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Financial Statement Analysis And Valuation

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Question:

Discuss About The Financial Statement Analysis And Valuation?

 

Answer:

Introduction

This report aims to give the overall financial analysis of the Vocus group Limited. In this report it analyze the key performance of the company in the long run. Moreover, it also explains the acquisition process of the company by different evaluation methods. There are two methods is used in this report to evaluate the appropriate price for the company to acquire the Vocus Group Limited. Lastly the recommendations are given to the other company regarding acquisition process. Recommendations are based upon the analysis of the historical movements and trends in the same industry.     

Financial analysis of the Vocus Group Ltd

Operating efficiency ratio measures the operational efficiency of the business. It indicates the cost components of the sales figure is n normal range. A low operating ratio indicates that high net profit ratio i.e. more operating profit (Vocusgroup, 2017). This ratio tests the efficiency of the company with its business operations. The formulae to compute the operating aspects of the company are

Operating ratio = Operating Expenses/Net Sales × 100

It can be analyzed from the above given table the operating ratio of the company for past 11 years is calculated in the table. It can be identified that the operating ratio is highest in these two years i.e. in the year 2007 and 2017 i.e. 807.54 and 164.314.The high operating ratio is not good for the company as it indicates the declines in efficiency of the company and there will be smaller profits available with the company to pay its dividends and creation of reserves (Bloomberg, 2017). So as per the analysis it is identified that the company’s operating ratio is low from 2008-2016 but it is high in 2017 that depicts the company efficiency has decreased in the year 2017.But as compared to the year 2007 the operating profit is low.

Efficiency capability

Similarly, Efficiency ratio measure the company’s efficient to use its assets and manage its debts effectively. Total asset turnover ratio of the company is given in the above second table indicates the company efficiency to generate taxation-law from assets. The industry average of the efficiency ratio is 0.47 and the company’s current efficiency ratio is 0.44 in 2017 that indicates that the efficiency of the company is low as compared to the industry average. It means that company is not generating sufficient profits from the assets. In previous years it is indicated that the company is generated good revenues from assets in the year 2010, 2011 and 2012 but again it is declined in the year 2013,2015 and 2016 which shows that company cannot generate effective profits from the assets and manage its liabilities effectively (Healy and Palepu, 2012).

Performance aspects of the company

The performance aspects of the business are to measure the different elements of the company related to its core operations. The performance aspects of the company are measured by compare the revenue to net fixed assets. The high the ratio which indicates that business is generating higher sales from the small fixed asset base.

As per the above given table it indicated that the total revenue of the company divide by its total assets indicates the performance of the business in these 11 years. The trend shows that the performance of the business is increased as compared to the year 2007 to 2017.It means that company is generating large amount of the sales from a small fixed assets.

 Similarly, quick ratio also measures the ability of the business to pay its short term debts. It evaluates the relationship between liquid assets and current liabilities. The current ratio of the company does not indicate the good signal for the company. In the year 2017, the current ratio is 0.83 and the industry average is 1.05 it means that the company cannot generate liquid effectively from the inventories. As compared to previous years, the current ratio of the company is good (Higgins, 2012).

Moreover, the net profit of the company indicated the growth of the company is past years is good but at the end of the year is -1,464,870,000 i.e. is in negative values. It indicates that the company net profit is due to losses. Similarly, the EPS of the company is increased in the years 2013-2015.In the year 2016 and 2017 the values of the EPS is in negative terms that indicates that company’s earnings are not good and it is riskier for the investors to invest.

It can be identified from the key indicators of the company like market capitalization of the company is good as compared to the previous year’s which is increased by 12.04% in 2017.Moreover, company generates good returns on assets i.e. 34.50% that is maximum as compared to its previous years. Return on equity percentage is also good i.e. 63% approximately which indicates that company generates effective profits from shareholders investment. Lastly, the key indicator which increases the value of the company is long term debt to its total assets is decreased i.e. 25.54 it indicates that company reduced their long term debts on its assets.

There are different types of valuation methods and approaches to determine a point or range estimate for the current intrinsic (fundamental) valuation of the target company. Discounted cash flow principles are used by the company to evaluate its assets (Laudon and Traver, 2013). Discounted cash flows estimates the future cash flows of a firm and discounting these to present value using the required rate of return representative of the level of the risk related to the future cash flow stream.

 

Discounted dividend model

This method is used to valuation process for Vocus Group Limited here by

D2018 = 0.143

D2019 = 0.168

Risk Free Rate (Rf) = 2.675% and Market return (Rm) = 9.976%

Cost of equity (kE) = 0.02675 + (0.09976-0.02675) (0.61) = 0.0712861 = 7.13

PV of future dividends after 2019 (P2020) = ($0.168×1.05) / (0.0712861-0.0500) = $8.29

P2018 =      = $7.25

In this method the method the above equation says that the current share value is the present value of future dividend payments from 1 year to infinity (Bragg, 2012).

2) Abnormal Earnings (EVA) Models

This method is the extension of the dividend discount model. Abnormal earnings models represent an extension of the dividend discount model. Abnormal earnings model say that the value of the firm comprises

  • Its current book value
  • The present value of future abnormal earnings (which represents the future value creation by the company) (David, 2011).This model can be used to value directly or the overall firm (asset/ enterprise value)

BV of shareholders equity at the end of 2017 = $2303.1240 million

RE2018 = (Earnings Forecasts × issued share capital) – (Cost of equity ke × Shareholder equity)

RE2019 = (Earnings Forecasts × issued share capital) – (Cost of equity ke × Shareholder equity) (Isberg and Pitta, 2013)

Earnings forecasts = $0.25 (calculated in the excel sheet)

Issued share capital = 670 millions

Cost of equity ke = 0.0712861

BV of Shareholder equity = $ 2303.1240 million                                 

So, RE2018 = ($0.25 × 670) – (0.0712861 × 2303.1240) = $3.32   

RE2019 = (-$0.901 × 670) – (0.0712861 × 2503.1240) = $425.23                           

(Note: Shareholder Equity is assumed in the year 2019)

The long term earnings (residual earnings) with the rate of 4.00% per annum

PV value of future residual earnings after 2019 (V2020) = ($425.23 * 1.04) / (0.0712861-0.0400) = $14135.325

V2018 = 2303.1240 +   = 15022.87

P2018 = 15022.87 / 670 = $22.42

Results across the two different models

  • Discounted dividend valuation = $7.25
  • Residual earnings valuation = $ 22.42

Analysis and Recommendation

Average valuation of the company is $14.83 and current share price of the 3.370.It indicates that the price of the share is undervalued

KKR gives the cash offer price of 3.50 per share it seems that the offer price would be an attractive price for the shareholders to consider accepting. This is the good offer for the KKR to acquire the company at offered price. KKR should acquire the Vocus Group Limited at the offered price. Below given are the past acquisitions activities of the company in the similar industry

It seems that the market capitalization of the companies is good and sales revenues are also high. Below given table indicated the offer price on book value and EPS in the last 7 years.

As per the trend of the acquisitions in the same industry it is identified that KKR gives the good offer to the Vocal group and Vocal Group should sell their stake to the KKR due to under valuation of shares. The current offer price is beneficial for the company according to its performance of the company in the market. It is identified that the current price offered by the company is fair but not reasonable according to the trends of the market.   

Conclusion

As per the overall analysis of the report, it is concluded that KKR gives the appropriate cash offer price to the Vocal Group Limited. Moreover, it is also concluded that valuation models are helpful for the company to identify the appropriate price. Lastly, it finds that the insightful analysis helps the company to evaluate its portfolio.

 

References

Bloomberg (2017) Company Overview of Vocus Group Limited.[Online].Avialable at: https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=100656194 (Accessed: 27th September 2017)

Bragg, S.M., (2012) Financial analysis: a controller's guide.USA: John Wiley & Sons.

David, F.R. (2011) Strategic management: Concepts and cases.UK: Peaeson/Prentice Hall.

Healy, P.M. and Palepu, K.G. (2012) Business analysis valuation: Using financial statements.UK: Cengage Learning.

Higgins, R.C. (2012) Analysis for financial management.USA: McGraw-Hill/Irwin.

Isberg, S. and Pitta, D. (2013) Using financial analysis to assess brand equity. Journal of Product & Brand Management, 22(1), pp.65-78.

Laudon, K.C. and Traver, C.G. (2013) E-commerce.UK: Pearson.

Vocusgroup (2017) Welcome To The Vocus Group investor Center.[Online].Available at: https://www.vocusgroup.com.au/investors (Accessed: 27th September 2017)

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