Sky City Entertainment Group - Limited Financial Situation - Example

Table of contents Executive summary………………………………………………………………………….1 1. Accounting analysis............................................................................................................2 1.1 Accounting policies:...........................................................................................................2 1.1.1 Operating proceeds..........................................................................................................2 1.1.2 Venture in properties........................................................................................................2 1.2 Appraisal of accounting policies:....................................................................................... 2 1.3 Assessment of the quality of disclosure:........................................................................... 3 1.4 probable Risks: ………….................................................................................................3 1.5 accounting distortions:...................................................................................................... 3 2. Financial analysis............................................................................................................... 4 2.1 Return on Equity………................................................................................................... 4 2.2 Profit Margin ‘’’’’.............................................................................................................. 4 2.3 Asset Turnover ..................................................................................................................5 2.4 Current ratio.......................................................................................................................5 Free cash flow Appraisal:........................................................................................................6 3.1 Discounted free cash flow model……………………….…………………………………6 3.2. Residual Income model……………………………………………………………………6 3.3 .Asset growth………………………………………………………………………………6 4.0 Conclusion and Recommendation………………………………………..………………6 5. Sustainability Report…………………………….……………….……...…………………7 5.1 Possible opportunities for improvement…………………………………………………..7 5.2 Potential challenges………………………………………………………………………..7 6. References.......................................................................................................................... 8 7.Appednices………...........................................................................................................9 1.1 Accounting Analysis Executive summary Sky City Entertainment Group is a New Zealand as well as Australian registered company in the stock exchange with a principal gaming and entertainment business activity. The company was registered in the year 1996 and at present as employees totaling 6100 transversely in New Zealand and Australia. The center trade of Sky City Group is amusement and the casinos. In addition, the trade of Sky City Group entailed in three sumptuousness hotels, over 50 eating-place, bars, and conference centers. 1. 1. The net profit growth The company has been experiencing a decline in reported net profit from the year 2011 to 2013.This might be due to internal and external factors that affect business operation. The decline is depicting a serious threat to the company’s liquidity position and consequently the management should consider alternatives of rescue the company from declining trend in net profit. The graph in the appendices depicts the declining trend in profit. Can be depicted that the Skycity Company is having a decrease in revenue growth from the year 2011 to 2014. This implies therefore that the gross profit margin as well as the net profit margin will be low implying that the working capital of the business is worse and thus the company is not going to have a strong liquidity in financing its daily operation alongside the long-term investment. 1.1.2 Venture in proprieties As per the company’s financial report, it can be depicted that investment in properties are accounted for on historical cost basis. The cost entails the purchase cost, transfer of equity consequential from gain or loss from disposal of qualifying asset such as the plant and equipment. The asset residual value as well as it is useful; live is appraised and adjustment was relevant is made every financial year. 1.2 Appraisal of the Accounting policy adopted by the company The company assumes an historical cost accounting principal while straight-line method of depreciation is practiced in determining the written down value of the asset at end of every financial year. In this regards, the company practice the elasticity of accounting policy adopted .Property plant and equipment; The Company assume the nature of depreciation technique that is applicable at present. It can be observed from the company’s annual report that straight-line method of fixed asset depreciation is employed by sky city entertainment limited. The .Operating income; The financial report of the company, on-gaming income totaled 19% of the company’s entire revenue proceeds collected during there financial year. The absolute receipt of GST as well as those of gaming win and non-gaming income is not considered as part of the revenue income for the business as defined by the international accounting standard (18).The company appreciates the straight-line, method of depreciation and consequently the management considers the reducing balance method of asset depreciation as an substitute to working the value of asset depreciation. 1.3 Assessment of quality disclosure The sky city financial disclosure for the financial year 2009/14 is superior and reliable for decision making this is in accordance to the financial reporting framework in compliance with the generally accepted accounting principle (GAAP) as well as the internal accounting standard (IAS).The integrated financial report contains an inclusive information together with the governance report which is considered relevant by users of the financial report as well as the compliance of international financial reporting standards (IFRS). 1.4 Probable risk Accounting provision is one of the key Ares susceptible to frauds. the sky city annual report Note to financial report No .5)a provision for doubtful dent of $2,728.000.This provision is deem to huge having in mind that the previous year’s provision was merely $43,000.the increase in provision depict business risk to the company. Furthermore, the notes to the financial statement do provide a comprehensive explanation as to rapid increase in value of the provision set out. In the y2013 financial statement. The disparity portray the poor working capital management adopted by the company hence, the business is having poor structure ;laid down in collecting the debt or fraud is being perpetrated by some fraudulent employees. The company should therefore centre on review its working capital managament by nearing those debtors takes short period to repay their debt in order to minimize the amount set out s provision to a smaller value. 1.5 Distortion of Accounting The accounting report do not account for the license contract of casino and this the company might be practicing fraudulent distortion of the books of account in order to understate the real worth of the company’s asset. The financial report of the company also provides a complex process amortizing the casino license by recognizing the amortizing cost as expense over its useful life. As per note two of the financial report, the company accounted for casino amortization worth. According to Note 2 page 13 of the annual report, provides the value of amortization worth $2,618,000 on the financial year 2013.Thre is a distortion of accounting standard since, the annual report do not account for the value of casino, yet the note to the financial statement provides an amortization on value of casino. The business must provide reliable financial report that is as per the accounting standards and disclosure of the financial report in order to ensure that the users of the report and the shareholders of the company are not mislead and at the same guarantee the going concern of there company. 2. Financial analysis In understating the business performance and financial situation of the company, the relevant financial, analysis such as the ratio analysis is conducted. The company’s prospective analysis has been evaluated and conclusion reached based on the company’s financial report. Some of the valuation technique adopted in the report is the use of ratio analysis, free cash flow method, the residual income approach, as well as ascertaining the asset growth of the company. These are key fundamental tool in valuing and understanding the company business situation. 2.1 Return on Equity (ROE) The return on equity of the company provides an average result of 0.15 for the last 5 preceding years. This is depicted in the appendices below in comparison with industrial average of 9%.The company reported profit from investment consequential from the 2008 worldwide financial crisis. The financial report for the last three preceding years depict an increasing trend in profit. The increasing trend in reported net profit lead to increase in return on equity to 0.167 in the year 2012.In year 2013, the ROE for the company decline due to a weak Australian dollar. 2.2 Net profit margin The company report a net profit margin of 0.19.Thi increase in profit margin is attributed to the strategy of product differentiation together effective production efficiency that lead to cost reduction and high reported net profit. 2.3 Asset turnover The company reported an asset turnover of 0.59 as compared to the previous year’s value of 0.49.The company plans on ensuring that there is product and service differentiation in order to report a higher profit from different department of its business activities. The progressive rise in value of asset turnover from the year 2009 to 20013 implies that the company is having a superior performance with increasing trend in sales level every financial year. 2.4 Current ratio The company depicts a current ratio of 1.54, which is quite lower and greater than one. This therefore implies that the company has more short-term asset to return its liability. The ratio table is depicted in the appendices below. The ideal value of current ratio reported by sky city is due to place significant importance on the operational financing as well as the state of the debt. The rising value of the current ratio implies that the company is a good financial situation capable of financing its working capital 3. Free Cash flow Analysis 3.1 .Discounted free cash flow model Discounted cash flow valuations are one pricing approach that potential investors with expertise skills use to appraise the worth of stocks. Proponents of this appraisal technique argue that you can get a precise image of a firm's accurate worth only if you approximate its present and future cash flow. Other proponents argue that this valuation technique has numerous drawbacks that include the fact that the approximation are based on protrusion and forecast rather than concrete data. FCF= (operating cash flow-capital expenditure} FCF= (230,773- 166,623=$64150 Negative free cash flow in itself is not bad since it implies that the business is having a huge capital investment that will a high returns in the near future. The company is having a high value of free cash flow worth $64,150.This implies that the business is having sufficient finance and thus the reserves will be used to finance future investment projects if an informed investment decision is made in order to save the company from experiencing a declining trend in reported net profit. 3.2. Residual Income model The residual income model tries to change a firm's prospect earnings approximation, to recompense for the equity cost and place an extra precise worth to a firm. Even though the return to equity holders of sky city entertainment is not an official prerequisite like the return to bondholders, in order to draw investors firms ought to recompense them for the investment threat exposure. In scheming, a firm's residual income the major calculation is to conclude its equity charge. Equity charge is merely a firm's total equity capital grow by the required rate of return of that equity, The model can be ascertained as well using the capital asset pricing model {CAPM model}.The formula below depicts the equity charge equation. Equity charge= {Equity capital*cost of capital} Equity charge= {773,885*10%} =77,388.5 Residual income= (equity charge-Net income) Residual income= {77,388.5- 84,915) =-7526.5 It can be concluded therefore that, the residual income valuation method is a practical and progressively more accepted technique of valuation and can be put into practice with no trouble by even apprentice investors. Residual income valuation can give a comprehensible approximation of what the true intrinsic value of a firm may be 3.3 .Asset growth The growth in asset is positive as depicted from the above graph in the appendices. In this regards, the return on asset and current ratio is positive. The company is having a strong financial position as depicted by its size of asset and market capitalization. In this regard, the business is viable for investment since it depicts ands increase in asset capital as well the revenue. The company is a having a huge investment on capital in order to earn a high returns in the future. This is envisaged by free cash flow analysis where the analysis depicts free cash flow high together with the residual income. It therefore implies that the business return will cater for investors return and will thus put investors into a safety by way of dividends from investment as well as opportunity for future capital investment. In this case, a detail analysis on the company’s performance should be analyzed before making intent to invest in this company (Jerald E. Pinto 2010). The problem a rises when the business is reporting both a negative analysis in terms of the free cash flow and the residual income this in general depicts the difficulties the business will be facing in terms of financing the capital expenditure as well as considering the need for shareholders returns inform of dividend. In for potential shareholders to realize investment in this company He/she will be forced to wait for a considerable time since the company is having a huge capital investment that can be realized in the near future. 4. 0 Conclusion and Recommendation of the Sky city entertainment limited financial situation Sky city limited is a corporation in the Entertainment industry. An analysis is made and conclusion on the company performance based on the annual and historic financial report reached and an investment decision as to whether to invest in the business. The ability of the company’s investment to generate positive returns from investment within a shortest time or within the relevant range of investment is positive as depcited in the ratio analysis in the apendices. Potential investors therefore should consider investing in Sky city Company since the business situation is favorable in terms of capital base and funds available for investment. In ascertaining the financial situation of the company using the free cash flow method, per share of 0.65 is envisaged in the analysis. This implies therefore that for every one share of potential investors, there is discounted free cash flow of $0.65.this is a good indication that the business does not have any financial difficulties despite the fact that the business is spending heavily on research and development of their product. This is a strong indication that the business is a going concern and will thus continue into unforeseeable future due to strong financial position depicted by growth in asset as well increase in net cash flow as well as the growth in profit margin. An investor should therefore consider investing in shares in the company since they will be assured of positive returns in the near future from their investment. 5. Sustainability Report 5.1 Possible opportunities for improvement and potential challenges Managing the cash flows Cash flow management is one of the fundamental decision that manager must consider since, an ideal working capital management implies that the business is having an ideal cash flow. Management’s favorable cash flow supervision is one that ensures that there is positive cash flow at end of every month. In order to ensure existence of positive cash flow, a manager must strive to ensure that the cash flow outflow is less as compared to cash inflows. This can only be achieved adopted the following strategies in order to guarantee effective working capital 1. Improving on debtors collection period Effective debtor’s collection period can be achieved by ensuring that the collection period is short. The net advantage of short collection period is that the business will be having extra cash inflows at their disposal, which can be used to finance daily operation of the business. Short debtor’s collection period reduces credit risk as well as guarantees debtors credit worthiness hence saving the company from liquidity risk by maintaining positive cash inflows throughout the month. 2. Long creditor payment period. The business should consider having long payment period to creditors. This facilitate for revolving fund to cater for day-to-day operation as the company awaits for cash inflows from their debtors. As a result, the cash flow balance at end of every month will remain positive due effective working capital management. 3. Reducing the operating cost The company should cut day the volume of unnecessary operating cost. Too much operating cost eats ups the reported revenue and may lead to loss to the business. In this regards, the company should consider cutting down the level of operating cost in order to remain with only relevant cost. This will to reduction of cash outflow and thus ensures that a positive cash flow at end of every month is positive. Having a planed budgeting Budget is vital decision tool that every company places reliance on in its daily operation from one financial year to another. A budget provides an estimates that a company plans to spend on as well as the source of income and the, manner in which the revenue will be collected. This estimate act a guiding tool to the company since it ensures that the business stay within it planned estimates or incase of variance since it is hard to provide an accurate budget forecast, the variance should be favorable or reasonable, the company spends only on relevant cost and investment on planned source of revenue with strict collection period, the business will remain valid in the market hence its going concern assumption will not be compromised. Budget act as a controlling and decision making tool since, it provide managers with critical investment decision as well as the reality of the spending. This will ensure that the business will only spend on that project that will generate positive return in form of profit to the business and within a short period. The investment decision will therefore ensure that the business does not spend too much on ventures that do not provide positive returns within the anticipate timeframe. A good investment should therefore provides a cash flow inflow within a short period of time in order to sustain the business operation of the business by financing the working capital as well as meeting the daily operating cost. 6.0 Reference list Cahill, M. (2003). Investor's Guide to Analyzing Companies and Valuing .. CFA, H. (2010). Security Valuation and Risk Analysis: Assessing Value in. Gabehart, S. (2002). The Business Valuation . Jerald E. Pinto, ‎. H. (2010). Equity Asset Valuation . KEVIN, S. (2008). SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT. McMenamin, J. (2002). Financial Management: An Introduction -. Nick Antill, ‎. L. (2005). Company Valuation Under IFRS: Interpreting and Forecastin. 7.0 Appendices Ratio Analysis and industrial comparison Year 2014 Year 2013 Industrial trends Current Ratio=current asset/current liability 114660/228418}=0.5 117864/105703=1.1 2.4 Quick Ratio{current asset-stock/current liability} 114660-7871/228418}=0.47 117864-7416/105703=1.04 0.5 Net Profit Margin=Net profit/ sales 84,915/ 68,264=1.2 101,799/ 110,929=0.92 0.8 Debt to Equity=total liabilities/equity} 1,057,442/ 773,885=1.4 839,128 /812,891=1.03 1.3 Return on Assets=(net profit/total asset} 84,915/1,831,327=0.06 101,799/1,652,019=0.06 0.09 Return on Equity=net profit/total equity) 84,915/773,885=1.1 101,799/812,891=0.13 0.08 Read More