Financial Analysis of a Clothing Manufacturer in Australia - Business Plan Example

Kathmandu Ltd Financial analysis Name: Lecturer: Course name: Course code: Date: Executive Summary Financial ratios refers to the financial indicators for its financial performance and position. Financial ratios are used by potential investors as well as financial statement users in evaluating the business relationship amongst the items of financial reports and evaluating the company’s viability of investment (James, 2013). Financial ratios are categorized on the following financial measures such as asset efficiency, profitability ratios, market performance, liquidity and capital structure ratios. Kathmandu Limited is represented the following financial ratios in the year 2012, 2013, 2014 and 2015 financial statements. Table of Contents Executive Summary 1 1 Profitability ratios 3 Return on equity 3 Return on assets 5 Gross profit margin 6 Profit margin 7 Asset efficiency analysis 9 This ratio measures the company’s ability in generating income in using the assets and other business transaction including collection of cash from the debtors. The efficiency ratio’s describes the ability of company in generating earning thus providing the investors decisions to invest in the company. 9 Asset turnover ratio 9 Day’s inventory 10 Day’s debtor’s turnover 12 Liquidity Analysis 13 Current ratio 13 Cash flow ratio 14 Capital Structure ratio 16 Debt ratio 16 Equity ratio 17 Market efficiency ratios 18 Conclusion 19 Reference list 21 Appendix One 23 Appendix Two 24 Appendix 5 28 Introduction Kathmandu Holdings Limited (KMD) is an Australian based company engaging in designing, retailing and marketing of clothing. It also fabricates travel and adventure equipment. The company presently owns eighty seven stores in Australia, forty four stores within New Zealand and five stores based United Kingdom. Kathmandu Holdings Limited also operates in online stores. Kathmandu Holdings Limited (KMD) manufactures product that is statistically falls into two retailing categories such as recreational goods and retailing apparel retailing. The Apparel goods involve; fleece, technical wear, thermals, down jackets, woven casual wear and merino designed for women, men and children. The recreational goods comprises of packs, sleeping bags, tents, footwear, and camping accessories. Profitability ratios Profitability ratios refers to the financial measures utilized in evaluating the firm’s ability in make earnings in relative to the financial assets equity, and turnover. Profitability ratio assesses the ability of the company’s to generate earnings as well as cash flows in relative to the firm’s investment (Earl, 2007). The ratio embraces return on equity capital employed, gross profit margin as well as profit margin. Return on equity Return on equity is a profitability ratio used in determining the firm’s profitability on the shareholders equity invested (Ittelson, 2009). The potential investors as well as the firm’s stakeholders are keen on the company’s return on the assets equity invested to the earnings generated by the company to evaluates the profitability of the company in making earnings attributable to the shareholders investment. ROE ratio provides comparison compares the extent of net profit to the amount shareholders equity invested in the company. It is arrived at using the formula = net profit / average shareholder's equity x 100. Particulars/ FY 2015 2014 2013 2012 Net Profit 20,419 42,152 44,174 34,852 Average Shareholders’ Equity 313,314 302,146 294,189 279,634 Return on Equity 6.52% 13.95% 15.02% 12.46% From the tables above, Kathmandu Limited shows a decreasing trend of the company’s return on equity invested. The company reveals return on equity of 12.45%, in financial year 2012 and tremendous increase to 15.02% in subsequent year 2013 with a sequential decrease to 13.95% in 2014 and increase to 6.52% in 2015 financial years. This reveals that for every one dollar company shareholders invested, they earn an average of more than 10 cents thus Kathmandu Ltd is viable for investment irrespective of decreasing trend (Gibson C. , 2012). Return on assets This ratio is used in assess the companies’ earnings per the total assets invested to generate profits. Return on assets gives comparison between the company’s earnings generated to the company’s total assets. In case of higher ratios the company’s efficiently operates while lower ROE unveils that competitors substantiates strategic operational measures which suppreses the company’s profitability on the assets. The formula = EBIT (earnings before interest and tax / average total assets x 100) Particulars/ FY 2015 2014 2013 2012 EBIT 30,432 59,663 58,982 51,126 Average total assets 430,451 408,297 376,217 372,830 Return on Assets 7.07% 14.61% 15.68% 13.71% From the information revealed from the table above, Kathmandu Limited shows a decreasing trend on return on every dollar invested on assets. Although the company reveals a fluctuating trend from 2012 towards 2013 increasing by 1.97 it was insignificant since the company efficiency to generate earning from assets decreased 15.68%, in 2013, to 14.61% and 7.07% in 2014 and 2015 financial year (Earl, 2007). The decrease in generating earnings unveils a reduction on the return of each dollar invested on the company’s assets since the company and management unprofessionalism to generate earning from 2012 towards 2015 financial years. Gross profit margin The gross profit margin evaluates the company’s gross profit to its revenue from sales (Altman, 2008). This ratio describes the efficiency of the firms in changing its stock into income. Gross profit margin reflects the amount of sales revenue that becomes the gross profit resulting from deduction of cost of goods sold from the sales revenue. Gross profit margin = Particulars/ FY 2015 2014 2013 2012 Gross profit 251,890 248,141 242,025 219,545 Sales revenue 409,372 392,918 383,983 347,104 Gross profit margin 61.53% 63.15% 63.03% 63.25% From the table above Kathmandu Limited shows their profitability in meeting their cost of goods sold by utilizing their revenue. Kathmandu Limited shows define and steady gross profit margin from 63.25%, in 2012, 63.03% in 2013, 63.15% and 61.53% in 2014 and 2015 financial years. This describes that Kathmandu Ltd has a stable in meeting the cost of sales and contributes to the business earnings over the four financial years (Alfredson, 2012). Profit margin Profit margin is a profitability ratio used to compare sales revenue and earnings before interest and tax. A company must meet all other expenses from its gross profit. Profit margin ratio describes the company’s comprehensive structure in meeting the operating expenses from its sales revenue. Profit margin = Particulars/ FY 2015 2014 2013 2012 EBIT 30432 59,663 58,982 51,126 Sales revenue 409372 392,918 383,983 347,104 Profit Margin 7.43% 15.18% 15.36% 14.73% From the tables above, Kathmandu Limited reveal an average trend of profit margin from 2012 to 2014 financial years although it show’s a decreasing trend in the year 2015 (Alali, 2012). Kathmandu Limited profit margin ratio shows that the company is profitable since it has a gradual increase in its profit margin from 14.73% in 2012, an increase to 15.36% in 2013 a slight decrease in financial year 2014 to 15.18% and decrease to 7.43% in financial year 2015. This evidence the poor viability of Kathmandu Ltd for every each of income Kathmandu generates from sales, hence Kathmandu Limited is not profitable enough for investors and shareholders.. Asset efficiency analysis This ratio measures the company’s ability in generating income in using the assets and other business transaction including collection of cash from the debtors. The efficiency ratio’s describes the ability of company in generating earning thus providing the investors decisions to invest in the company. Asset turnover ratio Asset turnover ratio assesses the firm’s general efficiency in making income per each dollar of assets invested (Alfredson, 2012). Asset turnover ratio is considers fundamental in assessing the management’s efficiency in properly managing the firm’s financial assets to generate revenue. Asset turnover ratio = Particulars/ FY 2015 2014 2013 2012 Sales revenue 409372 392,918 383,983 347,104 Average total assets 430,451 408,297 376,217 372,830 Assets Turnover Ratio 0.95 0.96 1.02 0.93 From the tables above, Kathmandu Limited shows a steady increasing trend of the efficiency in utilizing its assets to generate earnings. Kathmandu Ltd reveal an increase in asset turnover form 0.93 in 2012, to 1.02 in 2013, 0.96 in 2014 and 0.95 in financial year 2015 (Chordia, 2008). However, the average of 0.98 in the fur financial years signifies that the company’s has effected measures to increase its efficiency in generating earnings attributable to the shareholders. Day’s inventory The days inventory evaluates the average period of time it takes for a company to convert its inventories to cash (Earl, 2007). Normally, lower day inventory means that the management is efficient; higher day’s inventory could also imply that the entity is inefficient in inventory management. Days inventory = Particulars/ FY 2015 2014 2013 2012 Average inventory 113,270 103,767 80,031 73,295 Cost of goods sold 157,482 144,777 141,958 127,559 Inventory turnover ratio (days) 263 262 206 210 The table above shows that Kathmandu limited a decreasing efficiency in transfiguring the inventory to the turnover thus ineffective in meeting the due financial obligations on using the sales revenue (Earl, 2007). The company unveils a deteriorating conversion rate of inventory from 210 days in 2012, 206 days in 2013 262 days in 2014 and 263 days in 2015. Steady inefficiency of Kathmandu’s conversion of the inventory to the sales accentuates that the company management need to enhance measures attributable to promoting efficiency position of in paying the due financial obligation using sales. Day’s debtor’s turnover Days debtors assesses the average period through which the firm takes to collect cash from the trade receivables (Gibson C. , 2012). The amount of cash held by the company’s customers / trade receivables should be realized within a shorter time as compared to the time the company pay’s it obligation to trade payables. With less number of days unveils that the company is efficiency receiving cash collected from the trade payables. Days debtors = Particulars/ FY 2015 2014 2013 2012 Average trade debtors 3,741 3,779 3,668 3,503 Sales revenue 409,372 392,918 383,983 347,104 Days debtors turn over (day's) 3 4 3 4 From the tables above, Kathmandu Limited unveils a predictable increase from 4 days to three days efficiency of collecting of cash from their trade receivables. The company’s increasing efficiency in collecting cash unpaid for the trade debtors from 4 days in 2012, 3 days in 2013, and slight inefficiency of 4 days in 2014 an 3 days in financial year 2015. Kathmandu Limited unveils an average efficiency of 3 days in obtaining the cash within the four financial year ending 2015. However, this accentuates that the company has enough cash to meet the financial obligations. Liquidity Analysis The company’s liquidity ratio examines the company’s financial condition in paying the company’s obligations (Altman, 2008). Liquidity ratio describes the ability of the company in gathering the company’s liability. Where liquidity ratio is higher the company is liquid enough to pay its liabilities. Current ratio Current ratio refers to the financial measure which assesses the ability of the company in meeting short-term business financial liabilities using the business current assets (Ittelson, 2009). Current ratio unveils the amount of dollars of current assets to the company’s dollar of current liabilities. Current ratio is arrived at using the formula = current assets / current liabilities Particulars/ FY 2015 2014 2013 2012 Current assets 132,348 114,748 93,931 78,609 Current liabilities 45,700 43,458 38,820 38,707 Current ratio 2.90 2.64 2.42 2.03 From the tables above, Kathmandu Limited reveals steady increasing operational liquidity in meeting the business short-term financial liability in making use of the current assets. Kathmandu Limited current ratio unveils a stable financial state within the four consecutive years ending 2015 the ratio since the ration is more than one meaning the company is able to meet due obligation without any strain (Alisdair McGregor, 2013). The increasing trend show that the company’s management enhances strategic measures that conceptualize in improving the company’s liquidity to pay the short-term financial obligations without. The company current ratio unveils improvement in making use of current assets to settle the short-term financial liabilities from 2.03 in 2012, 2.42, 2.64 in 2013, and 2.90 in 2015 financial year. However this accentuates the viability of Kathmandu Ltd for investment. Cash flow ratio Cash flow ratio is a liquidity financial measures used in assessing the ability of the business in settling-off the current liabilities using business cash and cash items achieved from the firm operating activities (Earl, 2007). Cash flow ratio accentuates the extent to which the business firm paying the current liabilities in using the cash from business operating activities. This ratio describes the company’s liquidity in using the cash from operating activities in meeting the outstanding current obligations. Cash flow ratio = Particulars/ FY 2015 2014 2013 2012 Cash flow from operating activities 29,627 31,195 45,676 32,528 Current liabilities 45,700 43,458 38,820 38,707 Cash flow ratio 0.65 0.72 1.18 0.84 From the table above, Kathmandu Limited shows a variable liquidity trend in utilizing its cash and cash items from operating activities to settle current financial obligation (Alfredson, 2012). Kathmandu Limited shows 0.84 in 2012, 1.18 in 2013, 0.72 in 2014 and 0.65 in financial year 2015. The decreasing trend from financial year 2013 towards 2015 accentuates the fact that the management as probably enhances effective measures that promote cash flow from operating activities to meet current financial obligations. Capital Structure ratio Capital structure ratio comprehensively entail the key financial measures attributable to long term sources as well as short term sources of finances (Gibson C. , 2010 ). The capital structure financial ratios unveils the company’s long-term financial strength attributable to the coverage as well as business structural ratios that includes debt ratios, debt equity ratios. The ratio discloses the percentage ratio that the business finances its investment either using the debt and firm's equity. Debt ratio Debt ratio is structural financial ratio used in assessing the amount of liabilities that exist for every dollar of the business assets. The normal debt ratio should be reported to be more than 50% which is considered that the firm finances the investments using debt and equity available in the firm. Debt ratio = total liabilities / total assets x 100 Particulars/ FY 2015 2014 2013 2012 Total liabilities 117,137 106,151 82,028 93,196 Total assets 430,451 408,297 376,217 372,830 Debt ratio 27.21% 26.00% 21.80% 25.00% Kathmandu Limited reveals that they rely mostly on debt as compared to equity since their debt ratio is less than 50%. Kathmandu Limited unveils an increasing trend of debt ratio from 25.00% in 2012, 21.80% in 2013 and increase to 26.00% and 27.21% 2014 and 2015 financial years. However, this signifies that the company is not worth for the investment. Equity ratio Equity ratio shows that the amount of the company’s dollars for every equity in the assets. Based on the accounting equation total equity is achieved by adding the total assets to the liabilities thus in case where the equity ratio is less than 50%, it means the business firm less dependent in equity and more dependent on debt funding (Chordia, 2008). Equity ratio = total equity / total assets x 100   2015 2014 2013 2012 Total equity 313,314 302,146 294,189 279,634 Total assets 430,451 408,297 376,217 372,830 Equity ratio 72.79% 74.00% 78.20% 75.00% Kathmandu Limited table above shows more than 50% equity ratio in four consecutive years ending 2013 thus this means that the company are more dependent on equity as compared to debt (Altman, 2008). Kathmandu Limited shows an increasing trend of equity ratio from 75.00% in 2012, 78.20% in 2013, 74.00%in 2014 and 72.79% in financial year 2015. However this shows that company has more assets as compared to their obligation thus good for investment. Market efficiency ratios This entails company’s financial behavior ratios in relation to the market performances. This ratio involves, earning per share ratio, and dividend per share ratio. Earnings per share ratio, this refers to the amount of earnings which is attributable to shareholders ordinary shares preferably of the common stock. E.P.S is fundamental common ratios being used in assessing the share intrinsic value (Alali, 2012). Earnings per share is categorized as diluted or basics. Diluted earnings per share are shows 17.2 in 2012 and sturdy increase to 21.9 cents in 2013, 21.0 in 2014 and 10.1 in 2015 financial year. Kathmandu’s increasing trend of basic and diluted earnings per share ratio shows viability of investing since the company is retaining some profit as reserves to finance future investments in issue of the shares. Diluted earnings per refer to the evaluation of the earnings presuming the outstanding convertible shares options that were transformed to the maximum number of allowed shares of common stocks. Conclusion From the financial analysis of Kathmandu Limited profitability performances of the company disclosed define and steady gross profit margin from 63.25%, in 2012, 63.03% in 2013, 63.15% and 61.53% in 2014 and 2015 financial years. This describes that Kathmandu Ltd has a stable gross profit margin of 63.77% over the four financial years. The profit margin, return on assets and return on equity defines the increasing trend of company in generating earnings thus describing its viability in investing. The liquidity position reveal by the company’s current assets ratio and cash flow shows an improving trend from financial year 2010 as compared to 2013. The recommended liquidity ratio should be 1 but according to the current ratio, the analysis indicates that its more than1 thus the company is in good financial health. The analysis of asset efficiency ratios reveals that the company was more efficient in managing its assets from financial year 2010 as compared to 2013. Kathmandu Limited shows a steady increasing trend of the efficiency in utilizing its assets to generate earnings. Kathmandu Ltd reveal an increase in asset turnover an increase in asset turnover form 0.93 in 2012, to 1.02 in 2013, 0.96 in 2014 and 0.95 in financial year 2015 thus showing that the company is efficient in managing its assets to generate returns. The analysis of Capital structure ratio shows an improvement in the company financial stability since the equity ratio shows increasing from 75.00% in 2012, 78.20% in 2013, 74.00%in 2014 and 72.79% in financial year 2015. However this shows that company has more assets as compared to their obligation thus good for investment. However this shows that company has more assets as compared to their obligation thus good for investment. Kathmandu Limited ratio analysis accredits viable investment since the company reveals increasing trend in the major ratios. Reference list Alali, F. A. &. F. P. S., 2012. The value relevance of international financial reporting standards: empirical evidence in an emerging market. The International Journal of Accounting, 47(1), pp. 85-108. Alfredson, K., 2012. Applying international accounting standards. In: s.l.:John Wiley & Sons. Alisdair McGregor, C. R. F. C., 2013. Comparability analysis on financial statements . In: s.l.:Routledge, p. 113. Altman, E. I., 2008. Financial ratios, discriminant analysis and the prediction of corporate bankruptcy.. The journal of finance, pp. 589-609.. Chordia, T. R. R. &. S. A., 2008. Liquidity and market efficiency. Journal of Financial Economics, pp. 249-268. Earl, C., 2007. The international handbook of financial reporting. In: s.l.:Cengage Learning EMEA, p. 32. Gibson, C., 2010 . Financial Reporting and Analysis: Using Financial Accounting Information. In: s.l.:Cengage Learning, p. 10. Gibson, C., 2012. Financial reporting and analysis. s.l.:Cengage learning. Ittelson, T. R., 2009. Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. In: s.l.:Career Press, Incorporated. James Reeve, J. D., 2013. Financial analysis and Managerial Accounting. s.l.:Cengage Learning. Appendix One Appendix Two Appendix Three Appendix Four Appendix 5 Read More