.82 days 2014 50.07days 49.86 days 79.18 days 118.51 days 74.41 days 2015 41.29days 47.04 days 84.49 days 102.82 days 68.91 days Dividends per share 2011 0.12 1.20 1.0 2.20 1.13 2012 0.15 1.39 1.35 2.37 1.32 2013 0.13 0.81 1.50 0.00 0.61 2014 0.20 0.93 1.50 0.68 0.83 2015 0.20 0.54 1.60 0.62 0.74 Dividend cover 2011 5.83 3.73 2.93 6.98 4.87 2012 5.40 3.47 2.80 4.69 4.09 2013 6 3.38 2.67 - 3.01 2014 4.9 3.28 1.81 1.61 2.90 2015 2.25 3.52 2.08 3.65 5.75 Read More