Qatar Sports Equipment Ltd Financial Analysis - Research Proposal Example

Qatar Sports Equipment Ltd Name Institution Executive Summary Company’s financial analysis is one of the evaluation strategies that determine the sustainability of cash flow and growth. The company stocks, debts, and equity should be capitally structured and designed so that the company becomes very relevant in the modern business world. Important events are normally the turning points of most retail firms and with the coming 2022 world cup in Qatar, most firms retailing sportswear stand to benefit. As a Qatar-based sports retailer, the Qatar Sports Equipment Ltd (QSE) is one of the few firms that have already begun strategizing for the event. Due to its rapid growth, as realized from its stock prices as listed on the Qatar Stock Exchange, QSE Ltd has a more determined financial focus as the 2022 Football World Cup in Qatar draws near. This report focuses on the financial options that the company made that would affect the long term financing and cost of the capital issues as supposed by the company financial management. By analyzing QSE’s EBIT/EPS as well as the costs of capital of the company, this report provides an adoptive point of view that promotes the financial goodwill of Qatar Sports Equipment Ltd (QSE). Introduction EBIT-EPS analysis helps in designing the optimum capital structure of a company by designing various alternatives of debts, equity, and preference shares. This is done in order to maximize the EPS at given level of EBIT. EBIT (Earning before interest and taxes) is an accounting term used to refer to the net operating income, an amount that the company has from the subtraction of the operating expenses from sales (Ross, et al, 2006). In this case, it becomes the amount before interest and taxes deductions. EPS (Earning per Share) refer to the amount that shareholders with common stock are entitled to earn in terms of per share stock owned. EPS can be paid in dividend forms or retained and therefore reinvested into a company. Both cases are also possible. Qatar Sports Equipment (GSE) being a ports retailer has grown to greater heights of financial growth rates in the past years. As a result, it has been listed on the Qatar stock exchange (QSE) and is currently evaluating the benefits of dividends to shareholders. Purpose and objectives One of the major prospect of this study is the aspect of increasing (and therefore maximizing) the wealth of the shareholders by the management through their strategic moves for the company. Qatar Sports Equipment (GSE) is a company whose management seeks to strategically adopt a clear long term financing as well as cost of capital. Considering that the company has undergone a booming period of success of the last couple of years, Qatar Sports Equipment has been evaluating the benefits that may accrue to the company in the events of paying one-off special dividends to shareholders. According to the progressions in the company, the analysis thereafter; i. determine the impact of these actions on the EBIT/EPS over the next 10 years and three options recommended from the EBIT/EPS perspective ii. determine the impact on the EBIT/EPS over the next 10 years and recommend three options based on the cost of capital perspective Analysis Qatar sports Equipment ltd Balance Sheet Assets Liabilities & Net worth cash 700 Account payable 1,400 other short term assets 3,600 Bank loan 2,000 Plant and equipment 1,200 Bond 2,000 land, building, and fixtures 9,000 Total Liabilities 5,400 other assets 500 Equity including retained earnings 9,600 Total 15,000 Total 15,000 There are currently 2,800,000 shares on issues. The shares are listed on the Qatar Stock Exchange and the last trade was at a price of $3.00 Value of the shares=2,800,000/3 =$933,333.33 worth of equity Retained earnings total to $2,500,000 QSE’s bank debt of $2 million costs at 5.5% p.a. Future value of the debt =Ct/ (1+r)t =2,000,000/ (1.055) =2,104,266 QSE’s perpetual bond of $ 2 million is issued at 8% and currently has a yield to maturity of 6% PV of perpetuity= c/r =$2,000,000 (0.08-0.06) =$40,000 The payment terms of both bank debt and the perpetual bond are interest only Land and buildings are depreciated but the building fit-out, which is currently valued at $1 million, is depreciated Value of the land and building=present value- depreciated value =1,200,000-1,000,000 =200,000 The final balanced sheet becomes as follows. Qatar sports Equipment ltd Balance Sheet Assets Liabilities & Net worth cash 700,000 Account payable 1,400,000 other short term assets 3,600,000 Bank loan 2,104,266 Plant and equipment 200,000 Bond 2,040,000 land, building, and fixtures 9,000,000 Total Liabilities 5,400,000 other assets 500,000 Equity including retained earnings 3,433,333 B/c 377,599 Total 14,377,599 Total 14,377,599 In the same way, the company has its budgeted income and expenditures for the following financial year as well as the income and expenditures for the next 10 financial year projections. These projections are based on the per annum yearly interest adjustment on each component of the income statement as shown on the excel sheets attached. The below statement table shows the company has its budgeted income and expenditures for the following financial year. Qatar sports Equipment ltd income and expenses For the next financial year $000 Revenue 3,500 COGs 1,650 Wages 700 Repairs and Maintenance 110 Power 120 Sales and Marketing 170 Other 50 According to the time value for money, which determines the money today versus the money tomorrow, the valuation of a company like Qatar Sports Equipment (GSE) takes into consideration the current (or the present) value and the future valuation of the company. Under both cases, the valuation is done from the either the cost of capital of the company perspective or from the EBIT/EPS perspective. According to the table above, the cost is at $1,650,000, therefore, at the given discount (interest) Rate, PV= discount factor x Ct , where the discount factor = 1/ (1+r) t and can be used to compute the present value of any cash flow. This rate also represents the opportunity cost of capital, thus, i. Increase in cash flow increases the present value ii. Increase in the discount rate, r, decreases the present value Cost of Capital Analysis Cost of capital depends on the discount rate, investor’s required return, and investor’s expected return. According to Brealey, et al. (2012), required return is the product of risk-free returns and risk premium. In the like manner, when valuing the common stocks, the expected return represent the percentage yield that an investor forecasts from the specified investment over a set period of time. With the dividend, the periodic cash distribution from Qatar Sports Equipment to the shareholders, Expected return= r= (Div + p1 –P0 )/P0 Po= (Dividend +P1)/1+r The table below shows the analysis of the cost of capital considering no dividend or share purchase price, from the 1st year to the 10th year. The tables below represent the calculations of the ten year forecast of QSE. The analysis is based on the interest rates revenue, COGs, wages, repairs and Maintenance expenses, power expenses, sales and marketing expenses, and other expenses that were forecasted to increase at the rate of 4% (for year 2-5)-3% (year 6-10), 3% p.a., 3%, 3%, 4%, 2%,and 4% p.a. respectively. In the same way, the depreciation on the building fit out and plant and equipment were calculated at the rate of 10% and 20% respectively. Years 10 Sales revenue 4,746,653.45 COGs 2,152,875.75 Wages 913,341.23 Repair & Maintenance 143,525.05 Power 170,797.42 Sales & Marketing 203,165.74 Other Expenses 71,165.59 Dep. fit-out 10% 38,742.05 Dep. plant & equip 20% 32,212.25 After the 10 year, the valuation of the revenue, COGs, wages, repairs and Maintenance expenses, power expenses, sales and marketing expenses, and other expenses based on the ten year forecast becomes $4,746,653.45, $ 2,152,875.75, $ 913,341.23, $143,525.05,$ 170,797.42, $203,165.74,$ 71,165.59,$ 38,742.05, and $32,212.25 Qatar sports Equipment ltd income and expenses forecast For the next 10 financial years Revenue 4,746,653.45 COGs 2,152,875.75 Wages 913,341.23 Repairs and Maintenance 143,525.05 Power 170,797.42 Sales and Marketing 203,165.74 Other 71,165.59 Net operating income (EBIT) for QSE is revenue- expenses =4,746,653.45 -1,501,994.03 =$3,244,659.42 EBIT/EPS Analysis EBIT 1,020,828.37 Bank interest rate 5.5% 110,000.00 bond interest rate 8% 160,000.00 Profit of the year before tax 750,828.37 Tax 10% 75,082.84 Profit of the year after tax 675,745.53 Amount of shares 2,800,000.00 Earning per share $ 0.24 According to the table above, after a period of 10 years projections based on the expected interest changes in the market, the earning per share is expected to be $0.24. The analysis of EBIT considering the 10 year projections, where EBIT is rated at 25% lower than the EBIT valuation of $1,020,828.37, it becomes $765,621.27 and the EPS value becomes $0.16. years 10 EBIT 1,020,828.37 EBIT 25% lower 765,621.27 Bank interest rate 5.5% 110,000.00 bond interest rate 8% 160,000.00 Profit of the year before tax 495,621.27 Tax 10% 49,562.13 profit of the year after tax 446,059.15 SHARE AMOUNT 2,800,000.00 EPS $ 0.16 In the same way, a 10 year projections, where EBIT is rated at 25% higher than the EBIT valuation of $1,020,828.37, it becomes $1,276,035.46 and the EPS value becomes $0.32 as shown in the table below. years 10 EBIT 1,020,828.37 EBIT 25% higher 1,276,035.46 Bank interest rate 5.5% 110,000.00 bond interest rate 8% 160,000.00 Profit of the year before tax 1,006,035.46 Tax 10% 100,603.55 profit of the year after tax 905,431.92 SHARE AMOUNT 2,800,000.00 EPS $ 0.32 Conclusion and Recommendation Growths of major firms that are listed on the stock exchange largely depend on the growth of the share prices (Ross, et.al. 2006). Notably, the resurgence of strong strategic management can also be the paramount factor that can catapult the firm, like the Qatar Sports Equipment to a major financial positive overhaul. In this case therefore, considering the three options for the firm, the actions that will be taken have a great influence on the financial status of the firm in the near and later future. Decisions taken must be well analyzed; otherwise the coming 2022 Qatar world cup may turn out to be a major disappointment for the firm from business perspective. From the cost of capital perspective, the better option would be no dividend and repurchase of the shares. The firm management has greater control of the firm if the stocks of the firm have higher ownership within the firm itself and gains from the goodwill of the firm in the market. Considering the excess liabilities to the firm and at the same time the firm must have a major stock control considering the coming 2022 world cup that would be a major financial boost. Considering these actions on the QSE’s EBIT/EPIS (net operating income vs. earning per share), the EBIT projection for the next 10 years is forecasted to be $1,020,828.37. The earning per share (EPIS) going by the periodic cash distribution from Qatar Sports Equipment to the shareholders priced at $0.32 per share in the event the EBIT is valued at a 25% higher than the EBIT value, and $ 0.16 in the event that the EBIT would valued at 25% lower. In this case therefore, no dividend and shares repurchase becomes the better option for the firm. References Brealey, R. A., Myers, S. C., & Marcus, A. J. (2012). Fundamentals of corporate finance. New York: McGraw-Hill/Irwin. Ross, S. A., Westerfield, R., & Jordan, B. D. (2006). Fundamentals of corporate finance. Boston, Mass: McGraw-Hill/Irwin. Read More