Analysis of David Jones - Assignment Example

Analysis of David Jones A) i) Stakeholders may be a person, or a group of people or an entity that can directly affect or be effected by the achievements of the organization’s objectives. There are many stakeholders related to David Jones Company, five of them are mentioned below; 1) Investor/ Shareholder 2) Supplier 3) Employee 4) Customer 5) Australian Securities Exchange ii) As it is mentioned above that stakeholders can affect or be effected by the achievement of the organization’s objectives, so it is very important for those stakeholders that having more stake over the company to stay updated with the relevant information, so that timely decisions can be made. Accounting information is a vital source of information in this regard. Above mentioned stakeholders can use accounting information in the following way (Users of accounting, 2013). 1) Investor/ Shareholder: Investors of a company invest in a company with the intention of being received return on their investment in shape of dividend and capital appreciation of share value. If the operating performance of a company is consistently good, and dividend payment is up to the expectations of investor then investor will be agreed to invest further in this company. In other case, investor will divest. 2) Suppliers normally deal with companies on credit terms in order to enhance their sales, for the determination of allocating credit limit to a company. Suppliers are concerned with the cash flows of the company to judge whether the company’s liquidity position is able to pay off the debts of suppliers. 3) Employee would be eyeing at profits whether the company is capable of making Salary and Wages payment in the future. This can only be ensured through better profitability and cash flows. The main focus would be on the income statement and cash flows due to their concerns for profitability and cash flow statement. Employees are also concerned as how much company is spending on the Health and Safety to secure the workplace environment. 4) Customers will be looking forward about the pricing and quality of the product. Customers will be concerned about the budget spent on making quality products. Customer will be concerned with working capital strategy and credit lines available to customers. (Annual Report David 2013) 5) Australian Securities Exchange will be concerned either financial statements are prepared according to the financial reporting framework or not. The AEC will be eyeing at the optimum mix of equity and debt. (ASX, Corporate Governance Rules) iii) The accounting information limitations are as follow. The suppliers, employees and customer might have issues in getting any information relating to actual cash flows and loan covenants at which finance in obtained, this might change the problem of the David Jones. Limitation for Supplier As suppliers are concerned with the profitability and Cash Flows. There are limitations in such information as business might delay its payments to show better liquidity position or it might be following short term strategy which temporarily mend the financial statements. Limitations for Customers The company can tamper with financial reports and affects the quality of earnings of the business. This can distort the figures for research and developments costs and there is a possibility that wrong research costs might be capitalized to show that project have been successful. Limitations for Employees Tampering with the financial statement would place the careers of employees at stake. Short termism might be the strategy of the top management to boost share price but the post effects are drastic for stakeholders. The cash flows might be artificial, unrealized gains might be incorporated, the cash might be generated through selling the assets of the business. (CFA LEVEL II, Financial Statement Analysis) B) I) Corporate Governance is a mechanism through which companies are directed and controlled. It specifies the roles of different individuals in the company for effective operations of the business which are in the best interests of all stakeholders. Corporate governance structure ensures that interests of directors are aligned with shareholders of the company and issues of stewardships are minimized. The corporate governance specifies responsibility of the director of the company and make them accountable to shareholders for the consequences of action. Application of corporate governance in a company also ensures that all material information is disclosed transparently without any mala fide intention (Annual report of David Jones., 2013). If corporate governance rules are implied in public listed company, then market confidence will be enhanced and further finance will be easily available. Furthermore, investors, employees, suppliers and general public will be confident that their rights are being protected. ii) David Jones complies with ASX listing rules governing corporate structures. Some cases of compliance with corporate governance rules are depicting below; David Jones has ensured the “Independence of the non-executive directors” by appointing individuals who have no prior relationship with the company. David Jones hired all non-executive directors from different backgrounds and tailored orientation was also provided to the directors, so that they could understand all aspects of David Jones Company. The primarily objective of this initiative was to support the “Judgment” of the directors in the right way. iii) The ASX corporate governance rules have been complied with corporate governance listings in the following manner as. 1) Separate Chairman and Chief Executive Officers 2) Non-executive Directors are not involved with running of David Jones 3) Remunerations and Audit Committees headed by executive and non-executive directors (ASX.com) E) i) The two non-current assets are as follow 1) Property, Plant and Equipment 2) Intangible Assets Valuation Basis/Accounting Policies The David Jones Co used the respective accounting policies for measuring their Non-current assets. Property Plant and Equipment These are measured using the Cost Model approach, where cost less accumulated depreciation is stated on the balance sheet. This approach is provided by the International accounting standard under IAS-16 to measure the asset on historical basis approach. Intangible assets Intangible assets of David Jones include two main categories i.e. Software and Goodwill. Software are recognized at the historical cost at which they were purchased or developed. The software are amortized over the useful life the asset and are assessed for any impairment charges. Goodwill on the other hand is recognized on the fair value at the time of acquisition and is not amortized rather is reviewed for any impairments on yearly basis. ii) David Jones can recognize the above mentioned assets at fair value by using revaluation model and any changes in the fair values will be reported in the Profit and Loss accounts and Other Comprehensive Income through prescribed mechanisms. This is second approach provided by the International Accounting Standards (IAS-16). If fair value cannot be reliably measured, then cost model must be used. iii) Although Revaluation Model is a good model but it has a limitation that fair values might be difficult to measure for the specific assets. So Cost Model is rather a more appropriate model to use in such situations. Thus it is concluded that more relevant and reliable basis is to measure at Cost model and it will more close to Conceptual Accounting Framework F) i) Funding Analysis Business Financing is very important for effective and smooth operation of any business. Business Financing is done to invest in the capital assets of the company. There are many methods to do financing, however, most important are the following. 1) Operating Profit Operating Profit is an internal source of finance to fund the capital investments of the business. It carries an opportunity cost as this source is to be distributed in terms of dividends to the shareholders of the business and is considered the much expensive than the other sources of finance. 2) Debt Debt is considered as the cheapest source of finance as it carries a low cost of capital than the other available options of financing. However, more debt financing might push the company towards bankruptcy. 3) Equity Equity is a source of financing through issuing common and shares and other equity issues, it is considered a bit expensive than debt financing as per the theories of some finance experts. (Modigliani and Miller) ii) David Jones has mostly used the debt sources to fund its investment and this can be seen from the cash flow statement and David Jones’ Policy of funding mix. It can be seen through the financial statements of the David Jones that it more relies on debt financing as it is cheap source of finance comparing cost of capital from other sources. iii) David Jones has mostly repaid its debt during the 2013-2011 period and the reason might be that company’s analyst are foreseeing that debt will become more cheaper in the coming year and it will restructure its debt. David Jones also repaid $21,000,000 in 2011. This shows that company uses debt mix more than equity funding, and keep repaying its debt to minimize the risk of bankruptcy. David Jones did not issue any shares and neither used retained earnings to finance its capital investments for expanding business. (David Jones Annual Report, 2011, 12, 13) Iv) The company in 2014 would also finance through the debt financing as it has been David’s past practice to use debt financing and previous experiences show that company has used debt mix optimally. The repayment scheme can be seen as a strategy for debt restructuring which would ensure that more cheap debt is obtained and cost of capital is minimized. G) Share Price and Market Capitalization i) Current Share Price of David Jones as of August, 2014: DJS.AX AUD$3.99 Share Price as of July, 2013: DJS.AX AUD$2.65 Share Price as of July, 2012: DJS.AX AUD$2.44 (Yahoo Finance) ii) Although, the Earnings per share declined significantly in 2012 compared to 2011 yet the share price did not shown a fall comparatively, whereas in 2013, the EPS fell from 19.4 to 18, a decrease of 7.8% and the David’s Share price rose by 8.61%. This anomalous behavior might be due to the fact that David Jones has the growth potential, although, the performance has not been up to the mark, but new business expansions by the company might be in the interests of shareholders. (Guru Focus, Bloomberg) iii) The market capitalization of David Jones in July 2013 was AUD$1,445Millions which is significantly higher than the book value and this is the value at which the whole company can be bought. Book value as of July 2013 is AUD$565Millions.Book value includes the share at par value. (Yahoo Finance) iv) Market capitalization is the value of the David Jones Co at the market price multiplied by the no of share outstanding whereas the book value includes the par value of shares multiplied by the No of outstanding shares. The balance sheet is showing the book value of the company. Market capitalization is the value of the business at which it can bought or takeover (David Jones Ltd financial analysis). (Market Capitalization and M&A, Bloomberg n.d) Part II The two companies David and Myer are Cloth based fashion industries operating in the same business environment. Comparing the financial performance of the David with Myer would tell us that how well the company is performing relative to others. The following ratios are key indicators of financial performance. David Vs Myers in 2011, 2012 David Jones and Myers performance is as follow Profitability The profitability of David Jones has been below than the Myers and the reason might be that the Investments in 2006 by Myers is paying her well in future years. Although the asset turnover of Myers is lower than David, but this shows that Myers likes to invest in capital assets to get future economic benefits and pay offs. The Gross Profit Margin and Operating Margins are as follow. Ratio David 12 Myer 12 David 11 Myer 11 Gross Profit Margin 37.47% 49.31% 39.11% 47.68% Net Profit Margin 5.41% 5.40% 8.57% 5.99% (Bloomberg Analysis) Liquidity and Gearing The David Jones has a much better liquidity position than Myers although both the companies are well below the industry average. The industry averages are 2 for current ratio and 1 for quick ratio. The net working capital is positive for David jones, which shows that David jones have managed its inventory and receivables well, whereas Myers might not have been able to manage its working capital and has been continuously facing the negative results. Both the companies have invested a huge amount in inventory and the reason might be that they are avoiding are stock out circumstances. Ratio David 12 Myer 12 David 11 Myer 11 Current Ratio 1.06 0.88 1.23 0.81 Quick Ratio 0.14 0.11 0.14 0.11 Working Capital $16,951.00 ($61,397.00) $60,968.00 ($105,440.00) (Key Statistics of Myers and David, Guru Focus) Gearing Ratios The company David Jones although has more financing from debt in the recent year still the debt to equity ratio of Myers is higher than the David jones. The Myers are experts in using the debt finance to finance its assets and this can be seen from previous experience, However with the study of recent annual reports. David Jones is also making new efforts to use an optimum mix of debt and equity and to minimize its cost of capital. The interest cover ratio of David jones is better but it has low finance costs than Myers so this is a most appropriate reason. Ratio David 12 Myer 12 David 11 Myer 11 Debt/Equity ratio 0.6 1.186 0.2 1.29 Interest Cover Ratio 14.1 6.777 31.7 6.71 (Annual Report David, 2011/12), (Annual Report Myers, 2011/12) David Vs Myer in 2013 The company performances in 2013 are as follow Profitability David jones have suppressed Gross and Net Profit margins compared to Myer whose performance is comparatively better, i.e. the Gross Profit Margin is 50% for Myer and 37.18% for David Jones. Myer has better Sales Growth and shrinkage in costs of sales (Myer’s Annual Report, 2013). The Net Profit Margin of David Jones is better due to low operating costs than Myer. However, both companies have better inventory management than previous years but still they have high amount of perishable inventories as both companies operates in Fashion industry. Previous investments in capital assets have generated revenues for both of the companies. This can be shown through Return on Assets i.e. ROA of Myers is 6.70% and for David Jones is 7.69% (David Jones Annual Report, 2013). Liquidity The current and quick ratio is below the industry average and this is an alarming situation for both the companies. The current and quick ratio of David Jones is 0.986 and 0.143 and for Myer is 0.92 and 0.22 respectively. The industry average is 2 for current ratio and 1 for quick ratio. The working capital is also net liability for both the David Jones and Myers. Gearing Ratios The Gearing Ratios are suggesting that companies are more dependent on debt compared to equity. The Gearing ratio is 0.55 for David Jones and 1.14 for Myers. The reason has been that huge amount of liability has been invested in working capital in the shape of inventories. As this is a fashion based industry, Myer and David both have invested through debts. The Ratios has been provided in the Appendices below. Cash Flows The cash flows for David Jones have decreased from the previous year and the reason has been that David Jones has redeemed AUD$36Million in the year 2013. Myer have increased cash flows due to the better incomes (Whitley, 2014). Share Price and Market Capitalization The Share Price for David Jones is $AUD 3.99 and for Myers is $AUD 2.34. The David Jones shares prices is better than Myers, the reason has been that it is considered as a growth stock by the market analysts and it is expected that it will grow. Both companies have better market capitalization and both of the company’s stocks are considered as growth stock. (Annual Report David Jones Ltd) (Annual Report Myers, 2013) Appendices Ratio Calculations with formulae mentioned For the Year 2011 and 2012   Formula David Myer David Myer Ratio Calculation   2012 2012 2011 2011 Gross Profit Margin Gross Profit/Sales 37.47% 49.31% 39.11% 47.68% Net Profit Margin Net Profit/Sales 5.41% 5.40% 8.57% 5.99% Return on Assets Net Profit/Total Assets 8.15% 7.35% 13.84% 8.09%             Current Ratio Current Asset/Current Liability 1.06 0.88 1.23 0.81 Quick Ratio Current Asset-inventory/Current Liability 0.14 0.11 0.14 0.11             Debt/Equity ratio Total Liabilities/Equity 0.6 1.186 0.2 1.29 Interest Cover Ratio Profit Before Interest and Tax/Interest cost 14.1 6.777 31.7 6.71             Asset Turnover Sales/Total Assets 1.51 1.36 1.62 1.35 Working Capital Current Asset-Current Liability $16,951.00 ($61,397.00) $60,968.00 ($105,440.00) Calculation for the period of 2013 Ratio Calculation Formula David Myer     2013 2013 Gross Profit Margin Gross Profit/Sales 37.78% 50.04% Net Profit Margin Net Profit/Sales 5.16% 4.96% Return on Assets Net Profit/Total Assets 7.69% 6.70%         Current Ratio Current Asset/Current Liability 0.986 0.92 Quick Ratio Current Asset-inventory/Current Liability 0.143 0.22         Debt/Equity ratio Total Liabilities/Equity 0.55 1.14 Interest Cover Ratio Profit Before Interest and Tax/Interest cost 15.5 7.21         Asset Turnover Sales/Total Assets 1.49 1.35 Working Capital Current Asset-Current Liability $ (7,125.00) $ (43,553.00) References Annual report of David Jones. (2013). Annual Report: David Jones. Retrieved from http://www.davidjones.com.au/~/media/David-Jones/Corporate/ASX-and-Media/2013/DavidJonesLimited2013AnnuaReport.ashx ASX. (n.d.). Home - Australian Securities Exchange - ASX. Retrieved from http://www.asx.com.au/ David Jones Ltd financial analysis. (n.d.). David Jones Ltd financial analysis (AU000000DJS0 - ticker:DJS). Retrieved from http://www.infinancialsanalytics.com/en/financial%20analysis,David%20Jones%20Ltd,00053AA.html David Jones Ltd. (n.d.). Investing.com. Retrieved from www.investing.com/equities/d-jones-ltd-ratios Financial Statement Analysis”, CFA Level I Curriculum, 2014 edition Financial Statement Analysis,” Quality of Earnings”, CFA Level II Curriculum, 2014 edition Financial Analysis of David, Guru Focus, 2013, http://www.gurufocus.com/stock/DJNTY Myers Annual Report. (2013). Myer Investor Relations. Retrieved from http://investor.myer.com.au/Reports/ Professor Cram. "Ratios of Profitability: Return on Assets" available at College-Cram.com. 14 May 2008 Stock Analysis of Myers, Guru Focus, 2013 can be seen at, http://www.gurufocus.com/stock/ASX:MYR&summary Users of accounting. (2013). Users of Accounting Information | Internal | External | Examples. Retrieved from http://accounting-simplified.com/financial/users-of-accounting-information.html Yahoo finance. (n.d.). Yahoo Finance - Business Finance, Stock Market, Quotes, News. Retrieved from http://finance.yahoo.com/ Whitley, A. (2014). David Jones Nixed Bid, Shakeup Stokes Deal Talk: Real M&A - Bloomberg. Retrieved from http://www.bloomberg.com/news/2014-02-11/david-jones-nixed-bid-shakeup-stokes-deal-talk-real-m-a.html Williams, Jan R.; Susan F. Haka; Mark S. Bettner; Joseph V. Carcello (2008). Financial & Managerial Accounting. McGraw-Hill Irwin   Read More