Financial Statement Analysis and Financial Distress Prediction - Example

Financial Analysis Course Professor’s Name Name of the Institution Date Table of Contents Table of Contents 2 1.0 Introduction 2 2.0 Profitability sustainability ratios 3 3.0 Return on Asset 4 4.0 Return on Equity 4 5.0 Efficiency ratio 4 6.0 Liquidity ratio 5 7.0 Leverage ratios 6 8.0 Financial distress 6 Reference 7 Appendix 8 Appendix 2 10 1.0 Introduction Any business which is deemed as sustainable requires effective planning and financial management. In order to establish the growth and sustainability of business activities ratio analysis is very useful management tool that help in improving management understanding on financial performance over a given time period. Financial ratio analysis provides key indicators of the company performance (Dewachter et al., 2015). Organization management will use ratio analysis to pinpoint strengths and weaknesses from which strategies and initiatives can be performed. Investors will be comfortable using ratio analysis to measure organization results against other organization to help adjust their concerns and improve on effective management. For ratios to be effective they must have the following qualities:- Must be calculated using reliable and accurate financial information, that is information that reflects true picture of the company The consistently for a given period of time The ratios must be used in comparison to internal and external benchmarking and goals Some of the ratios which will be analyzed in this paper are grouped into four categories, they include:- Profitability sustainability ratio. Operational efficiency ratio Liquidity sustainability ratio Leverage ratio The ratios presented here gives some of the standard ratio used in the normal business practice and the guidelines. The ratios here are for Dick Smith Holdings Limited for a period of time (Dewachter et al., 2015). 2.0 Profitability sustainability ratios Net profit margin: - this ratio analysis’s how much money the company is making per every $ of sales. It measures the ability to cover all operating cost which include direct cost. For Dick Smith, these ratios are: In 2014 = 3.43% In 2015 = 2.87% From the results, the company was able to meet its expenses though it shows downward trends from the year 2014 to 2015. This is a bad indication of sustainability on the Dick Smith Holdings Limited. 3.0 Return on Asset This measure the company ability to turn assets into profit. It is very useful for the company to measure the comparison within the industry and company performance trends. For the year 2014, the ROA of Dick Smith Holdings Limited was 9.79% while in 2015, the ratio went down to 8.02%. This shows 1.77% decline in the ROA which shows downward trend in the business profitability (Dewachter et al., 2015). 4.0 Return on Equity This measure the rate of return on investment done by shareholders. It is very crucial for investors as it shows the investors whether they are making enough profit on their investment or not. For Dick Smith Holdings Limited in 2014, ROE was 25.25% while in 2015 was 22.41% indicating downward trends. In summary, there is downward trends in the profitability performance and if this continue, the company will not be in business in the near future because of downward trends in the company profitability. 5.0 Efficiency ratio Inventory Turnover: The number of times you turn inventory over into sales during the year or how many days it takes to sell inventory. The higher the inventory the better the performance. In 2014, the inventory turnover was 4.84% while in 2015 it went down to 4.50% indicating downward movement. Capital investment turnover: this is very important ratio as it shows the number of times the capital investment has been recouped. The higher this ratio the better. For Dick Smith Holdings Limited this investment turnover ratio was 8.27% in 2014 and 5.77% indicating a decline in the capital investment turnover. Asset turnover: How efficiently a business generates sales on each dollar of assets and an increasing ratio indicates you are using your assets more productively. For Dick Smith Holdings Limited this ratio has been declining with 2014 posting 2.72% while 2.60% in 2015 indicating a decline in the asset utilization. 6.0 Liquidity ratio These ratio shows the availability of cash on an ongoing basis to help in meeting its operational obligation. These ratios are important in indicating the financial health of the company. Current ratio measures the ability of the company to meet its short term obligation with the short term assets. It helps in showing the cash flow of the business in the near future. For Dick Smith Holdings Limited, the current ratio shows a fluctuating trends with 2013 giving 1.4 this declined in 2014 to 1.26 and declined further to 1.23 indicating a worrying trend on the company to meet it short term obligation though ratio of 1.2 is still sufficient enough to enable business operations. Quick ratio is a better option for testing the firm’s liquidity. A more stringent liquidity test that indicates if a firm has enough short-term assets (without selling inventory) to cover its immediate liabilities (Vogel 2014). For Dick Smith Holdings Limited, the year 2014 quick ratio was 0.23 while in 2015 it was 1.63. This shows that the firm is able to pay its obligation with ease in 2015 but the same does not apply in the year 2014 meaning the financial health of the company. With declining financial statement it gives red flags and an indication that the company is undergoing some financial distress. 7.0 Leverage ratios Debt to equity: Compares capital invested by owners/funders (including grants) and funds provided by lenders (Vogel 2014). This ratio is important as debtors have priority of equity owners. Lenders have priority over equity investors on an enterprise’s assets. Lenders want to see that there is some cushion to draw upon in case of financial difficulty. The more equity there is, the more likely a lender will be repaid. Most lenders impose limits on the debt/equity ratio, commonly 2:1 for small business loans. For the Dick Smith the leverage ratio was 2.63 in 2013, in 2014 2.70 while in 2015 was 3.01. This shows a declining trend of the company. 8.0 Financial distress From the ratio analysis shows distress situations of the company, for the time series analysis shows a declining trends of the firm financial performance. However, leverage ratio shows that the company performance is a bit strong but with reaching 3.1 it shows that the company will not be able to meet its debt obligation. The revenue growth rate is relatively constant with no significant growth in the revenue (Sheikhi et al., 2012). The excel appendix shows the various analysis shows the workings and explanation. Reference Dewachter, H., Iania, L., Lyrio, M. and de Sola Perea, M., 2015. A macro-financial analysis of the euro area sovereign bond market. Journal of Banking & Finance, 50, pp.308-325. Sheikhi, A., Ranjbar, A.M. and Oraee, H., 2012. Financial analysis and optimal size and operation for a multicarrier energy system. Energy and buildings, 48, pp.71-78. Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press. Appendix ASX Code Company Name Item 06/13 06/14 06/15 DSH DSHE Holdings Limited Net Profit Margin (%) -- 3.43 2.87 DSH DSHE Holdings Limited EBIT Margin (%) -- 4.35 4.32 DSH DSHE Holdings Limited EBITA Margin (%) -- 4.35 4.32 DSH DSHE Holdings Limited EBITDA Margin (%) -- 5.39 5.45 DSH DSHE Holdings Limited ROE (%) 0.00 25.25 22.41 DSH DSHE Holdings Limited ROA (%) 0.00 9.79 8.02 DSH DSHE Holdings Limited ROIC (%) 0.00 29.50 17.69 DSH DSHE Holdings Limited NOPLAT Margin (%) -- 3.57 3.07 DSH DSHE Holdings Limited Invested Capital Turnover 0.00 8.27 5.77 DSH DSHE Holdings Limited Inventory Turnover 0.00 4.84 4.50 DSH DSHE Holdings Limited Asset Turnover 0.00 2.72 2.60 DSH DSHE Holdings Limited LT Asset Turnover 0.00 10.65 11.13 DSH DSHE Holdings Limited PPE Turnover 0.00 15.59 14.26 DSH DSHE Holdings Limited Depreciation/PP&E (%) 0.00 13.20 11.87 DSH DSHE Holdings Limited Depreciation/Revenue (%) -- 1.05 1.13 DSH DSHE Holdings Limited Wkg Capital/Revenue (%) -- 3.30 8.82 DSH DSHE Holdings Limited Working Cap Turnover 0.00 30.29 11.34 DSH DSHE Holdings Limited Financial Leverage 2.63 2.70 3.01 DSH DSHE Holdings Limited Gross Gearing (D/E) (%) 22.75 6.86 52.74 DSH DSHE Holdings Limited Net Gearing (%) 11.59 -11.07 35.29 DSH DSHE Holdings Limited Net Interest Cover -- 22.85 15.51 DSH DSHE Holdings Limited Current Ratio 1.40 1.26 1.23 DSH DSHE Holdings Limited Quick Ratio 0.26 0.31 0.31 DSH DSHE Holdings Limited Gross Debt/CF -- 0.23 1.63 DSH DSHE Holdings Limited Net Debt/CF -- -0.37 1.09 DSH DSHE Holdings Limited NTA per Share ($) 0.49 0.71 0.72 DSH DSHE Holdings Limited BV per Share ($) 0.49 0.71 0.72 DSH DSHE Holdings Limited Cash per Share ($) 0.06 0.13 0.12 DSH DSHE Holdings Limited Receivables/Op. Rev. (%) -- 0.73 0.58 DSH DSHE Holdings Limited Inventory/Trading Rev. (%) -- 20.68 22.21 DSH DSHE Holdings Limited Creditors/Op. Rev. (%) -- 20.18 17.31 DSH DSHE Holdings Limited Funds from Ops./EBITDA (%) -- 83.44 20.99 DSH DSHE Holdings Limited Depreciation/Capex (%) -- 42.09 46.97 DSH DSHE Holdings Limited Capex/Operating Rev. (%) -- 2.49 2.40 DSH DSHE Holdings Limited Days Inventory -- 75.47 81.05 DSH DSHE Holdings Limited Days Receivables -- 2.67 2.12 DSH DSHE Holdings Limited Days Payables -- 73.65 63.18 DSH DSHE Holdings Limited Gross CF per Share ($) 0.00 0.21 0.23 DSH DSHE Holdings Limited Sales per Share ($) 0.00 5.19 5.58 Appendix 2 ASX Code Company Name Item 06/14 06/15 DSH DSHE Holdings Limited Operating Rev. 1 Year (%) -- 7.50 DSH DSHE Holdings Limited Operating Rev. 3 Year (%) -- -- DSH DSHE Holdings Limited Operating Rev. 5 Year (%) -- -- DSH DSHE Holdings Limited Operating Exp. 1 Year (%) -- 7.42 DSH DSHE Holdings Limited Operating Exp. 3 Year (%) -- -- DSH DSHE Holdings Limited Operating Exp. 5 Year (%) -- -- DSH DSHE Holdings Limited EBITDA 1 Year (%) -- 8.64 DSH DSHE Holdings Limited EBITDA 3 Year (%) -- -- DSH DSHE Holdings Limited EBITDA 5 Year (%) -- -- DSH DSHE Holdings Limited EBIT 1 Year (%) -- 6.96 DSH DSHE Holdings Limited EBIT 3 Year (%) -- -- DSH DSHE Holdings Limited EBIT 5 Year (%) -- -- DSH DSHE Holdings Limited EBT After Abs. 1 Year (%) -- 86.11 DSH DSHE Holdings Limited EBT After Abs. 3 Year (%) -- -- DSH DSHE Holdings Limited EBT After Abs. 5 Year (%) -- -- DSH DSHE Holdings Limited EAT 1 Year (%) -- 91.19 DSH DSHE Holdings Limited EAT 3 Year (%) -- -- DSH DSHE Holdings Limited EAT 5 Year (%) -- -- DSH DSHE Holdings Limited EPS Adj 1 Year (%) -- -10.04 DSH DSHE Holdings Limited EPS Adj 3 Year (%) -- -- DSH DSHE Holdings Limited EPS Adj 5 Year (%) -- -- DSH DSHE Holdings Limited Total Div. Ex Spec 1 Year (%) -- 50.00 DSH DSHE Holdings Limited Total Div. Ex Spec 3 Year (%) -- -- DSH DSHE Holdings Limited Total Div. Ex Spec 5 Year (%) -- -- DSH DSHE Holdings Limited DPS Adj Ex Spec 1 Year (%) -- 50.00 DSH DSHE Holdings Limited DPS Adj Ex Spec 3 Year (%) -- -- DSH DSHE Holdings Limited DPS Adj Ex Spec 5 Year (%) -- -- DSH DSHE Holdings Limited Total Assets 1 Year (%) 47.01 12.71 DSH DSHE Holdings Limited Total Assets 3 Year (%) -- -- DSH DSHE Holdings Limited Total Assets 5 Year (%) -- -- DSH DSHE Holdings Limited Net PP&E 1 Year (%) 30.62 17.50 DSH DSHE Holdings Limited Net PP&E 3 Year (%) -- -- DSH DSHE Holdings Limited Net PP&E 5 Year (%) -- -- DSH DSHE Holdings Limited Total Equity 1 Year (%) 43.30 1.32 DSH DSHE Holdings Limited Total Equity 3 Year (%) -- -- DSH DSHE Holdings Limited Total Equity 5 Year (%) -- -- DSH DSHE Holdings Limited Retained Profits 1 Year (%) 40.61 1.52 DSH DSHE Holdings Limited Retained Profits 3 Year (%) -- -- DSH DSHE Holdings Limited Retained Profits 5 Year (%) -- -- DSH DSHE Holdings Limited Net Debt 1 Year (%) -- -- DSH DSHE Holdings Limited Net Debt 3 Year (%) -- -- DSH DSHE Holdings Limited Net Debt 5 Year (%) -- -- DSH DSHE Holdings Limited Invested Capital 1 Year (%) 14.20 54.15 DSH DSHE Holdings Limited Invested Capital 3 Year (%) -- -- DSH DSHE Holdings Limited Invested Capital 5 Year (%) -- -- DSH DSHE Holdings Limited NOPLAT 1 Year (%) -- -7.55 DSH DSHE Holdings Limited NOPLAT 3 Year (%) -- -- DSH DSHE Holdings Limited NOPLAT 5 Year (%) -- -- DSH DSHE Holdings Limited Free Cashflow 1 Year (%) -- -- DSH DSHE Holdings Limited Free Cashflow 3 Year (%) -- -- DSH DSHE Holdings Limited Free Cashflow 5 Year (%) -- -- Read More