Slater and Gordon Financial Situation - Case Study Example

Slater and Gordon Financial Report Name Tutor PACC 6000 Date Executive Summary Financial statement analysis enhances the understanding of financial information and is, therefore, vital in decision making. This report covers the overall financial statement analysis for Slater and Gordon Limited (SGH). SGH is a top law firm in Australia and the UK. Overall financial statement analysis shows improved item figures in 2015 compared to 2014. The company acquired more liabilities, particularly long-term debt, to fund its acquisition strategy. This led to a fall in financial performance signalled by reduced profitability and liquidity. The debt also increased the company’s financial risk as indicated by the higher gearing ratios in 2015 compared to 2014. Table of Contents Executive Summary 2 Introduction 4 Analysis 4 Horizontal Analysis 4 Vertical Analysis 5 Financial Ratio Analysis 6 Conclusion 10 References 11 Appendices of Calculations 12 Introduction Financial statement analysis enhances the understanding of financial information and is, therefore, vital in decision making. The analysis entails two key areas: horizontal and vertical statement analysis, and ratio analysis (Jackling et al., 2010). This report covers the overall financial statement analysis for Slater and Gordon Limited (SGH). Slater and Gordon Limited is a top law firm in Australia as well as the United Kingdom (England, Scotland and Wales). The firm offers expert legal and complementary services in a variety of areas, such as, insurance claims, family law, commercial law, employment law, defamation and reputation management, clinical negligence, and other asbestor-related law. The company also provides advice to groups entangled in commercial/business disputes. SGH core activities are based in Australia and the UK. The company runs 80 offices all over Australia and 27 locations across the UK. SGH’s mission is to offer individuals stress-free right to use to world class and affordable legal services. SGH brags of over 90 years’ experience through which it has built its reputation on the range of services offered by the partners and staff, as well as on the coverage of their hands-on familiarity (Slater and Gordon, 2014). Analysis Horizontal Analysis a) Consolidated Statement of Financial Position The horizontal analysis indicates the changes in accounting figures from one accounting period to another. The analysis of SGH’s consolidated statement of financial position indicates that the company was very aggressive in boosting the financial position. There were huge increases in assets and liabilities. For instance, other current assets, intangible assets, other long-term assets, accounts payable, and long-term debt increased massively in 2015 by 2150 per cent, 8678.57 per cent, 2916.67 per cent, 4875 per cent and 533.63 per cent respectively (Appendix 1). b) Consolidated Statement of Comprehensive Income The horizontal analysis of SGH’s consolidated statement of comprehensive income shows overall increases in revenues and incomes. Total revenue increased by 39 per cent to AUD 573 million. Gross profit went up by 35 per cent, other operating expenses surged by 118 per cent, other expenses went up by 629 per cent and net income increased by 34 per cent from 61 million in 2013 to 82 million in 2015 (Appendix 2). Vertical Analysis a) Consolidated Statement of Financial Position The vertical analysis indicates the largest portion of a company’s assets, liability or revenue in a particular accounting year. The vertical analysis of SGH’s consolidated statement of financial position indicates that receivables, inventory and intangible assets account for the largest portions of the total assets at 20 per cent, 18 per cent and 41 per cent in 2015. There is no much difference in the contribution of the same assets to the total assets in 2014 as indicates in appendix 3. Long-term debt constitutes a colossal sum of the total liabilities at 46 per cent in 2015 and 24 per cent in 2014. This shows that the company relied so much on debt to finance its operations. Besides, common stock accounts for 55 per cent and 77 per cent of shareholder’s equity in 2014 and 2015 respectively (Appendix 3). b) Consolidated Statement of Comprehensive Income The vertical analysis of SGH’s consolidated statement of comprehensive income shows that the company generated gross profits of 100 per cent and 97 per cent of total revenue in 2014 and 2015 respectively. Sales, general and administrative expenses account for 72 per cent and 74 per cent on the total revenue in 2014 and 2015 respectively (Appendix 4). Financial Ratio Analysis Financial ratios are used in financial statement analysis because they are easy to understand and interpret given that the final statements of accounts are not easy to interpret. Financial ratios are represented in form of a mathematical relationship between one measure of financial information and another. The ratios are classified depending on how they are calculated, their importance and features. Therefore, dozens of ratios can be calculated from all information available in regard to a given organization. However, this report is based on three categories of ratios: profitability, liquidity and gearing (Anthony & Breitner, 2010). Profitability Profitability ratios review earnings performance relative to the investment or revenue. The ratios assess the capacity of the management as well as the company’s actions in bringing in returns (Bazley & Hancock, 2010). The ratios considered include rate of return on net assets, rate of return on total assets, asset turnover, rate of return on ordinary shareholder’s equity and earnings per share. Table 1: Profitability Ratio Analysis Slater and Gordon Limited Ratio 2014 2015 Rate of return on net sales 14.81 14.74 Rate of return on total assets 6.82 2.71 Asset turnover 0.46 0.20 Rate of return on ordinary shareholder’s equity 14.42 5.66 Earnings per share 0.28 0.35 In general, SGH’s profitability declined in 2015 as indicated by the results in table 1 above. The rate of return on net sales went down marginally from 14.81 per cent in 2014 to 14.74 per cent in 2015. The rate of return on total assets went down from 6.82 per cent in 2014 to 2.71 per cent in 2015. Asset turnover shed off 0.26 points in 2015, down from 0.46 in 2014. The rate of return on ordinary shareholder’s equity plunged substantially from 14.42 per cent in 2014 to 5.66 per cent in 2015. The fall in these ratios is attributable to the increase in sales, general and administrative expenses, other operating expenses, interest expense as well as other expenses. This led to a lower profit level. However, the earnings per share went up from 28 cents in 2014 to 35 cents in 2015. Slater and Gordon Limited is a growth stock, therefore, with increasing revenues, the return of shares is expected to continue rising. Liquidity Liquidity ratios mainly assess the ability of a company to honour its short-term debt obligations (Steven, 2012).The main liquidity ratios are the current ratio and the quick ratio. Other liquidity ratios considered in this report are working capital, inventory turnover, days in inventory, gross profit percentage, accounts receivable turnover, and days’ sales in receivables. Table 2: Liquidity Ratio Analysis Slater and Gordon Limited Ratio 2014 2015 Working capital 505 657 Current ratio 3.17 2.00 Acid-test ratio 1.15 1.19 Inventory turnover - 0.03 Days in inventory - 11443.82 Gross profit percentage 100 97.03 Accounts receivable turnover 1.80 0.93 Days’ sales in receivables 202.88 392.39 SGH working capital increased from AUD 505 million in 2014 to AUD 657 million in 2015. This was due to an increase in cash and cash equivalents, accounts receivable and inventory. Despite an increase in the working capital, the current ratio declined significantly from 3.17 times in 2014 to 2.00 times in 2015. This indicates that the company’s ability to pay short-term debt obligations went down. This can be attributed to a significant increase in accounts payable from AUD 12 million in 2014 to AUD 597 million in 2015. Nonetheless, the acid test ratio went up by 0.04 points from 1.15 times in 2014 to 1.19 times in 2015. Inventory turnover and days in inventory were 0.03 times and 11444 days in 2015 respectively. There were no figures for the same in 2014 since no cost of sales was reported. However, these figures are not impressive due to the high amounts of inventory held by the company. Gross profit percentage. This was due to an increase in the cost of sales. Also, accounts receivable turnover went down from 1.80 times in 2014 to 0.93 times in 2015. This was due to an increase in accounts receivable from AUD 229 million in 2014 to AUD 616 million in 2015. Day’s sales in receivables increased from 203 days in 2014 to 392 days in 2015. This indicates that SGH’s ability to collect cash from creditors fell and, therefore, the company takes longer to collect cash from its credit sales. Gearing Gearing ratios evaluate a company’s level of borrowing. The ratios generally compare the borrowed funds to the owner’s equity. The ratios, therefore, are an indicator of a company’s financial risk since high gearing ratios indicate higher debt proportions. Lenders perceive high gearing ratios as a danger to their funds (Arnold, 2005). Table 3: Gearing Ratio Analysis Slater and Gordon Limited Ratio 2014 2015 Debt ratio 51.28 65.16 Debt to equity ratio 28.34 49.69 Times interest earned ratio 10.75 6.45 SGH gearing worsened in 2015 compared to 2014. The debt ratio went up to 65 per cent in 2015 from 51 per cent in 2014. This shows that the company derives much of its capital from debt as opposed to shareholder’s equity. Also, debt to equity ratio rose up from 28 per cent in 2014 to 50 per cent in 2015. Indeed this reflects the impact of the increase in the company’s long-term debt from AUD 113 million in 2014 to AUD 716 million in 2015. The debt was mainly used up by the company to finance its various acquisitions as the company implements its acquisition strategy. The times interest earned ratio declined from 10.75 times in 2014 to 6.45 times in 2015. This was due to an increase in interest expense from AUD 8 million to AUD 11 million due to the increased debt obligations. Conclusion In conclusion, financial statement analysis is vital in decision making. The analysis of SGH’s consolidated statement of financial position indicates that the company was very aggressive in boosting the financial position. There were huge increases in assets and liabilities. Also, the company’s revenues and incomes went up in 2015 compared to 2014. The vertical analysis indicates that total assets was dominated by several asset items but long-term debt constitutes a colossal sum of the total liabilities. In the vertical analysis of the income statement, sales, general and administrative expenses was the single largest expense accounting for 72 per cent and 74 per cent on the total revenue in 2014 and 2015 respectively. The financial ratio analysis shows a fall in profitability, liquidity and gearing. This happened as the company increased its liabilities so as to finance its acquisition strategy. References Anthony, R.N. and Breitner, L.K. (2010). Essentials of Accounting: International, 10th Ed. Pearson. Arnold, G. (2005). Corporate Financial Management, 3d Ed. Harlow: Pearson Education Ltd. Bazley, M. and Hancock, P. (2010). Contemporary Accounting, 7th Ed. Cengage Learning. Jackling, B. Raar, J. and McDowall, T. (2010). Accounting: A Framework for Decision Making, 3rd Ed. McGraw-Hill. Steven, M.B, (2012). Business Ratios and Formulas: A Comprehensive Guide, 3rd Ed. Wiley. Slater and Gordon (2014). About us. Retrieved 14 October 2015, . Appendices of Calculations Appendix 1 SLATER & GORDON LTD (SGH) BALANCE SHEET Fiscal year ends in June. AUD in millions except per share data. 2014 2015 Absolute Percent Assets Current assets Cash and cash equivalents 25 97 72 288.00 Receivables 229 616 387 169.00 Inventories 471 553 82 17.41 Prepaid expenses 10 -10 -100.00 Other current assets 2 45 43 2150.00 Total current assets 738 1311 573 77.64 Non-current assets Property, plant and equipment Gross property, plant and equipment 40 32 -8 -20.00 Accumulated Depreciation -24 24 -100.00 Net property, plant and equipment 16 32 16 100.00 Goodwill 116 -116 -100.00 Intangible assets 14 1229 1215 8678.57 Deferred income taxes 87 87 Other long-term assets 12 362 350 2916.67 Total non-current assets 158 1711 1553 982.91 Total assets 895 3022 2127 237.65 Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt 7 4 -3 -42.86 Capital leases 2 -2 -100.00 Accounts payable 12 597 585 4875.00 Deferred income taxes 2 5 3 150.00 Other current liabilities 210 48 -162 -77.14 Total current liabilities 233 654 421 180.69 Non-current liabilities Long-term debt 113 716 603 533.63 Capital leases 4 -4 -100.00 Deferred taxes liabilities 98 166 68 69.39 Other long-term liabilities 25 36 11 44.00 Total non-current liabilities 240 919 679 282.92 Total liabilities 473 1573 1100 232.56 Stockholders' equity Common stock 234 1105 871 372.22 Retained earnings 180 261 81 45.00 Accumulated other comprehensive income 9 83 74 822.22 Total stockholders' equity 423 1449 1026 242.55 Total liabilities and stockholders' equity 895 3022 2127 237.65 Appendix 2 SLATER & GORDON LTD (SGH) INCOME STATEMENT Fiscal year ends in June. AUD in millions except per share data. 2014 2015 Absolute Percent Revenue 412 573 161 39.08 Cost of revenue 17 17 Gross profit 412 556 144 34.95 Operating expenses Sales, General and administrative 298 424 126 42.28 Other operating expenses 28 61 33 117.86 Total operating expenses 326 485 159 48.77 Operating income 86 71 -15 -17.44 Interest Expense 8 11 3 37.50 Other income (expense) 7 51 44 628.57 Income before taxes 84 110 26 30.95 Provision for income taxes 23 28 5 21.74 Net income from continuing operations 61 82 21 34.43 Other 0 0 Net income 61 82 21 34.43 Net income available to common shareholders 61 82 21 34.43 Earnings per share Basic 0.28 0.35 0.07 25.00 Diluted 0.28 0.35 0.07 25.00 Weighted average shares outstanding Basic 215 235 20 9.30 Diluted 218 236 18 8.26 EBITDA 100 132 32 32.00 Appendix 3 SLATER & GORDON LTD (SGH) BALANCE SHEET Fiscal year ends in June. AUD in millions except per share data. 2014 2015 Assets Current assets Cash Cash and cash equivalents 25 97 Percent 2.79 3.21 Receivables 229 616 Percent 25.59 20.38 Inventories 471 553 Percent 52.63 18.30 Prepaid expenses 10 Percent 1.12 0.00 Other current assets 2 45 Percent 0.22 1.49 Total current assets 738 1311 Percent 82.46 43.38 Non-current assets Property, plant and equipment Gross property, plant and equipment 40 32 Percent 4.47 1.06 Accumulated Depreciation -24 Percent -2.68 0.00 Net property, plant and equipment 16 32 Percent 1.79 1.06 Goodwill 116 Percent 12.96 0.00 Intangible assets 14 1229 Percent 1.56 40.67 Deferred income taxes 87 Percent 0.00 2.88 Other long-term assets 12 362 Percent 1.34 11.98 Total non-current assets 158 1711 Percent 17.65 56.62 Total assets 895 3022 Percent 100.00 100.00 Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt 7 4 Percent 1.48 0.25 Capital leases 2 Percent 0.42 0.00 Accounts payable 12 597 Percent 2.54 37.95 Deferred income taxes 2 5 Percent 0.42 0.32 Other current liabilities 210 48 Percent 44.40 3.05 Total current liabilities 233 654 Percent 49.26 41.58 Non-current liabilities Long-term debt 113 716 Percent 23.89 45.52 Capital leases 4 Percent 0.85 0.00 Deferred taxes liabilities 98 166 Percent 20.72 10.55 Other long-term liabilities 25 36 Percent 5.29 2.29 Total non-current liabilities 240 919 Percent 50.74 58.42 Total liabilities 473 1573 Percent 100.00 100.00 Stockholders' equity Common stock 234 1105 Percent 55.32 76.26 Retained earnings 180 261 Percent 42.55 18.01 Accumulated other comprehensive income 9 83 Percent 2.13 5.73 Total stockholders' equity 423 1449 Percent 100.00 100.00 Total liabilities and stockholders' equity 895 3022 Appendix 4 SLATER & GORDON LTD (SGH) INCOME STATEMENT Fiscal year ends in June. AUD in millions except per share data. 2014 2015 Revenue 412 573 Percent 100.00 100.00 Cost of revenue 17 Percent 0.00 2.97 Gross profit 412 556 Percent 100.00 97.03 Operating expenses Sales, General and administrative 298 424 Percent 72.33 74.00 Other operating expenses 28 61 Percent 6.80 10.65 Total operating expenses 326 485 Percent 79.13 84.64 Operating income 86 71 Percent 20.87 12.39 Interest Expense 8 11 Percent 1.94 1.92 Other income (expense) 7 51 Percent 1.70 8.90 Income before taxes 84 110 Percent 20.39 19.20 Provision for income taxes 23 28 Percent 5.58 4.89 Net income from continuing operations 61 82 Percent 14.81 14.31 Other 0 0 Percent 0.00 0.00 Net income 61 82 Percent 14.81 14.31 Net income available to common shareholders 61 82 Percent 14.81 14.31 Earnings per share Basic 0.28 0.35 Diluted 0.28 0.35 Weighted average shares outstanding Basic 215 235 Diluted 218 236 EBITDA 100 132 Appendix 5 Ratio Formula Calculation & Result 2014 Calculation & Result 2015 Profitability Rate of return on net assets 61/412 * 100 = 14.81 82/556 * 100 = 14.74 Rate of return on total assets 61/895 * 100 = 6.82 82/3022 * 100 = 2.71 Asset turnover 412/895 = 0.46 573/3022 = 0.20 Rate of return on ordinary shareholder’s equity 61/423 * 100 = 14.42 82/1449 * 100 = 5.66 Earnings per share Provided = 0.28 Provided = 0.35 Liquidity Working capital Current assets – Current liabilities 738 – 233 = 505 1311 - 654 = 657 Current ratio 738/233 = 3.17 1311/654 = 2.00 Acid-test ratio (738-471) / 233 = 1.15 (1311-533) /654 = 1.19 Inventory turnover - 17/533 = 0.03 Days in inventory - 533/17 * 365 = 11443.82 Gross profit percentage 412/412 * 100 = 100 556/573 * 100 = 97.03 Accounts receivable turnover 412/229 = 1.80 573/616 = 0.93 Days’ sales in receivables 229/412 * 365 = 202.88 616/573 * 365 = 392.39 Gearing Debt ratio 120/234 * 100 = 51.28 720/1108 * 100 = 65.16 Debt to equity ratio 120/423 * 100 = 28.34 720/1449 * 100 = 49.69 Times interest earned ratio 86/8 = 10.75 71/11 = 6.45 Read More