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Financial Analysis Of World Vision Australia Of 2015-16

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Questions:

1.Your task is to analyse the last two years Performance of the Selected Company and Present your findings in the form of a report, which will Introduce the Company to start with and cover Financial Performance Analysis in a Logical Cohesive Format.

2.Suppose the Chosen Company and its Competitor decided to expand their Operations by issuing bonds. You are required to value Bonds Issued by two Companies that you Selected.

 

Answers:

Introduction

Managing the finance in such a manner that the effective and efficient utilization of funds is ensured is crucial for the achievement of the organizational goals and objectives (Hales, 2006). The decision as regards arrangement funds and deployment of the funds collected from various sources plays a pivotal role in success or failure of a firm. Therefore, it is crucial for a firm pay special attention to the finance function. In order to ensure that the firm is on right track or there is a need to get improvements on, it is essential to analyze the financial performance and position of the firm (Baker and Powell, 2009). The ratio analysis is used as the most important tool in analyzing the firm’s financial performance and position. The ratio analysis covers the analysis of financial performance and position of a firm from end to end. It covers four core business aspects such as profitability, liquidity, efficiency, and solvency. In this context, the report presented here covers the analysis of financial performance of World Vision Australia. Further, the report also covers the computation of bond prices and discussion on the international bond rating agencies.    

Company Brief

World Vision Australia is a public company limited by guarantee. It started operations in the year 1969 and it has been now 37 years since then the company is running its charitable activities. The company has expended over the years and now operates at the global level in more than 96 countries with over 45000 people (World Vision, 2017). The company is committed to achieve transformational developments by working for the poor, disabled, and needy sections of the society. Further, the company works for removal of poverty and also provides disaster relief in the cases of emergency. The current projects undertaken by the company emphasize on fulfilling the needs of the children, promoting of gender equality, and increasing awareness for HIV and AIDS (World Vision, 2017).      

1.Analysis of Financial Performance

The analysis of financial performance of World Vision Australia has been carried out by applying ratio analysis tool. In order to assess the profitability, the financial ratios such as net profit margin, return on assets, and return on equity have been computed and analyzed (Tracy, 2012). Further, the liquidity of the company has been analyzed by computing two the most prominent ratios such as current ratio and quick ratio. Apart from these ratios, the capital structure ratio such as debt equity and debt ratio have also been analyzed (Tracy, 2012). This analysis of financial performance has been carried out for two years such as 2015-16 and 2015-14. Further, in order to make the analysis more critical and reliable, a comparison of the ratios with the competitor company namely Berry Street has also been made. 

 

Profitability

The analysis of profitability is the most important area that explains the financial performance of the business. The primary ratios used to analyze the profitability of the business are net margin, return on equity, and return on assets. The net margin is computed by dividing the net profit by the net revenues of the company (Walton and Aerts, 2006). The net margin ratio depicts the profits as a percentage of revenues. Further, the return on equity indicates the profits earned by the company for the equity shareholders. It is computed by dividing the net profits by the shareholder’s equity. The analysis of shareholder’s equity is essential from the view point of equity providers. Further, the return on assets is also used which indicates the profits of the firm as a percentage of total assets (Walton and Aerts, 2006).

In respect of World Vision Australia, the net margin has been found to be 5.53% and -4.40% for the year 2014-15 and 2015-16 respectively. It could be observed that the net margin of the company is slopping down in the current year as compared to the previous year. In respect of competitor, Berry Street, it has been found that the company is earnings net margins of -1.43% and 0.20% in the year 2014-15 and 2015-16 respectively (Appendix). It could be observed that World Vision Australia incurred losses in the current year however the competitor is earning profits. Further, the return on assets of the company has been found to be 24.77% and -25.54% whereas its competitor is found to be earning a return on assets of -2.08% and 0.29% in 2014-15 and 2015-16 respectively. Further, the return on equity is also showing the same trend with 29.82% and -31.13% in 2014-15 and 2015-16 respectively (Appendix).

Overall, it has been observed that the profitability of the company of current year 2015-16 is down as compared to the previous year 2014-15. Further, it has been observed that the competitor is performing better than the company in the current financial year. The primary reason for downfall in the financial performance of World Vision Australia in 2015-16 has been identified as the increased expenditure on the expansion activities. The expenditure on the overseas projects increased by 23.1% (World Vision, 2016) in the year 2015-16, which added to cost significantly and affected the profitability adversely. It has been found that total expenses other than fund disbursements amounted to $177.4 million in 2015-16 as compared to $142.0 million in 2014-15 (World Vision, 2016).

Further, DuPont analysis has been conducted to analyze the changes in the return on equity in more detail as under:

 

2015-16

2014-15

A. Asset turnover

       5.80

      4.48

B. Equity multiplier

1.22

1.20

C. Net Margin

-4.40%

5.53%

ROE (A*B*C)

-31.13%

29.82%

 

It could be observed that return on equity of World Vision Australia is changing from 29.82% to -31.13% in the year 2015-16 as compared to the year 2014-15. It could be observed that the net margin is major component that has caused significant changes in the return on equity of the company. The negative net margin has caused the return on equity to be negative. Further, assets turnover and equity multiplier have improved in the current year (Godwin and Alderman, 2012).                 

Liquidity

After analyzing the profitability, the next step in the analysis of financial performance is the assessment of liquidity. The liquidity refers to the ability of the company to pay off the short term debt as when it falls due for payment (Palepu et al., 2007). A firm needs to have enough liquidity to meet the short term obligation to run the day to day affairs hassle free. In order to assess the liquidity, the primary ratios being used worldwide are current and quick ratio. The current ratio is computed by dividing the current assets of the company by the current liabilities. A firm needs to keep the current ratio as high as possible to prove its liquidity sufficiency. Further, the quick ratio is also used as the indictor of liquidity. The quick ratio is computed by taking the current assets net of inventory which means that only the assets that are readily convertible in cash are taken into account. The quick ratio measures the liquidity of the firm more rigidly than the current ratio (Palepu et al., 2007).

 


In respect of World Vision Australia the current ratio has been found to be 4.55 and 4.02 times for the financial years 2015-16 and 2014-15 respectively (Appendix). It could be observed that the ratio is falling slightly down in the current year as compared to the previous year. The primary reason for decrease in the current ratio has been found to be decrease in the current assets in the year 2015-16. The current assets of the company went down from $59.84 million to $47.57 million in the year 2015-16 (Appendix). However, the company is still performing better than the competitor. Its competitor company namely Berry Street has been observed to be running with the current ratio of 0.86 times in the year 2015-16, which is lower than company’s current ratio of 4.02 times.

Further, the quick ratio of the company has been found to be 4.55 and 4.01 times for the financial year 2015-16 and 2014-15 respectively. The quick ratio is also slopping downward in the current year compared to the previous year. Though, the ratio has gone down, but it is still higher than the competitor. The competitor company, Berry Street, is running with the quick ratio of 0.80 times which is less than the company’s quick ratio of 4.01 times (Appendix). Overall, it could be articulated that the liquidity of the company has gone weaker in the current year as compared to the previous year but the company is still in the better position compared to the competitors.                     

Capital Structure Ratios: Advice on Loan

The capital structure refers the financing pattern of a firm. In other words, it refers to the mix of sources of finance such as equity and debt used by the firm. The decision of management in regards to use of sources of finance is critical as it affects the overall financial performance and position of the firm (Baker and Martin, 2011). There are different advantages and disadvantages of the use of debt and equity respectively. Thus, the management needs to analyze the situation and then decide as to which source of finance would suit the best in the given situation. It should be noted that the use of debt provides leverage advantages but at the same time it also gives rise to the risk of solvency. Further, the use of equity increases the financing cost and it also results in dilution of control. Overall, the essence is that the management should strike out a proper balance between the use of equity and debt funds to improve the financial performance (Lane and Milesi-Ferretti, 2000).

 


In order to maintain adequate balance between the equity and debt, it is essential to analyze the capital structure ratios. The primary capital structure ratios being used for this purpose are debt equity ratio and debt to total assets ratio. In respect of World Vision Australia, it has been found out that the debt equity ratio is 0.20 and 0.22 times for the year 2015-16 and 2014-15. Further, the debt to total assets ratio is 0.17 and 0.18 times (Appendix). The trend in the ratios depicts that the debt has increased a bit in the current year compared to the previous year. However, the company is still using less debt than the competitors. The competitor company, Berry Street, is having debt equity ratio of 0.60 times which is way higher than the company’s debt equity ratio of 0.22 times (Appendix). The low debt equity ratio shows that there exists scope to raise more debt to arrange finance for the company. Thus, considering the current debt position, it could be advised that the company is low on debt and therefore it can go for raising new loans to finance the assets.                 

Long Term and Short-Term Sources of Finance Used by the Company

It has been found out that World Vision Australia is a not for profit organization (NPO) which seeks finance in the form of government grant and donations. Apart from the government grant and donations, the company usages retained earnings as the primary source of long term funding (World Vision, 2016). Further, the company takes material from suppliers on credit; therefore, the supplier’s credit is used as the short term source of finance. The below given table shows source of finance used by the company in the preceding two years along with percentage change:  

Sources of Finance: World Vision Australia

 

2015-16 ($M)

2014-15 ($M)

Change (%)

Long Term

 

 

 

Retained earnings

45.92

64.6

-28.92%

 

 

 

 

Short Term

 

 

 

Supplier Credit

4.83

6.89

-29.90%

It could be observed that retained earnings decreased significantly by 28.92% in 2015-16 as compared to 2014-15. Further, the Supplier Credit decreased by 29.90% (World Vision, 2016).

 

Limitations of Ratio Analysis

Though, ratio analysis is highly useful tool for the purpose of analyzing the financial performance of a firm, but it has certain limitations. First of all, the ratio analysis is performed on the historical data that is taken from the financial statements of the company (Ehrhardt and Brigham, 2008). In preparing the financial statement, two companies may use different accounting policies that would affect the amounts recorded in the financial statements. The ratio analysis in this situation would yield less effective results. Further, the ratio analysis does not provide the reasons for fluctuations in the financial figures; it only indicates the quantitative data (Ehrhardt and Brigham, 2008).   

2.Bond Valuation

Comparing Value of Bonds

The face value, terms to maturity and coupon rate of both the bonds is same, but the yield to maturity and interest payment terms are different, therefore, the price of two bonds can not be identical (Bond and Brown, 2012). The bond of World Vision is “A” rated while the bond of Berry Street is “B” rated. Due to difference in ratings, the yield to maturity of the bonds is also different. Further, the bond of World Vision pays annual interest while the bond of Berry Street pays semi-annual interest. Applying the concept of time value of money, the prices of both the bonds have been computed as under:

World Vision Australia

Face value

100

Terms (Years)

5

Coupon rate

8.00%

Yield to maturity

3.50%

Yearly interest

      8.00

Price of bond

$120.32

 

Berry Street

Face value

100

Terms (Semi years)

10

Coupon rate (Semi year)

4.00%

Yield to maturity (Semi yearly)

2%

Half yearly interest

4

Price of bond

117.965

The price of bond issued by World Vision is $120.32 while that of Berry Street’s bond is $117.97. The bonds of both the companies are selling at premium.

International Bond Rating Agencies

There are many rating agencies working in different countries around the world. However, the three major rating agencies which have operations in different parts of the world and operate at the international level are Standards and Poor, Moody’s Investor Services, and Fitch Ratings Ltd (Nigudkar, 2017). The ratings assigned to the debt securities provide information to the lenders on creditworthiness of the company. The high rating bonds involve lesser risk but at the same time it may reduce the return. Further, the company having high debt rating, can issue the bonds at premium taking the advantages of low risk being involved in the issue of bond. The lenders can make decisions as regards investment in the debt securities of the companies by referring to the ratings assigned to it (Mathieson and Schinasi, 2000).       

Conclusion

The report presented here deals with the analysis of financial performance and position of World Vision Australia for the financial year 2015-16. The company operates for social causes with the particular focus on alleviation of poverty and developments in the field of education. From the ratio analysis, it can be articulated that the company’s profitability has not been up to the mark in the current year. However, in term of liquidity and solvency, the position of the company is better than the competitors. The company has sufficient liquid assets and low debt to equity ratio. Further, from the analysis of bond price, it could be observed that the company’s bond is selling at premium.        

Appendix: Ratios

Financial Data

Description

World Vision ($ M)

Berry Street  ($ M)

 

 

2015-16

2014-2015

 

2015-16

2014-2015

Revenue

 

       424.37

       380.00

 

         87.44

         84.63

Expenses

 

       443.05

       359.00

 

         87.26

         85.38

Excess/ (shortfall)

 

       (18.69)

         21.00

 

           0.18

         (1.21)

Interest

 

 

 

 

 

 

Inventory

 

           0.07

           0.02

 

           1.34

           1.25

Current assets

 

         47.57

         59.84

 

         18.39

         17.26

Current liabilities

 

         11.85

         13.15

 

21.44

18.88

Equity

 

         60.05

         70.41

 

         38.25

         37.58

Total liabilities

 

         13.13

         14.35

 

         23.03

         20.57

 

Description

Formula

World Vision ($ M)

Berry Street  ($ M)

 

 

 

2015-16

2014-2015

2015-16

2014-2015

Profitability

 

 

 

 

 

 

Net margin

Net profit/revenues

 

-4.40%

5.53%

0.20%

-1.43%

Return on assets

Net profit/Total assets

 

-25.54%

24.77%

0.29%

-2.08%

Return on equity

Net profit/equity

 

-31.13%

29.82%

0.46%

-3.21%

Liquidity

 

 

 

 

 

 

Current ratio

Current assets/current liabilities

 

           4.02

           4.55

           0.86

           0.91

Quick Ratio

Current assets-Inventory/current liabilities

 

           4.01

           4.55

           0.80

           0.85

 

 

 

 

 

 

 

Capital Structure Ratio

 

 

 

 

 

 

Debt to Equity Ratio

Debt/ Equity

 

0.22

0.20

0.60

0.55

Debt to assets

Debt/ Total assets

 

           0.18

           0.17

           0.38

           0.35

 

 

References

Baker, H.K. and Martin, G.S. 2011. Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice. John Wiley & Sons.

Baker, H.K. and Powell, G. 2009. Understanding Financial Management: A Practical Guide. John Wiley & Sons.

Berry Street. 2016. Annual report of Barry Street for 2015-16. [Online]. Available at: https://www.berrystreet.org.au/annual-reports [Accessed on: 04 April 2017].

Bond, P.H. and Brown, P. 2012. Rating Valuation: Principles and Practice. Taylor & Francis.

Ehrhardt, M. and Brigham.E. 2008.Corporate Finance: A Focused Approach. Cengage Learning.

Godwin, N. and Alderman, C. 2012. Financial ACCT2. Cengage Learning.

Hales, J. 2006. Accounting and Financial Analysis in the Hospitality Industry. Routledge.

Lane, P.R. and Milesi-Ferretti, G.M. 2000. External Capital Structure-Theory and Evidence. International Monetary Fund.

Mathieson, D.J., and Schinasi, G.J. 2000. International Capital Markets Development, Prospects and Key Policy Issues. International Monetary Fund.

Nigudkar, A. 2017. Credit Rating Agencies. [Online]. Available at: https://www.financewalk.com/credit-rating-agencies-sites/ [Accessed on: 06 April 2017].

Palepu, K.G., Healy, P.M., Bernard, V.L., and Peek, E. 2007. Business Analysis and Valuation: Text and Cases. Cengage Learning EMEA.

Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.

Walton, P. and Aerts, D. 2006. Global Financial Accounting and Reporting: Principles and Analysis. Cengage Learning EMEA.

World Vision. 2016. Annual report of World Vision for 2015-16. [Online]. Available at: https://www.worldvision.com.au/docs/default-source/annual-reports/wv-annual-reports/annual-report-2015-v2.pdf?sfvrsn=2 [Accessed on: 04 April 2017].

World Vision. 2017. About US. [Online]. Available at: https://www.worldvision.com.au/about-us [Accessed on: 06 April 2017].

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