Audit Of Premier Investments Limited - Financial Year Ended 30 June 2021

This report is based on Premier Investments Limited and assumes the role of a senior auditor who has been assigned to audit the company for the financial year ended 30 June 2021. As an instruction from the engagement partner, this report looks to gather relevant background information concerning the client which is a part of the audit procedures in order to gain a relevant understanding of the business and its environment. On the basis of the information gathered and the understanding obtained, as a senior auditor, the author is expected to comment on the type of audit opinion to be issued to the company.

Premier Investments Limited is a public company which is limited by shares and is based in Australia. The company is listed on the Australian Stock Exchange since December 15, 1987 (Premier Investments, 2022). The company was originally established to take the role of an investment vehicle which aimed to maximise growth with respect to capital returns for its shareholders through acquiring or strategically holding shareholdings in Australian organisations focused on retail, distribution and importing. Most of the company’s revenue are derived from operating specialty retail fashion chains. With a total employment of over 11000 people, the company is operating in Australia, New Zealand, Europe and Asia. The head office of the company is however situated in Melbourne, Victoria (Bloomberg.com, 2022).

There are two main business segments through which the company operates, investments and retail. The investment business segment constitutes investments in listed securities and money market deposits for short and long term capital gains, interest and dividend income (Simplywall.st, 2022). It is the retail business segment which includes specialty retail fashion chains offering brands such as Smiggle, Just Jeans, Peter Alexander, Portmans, Jay Jays, Jacqui E and Dotti. Some of the main subsidiaries of the company include the likes of Premfin Pty Ltd, Metalgrove Pty Ltd, Jay Jays Trademark Pty Limited, Just Group Limited, Springdeep Investments Pty Ltd, Just Jeans Group Pty Limited and Prempref Pty Ltd (Reuters, 2022).

The company operates in a cut throat competitive market with its main peers being Accent Group, Mosaic Brands, Wesfarmers and City Chic Collective Limited (Ibisworld.com, 2022). The operations and different aspects of the company are highly regulated. On undertaking exhaustive secondary research, the following regulations have been compiled to which the company tends to adhere to:

1. The Corporation Act and ASX Listing Rules for Disclosures.
2. ASX Principles and Recommendations for Corporate Governance.
3. Workplace Gender Equality Act 2012 for promoting workplace diversity.
4. Competition and Consumer Act 2010 for provision of accurate information to customers.
5. Modern Slavery Act 2018 for ethical supplies.
6. Australian Accounting Standards and IFRS for financial reporting compliances.

(Source: Calculated by Author)

The profitability position of the company can be ascertained with the help of gross margin ratio, the net profit ratio and the return on assets ratio. The gross profit margin is the ability of the company to cover its direct expenses from its revenue generated (Griffin and Mahajan 2019). The metric has increased from 61.06% in 2020 to 64.33% in 2021 which is because of an increase in revenue. Likewise, the net profit margin ratio of the company is ascertained as the ultimate measure of the bottom line profits an entity generates relative to its sales. It is the margin of revenue left behind after meeting the total expenses incurred for the particular financial year. The metric has increased from 11.30% in 2020 to 18.82% in 2021. This is because of an increase in revenue as well as a decline in several expenses such as depreciation, impairment, amortisation and finance costs. Lastly, the return on assets ratio have also increased from 6.94% in 2020 to 12.13% in 2021 which showcases the efficiency of utilising resources for generating profits.

Company Background and Description

The liquidity position of the company can be gauged with the help of current ratio and quick ratio. The current ratio measures the availability of total current assets for meeting the total current liabilities of the company. The quick ratio on the contrary places reliance upon only quick assets which excludes inventories from total current assets for meeting all the short term debts and obligations (Easton et al. 2018). The current ratio of the company has improved from 1.25 times in 2020 to 1.48 in 2021 which is because of an increase in current assets and a marginal decline in current liabilities. In fact, the quick ratio has also improved from 0.95 times in 2020 to 1.07 times in 2021. Since these metrics are above 1, the company has an optimal availability of liquid resources to meet its short term obligations.

The activity position of the company can be determined by analysing the asset turnover ratio, inventory turnover and the debt turnover ratio. The asset turnover ratio implies the efficiency of an organisation in making use of its total resources for generating revenue (Robinson 2020). The metric has improved from 0.61 times in 2020 to 0.64 times in 2021 because of an increase in revenue. The inventory turnover ratio measures the efficiency of inventory management and is implied as the total number of times a company can sell their average inventory levels during a financial year. Despite an increase in sales, the company’s ratio has marginally declined from 2.90 times in 2020 to 2.82 times in 2021 which is because of an increase in the average inventory lot size. Lastly, the debt turnover ratio showcases the efficiency of collecting debts from credit customers and measures the total number of times credit collection takes place during a given financial year. The metric has increased from 45.71 times in 2020 to 72.57 times in 2021 because of a decline in average receivables showcasing an improvement in efficiency.

The solvency position of the company can be evaluated with the help of the debt to equity ratio and the equity ratio. The debt to equity measures the total proportion of debt capital with respect to every $1 of equity capital invested in the total capital structure (Fridson and Alvarez 2022). The metric has declined from 0.63 times in 2020 to 0.49 times in 2021 because of a significant decline in debt financing which helps reduces the gearing and exposure to financial leverage. Consequently, the equity ratio of the company has increased from 61.18% times in 2020 to 67.20% in 2021 because of an increase in the value of total shareholder’s equity.

Ratio analysis results is one of the analytical procedures that the auditor can rely upon as a part of the audit engagement to review the results and detect possible issues in the financial records that are maintained and presented by the client. This involves comparing the ratio results of the current period to prior period results to witness if the historical relationships are moving forward into the period under review. Based on the financial ratios calculated above, the following three accounts are identified to which may be subject to potential misstatements:

1. Revenue: The total revenue generated by the company has increased from $12,18,780,000 in 2020 to $14,44,596,000 in 2021 (Premier Investments, 2022). Considering the adversities of Covid-19 and the economic volatility of the overall business environment, the figure may be prone to manipulations to project a favourable financial performance.
2. Net Profit: The ultimate bottom line absolute figure has also seen an increase from $1,37,753,000 in 2020 to $2,71,840,000 in 2021 resulting in an exponential increase in the net profit margin of the company. This figure is subject to the most manipulation for projecting favourable financial results to drive stock prices up for creating value to the shareholders and for personal incentives of the management.
3. Inventories: Despite a surge in demand resulting in an increase in revenue, the value of closing inventory has increased significantly from $1,56,590,000 in 2020 to $2,08,760,000 in 2021 which is worth the auditor’s time investigating.

Calculation of Select Financial Ratios

There are several financial indicators that indicate the company to continue as a going concern. The total revenue of the company has increase despite the aftermath of Covid19 resulting in an increase in the profitability position and the earnings per share of the company which are indicators of future growth potential. The earnings per share have almost doubled from 86.89 cents per share in 2020 to 171.15 cents a share. The company also managed to improve their liquidity position as validated from the improvement in liquidity ratios which means that the company can rely upon their liquid resources to meet their near terms and obligations which will result in running of the business operations efficiently. Lastly, the company has also managed to reduce their reliance upon debt financing which in turn renders its gearing to be lower. This reduces exposure to financial leverage and thus the risk of default. These factors are indicators of the company’s ability to exist as a going concern.

The auditor Ernst and Young have issued an unmodified audit opinion to the company after auditing the financial reports of the company and its subsidiaries. The auditor has issued the audit opinion in accordance with the requirements of the Corporations Act, 2001. The financial statements of the company have been audited to reflect a true and fair view as at the year end date and are prepared in compliance with the Australian Accounting Standards and Corporations Regulations, 2001. During the course of audit, the auditors did not detect any form of material misstatement due to fraud or error which would result in reporting otherwise. Lastly, the auditors have gained sufficient and appropriate audit evidences to base their audit opinion issued to the company.

Conclusion

Based on the research presented in this report it can be concluded that PMV have a strong set of financials which is validated by a strong set of financial ratios that have been calculated and compared against prior period results. Further, the company’s growth prospects are very high based on their position of profitability, liquidity and solvency which provides a reasonable assurance of the company to continue operating for the foreseeable future.

References

Bloomberg.com, 2022. Premier Investments Ltd - Company Profile and News. [online] Bloomberg.com. Available at: <https://www.bloomberg.com/profile/company/PMV:AU> [Accessed 27 April 2022].

Easton, P.D., McAnally, M.L., Sommers, G.A. and Zhang, X.J., 2018. Financial statement analysis & valuation. Boston, MA: Cambridge Business Publishers.

Fridson, M.S. and Alvarez, F., 2022. Financial statement analysis: a practitioner's guide. John Wiley & Sons.

Griffin, P.A. and Mahajan, S., 2019. Financial Statement Analysis. Finding Alphas: A Quantitative Approach to Building Trading Strategies, pp.141-148.

Ibisworld.com, 2022. IBISWorld - Industry Market Research, Reports, and Statistics. [online] Ibisworld.com. Available at: <https://www.ibisworld.com/au/company/premier-investments-limited/28172/#:~:text=Premier%20Investments%20Limited%20is%20a,head%20office%20in%20Melbourne%2C%20Victoria.> [Accessed 27 April 2022].

Premier Investments, 2022. Financial Results - Premier Investments. [online] Premier Investments. Available at: <https://www.premierinvestments.com.au/financial-results/> [Accessed 27 April 2022].

Premier Investments, 2022. Home - Premier Investments. [online] Premier Investments. Available at: <https://www.premierinvestments.com.au/> [Accessed 27 April 2022].

Reuters, 2022. [online] Reuters. Available at: <https://www.reuters.com/markets/companies/PMV.AX> [Accessed 27 April 2022].

Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.

Simplywall.st, 2022. [online] Simplywall.st. Available at: <https://simplywall.st/stocks/au/retail/asx-pmv/premier-investments-sharesx> [Accessed 27 April 2022].