Myer Holdings and David Jones Corpulent Accumulation Boundary Quotient - Assignment Example

Analysis of Financial Statements: Myer Holdings and David Jones [Name] [Professor Name] [Course] [Date] Table of Contents Table of Contents 1 Executive Summary 3 Introduction 4 Horizontal Analysis 4 Horizontal analysis for Myer Holdings 5 Horizontal analysis for David Jones Ltd 7 Comparison of Myer Holdings and David Jones 8 Trend analysis 9 Trend analysis of Myer Holdings 9 Trend analysis for David Jones Ltd 11 Comparison of Myer Holdings and Davy Jones Performance 13 Relevant Financial Ratio Analysis 13 Financial ration analysis for David Jones 13 Gross Profit Trend for David Jones 14 Financial ratio analysis for Myer Holdings 14 Gross Profit Trend for Myer Holdings 15 Comparison of David Jones and Myer Holdings 19 Limitations of financial statement analysis 19 Conclusion and Recommendation 19 References 20 Appendix A: Financial ration analysis for David Jones 21 Appendix B: Financial ratio analysis for Myer Holdings 22 Executive Summary Phenomenal growth of interest in corporate investment has emerged in recent years. It must therefore be appreciated that while investors advocate and share a common though that corporations should sustain profitability, measuring their liquidity, activity, leverage and financial performances, at best, can be difficult without analysis of their financial statements. The techniques to be used in the analysis of financial analysis include trend analysis, horizontal analysis and financial ratio analysis (Yahya et al 2013). The main contribution of this report is to rate the profitability of two Australian companies, namely David Jones Ltd and Myer Holdings. To all intents and purposes, this report hopes to shed light on the financial performance of the two companies with the view of providing data for investors to make sound investment decision in selecting which of the two to invest in. This report concludes that Myer Holdings would be the better investment decision as its more profitable. This report is based on the two company’s financial statements for three years of 2010, 2011 and 2012. A horizontal analysis is performed for the balance sheets, income statements and statement of cash flow using their annual report for analysis. Further a trend analysis for balance sheets, income statements and statement of cash flow is also performed. Lastly, relevant ratio analyses are also performed. A discussion of the three analyses is further conducted to summarize and interpret the analysis of each individual company and the two companies through comparison. Introduction The Australian upmarket retail industry has few major players dominating the market. The average profitability of most industries is greatly affected by the nature of rivalry that exists in the industry. The few dominant competitors include David Jones, Myer Holdings, Harris Scarfe and Dimaru. Of the four, Myer Holdings and David Jones are the top competitors and have almost equal size and might. David Jones Ltd (DJS) is a major Australian upmarket retailer brand. Currently, it operates some 36 department stores and two warehouse outlets across Australian states and territories. Myer Holdings Ltd is also a major player in the Australian retail industry. Currently, it has 66 stores distributed across Australian states and territories (Myer Holdings 2011). The company was first listed on the Australian Securities Exchange (ASX) on November 2, 2009 after an initial public offering (Myer Holdings 2011). This report investigates whether both companies are on stable track of annual sales over the three years (2010, 2011 and 2012). The key objective of this report is to give a recommendation on which of the two companies is a better option to invest in. Horizontal Analysis Horizontal analysis refers the comparison of financial data of historical nature over a series of reporting periods. In brief, it involves the appraisal of financial data of a company over a time period. However, the numbers in each subsequent period can as well be expressed as a percentage of the amount in the baseline year. The baseline amount is listed as 100 percent. The objective is calculation and analysis of the change in amounts and changes in percentage from one period to the other (Yahya et al 2013). The changes are indicated in percentage and in dollars using the underneath principle. Horizontal analysis for Myer Holdings In the fiscal year (FY) 2010, Myer Holdings experiences significant increase in profitability to $159,665 from $67,182. A nominal decrease in FY2011 is however experienced (see table 1). However, a remarkable increase in profits does not in actual sense depict increase in actual earnings index (Accounting Tools 2013). This is because a decline in revenues from sale of goods is also reported. In point of fact, the impressive rise in profit in the FY 2011 is instead accredited to the increase in the IPO transaction costs (Myer Holdings 2011). Related charges over the period could also have factored the rise in profits (Myer Holdings 2011). As a result, the profit for each successive period is viewed to be considerably stable. Table 1: Horizontal analysis for Myer Holdings Ltd The horizontal analysis for the Myer Holdings’ balance sheets for the three successive years from 2010 shows a nominal ruse in the net assets. In the period between FY2010 and FY2011, a rise of 0.45 in the account of net assets is noted. Between the FY2011 and 2012, a 1.9 increase in the net assets is indicated (Myer Holdings 2012). Conversely, substantial decline in the FY2011 in the account of cash and cash equivalent is noted. Given that the significant decline demonstrated liquidity of the company, it is possible to argue that it shows a declining trend in the business operations. The decline could indicate future cash shortages (Myer Holdings 2011). As a result, this may impose a negative impact on the business’ daily operations. Additionally, the amount of capital imputable to the company’s shareholders experiences a small decline or rise in the three years 2010, 2011, 2012. Further horizontal analysis of cash flow statements shows change in cash flow with regard to investing, operating and financial activities. Without a doubt, a manifest decrease in the cash and cash equivalent at the end of fiscal period 2011 and a stabilizing trend in the item over the FY2012 is noted. Horizontal analysis for David Jones Ltd David Jones Ltd experiences decreased profits in the three years 2010, 2011 and 2012. In the FY 2012, 39.9 percent decrease in profits is indicated (See Table 2). In addition, analysis of the company’s balance sheet indicates decrease in cash and cash equivalent in the FY2010/2011 shows a decrease of 33.5 percent. Substantial increase of 75.5 percent in cash and cash equivalent in the fiscal period 2011/2012 is also indicated (Davy Jones 2012). Table 1: Horizontal analysis for David Jones Ltd In addition, the horizontal analysis shows increase in total liabilities by 8.4 percent in the FY2012. Further horizontal analysis of the cash flow statement shows decrease in the amount of net cash flow from operational activities by 10.5 percent between the period 2010 and 2011 (Myer Holdings 2010). Lastly, increase in cash flow by 7.8 percent in FY2012 is noted. Comparison of Myer Holdings and David Jones Horizontal analysis of Myer Holding’s and David Jones’ profitability indicates that the former had performed more profitably in the three 2010, 2011 and 2012 9 (Myer Holdings 2012). In particular, Myer Holdings reported a profit of $141,067 in the fiscal year 2012 compared to $101,167 by Davy Jones. On the other end, Myer Holdings witnessed better earnings from the sale of goods. It is further noted that even as Myer Holdings reported $2,616,700 revenue from sale of goods, David Jones earned $1,867,817 from sale of goods. In the FY2012, Myer Holdings witnessed higher gross profit of $699,830 compared to David Jones’ $288,421. It can be concluded that Myer Holdings witnessed better profitability compared to David Jones. Horizontal analysis has therefore declared Myer Holdings as a better company (Myer Holdings 2012). Trend analysis Trend analysis comprises the practice of collection of information and analysis of the pattern in the same metric historically using tables or charts. Also referred as time-series analysis, trend analysis can help determine how Myer Holdings Ltd and David Jones Ltd are likely to perform over time (Yahya et al 2013). Typically, the analysis is based on historical data from the companies’ financial statements and sometime forecasted data from the companies’ pro forma. For the purpose of this report, historical data from the two companies’ financial statements are analyzed to gain an insight into their performance over the three years (2010, 2011 and 2012). This is with the view of determining which of the two companies has better performances over time. Trend analysis of Myer Holdings The trend analysis of Myer Holdings over the FY2011/2012 shows a decrease in sales revenue by 40 percent (Myer Holdings 2012). This represents decline in net sales by 1.3 percent relative to the preceding financial year. Decline in net sales coupled with an increase in operating profit in 2010 triggered comparative decline in operating profits by 3.7 percent (US$100,000). Further, there was an increase in operating income between FY2011 and 2012 resulting to decline in operating profit by 11.5 percent (US$300,000). The quondam increase in net income triggered dramatic increase of 928,000 (138 Percent) in net income in FY2011. This however failed to trigger further increase in net income over the subsequent years. This is because in FY2012, a decline in net income by 13 percent (US$210,000). Table 3: Converting Sales Revenue, EBIT, Pre-tax profit and Net income for a trend analysis Absolute Amounts($m) 2010 2011 2012 Sales revenue 3,324 3,159 3,119 Operating Profit (EBIT) 333 339 312 Pre-tax profit 228 225 205 Net Income 67,2 160 139 2010 is the base year (assigned index value of 100). Table 4: Trend analysis Trend analysis 2010 2011 2012 Sales revenue 100 95.03 93.83 Operating Profit (EBIT) 100 101.8 93.69 Pre-tax profit 100 98.68 89.91 Net Income 100 238 206 From the above trend analysis, it is apparent that a decrease in sales revenue is experienced in the three years 2010, 2011 and 2012. Further, decrease in operating profits, net income and pretax profit is also witnessed over the three successive years. Figure 1: Myer Holdings graph of trend Myer Holding’s 2010 performance (base year) is compared with the performances of the FY2011 and FY2012. Based on the trend analysis, it is clear that Myer Holding’s performance has been failing over the years. Simply put, the company’s profitability has declined steadily in the three successive years 2010, 2011 and 2012. Trend analysis for David Jones Ltd David Jones Ltd reported a nominal decline in its operating profit by 0.8 percent (US$200,000) in FY2010. In the FY 2011, a decline in operating profit of 37 percent, or US$930,000 was noted. Other declines were witness on the item of net income. In the FY2010, a small decline of around 1.8 percent, or US$300,000 was reported. Another net income decline was witnessed in the FY2011 of US670000, or 40 percent. Based on analysis of the trend figures, it is clear that sales revenues reduced in the year 2010, 2011 and 2012. Declines were also seen in operating profit, pretax profit and the net income in the three consecutive years. Table 5: Converting Sales Revenue, EBIT, Pre-tax profit and Net income for a trend analysis Absolute Figures ($m) 2010 2011 2012 Sales revenue 2,053 1,962 1,868 Operating Profit (EBIT) 249 247 154 Pre-tax profit 242 239 144 Net Income 171 168 101 Table 6: Trend analysis Trend analysis 2010 2011 2012 Sales revenue 100 95.57 91 Operating Profit (EBIT) 100 99.20 61.84 Pre-tax profit 100 98.76 59.50 Net Income 100 98.24 59.06 On comparing David Jones’ base year performance (the year 2010) to the preceding years (2011 and 2012), it is evident that the company’s profitability is on a dramatic declining trend. The company’s overall performance has indeed weakened over the three years and is becoming even gradually weaker. Figure 2: David Jones’ graph of trend Comparison of Myer Holdings and Davy Jones Performance Analysis of Myer Holding’s and David Jones’ profitability in the three years 2010, 2011 and 2012 shows that the two companies performed poorly over the three-year period. Myer Holdings witnessed small increase in its operating profit of 600,000 in the financial year 2010/2011 (4-traders 2013). The company also suffered relative fall in operating profit by $1,000,000, or 3.7 percent. On the other end, in 2010, David Jones experienced a decline of operating profit by $200,000, or 0.8 percent fall. The company further witnessed 930,000, or 37 percent, in the financial year 2011 to 2012. Based on the above findings, it is clear that despite the two companies failing to indicate desirable financial performance in the year 2010, 2011 and 2012, Myer Holdings shows better profitability compared to David Jones. Trend analysis has therefore declared Myer Holdings as a better company. Relevant Financial Ratio Analysis There is a need to compare the relationship between different pieces of financial information so as to get the picture of the internal performance of Myer Holdings and David Jones. Therefore, financial ratio analysis on the company’s profitability has to be calculated. By comparing the preceding year’s financial ratios to the current year ratios, the areas that have improved or faltered in the business operation of the two companies are discovered. For the purpose of this report, gross profit margin is calculated as it is the most relevant (Yahya et al 2013). Financial ration analysis for David Jones Measuring gross profit margin: The gross profit margin ratio indicates on how a business sets prices and controls its production costs. Investors are often interested on seeing high gross profit margins as it shows that a company generates more revenue from sales. David Jones gross profit ratios for 2010 and 2011 are calculated below. Table 7: Gross profit margin ration calculations for David Jones 2010 2011 2012 Sales – Cost of goods sold Sales 2,053,087 – 1,237,358 2,053,087 1,961,744 – 1,194,474 1,961,744 1,867,817 – 1,167,987 1,867,817 0.39 0.39 0.37 As showed, 2010 and 2011 gross margin is 0.39 or 39 percent (see Appendix B). This means that for every one dollar ($.100) that was generated in sales, 39 cents remained in the company. In 2012, the gross profit margin is 0.37 or 37 percent. This shows that for every one dollar that the company generated in sales, 37 cents remained in the company (4-traders 2013). Gross Profit Trend for David Jones The gross profit margin has remained stable in FY2010 and 2011 at 39 cents. This means that the company has stabilized its pricing and the production cost. In 2012, the margin decreases slightly to 37 cents. In any case, lower gross profit margin shows the company is making less money from each sale. Financial ratio analysis for Myer Holdings Table 8: Gross profit margin ratio calculations for Myer Holdings 2010 2011 2012 Sales - Cost of goods sold Sales 3324240 – 449,950 3324240 3,158,774 – 451,867 3,158,774 3,119,119 – 467,207 3,119,119 0.86 0.86 0.85 As showed, 2010 and 2011 gross margin is 0.86 or 86 percent (see Appendix B). This means that for every one dollar ($.100) that was generated in sales, 86 cents remained in the company. In 2012, the gross profit margin declines insignificantly to 0.85, or 85 percent. This shows that for every one dollar that the company generated in sales, 85 cents remained in the company in the FY2012. Gross Profit Trend for Myer Holdings The gross profit margin has remained stable in FY2010 and 2011 at 89 cents. This means that the company has stabilized its pricing and the production cost. In 2012, the margin decreases slightly to 85 cents. In any case, higher gross profit margin shows the company is making more money from each sale. Liquidity ratios The below liquidity ratios examines the ability of Myer Holdings and David Jones Ltd to repay their short-term debts as well as meet unexpected cash needs. Table 9: Liquidity ratios for David Jones Ltd 2010 2011 2012 Current Assets 328,084 327,101 323,249 Current Liabilities 313,300 266,133 306,928 Current ratio 1:1 1.2:1 1.1:1 The liquidity ratio indicates that, on average, David Jones has current assets that are equal to current liabilities. The company can therefore still meet unexpected cash needs although with financial difficulties. Table 10: Liquidity ratios for Myer Holdings Ltd 2010 2011 2012 Current Assets 482,692 446,751 441,472 Current Liabilities 557,414 552,190 502,869 Current ratio 0.9:1 0.8:1 0.9:1 The liquidity ratio indicates that, on average, Myer Holdings has more current liabilities than current assets. The company can therefore not meet unexpected cash need. Inventory Turnover ratio Inventory turnover ratio shows whether Myer Holdings and David Jones have an excessive or insufficient amount of product in inventory. The ratio shows the number of times each year that both companies use or consume an average stock of inventory. The Myer Holdings inventory turnover ratio for 2010, 2011 and 2012 is calculated below. Table 11: Myer Holdings inventory turnover ratio for 2010, 2011 and 2012 2010 2011 2012 4.8 times 4.0 times 4.2 times Myer Holdings’ inventory turnover ratios are 4.8, 4.0 and 4.2 times for the years 2010, 2011 and 2012 respectively. This shows that the company had more money tied up to its inventories in 2010 than 2012 and 2011 respectively. Table 12: David Jones inventory turnover ratio for 2010, 2011 and 2012 2010 2011 2012 4.3 times 6.9 6.7 Myer Holdings’ inventory turnover ratios are 4.3, 6.9 and 6/7 times for the years 2010, 2011 and 2012 respectively. This shows that the company had less money tied up to its inventories in 2010. The money however increased in 2011 and slightly decreased in 2011. Debt to Equity ratio The debt to equity ratio compares the investment made by shareholders to those made by creditors in Myer Holdings and David Jones Ltd. It shows investors whether shareholders investment is higher that creditors’ investment. The debt to equity ratio for Myer Holdings is calculated below. Table 13: Myer Holdings debt to equity ratio 2010 2011 2012 1.28 1.29 1.19 The debt to equity ratio for 2010 is 1.28 for 2011 is 1.29 and for 2012 is 1.29. This shows that for every one dollar the shareholders have invested into Myer Holdings, creditors have invested $1.28 for 2010, $1.29 for 2011 and 1.19 for 2012. The debt to equity ratio increased slightly from 2010 to 2011 and decreased sharply from 2011 to 2012. It shows the shareholders own more of the company than creditors in 2012 than in 2011. In any case, the company is paying its creditors and therefore owes less money to creditors in 2012. This shows the company is becoming stronger. Table 14: David Jones debt to equity ratio 2010 2011 2012 0.6 0.5 0.1 The debt to equity ratio for 2010 is 0.6 for 2011 is 0.5 and for 2012 is 0.5. This shows that for every one dollar the shareholders have invested into Myer Holdings, creditors have invested $0.6 for 2010, $0.5 for 2011 and $0.1 for 2012. The debt to equity ratio decreased from 2010 all through to 2012. It shows the shareholders own more of the company than creditors in 2012 than in 2011 and 2010. In any case, the company is paying its creditors and therefore owes less money to creditors in 2012 than it did in 2010. This shows the company is becoming stronger. Comparison of David Jones and Myer Holdings As illustrated above, Myer Holdings has greater overall performance and is stronger than David Jones. The company is making more money (an average of 86 cents) from each product sold compared to David Jones (an average of 39 cents from each product sold). Limitations of financial statement analysis The main limitation of the financial statement analysis presented by the report is that even though it shows how the two companies perform internally over the three-year period (from 2010), it does not indicate how the two companies perform relative to other major players in the Australian retail industry. The financial ratios (such as gross profit margin) need to be compared to ratios of similar business in the industry to get an actual insight into their performances. This would indeed be necessary if the most ideal recommendation would have to be made. In any case, it would limit the scope of the recommendations to the two companies while at the same time leaving room for analysis of financial statement of other similar businesses. This would indeed have formed a good financial picture of the two companies. Conclusion and Recommendation It can be concluded that Myer Holdings has shown better profitability and desirable overall performance in the three years 2010, 2011 and 2012. The trend analysis declared Myer Holdings as the better company. Results of the horizontal analysis also indicate that Myer Holdings performed more profitably in the three years. Calculation of the gross profit margin ratio also indicates that Myer Holdings has greater overall performance and is financially stronger than David Jones. For instance, the company is making an average of 86 cents from each product sold while David Jones is making an average of 39 cents from each product sold. From the analysis, this report recommends that the investors should consider investing in Myer Holdings instead of David Jones since the former is more profitable and is showing overall better financial performance. References Accounting Tools 2013, Horizontal Analysis, Accounting CPE, viewed 4 August 2013, http://www.accountingtools.com/horizontal-analysis Davy Jones 2012, Annual Report 2012, viewed 4 August 2013, http://www.davidjones.com.au/-/media/Files/Corporate/Presentations/2012/David%20Jones%202012%20Annual%20Report.ashx Myer Holdings 2010, Myer Holdings Ltd Annual Report 2010, viewed 4 August 2013, http://media.corporate-ir.net/media_files/irol/23/231681/2010AR/2010AR/assets/downloads/Myer_AR10_FINS.pdf Myer Holdings 2011, Myer Holdings Ltd Annual Report 2010, viewed 4 August 2013, http://media.corporate-ir.net/media_files/IROL/23/231681/Myer_Holdings_Limited_2011_Annual_Report_to_Shareholders.pdf Myer Holdings 2012, Myer Holdings Ltd Annual Report 2010, viewed 4 August 2013, http://media.corporate-ir.net/media_files/IROL/23/231681/Myer_AR12_FINAL.pdf Yahya, F, Atif A, Mir, Z, Yaqoob, M & UKhan, A 2013, 'Significant Analysis for Financial Statements: An Empirical Study of National and Unilever Foods.' Research Journal of Finance and Accounting, Vol. 4, No.1, pp.26-33 4-traders 2013, Myer Holdings Ltd, viewed 3 August 2013, http://www.4-traders.com/MYER-HOLDINGS-LTD-6500903/financials/ Appendix A: Financial ration analysis for David Jones Gross profit margin ratio calculations for David Jones a) Gross profit margin ration calculations for David Jones FY2010 Sales = 2,053,087 Cost of goods = 1,237,358   = (825,729 ÷ 2,53,358) = 0.39 Gross margin % = 0.39 × 100 = 39% Gross margin ration = 0.39 or 39% b) Gross profit margin ration calculations for David Jones FY2011 Equation =  Sales = 1,961,744 Cost of goods sold = 1,194,474  =  767,270 ÷ 1,961,755 = 0.39 Gross profit margin % = 0.39 × 100 = 39% Gross profit margin ratio = 0.39 0r 39%. c) Gross profit margin ration calculations for David Jones FY2012  Sales = 1,867,817 Cost of goods sold = 1,167,987  =  699,830 ÷ 1,867,817 = 0.37 Gross margin % = 0.37 × 100 = 37 percent Appendix B: Financial ratio analysis for Myer Holdings Gross profit margin ratio calculations for Myer Holdings a) Gross profit margin ration calculations for Myer Holdings FY2010 Sales = 3324240 Cost of goods sold = 449,950  =  Gross profit margin (%) = 0.86 × 100 = 86% Gross profit margin = 0.86 or 86% b) Gross profit margin ration calculations for Myer Holdings FY2011 Sales = 3,158,774 Cost of goods sold = 451,867  =  2,706,907 ÷ 3,158,774 = 0.85 Gross profit margin (%) = 0.85 × 100 = 85% Gross profit margin = 0.85 or 85%. c) Gross profit margin ration calculations for Myer Holdings FY2012 Sales = 3,119,119 Cost of goods sold = 467,207  =  Gross profit margin (%) = 0.86 × 100 = 86% Gross profit margin = 0.86 or 86 percent Read More