Financial Analysis for an Australian Pure Automotive Retail Group Eagers Limited - Case Study Example

Executive summary This report conducts the financial analysis for an Australian pure automotive retail group A.P. Eagers limited. The report is prepared with an aim of helping the users of the financial reports to better understand the information contained in the financial report and hence be able to make more informed economic decisions. In achieving this objective, the company’s trend analysis as well as ratio analysis for the four years period between 2011 and 2014 has been conducted. The trend analysis reveals considerable growth levels in the various aspects of the company’s financial performance including the balance sheet and the income statements. This is evidenced by the increase in the company’s level of sales, the earnings before interest and the amount of income attributable to the company’s equity shareholders over the four years period. The company’s balance sheet has also continued to grow. This will be observed from the growth in the company’s total assets, the liabilities as well as the owner’s equity during the four years period. The growth in the company’s profitability as well as balance sheet will be taken to imply growth in the company’s level of operations. The company’s ratio analysis however reveals mixed results. For instance, the company’s profitability has registered mixed results with ROE having increased from 10.85% in 2011 to 13.49% in 2014. On the other hand, the company’s ROA has reduced over the four years period. The company’s efficiency has also revealed mixed results with its assets turnover declining meaning assets are being less efficiently utilized. On the other hand, the debtor’s days has slightly improved implying efficiency in debt collection. The company’s liquidity position has also been mixed with its current ratio declining from 1.29 in 2011 to 1.21 in 2014. The company’s current ratio which has been noted to be very low has also registered mixed results having greatly declined in 2012 and increasing gradually up to 2014. Though the current ratio looks normal, the company ought to be concerned with its low quick ratio which is an indication of high liquidity risk. The high amount of debt may threaten the company’s future financial stability given that the capital structure suggests that the company is largely financed through debt. It is however important to note that the company’s market performance has been strong throughout the period. The company’s share price has more than doubled during the four year period with its price earnings ratio noted to have also increased significantly. Such good performance is an indication of increasing confidence in the company by the market. Table of Contents Executive summary 1 1.0 Introduction 4 2.0 Overview of AP Eagers business 4 3.0 Trend analysis 5 3.1 Income statement 5 3.2 Balance sheet 6 4.0 Ratio analysis 8 4.1 Profitability 8 4.2 Efficiency 9 4.3 Liquidity 9 4.4 Capital structure 10 4.5 Market performance 11 5.0 Conclusion 11 References: 12 1.0 Introduction Though companies prepare financial statements in a bid to meet their financial reporting obligations, such statements may make no meaning to the intended users and hence they may not be able to draw meaningful conclusions therefrom. As such, financial statements analysis is important as it helps determine the strengths or weaknesses of the business in question by comparing the company’s balance sheet with the corresponding income statements. As such, the users are better able to determine the company’s financial strength and stability. In addition, the analysis would reveal how good the management has been employing the resources at their disposal with other current and potential users being able to make better informed decisions regarding the company. This report conducts the financial analysis of AP Eagers company Limited’s financial statements for the four year period between 2011 and 2014. The analysis is conducted in a number of sections including an overview of the company’s background and business. The report also conducts a trend analysis with an aim of analyzing the trend of how the company’s balance sheet as well as income statements have performed over the period. A ratio analysis on the company’s financial statements has also been conducted with a view of determining how the company performed during the four years with regard to profitability, liquidity, efficiency, market performance and capital structure. The report concludes by giving its findings based on the analysis. 2.0 Overview of AP Eagers business As stated above, this report analyzes AP Eagers financial statements. The company is a pure automotive retail group that has its main operations in South-east Queensland, Adelaide, Darwin, Melbourne, Sydney and New South Wales. The company sells the top luxury car brands in Australia which amount to 27 car brands and 11 truck and bus brands. Its core business also consists of ownership and operation of motor vehicle dealerships. Having been established in 1913, the company has grown to become one of the biggest car dealers in Australia on the basis of offering high quality goods and services. This has seen its sales grow to more than $3 billion a year with comparable growth in profitability being above $76.7 million. As a result, the company has paid record dividend to its shareholders for almost every year since 1957 hence explaining its satisfactory performance in the market. It can thus be concluded that the company has been performing very well financially. 3.0 Trend analysis This is an important tool for financial statements analysis and interpretation that helps one study changes that have occurred in the company’s items of balance sheet as well as profit and loss account from one year to the other. This is useful in forming an opinion about the company’s favourable or unfavorable tendencies that are reflected by the financial statement’s accounting data. Regarding AP Eagers income statement trend analysis, the company’s sales have been found to have increased by 19% over the four years period with the company’s EBIT and earnings attributable to the company’s shareholders having similar growth trend. This is a favourable tendency that indicates that the company grew in its financial performance. Similarly, the company’s balance sheet items of liabilities, owners’ equity and assets were observed to take an increasing trend over the four years period indicating an increase in the business operations magnitude. 3.1 Income statement As stated above, the company’s trend analysis reveal strong growth in its operations as far as its balance sheet and income statement is concerned. The results of the company’s income statement trend analysis for the years 2011 to 2014 have been tabulated and graphed as shown below. From the analysis, the company’s sales grew by 19% between 2011 and 2014 although the sales growth was almost flat in 2013 when the sales grew by only 1%. On the other hand, the company’s EBIT grew by 49% with the profit attributed to equity holders of the parent entity registering the greatest growth of 90% over the four years period. Given that the country was recovering from the effects of the global financial crisis, such growth in the company’s income levels is remarkable. Year 2011 2012 2013 2014 Sales 100% 110% 111% 119% EBIT 100% 123% 131% 149% Profit attributed to equity holders of the parent entity 100% 138% 158% 190% This is especially given the fact that cars are luxury items and would be expected to have weak demand during seasons of low economic growth. As such, the growth in sales and income growth could only be attributed to the company’s aggressive expansion strategy that emphasizes on quality. The company also attributes this increase to the increase in dealership acquisitions as well as increased used vehicle volumes that resulted in 6% increase in operations revenue in the year 2014 to the $3 billion mark. 3.2 Balance sheet Based on the company’s balance sheet trend analysis, the company’s total assets, total liabilities and owners’ equity significantly increased during the four years period between 2011 and 2014 as shown in the table below. The graph below clearly displays the company’s balance sheet trends over the four years period. From the analysis, it has been shown that there was a 46% increase in the company’s total assets during the four years period. The company’s total assets were $931,760 in 2011 compared to $1,357,998. There was a similar trend in the company’s total liabilities which increased by 39% over the four years. Year 2011 2012 2013 2014 Total assets 100% 126% 131% 146% Total liabilities 100% 129% 123% 139% Owner’s Equity 100% 123% 142% 155% This is an increase from $551,145 in 2011 to $766,942 worth of total liabilities. The company’s owner’s equity increased significantly by 55% over the four years period by rising from $380,615 in 2011 to $591,056 in 2014. It can thus be concluded that the company experienced significant growth in its balance sheet over the four years. The growth resulted from the need to finance the company’s growing sales. In other words, the company’s operations have significantly increased over the four years period resulting in growth in the balance sheet items to finance purchase of new assets especially the inventory. The financing was mainly done through debt as well as retained earnings thus resulting in significant increase in all balance sheet items over the period. It should also be noted that the company experienced more growth in its long-term assets at 57% than it did in its current assets at 35% as shown in the table below. The increase is mainly attributed to financing assets in the increasing operations as well as the increasing dealerships and acquisitions as stated above. On the other hand, the company’s current liabilities increased at a greater rate of 44% compared to 27% for long-term liabilities during the period. The increasing current liabilities are associated with the need to finance the increasing sales. On the other hand, the increased owner’s equity is attributed to increasing company’s income and hence retained earnings. Year 2011 2012 2013 2014 Current Assets (Million) 100% 115% 116% 135% Non-Current Assets (Million) 100% 138% 146% 157% Total assets (Million) 100% 126% 131% 146% Current Liabilities (Million) 100% 129% 119% 144% Non-Current Liabilities (Million) 100% 129% 132% 127% Total Liabilities (Million) 100% 129% 123% 139% Owner’s Equity (Million) 100% 123% 142% 155% 4.0 Ratio analysis Ratio analysis is an important tool for company’s performance analysis as it helps one to better understand a company’s financial position for one to make an informed decision. Through ratio analysis, users of financial statements are able to judge the company’s strengths in various aspects as well as its weaknesses that may influence users’ decisions. The company’s ratio analysis reveal mixed results for the company’s profitability given that its ROE increased while it’s ROA decreased. Similar results have been noted in the company’s efficiency with the assets turnover declining to indicate decreasing efficiency in asset utilization while Days debtors decreased indicating increased efficiency in debtors’ management. On liquidity, the company’s current ratio and quick ratio has declined over the period though the quick ratio shows an increasing trend. The low quick ratio however indicates that the company may be faced with liquidity risks in future. Despite the company’s capital structure indicating that the company’s debt ratio has declined, it still forms the company’s greater form of financing. However, this is likely to change in future should the trend continue and hence the company’s future financial does not appear to be in danger at the moment. The company’s ,market performance has continued to improve as indicated by increasing share price and price to earnings ratio indicating increasing confidence by investors in the company. 4.1 Profitability Year 2011 2012 2013 2014 ROE 10.85% 13.04% 12.63% 13.49% ROA 5.92% 5.31% 5.25% 4.39% As indicated above, AP Eagers showed mixed results as far as its profitability is concerned over the four years period. For instance, the company’s ROE has increased from 10.85% in 2011 to 13.49% in 2014. This shows that its ability to earn profits for every dollar of equity invested has increased over the period. In other words, the company was earning 10.85 cents for every equity dollar compared to 13.49 cents for every equity dollar in 2014. The increase is however not reflected in the company’s ROA since it reduced from 5.92 cents per every asset dollar in 2011 to 4.39 cents for every asset dollar in 2014. This is an indication of declining ability to utilize assets to generate profits by the company. The decline could however be attributed to the increased levels of the company’s assets compared to revenue increase. Despite the declining economic conditions however, the company’s profitability should continue to improve with its expansion strategy of dealerships and acquisitions. 4.2 Efficiency Year 2011 2012 2013 2014 Assets turnover 2.62 2.50 2.23 2.22 Days debtors 14.18 13.34 12.96 13.51 The table above shows mixed results for the company’s efficiency for the four years period between 2011 and 2014. The company’s assets turnover declined from 2.62 in 2011 to 2.22 in 2014. This shows that the company’s efficiency in using its assets to generate sales for the company declined during the period. Though this is not a good sign, it could be attributed to the rising levels of assets for the company during the period since the assets increased at a greater rate than the earnings increased. The company’s debtor days also declined from 14.18 days in 2011 to 13.51 days in 2014. The decline in debtor days is however an improvement in debtor management efficiency as it shows that the number of days it takes the company to receive payments from its customers for invoices issued declined by almost a day (0.67 days) during the year. The decline could be attributed to the slower growth of the company’s receivables compared to its credit sales during the period under review. 4.3 Liquidity Year 2011 2012 2013 2014 Current ratio 1.29 1.15 1.26 1.21 Quick Ratio 0.36 0.25 0.31 0.32 As can be seen from the table above, the company’s liquidity over the four years registered mixed results. The company’s current ratio was 1.29 in 2011 declining to 1.15 in 2012 before increasing again to 1.26 in 2013 and decreasing again to 1.21 in 2014. This means that the company had $1.29 of current assets for every dollar of current liabilities in 2011 and $1.21 of current assets for every current liability dollar in 2014 which is a decline of $0.08 over the period. Though the current ratio is still safe, the decline indicates a liquidity risk in future if the declining trend should continue. The quick ratio over the period is very low ranging from $0.36 in 2011 declining to $0.32 in 2014. This indicates that most of the company’s current assets are in form of inventories given the company’s business of dealing with motor vehicles. The declining trend and the quick ratio level pose a great liquidity risk for the company especially if the declining trend should continue. The company thus needs to come up with a strategy that would see its current liabilities decline relative to current assets. Another strategy could be that of aggressive marketing to ensure that much of its current assets are not held in form of inventory. This way, more current assets could be made available to reduce the current liabilities and hence avert the liquidity risk. 4.4 Capital structure Year 2011 2012 2013 2014 Debt ratio 59.15% 60.23% 55.70% 56.48% Debt coverage ratio 0.26 0.17 0.30 0.26 Interest coverage 3.45 4.17 4.73 5.66 From the table above, it can be observed that the company’s debt ratio has declined significantly from 59.15% in 2011 to 56.48% in 2014. This means that the company has been making effort to repay its debts and this has caused the decline. The effort to reduce the debt levels could be attributed to the company’s increased levels of profit meaning some retained earnings have been utilized to clear debts. The decline is also attributed to the increasing level of retained earnings and hence owners’ equity. The current level of the debt ratio is still not desirable given that the greater part of the company’s assets are financed through debt as opposed to equity. This means that the company still faces significant financial risk owing to the high financial leverage. Though the company’s debt coverage ratio had increased to 0.30 in 2013, it declined to 0.26 in 2014 the same level it was in in 2011. The company’s interest coverage ratio on the other hand increased from 3.45 times in 2011 to 5.66 times in 2014. This could be attributed to increasing profitability by the company implying that more funds have been made available for the company to meet its interest obligations thus avoiding the associated risks of default. Thus, owing to the fact that its debt ratio has been on the decline while its interest coverage ratio has been on the increase, it means the risks associated with defaults have been minimized implying that the current level of financial stability would be expected to improve in future to even more stable levels. 4.5 Market performance Year 2011 2012 2013 2014 EPS $0.255 $0.34 $0.364 $0.43 Price $2.425 $3.255 $4.555 $5.32 Price to earnings ratio 9.6 9.6 12.5 12.37 Analyzing the company’s market performance revealed the company’s earnings per share, the share price and its price to earnings ratio greatly increased. For instance, the company’s EPS rose from $0.255 in 2011 to $0.43 in 2014 owing to the continued increase in the company’s income. The company’s share market price more than doubled to $5.32 in 2014 to $2.425 in 2011. Similarly, the company’s price to earnings ratio increased from 9.6 in 2011 to 12.37 times in 2014. The improving market performance for the company implies that the confidence of the market in the company greatly increased. The confidence is associated with the company’s expansive strategy and increasing returns and hence earnings for the investors. 5.0 Conclusion The financial analysis of AP Eagers Company limited revealed improving trend as far as the company’s financial performance is concerned. The company’s sales in terms of sales, EBIT and attributable profits greatly improved over the four year period. The same trend was observed in the company’s balance sheet items of assets, liabilities and owners’ equity. The improvement trend is associated with the company’s increasing operations and hence increasing profitability. The company’s ratio analysis in terms of profitability, efficiency, liquidity, and capital structure and market performance however revealed mixed results though there was a general improvement trend. However, it was observed that the company needs to come up with policies that can improve its liquidity to avert any related risks. The report thus does paint an improving picture for the company. It is hoped that this report will go a long way into helping users including investors, shareholders and creditors among other users in making informed decisions regarding AP Eagers Company limited. It should however be noted that the company’s financial stability and hence status has been found favourable for the company. References: Apeagers.com.au, 2011, AP Eagers 2011 Annual Report, Retrieved on 4th May 2016, from; http://www.apeagers.com.au/pdfs/AP%20Eagers%20AR%202010-2011_ASX.pdf Apeagers.com.au, 2012, AP Eagers 2012 Annual Report, Retrieved on 4th May 2016, from; http://www.apeagers.com.au/pdfs/annualreport2012.pdf Apeagers.com.au, 2013, AP Eagers 2013 Annual Report, Retrieved on 4th May 2016, from; http://www.apeagers.com.au/wp-content/uploads/2014/04/1321217.pdf Apeagers.com.au, 2014, AP Eagers 2014 Annual Report, Retrieved on 4th May 2016, from; http://www.apeagers.com.au/wp-content/uploads/2015/04/Annual-Report-2014-for- website-excludes-spine-170415.pdf apeagers.com.au, 2016, A P Eagers, Retrieved on 4th May 2016, from; http://www.apeagers.com.au/ Read More