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Analysis & Interpretation Of Financial Statements

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Questions:

1.Based on the financial reports and other information, prepare an analysis that covers the financial years ending 30 June 2015, 2016 & 2017 concentrating on the following aspects and including consideration of segment information and position in relation to its industry:

Profitability
Liquidity

2.Analyse and interpretation of Cash Flow Statements.

 

Answers:

1.Ratio Analysis

The profitability ratios for the company over the period 2015-2017 are highlighted below.

Based on the above ratios, it is apparent that there has been an improvement in the gross profit margins over the last years. This is on account of various acquisitions which has led to significant growth in the revenue particularly in retail and service along with specialist wholesale segment which is having a positive impact on the gross profits owing to greater profitability. However, the net profit margin after improving in 2016 has remained stagnant in 2017. This is on account of increase in various operating expenses along with jump in administration costs along with interest costs. The jump in administration costs could be related to the related acquisition costs.

The return on assets after showing an improvement in 2016 has dipped in 2017. This is primarily due to the increase in assets of the various acquired businesses which has led to swelling of the total assets. However, on the revenue front, only the six month results have been introduced for certain businesses, which is why the profit does not fully reflect the acquired businesses. Also, the return on equity has significantly improved in FY2017 owing to higher profits generated without much increase in equity. However, in FY2018, there has been a significant jump in the issued capital along with significant decrease in the accumulated losses which has caused the equity to significantly enhance leading to lower ROE.

The liquidity ratios for the company over the period 2015-2017 are highlighted below.

It is apparent from the above current ratios value that there has been a decrease in this ratio from 2015 to 2016. This was on account of a sharp increase in the current liabilities owing to high trade payables and provisions. However, the current ratio improved in 2017 to over 2 which implies that the company does not have any concern of short term liquidity. A similar trend is also seen in acid test ratio. The steep decline in 2016 is on account of steep increase in the inventories witnessed in that year. However, both the ratios remain healthy indicating no short term liquidity crunch.

 

2.Cash flow Analysis

The requisite cash flow analysis is summarised below.

From the above, it is apparent that there is an increasing trend for cash flow from operations. This may be attributed to the acquisitions done by the company in FY2016 and FY2017 which has provided a boost to the net profits of the company and thus led to increased operating cash flows. The cash from investing has shown a jump in 2016 as the cash outflow on investing increased about 25 times. This is on account of the purchase of businesses that the company did in FY2016. A similar trend is also witnessed in FY2017 where owing to acquisitions, the outflow has increased. In order to finance the acquisitions in FY2016 and FY2017, as expected, there has been a significant jump in the financing inflow as money is raised from both debt and equity.

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