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AFA1105 Accounting For Management 3

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  • Course Code: AFA1105
  • University: Academies Australasia Polytechnic
  • Country: Australia

Question:

Write a report of Lantern Hotel Groups

Required:

  • The following items are to be calculated: -
    • salesrevenue
    • net profit aftertax

Use the following table to insert absolute figures and the trend analysis

Absolute Figures $m

2017

2016

2015

2014

Total Sales revenue

 

 

 

 

Net profit after tax

 

 

 

 

Trend Analysis in %

 

 

 

 

Total Sales revenue

 

 

 

 

Net profit after tax

 

 

 

 


Graph the trends of the Lantern Hotel Group:-

  • Total Salesrevenue
  • Net profit after tax for 2014-2017

1. Vertical analysis

Vertical analysis is another method of converting the absolute dollar values in financial reports to more meaningful figures. Whereas horizontal analysis compares reported figures over time, vertical analysis involves comparing the items in a financial report to other items in the same financial report.

The vertical analysis involves comparing the items in a financial report to an anchor item in the same financial year. The anchor item in the Balance Sheet is the total asset figure. All assets, liability and equity items are expressed as a percentage of total assets and all revenue and expense items are expressed as a percentage of revenue

Using a Vertical Analysis

  • Using the 30thJune 2017 income statement calculate a vertical analysis for the items listed

e.g. sales revenue, cost of sales, gross profit, other expenses, profit before income tax. Use sales at the anchor point – 100%.

  • Using the 30thJune 2017 balance sheet, calculate a vertical analysis for the items listed as assets and 
  1. Ratio analysis

From the Company’s 2017 and 2016 financial statements and notes to financial statements, calculate the following ratios based on what you were taught.

Explain what the ratios mean in general and comment specifically on what they tell about the Company’s performance.

Examine and explain how the ratios are trending and comment/explain if the trend is favourable or not.

 

 

2017

2016

Return on Equity (ROE)

Net Profit After Tax / Average Equity (%)

 

 

Return on Assets (ROA)

Net Profit After Tax / Average Assets (%)

 

 

Net Profit Margin

Net Profit After Tax / Total Revenue (%)

 

 


Calculate Current Ratio and Quick Asset Ratio for the years 2017 and 2016. Show it in a table as in the previous sections and comment on the Company’s liquidity position.

 

Answer:

Company Overview

Lantern Hotel Group held a portfolio of hotels and pubs located in Australia and New Zealand. During the recent times, there have been issues on profitability and liquidity front for the company’s assets. As a result, the company has been rejigging the asset portfolio whereby it is selling non-profitable assets. Owing to cash crunch, it exited the New Zealand market in 2013. The sale proceeds were used for Australian properties renovation. Further, in 2014/2015, the company made a strategic decision to retain only certain pubs while liquidating all the other non-core portfolio assets and instead grow by acquiring new assets (Cummins, 2016). The strategy since then has been modified and company has executed the selloff strategy during FY2017 thus having assets only in the form of cash on the books of the company. These can be used to make acquisitions of assets which the company believes would be profitable (Young, 2017).

Analysis

  1. Trend  Analysis

Two items have been chosen from the profit and loss statement and a horizontal trend analysis has been conducted for the same during 2014-2017. It is  imperative to note that since in certain years, a significant contribution of profits and revenues was derived from discontinued operations, therefore the horizontal analysis has been conducted using the respective values from continuous operations only.

The trend above clearly highlights the company’s operational revenues have decreased which may be attributed to asset sale strategy being pursued by the company. The net result is that a large share of the revenue in the recent years (especially FY2017) is being derived on account of discontinued operations. The continuous loss generation by the company is clearly a cause of concern.

  1. Vertical Analysis

For the year 2016/2017, the income statement vertical analysis is shown below.

In FY2017 is also on account of sell down strategy by the company since when the portfolio asset have been sold, the operating expenses would automatically decline. The tax paid for 2016 was zero on account of previous accumulated losses which got adjusted in FY2017 and hence some taxation burden was borne by the company. The huge jump in profit after tax in FY2017 is the result of increasing gross margins and lower expenses which is facilitated by a large chunk of revenue being generated by profits on the discontinued operations. Hence, the income statements of the two years are not comparable.

 

The balance sheet vertical analysis is indicated as follows.

 

A critical observation on the basis of vertical analysis is that for FY2017 closing, the company assets are in cash and equivalent form with no non-current assets. As a result, the company as on June 30, 2017 does not have any non-current liabilities and all the liabilities are current in nature. There is a major shift in the distribution of liabilities and equities with the share of liabilities jumping in FY2017 in comparison to the corresponding share in FY2016. The composition of assets for the company has also seen dramatic alteration since as on June 30, 2016, more than 75% of the assets of the company were in form of non-current assets which is not surprising considering the business model of the company. However, the representation of non-current assets has been trimmed to zero as on June 30, 2017 as the company has executed the sell-off strategy which involved liquidation of all the portfolio assets. The outstanding long term debt for the company has also been cleared as on June 30, 2017 when no such debt exists on the books. Thus, it can be concluded that the drastic shift in the company’s financial position owing to the sell-off strategy is apparent from the vertical analysis of balance sheet.

  1. Ratio Analysis

The data obtained from the financial statement of the company and used for ratio computation is shown as follows.

Over the previous two years, the relevant profitability ratios are indicated as follows.

The above comparison highlights a sizable improvement with regards to the company’s profitability in FY2017 as compared to FY2016. All the three measures of profitability have a significantly higher value in FY2017 in comparison to FY2016 values. The main driver of the spectacular profitability ratios in FY2017 is the jump in profits to $ 40.86 million for FY2017 when compared to FY2016 figure of $ 7 million. This huge increase in profit is not the result of continuous operations but rather the impact of asset sale where profits have been realised by the company. The continuing operational revenue has seen decline during the given period. The increased profitability in FY2017 to an extent is also aided owing to absence of any depreciation charge for the year since there are no fixed assets with the company as on June 30, 2017  (Damodaran, 2015).

The relevant ratio analysis of the company in relation to liquidity is highlighted as follows.

The liquidity ratios for the company have shown some decrease in FY2017 as compared to FY2016. Even though, there has been decline in the liquidity ratios but the company faces no issues of liquidation or short term cash crunch as on June 30, 2017 especially considering that all assets are in the form of cash (Parrino and Kidwell, 2014).  Further, the company has disposed all non-current assets and only retains asset in the form of cash at the end of FY2017. The liquidity ratios in FY2017 have seen a decline as current assets fall is higher than the corresponding fall in current liabilities. Further, there is no difference between the current ratio and quick ratio for FY2017 as the company does not have any inventory or any other current asset which is not liquid.

 

References

Cummins, C. (2016) Lantern Hotel group raises $14.5m from asset sale, Retrieved from https://www.smh.com.au/business/companies/lantern-hotel-group-raises-145m-from-asset-sale-20161018-gs4nau.html 

Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley, John & Sons.

Parrino, R. & Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley Publications

Young, A. (2017) Lantern Hotels Group sells its last remaining pub, Retrieved from https://www.theshout.com.au/news/pub-news/lantern-hotels-group-sells-its-last-remaining-pub/

OR

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