Kresta Holdings Limited - Essay Example

Financial Review Kresta Holdings Limited Introduction Kresta Holdings Limited (KHL) is an Australian company that deals in the manufacture and retailing of window treatments and its components. The company carries out its procurement and manufacturing operations predominantly in the Western part of Australia and it does its marketing and selling using a chain of its outlets that are located all over Australia and a similar presence is felt in the New Zealand. It operates in various brands including Vista window covering, Kresta Blinds, Curtain Wonderland, Decor2Go, and Ace of Shades. Its stock market code is KRS and it is listed in the Australian Stock Exchange (ASX). The company commenced its manufacturing and retail operations over 40 years ago, and according to the message from the CEO, Jules Di Bartolomeo, the company’s operations still continue to do well up to today. There is a lot of more innovation that the company gets from the fact that it has remained in manufacturing for a long time rather than if it was outsourcing and just being in retail. This is because manufacturing keeps the company struggling to keep up with the ever changing technology, hence increasing innovativeness and improvements in the line of products. Those companies that major in oversees products, majorly the company’s competitors, do end up filling the market with copied products, hence lack of innovativeness. Financial Review Looking at the income statement, the company had a gross profit of 70.29% in 2012 and 70.92% in 2013. This shows that the company’s expenses such as cost of goods sold decrease as its income increased. Looking at the operating expenses, the company had 42.01% in 2012 and 40.46% in 2013. This again shows that the company has engaged in ways that are able to reduce its cost of operations in order to maximize on the operating income. The great reduction in the cost of operation therefore led to an increase in net income to up to 30.46% in 2013 from 28.28% in 2012. The god performance of the company by reducing its cost of operations made it to record an income before taxes of 1.79% in 2013 from 0.10% only in 2012. This shows a great improvement in the company’s income before taxes which therefore increases the company’s ability to meet its short term financial obligations. Even though the tax liability increased from -0.61% in 2012 to 0.27% in 2013, the net income of the company has still proved to increase despite it all. The net income therefore increased from 0.71% in 2012 to 1.52% in 2013. The company therefore closed the 2013 year with a net income of 1.51% after the nonrecurring expenses had been taken into considerations. This is a much improvement when compared to the previous year where the net income after the nonrecurring expenses was 0.67%. On the company’s balance sheet, the company has recorded an increase in its cash and cash equivalents, inventories and its prepaid expenses from 2012 to 2013 with slight decreases in the company’s receivables, trade incomes and other assets. These have made the company’s current asset to increase from 48.14% in 2012 to 51.45% in 2013. Due to a great reduction in intangible assets from 9.62% to 5.87% in 2012 and 2013 respectively and other decreases in non-operating assets, there was a slight reduction in the company’s non-current assets from 51.86% to 48.55% in 2012 and 2013 respectively. The fact that current assets were more than the non-current assets puts the company at a more liquid state where it can easily set its current liabilities. The company’s total current liabilities has also reduced from 45.09% in 2012 to 35.71% in 2013. This is a clear indication that the company is a good course to set its current obligations through repayment of short-term borrowed loans and such like steps. Similarly, the total long-term liabilities of the company have also reduced from 5.31% in 2012 to 3.59% in 2013. This is also a good indication to show how the company has struggled through the year to repay some of its long-term debts. The company therefore is on the road to soon begin operating the company based on the owner’s equity with minimal borrowed debts. The company’s total liabilities has since reduced from the 50.39% mark in 2012 to the current 39.39% in 2013. This has shown much decrease in the company’s debts collectively and a good sigh to show that the company is leveraging itself from its debts. This as a factor, has made the company’s value of the shareholders’ equity to rise from the previous year’s 49.61% to the current year’s 60.70% the shareholders’ equity has finally moved beyond 50% hence the company is majorly operated by the owners’ capital and less of the borrowed capital. This is a very good step for the company as it encourages more investors to make a decision of investing in the company’s shares since its value is increasing. When the company’s value increases, it means that the investors get a chance to share in its higher earnings per share. Pro forma Financial Statements for 2014 Fiscal year Pro forma Income statement 2014 2013 Revenues Gross sales 110,830 100,755 Less allowances - - Net sales 110,830 100,755 Cost of sales 32,230 29,300 Gross Profit 78600 71,455 Operating Expenses Operating expenses 40, 770 40,770 Other expenses 28,860 28,860 Total expenses 69,630 69,630 Income before tax 8,970 1,825 Tax expense 270 270 Income after tax 8,700 1,555 Noncontrolling income (loss) -37 -37 Net income 8,663 1,518 Pro forma Balance Sheet 2014 Fiscal Year Assets 2014 2013 Current Assets Cash 6,000 5,206 Receivables 2,500 2,034 Inventories 9,200 9,093 Prepaid expenses 1,200 1,153 Other current assets 600 580 Total current assets 19,500 18,066 Fixed Assets Tangible assets 12,250 12,220 Intangible 2,100 2,061 Other 2,100 2064 Total fixed assets 16,450 17,045 Total assets 35,950 35,111 Liabilities Current liabilities Accounts payable 2,500 2,729 Short-term notes 2,000 2,083 Other 7,000 7,726 Total current liabilities 11,500 12,538 Long-term liabilities Long-term debt 3,000 3,976 Other long-term liabilities -1,750 -2,714 Total long term liabilities 1,250 1,262 Total liabilities 12,750 13,800 Shareholder’s equity Capital stock Retained earnings Total shareholder’s equity including retained earnings 23,200 21,311 Total liabilities and equity 35,950 35,111 Ratio Analysis a. Liquidity ratios i) Current Ratio Current ratio = current assets / current liability For 2013; = 18,066 / 12,538 = 1.44 The current ratio is greater than 1, hence the company has a good financial health. From the general rule, any current ratio greater than 1 shows that the firm is able to meet its short-term obligations when they fall due. Therefore Kresta Holdings can meet its short-term obligations when they fall due. ii) Quick Ratio Quick ratio = (current assets – inventories) / current liabilities For 2013; = (18,066 – 9093) / 12,538 = 0.72 This ratio is below 1. According to the general rule, quick ratio should be equal to or greater than 1 to show the firm’s good financial health. In this case, it means that, in every $1 the company receives, it has only $0.7 to cover its quick assets. This value is low, hence the company’s financial health when as far as quick assets are concerned, is not good. b. Financial Leverage i. Debt –Equity ratio Debt: equity ratio = total debt / Total Equity For 2013; = 13,800 / 21,311 = 0.65 The ratio is less than 1 hence the company is financially healthy. A debt-equity ratio of 0.65 means that, for every $1 that the shareholders own, there is $0.65 that belongs to the creditors. It therefore leaves the shareholders with only $0.35 of every dollar they own. ii. Debt ratio Debt ratio = Total debt / total assets For 2013; = 13,800 / 35,111 = 0.39 The company’s debt ratio is 0.39 showing that, for every $1 of the company’s assets, the company has $0.39 in debt. This ration is low, hence the company is healthy financially as it can be able to pay off all its debts with the assets it has. c. Asset Management i. Inventory Turnover ratio = Net sales / inventory For 2013; = 100,755 / 9093 = 11.08 This ratios show how the inventory is sold and restocked each year. A higher figure is good for this ratio, however, a company may be in danger of stock outs. This ratio is so high, showing that the company sells a lot of inventories so quickly, hence needs to have more supply of the same. ii. Receivables Turnover = Sales / Accounts Receivable For 2013; = 100,755 / 2034 = 49.54 This shows the number of times in a year that the company collects its receivables. The higher the receivables, the better it is for the company. In this case, the company collets its debt like 49.54 time in a year. This is a good figure for the company as it tries to collect most of its debts in a year. d. Profitability i. Gross profit margin = (Net Sales – Cost of Sales) / Net Sales For 2013; = (100,755- 29,300) / 100,755 = 71455 / 100,755 = 0.71 This ratio is more than half, hence it shows that the company makes more profit than its expenses. A gross profit margin ratio of 0.71 shows that, in every $1 that a company makes, the company remains with $0.71 as the profit after removing $0.29 for the expenses. It therefore shows that the company makes good profits. ii. Net Profit Margin = net profit / total Revenue = 1518 / 71455 = 0.021 This ratio shows how effective the company is in converting its revenues into profits. The figures here shows that the ratio is 2.1%, it therefore indicates that the company does so little to change its revenues into profits since 2% is too little. However, it shows that the company makes profits. e. Market Value i. Price per earnings ratio Market price per share / annual earnings per share For 2013; 0.66 / -0.01 -66 This shows that the company’s price per earnings is not healthy, hence the company’s market value is considerably low. ii. market/Book ratio Current market value / current book value = 0.205 / 0.14 = 1.46 This shows that, in every $1 of the market value, the current book value of the company is $1.46. This ratio is high hence shows the company is good to invest in. Return on Equity Using the Dupont equation, ROE = (Net income / sales) x (sales / assets) x (assets/equity) = (1518/100,755) x (100,755/35111) x (35111/21311) = 0.015 x 2.87 x 1.65 = 0.071 = 7.1% Economic Value Added (EVA) = Net Operating Profit After Tax – (Capital x Cost of Capital) = 1518 – (7890 - 6523) = 1518-1367 = 151 Synopsys of Findings After the above analysis about the Kresta Holdings Limited, it is so vivid that the company makes profits as can be seen from the income statement. The profit seems to increase every year and the pro income statement also indicates that the same increase in profits, both the before and after tax, will be witnessed in the coming fiscal year. The company also has a way of reducing its operating expenses in order to maximize on the net operating incomes. This results to higher net profits after tax. It is also vivid that the company’s liabilities decrease every year. With this, it is a very good indicator that the future of the company is very promising when the company will not have to depend on debts anymore to finance its operations. The company is striving to repay most of its debts every year, hence leveraging it from the hands of creditors. Soon, the company will be owned by a larger percentage by its shareholders only and this will increase its stock ratings and its stock earnings per share. It is advisable therefore, that any prospectus investors can very well invest in this Company without expressing any fears. The company has string liquidity ratios that shows its potential to meet its current obligations when they fall due. The profitability ratios also show how the company is making profits and not losses. The leverage ratios show the company’s potential to pay its debts and still make profits out of it. I therefore recommend strongly that investors can put their money in the company’s stocks. References Irfanulla, J. (2012). Margin of Safety. Accounting Explained Journal, 1-2. James, J. (2013). Financial Ratios Explanation. University of Notre Dame, 1-3. Jim, R. (2011). How is the Current Ratio Calculated and Interpreted. Tutor2u Journals , 1-2. Jim, R. (2012). Gearing Ratio. Tutor2u Journals, 1-2. Pamela, P. D. (2013). Financial Rtios Analysis. A Journal of James Madison Uiversity, 1-3. Penman, S. (2013). Book Rate of Return. A Journal of Tel Aviv University, 1-2. Read More