Kathmandu Limited Financial Analysis - Case Study Example

Kathmandu Limited Name: Lecturer: Course name: Lecturer name: Date: Executive summary Financial analysis is the process of investigating the operations of the company to determine the going concern and suitability as well as the viability of the company. Financial analysis is used to find out the stability of a company, the solvency position, its liquidity situation and profitability of the company in relation to interested parties for example investors. Profitability analysis ratios include return on equity, return on assets, and profit margin (Böhm, 2008). When performing asset efficiency, asset turnover ratio, times inventory turnover and times debtors turn over ratios are used. Current ratio and quick asset ratio indicates the liquidity position of the company. Capital structure ratios include debt to equity ratio, debt ratio, equity ratio, interest coverage ratio and debt coverage ratio. Ratios used to analyse the investment performance of a company include net tangible assets per share, earnings per share, and price earnings ratio. 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 (Charles Moyer, 2011). 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. Kathmandu Holdings Limited Trend Analysis Trend analysis is used to forecast the future direction of various items on the basis of the trend of the items in the previous periods. Trends in revenue and net profit after tax figures for Kathmandu Ltd for the period 2010 - 2013 According to the information above, the revenue of Kathmandu Ltd had an upward trend from 2010 to 2011, but a downward trend from 2012 to 2013, as well as net profit after tax. This proposes that selling segments of the company from 2010 to 2011 has increased revenue and achieved profit growth. But from 2012 to 2013, the firm has decreased revenue and profit. This could be due to the poor performance of the sold segments or due to poor management of expenses. Profitability Analysis Profitability analysis describes the company’s capability in generating profits from its investments. Profitability ratios are used to measure the effectiveness of companies in generating earnings from their investments throughout the financial period (Frank J. Fabozzi, 2012). A higher value in most of these ratios indicates that the business is doing well in relation to competitors or past financial years. Return on equity (ROE) Shareholders are fascinated in the return that the company is making for them. Return on equity is the test of a firm’s performance. The ROE, articulated as a percentage, is calculated by comparing the profit that the company has generated for its shareholders during the financial period to the shareholders’ investments in the company. Return on Equity (ROE) = 2010 2011 2012 2013 Net profit available to ordinary shareholders 9387 39066 34852 44174 Average equity 239127 254926 279634 294189 ROE 3.9 15.3 12.5 15.0 As shown above, ROE for Kathmandu Ltd increased from 2010 to 2011 this means that an investment of one dollar of owners’ equity in 2010 returned 3.9 cents of earnings available for sharing among shareholders. In 2011, 2012 and 2013, an equivalent investment generated 15.3 cents, 12.5 cents, and 15.0 cents of earnings available for distribution to shareholders. ROE increased in 2011 to 15.3, then it declined in 2012 to 12.5 and it increased to 15.0 in 2013. The ROE of Kathmandu ltd is fluctuating with a very high fluctuation in 2010 and 2011 and it is also maintaining very low ratios. Return on assets (ROA) Return on assets ratio is used to evaluate the percentage of earnings as compared to the assets of the company (Gates, 2003). The return on assets ratio is a profitability ratio that relates an entity’s profits to the assets available to produce the profits. Return on assets = 2010 2011 2012 2013 Earnings before interest and tax 38798 57217 51126 58982 Average total assets 319414 339890 372830 376217 Return on assets (ROA) 12.15 16.83 13.71 15.68 The information presented on the table above demonstrates that the previous two years in Kathmandu Ltd represented a rising trend of ROA ratio which was 12.15 cents in 2010 and 16.83 cents in 2011. The ROA declined in 2012 to 13.71 cents and increased again in 2013 to 15.68 cents in 2013. The trend was positive in the last two years, this means that steady and rising dollars of profit they gain from each dollar of assets they manage. Gross profit margin The gross profit margin evaluates the company’s gross profit to its revenue from sales. This ratio describes the efficiency of the firms in changing its stock into income (Tracy, 2012). 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 = 2010 2011 2012 2013 Gross profit 155289 200583 219545 242025 Sales revenue 245812 306143 347104 383983 Gross profit margin 63.2% 65.5% 63.3% 63.0% From the information above, the profit margin for Kathmandu ltd in the first two years increased but in the subsequent two years it deteriorated. One dollar of net sales revenue in 2010 and 2011 resulted 63.2 cents and 65.5 cents correspondingly whilst one dollar of net sales revenue in 2012 and 2013 resulted 63.3 cents and 63.0 cents respectively. The gross profit margin for Kathmandu Ltd was a decreasing trend from 2011 to 2013 though its margin was high. Profit margin Profit margin is a profitability ratio used to compare sales revenue and earnings before interest and tax (Thomas R. Robinson, 2012). 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 = 2010 2011 2012 2013 Earnings before interest and tax (EBIT) 38798 57217 51126 58982 Sales revenue 245812 306143 347104 383983 Return on assets (ROA) 15.8 18.7 14.7 15.4 As it is revealed in the above table, the profit margins of Kathmandu Ltd are 15.8 %, 18.7 %, 14.7 % and 15.4 % from 2010 to 2013 respectively. It can be concluded from the figures above that there was an increasing trend in first two years whilst a decreasing trend in the two subsequent years. 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 (Paul Healy, 2012). 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 The asset turnover ratio signifies a firm’s general efficiency in making income per each dollar of investments in assets. Asset turnover ratio is also very useful to assess management’s efficiency in managing the company assets. Asset turnover ratio = 2010 2011 2012 2013 Sales revenue 245812 306143 347104 383983 Average total assets 319414 339890 372830 376217 Gross profit margin 0.77 0.9 0.93 1.02 From the information shown in the table above, it is evident that the asset turnover ratio from 2010 to 2013 of Kathmandu Ltd represented 0.77 times, 0.9times, 0.93 times, and 1,02 times. Kathmandu ltd had a rising trend; this means that there is efficiency in the utilizing company’s assets. This positive trend in the asset turnover ratio has contributed to the firm’s improved ROA. Day’s inventory The days inventory evaluates the average period of time it takes for a company to convert its inventories to cash (Gibson, 2010). 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 = 2010 2011 2012 2013 Average inventory 37416 54001 73295 80031 Cost of sales 90,523 105,560 127559 141958 Days inventory 151 187 210 206 From above table, it is evident that days inventory of Kathmandu Ltd has an increasing trend between 2010 and 2012 (151 days, 187 days and 210 days respectively) and it decreased to 206 days in 2013. This means from 2010 to 2012, the company took more and more time to convert its inventory. Day’s debtors Days debtors evaluate the average period of time it takes for a firm to collect money for the trade receivables. 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 (Gibson, 2010). The lesser the number of days shows a efficiency on receiving cash from trade payables. Days debtors = 2010 2011 2012 2013 Average trade debtors 3903 2339 3503 3668 Sales revenue 245812 306143 347104 383983 Days debtors 6 days 3 days 4 days 3 days From the information above, Kathmandu ltd had a decreasing days debtors from 2010 to 2011, 6 days to 3 days, but after these two years, the company’s days debtors increased in 2012 to 4 days then decreased to 3 days in 2013. Though the day’s debtors are fluctuating, the company is efficient in collection of debt from trade debtors. The risk associated with higher efficiency in collecting cash from receivables can reduce the company sales since debtors does not have more time to capitalize on paying the company (George T. Friedlob, 2003). Liquidity Analysis The company’s liquidity ratio examines the company’s financial condition in paying the company’s obligations. 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 evaluates the dollars of current assets the company has per 1 $ of current liabilities. This ration describes the firm’s ability in using its current business assets to pay its liabilities. Current ratio = 2010 2011 2012 2013 Current assets 46055 59916 78609 93931 Current liabilities 26007 38183 38708 38820 Current ratio 1.8 1.6 2.0 2.4 From the above information, it is evident that the current ratio of Kathmandu ltd had an increasing trend from 2011 to 2013. The company had $1.8 of current assets for every $1 of current liabilities in 2010, $1.6 of current assets for every $1 of current liabilities in 2011, $2.0 of current assets for every $1 of current liabilities in 2012, and $2.4 of current assets for every $1 of current liabilities in 2013. The trend is healthy for the business because the company can pay off short term obligations comfortably using its current assets. The company should increase its current liabilities for it to have increased profits. Quick asset ratio The quick asset ratio evaluates the dollars of current assets available (excluding inventory) to service 1$ of current liabilities (Charles Moyer, 2011). Quick ratio is a more stringent test of liquidity. Quick asset ratio = 2010 2011 2012 2013 Current assets - inventory 8594 5915 5314 13900 Current liabilities 26007 38183 38708 38820 Current ratio 0.3 0.2 0.1 0.4 From the figures above, Kathmandu Ltd had $0.3 of current assets excluding inventory for every dollar of current liabilities in 2010, in 2011 the ratio reduced slightly to 0.2 and 0.1 in 2012. The ratio increased in 2013 to 0.4. it is evident that the company did not overinvest in inventory. Cash flow ratio Cash flow ratio evaluates the company’s ability to cover its current liabilities using operating activity cash flows (Michelle R. Clayman, 2011). This ratio describes the company’s liquidity in using the cash from operating activities in meeting the outstanding current obligations. Cash flow ratio = 2010 2011 2012 2013 Net cash flow from operating activities 32603 39774 32528 45676 Current liabilities 26007 38183 38708 38820 Current ratio 1.3 1.0 0.8 1.2 Kathmandu Ltd had $ 1.3 of operating cash flows for every dollar of current liabilities in 2010, in 2011 it had $ 1.0 of operating cash flows for every dollar of current liabilities, in 2012 it had $ 0.8 of operating cash flows for every dollar of current liabilities, and in 2013 it had $ 1.2 of operating cash flows for every dollar of current liabilities. This means that the company had difficulties in meeting its obligations from the net cash flows in 2012 as opposed to the other three years. Capital structure analysis The company’s capital structure is the percentage of debt funding comparative to equity funding, and it reflects the company’s financing decisions (Tracy, 2012). Capital structure ratio (also known as gearing ratio) depicts the percentage of debt to equity financing, and are important when assessing company’s long-term feasibility. Debt to equity ratio Debt to equity ratio evaluates how much dollars of debt exist per 1$ of equity funding. If this ratio exceeds 100 per cent, then the company relied more on debt funding than equity funding. Debt to equity ratio = 2010 2011 2012 2013 Total liabilities 80287 80964 93196 82028 Total equity 410024 408819 407471 405792 Current ratio 19.6 19.8 22.9 20.2 From the information above, it is clear that Kathmandu ltd was more reliant on equity funding than debt funding this is because the debt to equity ratio was lower than 100 per cent (Paul Healy, 2012). The company had a decreased debt to equity ratio which means that it reduced the liabilities. Debt ratio Debt ratio evaluates how much dollars of liabilities exist per 1$ of assets. If this ratio exceeds 50%, then it means that the company funded its investments in assets by depending more on debt as compared to equity. Debt ratio = 2010 2011 2012 2013 Total liabilities 80287 80964 93196 82028 Total assets 319414 339890 372830 376217 Current ratio 25.1 23.8 25.0 21.8 From the above figures, it is revealed that Kathmandu ltd financed every $1 of assets with $0.25 of debt in 2010, funded every $1 of assets with $0.24 of debt in 2011, funded every $1 of assets with $0.25 of debt in 2012, and funded every $1 of assets with $0.22 of debt in 2013. This means that Kathmandu funded its investments in assets by relying more on equity funding relative to debt funding Equity ratio The equity ratio determines the amount of dollars of equity per 1$ of assets. In the accounting equation, the equity equals the total assets plus total liabilities (Gates, 2003). In case the Equity ratio is less than 50 %, then it means that the company is more reliant on debt financing than equity financing i.e. the company had more liabilities than assets. Equity ratio = 2010 2011 2012 2013 Total equity 410024 408819 407471 405792 Total assets 319414 339890 372830 376217 Equity ratio 128.4 120.3 109.3 107.9 As depicted above the equity ratio for Kathmandu Ltd were 128.4 %, 120.3 %, 109.3 % and 107.9 % from 2010 to 2011. It also had a downward trend with figures above 100 %, which means the company was more reliant on the equity financing than debt funding. Market performance analysis Earnings per Share (EPS) Earnings per share is calculated by dividing net profit available to ordinary shareholders divide by weighted number of ordinary shares on issue. 2010 2011 2012 2013 Net profit available to ordinary shareholders 5292 35420 44337 34364 Weighted number of ordinary shares on issue 300903 300903 301152 301224 Earnings per share 0.02 0.12 0.15 0.11 Earnings per share increased from 0.02 in 2010, 0.12 in 2011 and 0.15 in 2012. It decreased again in 2013 to 0.11. NTAB per share 2010 2011 2012 2013 Ordinary shareholder’s equity – intangible assets (2698) 11241 30542 59326 Weighted number of ordinary shares on issue 300903 300903 301152 301224 NTAB (0.009) 0.04 0.10 0.20 The NTAB per share for Kathmandu have an increasing trend from 2010 to 2013. Conclusion From the analysis of the four years financial statements of Kathmandu ltd, it is evident that the company trend analysis decreased in the last three years with a small margin. The company is efficient in managing its assets. This was revealed in the analysis of the asset efficiency ratios like asset turnover, day’s debtors and days inventory ratios. The company is profitable as evident also by the profitability analysis. The profitability ratios reveal stability in company profits. The liquidity position of the company reveals that the company is healthy. It is also revealed that the company depends mainly in equity financing than debt financing in financing its activities. References Böhm, A. (2008). Interpretation of Key Figures in Financial Analysis. GRIN Verlag. Charles Moyer, J. M. (2011). Contemporary Financial Management. Cengage Learning. Frank J. Fabozzi, a. P. (2012). Analysis of Financial Statements. John Wiley & Sons. Gates, S. (2003). 101 business ratios: a manager's handbook of definitions, equations, and computer algorithms : how to select, compute, present, and understand measures of sales, profit, debt, capital, efficiency, marketing, and investment. McLane Publications. George T. Friedlob, L. L. (2003). Essentials of Financial Analysis. John Wiley & Sons. Gibson, C. (2010). Financial Reporting and Analysis: Using Financial Accounting Information. Cengage Learning. Michelle R. Clayman, M. S. (2011). Corporate Finance: A Practical Approach. John Wiley & Sons. Paul Healy, K. P. (2012). Business Analysis Valuation: Using Financial Statements. Cengage Learning. Thomas R. Robinson, E. H. (2012). International Financial Statement Analysis Workbook (CFA Institute Investment Series). John Wiley & Sons. Tracy, A. (2012). Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net. 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