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Question:

Based on the information contained in these statements calculate for each company for the relevant financial years. You must show the formula used and your calculations.

The Net Profit Margin;
Current Ratio;
Inventory Turnover;
Asset Turnover Ratio;
Leverage Ratio;
Return on Equity;
Return on Total Assets;
Earnings per share (EPS);
Net Debt to Equity Ratio; and
1. Demonstrate and explain what would happen to the 2017 Return on Equity and the Net Debt to Equity Ratios if your allocated company just prior to the end of the 2017 financial year raised an additional \$200 million loan from the bank, which it invested entirely in new plant and equipment. Assume that the immediate effect on sales and net profit was zero.
2. Using the ratios calculated in Task 1 of this case study, compare and contrast the financial performance of the companies over the period of your analysis. [Provide a single agreed answer per team.
3. Use your analysis of the financial performance of the companies over the past 3 years to explain any differences in the Total Return to Shareholder between the companies over the past 3 years. Provide a single agreed answer per team.
4. Compare and contrast the current market value of each company. Use the ratios you have collected, other information from the media to provide observations about the value of these companies (i.e. cheap or expensive?) [Provide a single agreed answer per team.
Introduction

This report emphasis on the financial evaluation of the six companies operating in the field of health care namely API Ltd, Nick Scali limited, JB Hi FI Ltd, Blackmores limited, Super Retail Group, and Reject Shop Ltd. the report analyses the companies on the basis of financial ratios followed by analysis of the impact of bank loan on the companies. The report also evaluates the ratios and identifies the suitable company that will perform better.   The last part of the report evaluates these companies on the basis of the Market value of share, market capitalization and P/E ratio.

Question 1)
 1) Ratio Analysis (API Limited) Ratio Names Formulas 2014/15 (AUD in Millions except per share data) Ratios 2015/16(AUD in Millions except per share data) Ratios 2016/17 Ratios Net Profit Margin Net profit/Total revenue*100 91/3346*100 2.72 43/3457*100 1.24 52/3840*100 1.35 Current Ratio Current Assets /Current Liabilities 932/687 1.36 994/778 1.28 1129/846 1.33 Inventory Turnover Ratio Cost of Goods/Average inventory 449/342 1.31 481/364 1.32 505/414 1.22 Asset Turnover ratio Net Sales/Total Assets 91/1289 0.07 43/1343 0.03 52/1449 0.04 Leverage ratio Total debt/Total Assets 99/1289 0.08 37/1343 0.03 46/1449 0.03 Return on equity Net Income/Shareholder equity 91/4812 0.19 43/505 0.09 52/5370 0.10 Return on total assets Net income/Average Total Assets 91/1289 0.07 43/1343 0.03 52/1449 0.04 Earnings per share Total earnings/outstanding shares 105/566 0.19 105/566 0.19 105/566 0.19 Net debt to equity ratio Total Liabilities/Total equity 808/4812 0.17 837/44 19.02 912/73 12.49 Total return to shareholders ratio Total Revenue/Shareholder equity *100 3346/4812*100 69.53 3457/505*100 6.85 3840/5370*100 71.51

(Source: API, 2016/17)

2) Nick Scali limited

 Nick Scali limited Ratio Names 2014/15 (AUD in Millions except per share) Ratios 2015/16 2016/17 Net Profit Margin 1414/1423*100 99.37 1567/1708*100 91.74 2038/2615*100 77.93 Current Ratio 5518/3115 1.77 5886/3556 1.66 6327/4038 1.57 Inventory Turnover Ratio 5601/1901 2.95 6128/2421 2.53 7968/2585 3.08 Asset Turnover ratio 1414/8042 0.18 1557/9634 0.16 1188/1214 0.98 Leverage ratio 6762/8042 0.84 1206/9634 0.13 2116/1214 1.74 Return on equity 1414/4013 0.35 1567/4623 0.34 2038/5779 0.35 Return on total assets 1414/8042 0.18 1567/9634 0.16 2038/1214 1.68 Earnings per share 3680/81 45.43 4266/81 52.67 5514/81 68.07 Net debt to equity ratio 4029/4013 1.00 5011/4623 1.08 6368/5779 1.10 Total return to shareholders ratio 1423/4013*100 35.46 1708/4623*100 36.95 2615/5779*100 45.25

(Source: Nick, 2016/17)

3) JB Hi FI Ltd

 JB HI FI Limited Ratio Names 2014/15 Ratio 2015/16 Ratio 2016/17 Ratio Net Profit Margin 1284/3483*100 36.86 1365/3652*100 37.38 1521/3954*100 38.47 Current Ratio 5781/3521 1.64 6169/3803 1.62 7025/4468 1.57 Inventory Turnover Ratio 2727/4586 0.59 2045/4788 0.43 2352/5464 0.43 Asset Turnover ratio 3483/2816 1.24 3652/8950 0.41 3954/9923 0.40 Leverage ratio 1796/2816 0.64 1394/8950 0.16 1097/9923 0.11 Return on equity 1284/2946 0.44 1365/3434 0.40 1521/4047 0.38 Return on total assets 1284/8598 0.15 1365/8950 0.15 1521/9923 0.15 Earnings per share 2199/114.42 19.29 2851/100.2 28.51 3495/100.16 34.95 Net debt to equity ratio 2130/2946 0.72 5515/3434 1.61 5876/4047 1.45 Total return to shareholders ratio 3483/2946*100 118.23 3652/3434*100 106.35 3954/4047*100 97.70

Source: (Source: JB, 2016/17)

4) Super Retail Group

 Super Retail Group Ltd (In AUD Millions) Ratio Names 2014/15 Ratios 2015/16 Ratios 2016/17 Ratios Net Profit Margin Net profit/Total revenue*100 108/2112*100 5.11 81/2239*100 3.62 63/242*100 26.03 Current Ratio Current Assets /Current Liabilities 555/318 1.75 558/324 1.72 560/330 1.70 Inventory Turnover Ratio Cost of Goods/Average inventory 1171/490 2.39 1273/506 2.52 1372/502 2.73 Asset Turnover ratio Net Sales/Total Assets 2112/1575 0.13 2239/1583 1.41 242/1570 0.15 Leverage ratio Total debt/Total Assets 402/1575 0.26 389/1583 0.25 410/1570 0.26 Return on equity Net Income/Shareholder equity 108/760 0.14 81/768 0.11 63/735 0.09 Return on total assets Net income/Average Total Assets 108/1575 0.07 81/1583 0.05 63/1570 0.04 Earnings per share Total earnings/outstanding shares 210/542 0.39 213/542 0.39 194/542 0.36 Net debt to equity ratio Total Liabilities/Total equity 814/760 1.07 815/768 1.06 834/735 1.13 Total return to shareholders ratio Total Revenue/Shareholder equity *100 2112/760*100 27.76 2239/768*100 29.15 242/735*100 32.93

(Source: Super retail group, 2016/17)

5) Black Mores limited

 Blackmores Limited (In AUD Millions) Ratio Names 2014/15 2015/16 2016/17 ratios Net Profit Margin Net profit/Total revenue*100 25/347*100 7.20 47/472*100 9.96 100/717*100 13.95 Current Ratio Current Assets /Current Liabilities 131/58 2.26 188/115 1.63 295/192 1.54 Inventory Turnover Ratio Cost of Goods/Average inventory 240/39 6.15 148/39 3.79 214/116 1.84 Asset Turnover ratio Net Sales/Total Assets 347/237 1.46 472/293 1.61 717/434 1.65 Leverage ratio Total debt/Total Assets 73/237 0.31 44/293 0.15 55/434 0.13 Return on equity Net Income/Shareholder equity 25/104 0.24 47/133 0.35 100/178 0.56 Return on total assets Net income/Average Total Assets 25/237 0.11 47/293 0.16 100/434 0.23 Earnings per share Total earnings/outstanding shares 66/35 1.89 87/38 2.29 135/38 3.55 Net debt to equity ratio Total Liabilities/Total equity 132/104 1.27 160/133 1.20 256/178 1.44 Total return to shareholders ratio Total Revenue/Shareholder equity *100 347/104*100 333.65 472/133*100 354.89 717/178*100 402.81

(Source: Black More, 2016/17)

6) Reject Shop Ltd

 Reject Shop Ltd. (In AUD Millions) Ratio Names 2014/15 Ratios 2015/16 Ratios 2016/17 Ratios Net Profit Margin Net profit/Total revenue*100 1450/7115*100 20.38 1423/7568*100 18.80 1710/7999*100 21.38 Current Ratio Current Assets /Current Liabilities 1200/7708 0.16 1285/6793*100 0.19 1349/8380*100 0.16 Inventory Turnover Ratio Cost of Goods/Average inventory 3962/1008 3.93 4203/1002 4.19 4586/9851 0.47 Asset Turnover ratio Net Sales/Total Assets 7115/2219 3.21 7568/2283 3.31 7999/2317 3.45 Leverage ratio Total debt/Total Assets 130/2219 0.06 140/2283 0.06 120/2317 0.05 Return on equity Net Income/Shareholder equity 145/120 1.21 142/134 1.06 171/135 1.27 Return on total assets Net income/Average Total Assets 145/2219 0.07 142/2283 0.06 171/2317 0.07 Earnings per share Total earnings/outstanding shares 73/28 2.61 80/28 2.86 86/28 3.07 Net debt to equity ratio Total Liabilities/Total equity 101/120 0.84 93/134 0.69 96/135 0.71 Total return to shareholders ratio Total Revenue/Shareholder equity *100 711/120*100 592.50 756/134*100 564.18 799/135*100 591.85

(Source: Reject, 2016/17)

Question 2)

In case of increase in the long term loan by \$200 million for the investment in new plant and equipment will lead to no impact on the return to equity ratio of the companies that are analyzed. As the main impact of the decision will impact the total liabilities of the company so it will lead to affect the net debt to equity ratio (DRURY, 2013).  The impact on each of the company is as below:

Net debt to equity = total liabilities/ total equity

API limited = (912 + 200)/73 = 15.232

Nick Scali Limited = (6368+200)/5779 = 1.136

JB Hi-Fi Ltd = (5876+200)/4047 = 1.501

Super Retail Group = (834+200)/735 = 1.406

Blackmores Ltd. = (256+200)/178 = 2.561

Reject Shop Ltd. = (96+200)/135 = 2.192

This indicates that it will have negative impact on the company as this will lead to increase the net debt to equity ratio of the companies. The company that is most impacted due to this loan is Reject Shop Ltd. In addition to this, the changes in the ratio will lead to affect the financial performance of the companies and there will be a negative impact on the investors due to increase in this ratio of the companies.

Question 3)

Net profit Margin: As per the analysis of the profitability ratio it can be identified that the profitability of the companies namely API Limited and Nick Scali Limited is decreased as compared to other companies namely JB Hi Fi Limited, Super retail group, reject shop Ltd and Black mores Ltd. The net profit margin ratio of the company is increased from 2.72% to 1.35 % in 2016.It indicates that the net profit margin ratio of the company is reduced these years due to low sales and high operating expenses which directly impact the net profit margin of the company. Similarly, on the other side, it is identified that the JB HI FI Ltd ratio shows an increasing trend i.e. 36.86% to 38.47% in the year 2016.It indicates that net profit ratio of the company is good due to good sales position in the market and company effectively manage its operating expenses that improves its profitability ratio.

Current ratio: It shows the liquidity position of the company (Hilton, and Platt, 2013). It can be identified from the above table that liquidity position of the company is reduced for all the companies but the companies namely API ltd, Nick Scali ltd and JB Hi Fi ltd has less decreasing trend as compared to other three companies. It indicates that the company needs to pay less debt in short period of time as compared to its assets. The current ratio of the company namely Super Retail Group indicates the decreasing trend in its three years of its time i.e. 1.75% to 1.70% in the year 2016.It indicates that the company not effectively pay off its short term debts with its assets in these three years. Moreover, the liquidity of the company is low due to decreasing trend in these three years due ineffective credit policies or much cash tied with its assets that influence the liquidity position of the company. Similarly, the current ratio of the company namely Blackmores Ltd is also shows the decreasing trend i.e. 2.26 to 1.54% in the year 2016.This reducing trend is also not ideal for the company as it indicates that company has not enough cash to pay off its short term debts. It also indicates that company needs to raise extra finance or extend the time to pay off its creditors.

Inventory turnover: The inventory turnover ratio of the companies are showing the normal trend except two companies namely Black more Ltd and Reject shop Ltd. Black More company ltd inventory ratio is 6.15 to 1.84 it indicates that company effectively sell off its inventory in a year. Similarly, Reject Shop Ltd also maintains its inventory level to 3.93 to 0.47.Moreover, the inventory turnover ratio of the company namely API Ltd is 1.31 to 1.22 in the year 2016.It indicates the decreasing trend in these three years due to company is not able to convert its inventory effectively into cash due to ineffective credit policies and not having healthy relationship with its creditors. Similarly, Super Retail Group company manage it inventory turnover ratio to 2.39 to 2.73 it indicates the increasing trend of the company which shows that company maintain the healthy relationship with its suppliers and creditors that manages the company's inventory on time. The sales of the company is good that smoothly sell its company's inventory on time.

Asset turnover ratio: The asset turnover ratio of all the companies are showing moderate trend except Reject Shop Ltd. In this particular ratio, it can be identified that the company generate good sales from its assets in its three years i.e. 3.21 to 3.45.It indicates that company generates the sales of 3.45 on every dollar in assets. Moreover, the trend of company namely Blackmore Ltd also shows the good asset turnover ratio i.e. 1.46 to 1.65 in 2016 which indicates that company effectively generate sales from its current assets. It also indicates that company efficiently can use its assets to generate sales. This increasing trend indicates that company use its assets more as compared to other companies. It is also gives the good idea to its investors and creditors regarding the financial performance of the company. Furthermore, the asset turnover ratio of the company namely Nick Scali Limited is 0.18 to 0.98 in 2016 that indicates the good ratio which shows that company generates the high sales in this particular year from its every assets.

Leverage ratio: It indicates the total debts taken by the company on its assets. The debt ratio of the company namely JB Hi Fi Ltd is shown the decreasing trend i.e. 0.64 to 0.11 in the year 2016.It indicates that company lend less debts on its assets in these years as compared to other companies. So the position of this company is identified as good as compared to other companies.

Return on equity: It indicates the ability of the company to generate profits from the shareholders equity (Hilton, and Platt, 2013). As per the analysis of the all the companies the good return on equity of the company namely Reject Shop Ltd which shows an increasing trend i.e. 1.21 to 1.27.The company which gives the less return on equity is identified from the table i.e. API Ltd which gives only 0.19 to 0.10 in the year 2016.

Return on total assets: ROA is the return generated by assets employed in a year. It is identified that Nick Scali limited has generated highest returns of 1.68 followed by Blackmores that has generated 0.23, JB 0.15 and others. It is also identified that the least returns were generated by API of 0.04 and the performance of API and SRG is continuously declining over the period of analysis. It is needed that the companies are required to be focused on the utilizing the assets more appropriately for generating higher return.

Earnings per share: While analysis the EPS of the companies it is identified that there is huge difference in the EPS of the companies analyzed. Nick Scali limited is having highest EPS of 68.07 in year 2016. The identified EPS of JB HI FI limited is also higher in comparison to other companies with 34.95. This indicates that the investor will be attracted more towards these companies in comparison to rest of the four companies that are compared as higher EPS indicates higher profitability position of the company on the number of shares issues/outstanding in the market.

Net debt to equity: this ration depicts the risk or gearing position of a company if a firm uses its resources very efficiently than it is leveraging the debts to generate high returns. The analysis of the companies indicates that Reject Shop Ltd is having lowest 0.71 debts to equity indicating the capacity to pay its debts in effective manner but at the same time it indicates less leverage or company fails to utilize the debts for productive purpose (DRURY, 2013). So, API is considered to be risky but might generate high profits in near future. On the other side, Nick Ltd, SRG and Blackmores are considered to be the companies that have leveraged the debts in appropriate manner and are having enough cash to repay its debts.

Total return to shareholders: This ratio indicates the higher returns and performance of the company having higher returns. It is identified that Reject Shop limited is having highest returns 591.85. Blackmores is also having high returns of 402.81 followed by JB Hi FI having returns of 97.70 followed by API 71.51.

The overall analysis depicts that JB Hi FI ltd is looking stable and performing well in comparison to all the companies.

Question 4)

Total returns to shareholders ratio of API indicates fluctuating trend as the ratio was 69.53 in year 2014 which is declined to 6.85 in year 2015 and again improved to 71.5 in 2016. This indicates high fluctuations in the performance of the company. On the other side, Nick Scali Ltd is having continuous inclining trend of 35.46, 36.95 and 45.25 in year 2014, 2015 and 2016. On contrary, JB HI FI Limited is identified with declining trend 118.23, 106.35, 97.70 in the period of assessment. The main reason for this is increase in shareholders at higher rate than total returns (Hilton, and Platt, 2013). The analysis of Super Retail Group indicates that the company has performed well and the total returns to shareholders are increased year by year. The ratio was 27.76 in 2014, 29.15 in 2015 and 32.93 in 2016. Blackmores return to shareholders ratio also indicates an increasing trend from 333.65 in year 2014 to 354.89 in next year and again to 402.81 in year 2016. At last, when Reject Shop Ltd. total return to shareholders ratio is analyzed than it indicates slight fluctuation in the assessment period although the ratio of the company was highest among the other competitors with 592.50 in year 2014 that declined to 564.10 in year 2015 and again improved to 591.85 in year 2016.

From the above analysis, Reject shop Ltd. is identified as the company that can be considered as best in terms of total return to shareholders ratio.

Question 5)

It is identified that the market value of API Ltd. is \$1.57, market capitalization of the company is \$775.58 million and P/E ratio is identified as 16.21 (Reuters, 2018). The identified share price of Nick Scali Ltd is \$5.12 having market capitalization of \$413.10 million having P/E ratio of 10.08 (Reuters, 2018). The analysis of JB Hi-Fi Ltd indicates a market capitalization of \$2597.06million having market value per share of \$23.25 per share and P/E ratio of 11.56 (Yahoo Finance, 2018). The market value per share of Super retail Group Ltd is \$7.51 having a P/E ratio of 15.88. The market capitalization of Super retail Group is \$1605.53 million (Reuters, 2018). It is also identified that Blackmores Ltd is having market capitalization of \$2044.27 and market share price of \$126.90 (Reuters, 2018). The identified P/E ratio of the company is 34.89. Reject Shop ltd. is having the current market value of \$2.18 with a market capitalization of \$64.75 million. Along with this, the identified P/E ratio of the company is 3.97 (Reuters, 2018).

It is identified that high P/E ratio indicates high growth possibility in future. Along with this, the company is having higher market capitalization will have more assets, higher revenues than that of smaller companies and higher capital. This indicates that JB Hi-Fi Ltd is having highest market capitalization of \$2597 but the P/V ratio, market capitalization and market price per share of Blackmores Ltd. is comparatively indicating better prospects in this company so it will be considered better among all the companies analyzed (Reuters, 2018).

Conclusion

It can be concluded that JB HI FI Limited is identified as the company that is performing better among all the companies as depicted by the financial ratios. In addition to this, the analysis on the basis of market capitalization and P/E ratio it is identified that Blackmores looks attractive for the investors.

References

DRURY, C. M. (2013). Management and cost accounting. Germany: Springer.

Hilton, R. W., & Platt, D. E. (2013). Managerial accounting: creating value in a dynamic business environment. USA: McGraw-Hill Education.

Cite This Work

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