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Discussion

Discuss about the case study Financial Accounting for Furniture Manufacturing and Retailing Company.

In this given assignment, the analysis of the financial standings of a company listed in Australian Stock exchange will be made on the basis of profitability and liquidity analysis. In this process various ratios, which reflect the profitability and liquidity aspects of a company, will be calculated and analyzed (Collier 2016). Based on which future prospects of the company will be determined and recommendation will be given whether to purchase shares of the company or not.

Company Background

Company that has been selected for the purpose of analysis in this assignment is Fantastic Holdings Ltd. It is an Australian based company whose share is listed on Australian Stock Exchange (ASE) (Fantasticholdings.com.au 2016). It is engaged in manufacturing, retail and household furniture. It commenced its operation in the year 1989 and had shown a good growth rate since then and presently it is the third largest retailer of furniture in terms of revenue.

Overview of the recent stock price movements for the company 

In order to overview and analyze the recent stock price movements for the firm Fantastic Holdings Ltd, the close value of the stocks of the particular firm for the period 1st January 2016 to 1st July 2016 has been considered. According to the chart of historical stock prices, it can be said that the stock price was AUD 1.94 in January 2016 that increased to AUD 2.14 in February 2016. However, it decreased to AUD 1.90 in May 2016 but ultimately it has increased to AUD 2.32 in July 2016. This indicates that the stock price movement of the firm Fantastic Holdings Ltd is volatile due to major shareholder selling, research notes, faulty numbers and future guidance.

In this section, the financial position of the company will be analysed based on the data and information available from the income statement and balance sheet of the company available from the various websites and annual report of the company (Connolly, Hyndman and McConville 2013).

Fantastic Holding Limited

AUD million

INCOME STATEMENT

2011

2012

2013

2014

2015

Revenue

438

446

445

448

497

Less:

Cost of goods sold

213

214

236

224

275

Gross profit

225

232

209

224

222

Less:

operating Expenses

199

204

194

223

206

Operating Profit

26

28

15

1

16

Add:

Other Income

3

4

3

8

4

Less:

Other Expenses

0

0

0

0

0

Earnings before interest and taxes

29

32

18

9

20

Less:

Interest

1

1

1

0

0

Earnings before taxes

28

31

17

9

20

Less:

Provision for tax

8

9

4

3

6

Earnings after tax / Net profit

20

22

13

6

14

weighted average number of shares

103

103

103

103

103

 

BALANCE SHEET

2011

2012

2013

2014

2015

 

Asset

   
 

Current asset

98

101

100

112

134

 

Receivable

9

10

7

9

5

 

Other Current Asset

89

91

93

103

129

 

Non Current Asset

70

78

84

70

53

 

Total Asset (a)

168

179

184

182

187

 

Liability and shareholders fund

   
 

Current liability

50

58

50

51

69

 

Non Current Liability

17

12

27

24

8

 

Long term Debt

11

6

22

15

0

 

Other Non Current Liability

6

6

5

9

8

 

Total liability (b)

67

70

77

75

77

 

Equity / Net worth (a-b)

101

109

107

107

110

 

RATIO ANALYSIS

2011

2012

2013

2014

2015

 

Profitability Ratio

   
 

Net margin
(Net profit/Turnover*100)

4.57%

4.93%

2.92%

1.34%

2.82%

 

Return on asset
(Net profit/Total asset*100)

11.90%

12.29%

7.07%

3.30%

7.49%

 

Return on Equity
(Net profit/Equity*100)

19.80%

20.18%

12.15%

5.61%

12.73%

 

Earnings per share (EPS)
(Net profit/Number of shares)

0.19

0.21

0.13

0.06

0.14

 

Liquidity Ratio

   
 

Current Ratio
(Current Asset/Current Liability)

1.96

1.74

2.00

2.20

1.94

 

Capital Structure

         
 

Debt Equity ratio
(Long term debt/Equity)

0.11

0.06

0.21

0.14

0.00

 
 

Activity Ratio

   
 

Receivable turnover
(Turnover/Account Receivable)

48.67

44.60

63.57

49.78

99.40

 

Asset Turnover
(Turnover/Total  Asset)

2.61

2.49

2.42

2.46

2.66

                          (Source: Fantasticholdings.com.au 2016)

Variance Analysis of Ratios

2012

2013

2014

2015

Profitability Ratio

Net margin

0.37%

2.01%

1.58%

1.48%

Return on asset (ROA)

0.39%

5.23%

3.77%

4.19%

Return on Equity (ROE)

0.38%

8.03%

6.54%

7.12%

Earnings per share (EPS)

0.02

-0.09

-0.07

0.08

Liquidity Ratio

       

Current Ratio

-0.22

0.26

0.20

-0.25

Debt Equity ratio

-0.05

0.15

-0.07

-0.14

Activity Ratio

       

Receivable turnover

-4.07

18.97

-13.79

49.62

Asset Turnover

-0.12

-0.07

0.04

0.20                                               

                                                                                     
                                                                                           (Source: Created by author)

The above table of variance analysis of ratios indicates that the net margin of the organization Fantastic Holdings Ltd increases in the year 2013 by 2.01 % than 0.37 % in the year 2012. However, it has been found that it has constantly decreased for two consecutive years 2014 and 2015 to 1.58 % and 1.48 % respectively (Fantasticholdings.com.au 2016). The values of the return on assets of the particular organization indicate that the variance is volatile as it increased from 0.39 % in 2012 to 5.23 % in the year 2013 and it has been found that it has again reduced to 3.77 %. But finally it increases to 4.19 % in the year 2015. This implies the volatility of the return on assets ratio. Similarly, it has been found that the return on equity ratio is also highly volatile as it increased to 8.03 % in the year 2013 from 0.38 % in the year 2012 and then it reduced to 6.54 % in 2014 (Fantasticholdings.com.au 2016). Finally, it has been found that the variance of the particular ratio has increased to 7.12 % in the year 2015. In addition to this, the earnings per share has also been found to be much volatile as it was 0.02 in the year 2012, then it decreased to a larger extent that resulted into negative values like -0.09 in the year 2013 and -0.07 in the year 2014. However, ultimately, the variance of the earnings per share has increased to 0.08. The variance of the current ratio of the organization Fantastic Holdings Ltd is also much volatile. Thus, it increased from -0.22 in the year 2012 to 0.26 in 2013 and then it decreased consecutively for two years 2014 and 2015 to 0.20 and -0.25 respectively (Elshahat, Freedman and Elshahat 2015). Similarly, from the above calculated table, it can be said that the variable of other ratios like receivable turnover ratio also has high volatility. Though close analysis indicates that debt equity ratio increased to 0.15 in 2013 from -0.05 in 2012 and finally it decreased constantly for two consecutive years 2014 and 2015 to -0.07 and -0.14 respectively. Finally, it can be said that variance of the asset turnover ratio constantly increased for all the years 2012, 2013, 2014 and 2015 from -0.12 to -0.07 to 0.04 and ultimately to 0.20 respectively (Elshahat, Freedman and Elshahat 2015). All these indicate that the variances of most of the ratios of the organization Fantastic Holdings Ltd are highly volatile.

Financial Analysis

In this section, analysis and evaluation of the of income statement, balance sheet and ratios will be done.

Income Statement

From the above five years, income statement it can be said that revenue of Fantastic Holdings Ltd. has shown a steady growth in the last five years. Thus, it has been able to capture a good market share (Elshahat, Freedman and Elshahat 2015). However, it has drastically increased by AUD 49 m in the year 2015 which is a very good sign from the view point of  Fantastic Holdings Ltd. COGS has also increased drastically which has resulted in lowering the gross profit from AUD 225 m in the year 2011 to AUD 222 m in the year 2015 (Feng et al. 2014).

Operating expenses of Fantastic Holdings Ltd. has been stable within the range of AUD 199 m to AUD 206 m during the year 2011 to 2015. However, it has shown an increasing trend as Earning after tax (EAT) and Earning before tax (EBT) have decreased during the five years span i.e. definitely a worrying factor for the management of Fantastic Holdings Ltd (Harper 2016). 

Balance Sheet

From the analysis of five years Balance Sheet of Fantastic Holdings Ltd., it can be said that its current asset has increased from AUD 98 m in the year 2011 to AUD 134 in the year 2015 (fantasticholdings.com.au 2016). This is due to other current asset as its receivable has decreased from AUD 9 m in the year 2011 to AUD 5 m in the year 2015. Its non current asset has also decreased during the this five year from AUD 70 m to AUD 53 m, which indicates that it has not purchased much fixed asset during past five years. Its current liability has also shown an increasing trend in the past five years from AUD 50 m to AUD 69 m, which needs to control as its current asset has decreased during this five years otherwise liquidity may become a big issue for the management of Fantastic Holdings Ltd (Hoskin, Fizzell and Cherry 2014).


Ratio Analysis

In order to analyze the profitability aspects of Fantastic Holdings Ltd. net profit margin, ROA, ROE and EPS has been used.

Net margin has fluctuated during the past five years. However, it has decreased from 4.57 % to 2.82 %, which must be a worrying factor the management of Fantastic Holdings Ltd. and they should try to improve it in near future otherwise it will be difficult for them to carry on business (Jawadi,  Jawadi and Louhichi 2014). It can be seen that profit has decreased in 2014 then it has increased in the year 2015, which is a positive factor.

Variance Analysis of Ratios

ROI implies that whether a company is effectively using its shareholders fund in generating profit or not. It has also followed the same trend as net margin i.e. it had decreased 19.80 % in the year 2011 to 5.61 % in the year 2014, again it has increased during the year 2015 to 12.73 % which implies that it might be due to some economic down turn of the whole industry during that period (Jawadi,  Jawadi and Louhichi 2014).

ROA has also followed the same trend as ROI, which has decreased from 11.90 % in the year 2011 to 3.30 % in the year 2014. Then it has again increased to 7.49 % in the year 2015, which indicates that Fantastic Holdings Ltd. has been able to turn around from the economic down turn (fantasticholdings.com.au 2016).

EPS has decreased during from 0.19 in the year 2011 to 0.06 in the year 2012, and then it had again increased to 0.14 in the year 2015 which is very good sign for Fantastic Holdings Ltd. since EPS indicates the profit earning capacity of each year (Jawadi,  Jawadi and Louhichi 2014).

In order to analyze the liquidity position of the company current ratio has been taken into account. Current ratio of the company is currently 1.94 for the year 2015 and has been within the range of 1.94 to 1.96 in the past five years, which indicates that as regards to solvency it is in a better position since it is greater than one (fantasticholdings.com.au 2016).

The capital structure of Fantastic Holdings Ltd is analyzed with the help of debt equity ratio, which has increased in the year 2013 due to some major debt infusion (fantasticholdings.com.au 2016). However, it has been repaid in the year 2014 and 2015 so it has came down to 0 in the year 2015 which means that currently Fantastic Holdings Ltd have no debt funding. Its only source of finance is equity.

The market value of Fantastic Holdings Ltd has been analyzed with the help of Price-earnings ratio (P/E ratio) that indicates the market value of the particular firm has decreased from 0.007 in the year 2011 to 0.006 in the year 2012 (fantasticholdings.com.au 2016). However, it has increased to 0.007 in the year 2013 and it has further increased to 0.01 in the year 2014. Nevertheless, it has again decreased to 0.007 in the year 2015. This indicates that the market value of the firm Fantastic Holdings Ltd is highly volatile as the earnings before interest and taxes of the firm is also volatile (fantasticholdings.com.au 2016).    

Efficiency of the company is measured through the help of Receivable turnover and Asset turnover. Receivable turnover implies the efficiency of the company in collecting its dues from the creditors. It has increased from 48.67 in the year 2011 to 99.40 in the year 2015, which means that Fantastic Holdings Ltd has a good customer base that can pay their due in very short time (Fantasticholdings.com.au 2016). Whereas asset turnover ratio of the company has been within the range of 2.61 to 2.66 during the past five years, which implies that Fantastic Holdings Ltd have been able to effectively used its asset to generate profit at a constant rate.

The debt ratio of the firm Fantastic Holdings Ltd has been calculated, which indicates that the debt ratio of the particular firm was 0.399 in the year 2011 but it increased constantly to 0.412 in the year 2015 (Fantasticholdings.com.au 2016). This implies that the total liabilities of the firm Fantastic Holdings Ltd has increased with the passage of time and the total assets of the firm have decreased. Therefore, it can be said from the above analysis that the financial condition of the particular firm is weak.


The interest coverage ratio of the firm Fantastic Holdings Ltd has been calculated for five years. This indicates that the EBIT of the firm has decreased with the passage of time and the interest expenses of the firm have also been decreased with time. It has been found that the interest expense of Fantastic Holdings Ltd has been reduced to zero in the years 2014 and 2015 (Fantasticholdings.com.au 2016). Thus, the interest coverage ratio has become zero in both the years 2014 and 2015.

As the financial ratios are limited to the organization Fantastic Holdings Ltd, it can be used further in order to compare the values of these ratios to any other businesses in the same industry (Fantasticholdings.com.au 2016). In addition to this, for comparing the financial ratios, the value of the ratios of a firm can be compared with the industry standards. This helps to understand the position of a company in the overall industry. On the contrary, by comparing the ratio values of one firm with another helps an individual to understand the financial condition of the particular firm (Biz.yahoo.com 2016). It also helps to understand the competitive advantage that can be earned by the specified firm. The financial position of the firm can also be detected by comparing the ratio values of a particular organization with other organizations of similar industry and also by comparing the calculated values with the industrial standard.

It has been found that the industry standard of the current ratio is 1.5 (Biz.yahoo.com 2016). The current ratios of the firm Fantastic Holdings Ltd for all the 5 years are more than the industrial standard. This indicates that the particular company is running well and it has a better financial position in the market. On the other hand, it has been found that the value of the debt equity ratio of the firm Fantastic Holdings Ltd for the years 2011, 2012, 2013, 2014 and 2015 are lesser than the industrial standard average value i.e. 1.5 (Biz.yahoo.com 2016). This indicates that the financial position of the firm is relatively stronger as the debt to equity ratio decreased with time. This also implies that the liabilities or debt of the firm have been reduced with the passage of time indicating a positive aspect for the organization Fantastic Holdings Ltd. It has been noted that the industrial standard average of the receivable turnover is 31.04 days (Biz.yahoo.com 2016). However, it has been found that the receivable turnover ratio for the organization Fantastic Holdings Ltd for all the five years i.e. 2011, 2012, 2013, 2014 and 2015 are more than the industrial standard average. This indicates the inefficiency of the firm Fantastic Holdings Ltd as with the increase in the duration of time or numbers of days, the particular ratio implies that the firm takes more time to turnover its receivables. This can be improved by decreasing the turnover and by increasing the account receivables. On the other hand, the industrial standard average of asset turnover ratio is 2.00 (Biz.yahoo.com 2016). It has been found that the values of asset turnover ratio of the organization Fantastic Holdings Ltd for all the five years are in line with the standard average value or it can be said that it is slightly higher than the standard average. The price earnings ratio has an industrial standard average of 12 – 15 % i.e. 0.12 – 0.15 (Biz.yahoo.com 2016). For the organization Fantastic Holdings Ltd it has been found that the values of price earnings ratios for all the five years are around 0.007 – 0.006. This implies that the firm has a healthy financial position in the present competitive market. It has been found that the industrial standard average of the debt ratio is 0.47 (Biz.yahoo.com, 2016). It has been found that all the ratio values of the organization Fantastic Holdings Ltd for 5 years i.e. 2011, 2012, 2013, 2014 and 2015 are in line with the industrial standard. Thus, it can be said that the particular organization has a strong financial condition.

  • Data available for the income statement does not always reflect the clear position of the company (Biz.yahoo.com 2016).
  • Value of asset and liabilities in the balance sheet is at either book value or carrying amount whereas market value of the asset may be different which tends to give misleading results.
  • The ratios are based on the past data available from balance sheet and income statement so they are unable to show the future prospect of the company.
  • Ratio analysis is based on various assumptions, which may vary from company to company (Jawadi, Jawadi and Louhichi 2014).

In this section, the intrinsic value of shares is calculated assuming a standard dividend growth rate of 4 % and required rate of return of 9 %. Based on which is will be decided whether the shares are trading rich or cheap (Biz.yahoo.com 2016).

P0 = D1 / (Re-g)

Where, P0 = Current market price or intrinsic value

D1 = D0 + g

Re = Required rate of return or cost of capital

g = Growth rate of dividend

Dividend per share (DPS) for the year 2015 is AUD 0.13.

Therefore,

D0

0.13

D1

0.1352

         (Source: Fantasticholdings.com.au 2016)

Intrinsic Value

2.704

(Source: Created by author)

However, the current market price of the share is 2.27, which implies that the share of Fantastic Holdings Ltd is trading cheap and investor should purchase it (Lazzati and Menichini 2015).

Conclusion and Recommendation

From the above analysis, it can be said that the Fantastic Holdings Ltd has shown adown turn during the period 2011 to 2014 but it has been able to turn around in the year 2015, which is a very good sign for the management as well as the shareholders of the company. It has been found that from the analysis of the of dividend discount model that the market price of the share is lower than its intrinsic value that means it is currently trading cheap. Therefore, it is advised that investors should purchase the shares of Fantastic Holdings Ltd.

References

Biz.yahoo.com. 2016. Industry Index By Sector: Industry Center - Yahoo Finance. [online] Available at: https://biz.yahoo.com/ic/ind_index.html [Accessed 15 Jul. 2016].

Collier, P., 2016. Accounting For Managers Interpreting Accounting Information For Decision Making 0470845023.

Connolly, C., Hyndman, N. and McConville, D., 2013. Conversion ratios, efficiency and obfuscation: a study of the impact of changed UK charity accounting requirements on external stakeholders. Voluntas: International Journal of Voluntary and Nonprofit Organizations, 24(3), pp.785-804.

Elshahat, I., Freedman, M. and Elshahat, A., 2015. Are index measures better than individual measures in assessing the association between environmental and financial performance? A multivariate analysis study.International Journal of Critical Accounting, 7(2), pp.191-212.

Fantasticholdings.com.au. 2016. Fantastic Holdings Limited - Home. [online] Available at: https://www.fantasticholdings.com.au [Accessed 14 Jul. 2016].

Fantasticholdings.com.au. 2016. fantasticholdings.com.au. [online] Available at: https://www.fantasticholdings.com.au/media/122945/fan%20annual%20report%202015.pdf [Accessed 14 Jul. 2016].

Fantasticholdings.com.au. 2016. fantasticholdings.com.au. [online] Available at: https://www.fantasticholdings.com.au/media/122561/annual%20report_fy2014_lr.pdf [Accessed 14 Jul. 2016].

Fantasticholdings.com.au. 2016. fantasticholdings.com.au. [online] Available at: https://www.fantasticholdings.com.au/media/118003/annual%20report%20fy13%20final_lr.pdf [Accessed 14 Jul. 2016].

Fantasticholdings.com.au. 2016. fantasticholdings.com.au. [online] Available at: https://www.fantasticholdings.com.au/media/88718/updated%20annual%20report.pdf [Accessed 14 Jul. 2016].

Feng, M., Li, C., McVay, S.E. and Skaife, H., 2014. Does ineffective internal control over financial reporting affect a firm's operations? Evidence from firms' inventory management. The Accounting Review, 90(2), pp.529-557.

Harper, D., 2016. Accounting Financial Statements Analysis.

Healy, P.M. and Palepu, K.G., 2012. Business Analysis Valuation: Using Financial Statements. Cengage Learning.

Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014. Financial accounting: a user perspective. Wiley Global Education.

Jawadi, F., Jawadi, N. and Louhichi, W., 2014. Conventional and Islamic stock price performance: An empirical investigation. International Economics, 137, pp.73-87.

Lazzati, N. and Menichini, A.A., 2015. A dynamic approach to the dividend discount model. Review of Pacific Basin Financial Markets and Policies, 18(03), p.1550018.

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