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Financial Statements Of Kathmandu Holdings

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Questions:

1. Provide a brief of the company (Name, year of establishment, history, background, the product/service they deal in) and also what year is under review? Try selecting the latest year?
 
2. Looking at the contents page and flicking through the report, which sections dominate the report?
 
3. Who are the directors? List three or four main directors along with a brief summary of director’s report?
 
4. Who are the auditors? What is the auditor’s opinion? Provide a brief summary of auditor’s report?
 
5. Have sales increased or decreased (compare the year you have selected with that of the previous/preceding one)? Comment on the reasons for the change in the sales.
 
6. What is the net cash inflow (outflow) from operating activities? (See the company’s cash flow statement). How has the company’s net cash inflow changed from the previous year in terms of money and in terms of percentage?
 
7. What was the retained profit for the year? Has the company any borrowings, i.e. loans, debentures, etc.?
 
8. Based on the income statement, Balance sheet & cash flow statement, calculate the following ratios and comment on the financial health of the company?
 
 

Answers:

1. Brief introduction of Kathmandu Holdings Limited

Kathmandu Holding Limited is the professional outdoor wholesaler. It was established in 1987.The company is hooked in designing, marketing, wholesaling of clothes and material for travel and adventure. The company’s sector consists of the country’s like New Zealand, Australia, and the United Kingdom. It offers a range of garments like fleece jacket, waterproof jacket, shirt pants and footwear and socks. It also provides equipment consist of bags, sleeping bag, tents, camping accessories and travel accessories. The company works approximately 110 stores in Australia, over 46 stores in New Zealand and approximately 4 in the United Kingdom. The company’s subdivision includes Kathmandu (U.K) Limited, Kathmandu Ply Limited, Kathmandu Limited, and Milford Group Holding Limited (www.kathmanduholdings.com, 2017).

2. Identifying the key aspect of the annual report

Annual report of any company includes all the relevant and compulsory information for the users (both internal and external) of the report. The annual report specifically includes, directors report, interim report, media announcement, strategic performance report, etc. However, the interim report is the most dominating section of the annual report, followed by the director’s report and media announcement (Zadek et al. 2013).

Similarly, interim report is the most dominating section of the annual report of Kathmandu Holdings Limited. Financial statement and Auditor's report are the most significant part of it, since it brings material and required information for the users of the report. Here it has been found that the PWC has audited the financial statement of the company, stating that the company has followed the guidelines of AASB and the statement is showing true and fair view (de Villiers et al. 2014).

The report has made individually to the company’s shareholder.  The audit work has been tackled so that it might shape to the company’s shareholders the matter which are required to state to the shareholders for the review report and for no other desire. To the fullest extension allowed by the law, the company do not accept or guess the duty anyone other than the shareholder.

 

3. Identifying the key directors and analyzing the directors report

The director is the prime of the organization, they are either appointed or elected, who mostly has the power and duties link to administration and management (Cassim, 2016).

The three-significant director of this company are David Kirk, Xavier Simonet and John Harvey.

The directors report analysis that majority of Kathmandu’s year ended sale are obtained from three major sales promotions each year appearing in the part of the months of March and April (Autumn), June and July (Winter) and December and January (Christmas). Among these three developments the Largest sales is Winter sale and the remaining two sales occur in the second half of the financial year. As the outcome, in the second half of every financial year the largest proportion of the Kathmandu sales and EBITDA is obtained. However, the fee structure of the directors is represented below in a diagram.

Figure 1: Directors remuneration

(source: www.kathmanduholdings.com, 2017)

4. Defining auditors, their opinion and discussing the summary of auditor's report

Auditor is someone who is responsible for calculating the validity and security of a company's or management’s financial statements (Tang et al. 2017).

The only financial statement which was occurred by the Group that are estimated at the fair value are over the counter derivatives. These derivatives have all been resolve to be in the level two of the fair value position. As all the powerful inputs are needed to find out the fair value of these derivatives. Pwc has audited the financial statements of the company and found that the report has been prepared in relationship with group interest and accounting guidelines. Thus, the Accounting firm, Pwc has given unqualified report. The report is individually made to the company’s shareholder as a body (Christ et al. 2015). The audit work has been so that it might state to the company’s shareholder, the matter which are required to state to the shareholder for the review report. The company do not accept or assume responsibility to anyone other than shareholder.

 

5. Comparative analysis of sales for the year 2017 and 2016 and explaining the reason behind the changes

Based on the audited financial statements of Kathmandu Holdings Limited, it can be seen that the total sales for the year ended 31 January is almost similar to the previous year. Total segment sales in the Australia domain is around $ 279,704. The company specifically recognizes the sales whenever the payment is made (Ordanini, Parasuraman & Rubera, 2014). However, the credit sales contribute 80% of the total sales. In addition, the group sales also contribute 80% of the total credit sales. It can easily be understood from the sales graph shown below, that how the company efficiently performed in the previous five years to increase sales. This, is the reason why Kathmandu Holdings have never faced losses in the past five years.

Figure 2: Segment sales in the domain of New Zealand

(source: www.kathmanduholdings.com, 2017)

With respect to the above context, the sales revenue in the UK domain has faced struggle in increasing its sales, because the region has very strict belief in accepting the products offered by the company. However, the segment sales are well described in the context of three different countries.

An operating is a part of an element that participates in business exercises which wins income and brings about costs and where the central leader audits the working outcomes all the time and settles on choices on asset allotment (Hambrick and Quigley, 2014). The Group is composed into three working portions, portraying the three land areas the Group works in.

 

6. Discussion on net cash flows of the company

The operating cash flow for the year 2017 decreased significantly to $ 10,033, also the cash used in investing. Compare to 2016 and 2017 the net cash flow from operating activities has decreased from 24,187 to 10,033 because in 2017 they paid more to the supplier and the employee, they paid more income tax, also paid interest more as compare to 2016. Receipt from customers remained unchanged, payments to suppliers and employees slightly rose, but income tax and interest paid in the current year is slightly less. This made the operating cash flow less than 2016. However, the net cash used in investing activities has increased in 2017 compare to from (12,875) to (6,792), this is because they purchased less fixed assets, but they purchased more intangible assets. Moreover, proceeds from loans and advances considerably rose to $ 41,921. Similarly, the net cash (outflow) from financing activities has increased in 2017 as compared to 2016, because the company paid less dividend in the current year, also provided less loan as compare to 2016. This is because the cash and cash equivalent is less as compare to 2016 (Ball et al. 2016).

However, the computation of net cash inflows from operating activities is shown below.

Figure 3: Changes in net profit after taxation with cash inflow

(source: www.kathmanduholdings.com, 2017)

7. Discussing the debt and equity structure of the company

Kathmandu Holding’s total debt is amounted to $ 103,838, which consist of fixed interest-bearing liabilities of $ 51,595 and derivative financial instruments of $ 3,199 for the year 2017. On the other hand, total debt for the year 2016 was $ 48,591 which was less than the current. Thus, it can be said that the company is raising funds to finance their business operation. However, the total equity for both the year remained almost same, which includes unchanged total equity shares (Bradley and Roberts, 2015). Moreover, retained earnings slightly increased, but reserves and surpluses significantly rose in the current year. Therefore, it can be said that Kathmandu Holdings has efficiently managed its equity shares and performed up to the expectations of the shareholders. Since, the dividend paid by the company is considerably higher than that of previous year.

However, the consolidated statement of changes in equity with respect to the debt and equity structure is given below.

Figure 4: Changes in equity

(Source: www.kathmanduholdings.com, 2017)

 

8. Computation of the financial ratios for identifying the financial health of the company

 

KATHMANDU HOLDINGS LIMITED

 

 

Profitability ratios

 

 

 

Particulars

 

2017 $

2016 $

Rate of return on net sales

Operating profit / net sales

14830/196316

15139/195977

 

 

0.075541474

0.077248861

 

 

7.50%

7.70%

Rate of return on equity

Net profit / total equity

10045/303328

9410/305782

 

 

0.033115967

0.030773558

 

 

0.03

0.03

Earnings per share

given in the annual report

4.9 cents

4.6 cents

Liquidity ratios

 

 

 

Particulars

 

2017 $

2016 $

Working capital

Current assets-current liabilities

107202 - 51930

123204 - 48591

 

 

55272

74613

 

 

$ 55272

$ 74613

Current ratio

Current assets/current liabilities

107202 / 51930

123204 / 48591

 

 

2.064355864

2.535531271

 

 

2.0:1

2.5:1

Accounts receivable turnover

Net credit sales/Avg. receivables

((196316/ (5399+7313)/2))

((195977/ (7313+5031)/2))

 

 

7.721680302

7.938148088

 

 

7.72 times

8 times

Leverage ratios

 

 

 

Particulars

 

2017 $

2016 $

Debt ratio

Total liabilities/total assets

103838 / 407166

119919 / 425701

 

 

0.255026206

0.281697717

 

 

25.50%

28.00%

Debt to equity ratio

Total liabilities/total equity

103838 / 303328

119919 / 305782

 

 

0.342329096

0.392171547

 

 

34.23%

39.21%

Assets turnover ratios

 

 

 

Particulars

 

2017 $

2016 $

Assets turnover ratios

Net sales / average total assets

((196316/ (407166 + 425701)/2))

((195977/ (425701 + 413253)/2))

 

 

0.117855552

0.116798418

 

 

0.12

0.12

Table 1: Financial ratios

(Source: Self-created)

Based on the computation of different financial ratios of Kathmandu Holdings Limited, for the year ended 31 January 2017, relevant information regarding the financial health of the company have been found, which are commented below.

Company’s return on sales and return on equity both remain almost same, but the return on sales slightly declined by 0.2% in 2017. Thus, it can be concluded that company is moderately doing well, but it need to put more focus on its unnecessary expenses (Delen et al. 2013). However, the current ratio has shown satisfactory result in 2017, which meet the industry standard of 2:1, but the working capital and accounts receivable turnover declined in 2017 to $ 55272 and 7.72 times respectively. Thus, it can be said that the company is still struggling in paying off its debt obligations. However, the liquidity of current assets gives a sense of relief. On the counter part, the organization’s debt-equity mix is quite high, indicating that the entity is largely relying on the debt capital for financing their operation (Kou et al. 2014). However, the assets turnover ratio remained unchanged, indicating that the company is quite stable in generating sufficient revenue with its assets.

 

References

Ball, R., Gerakos, J., Linnainmaa, J.T. and Nikolaev, V. (2016). Accruals, cash flows, and operating profitability in the cross section of stock returns. Journal of Financial Economics, 121(1), pp.28-45.

Bradley, M. and Roberts, M.R. (2015). The structure and pricing of corporate debt covenants. The Quarterly Journal of Finance, 5(02), p.1550001.

Cassim, R. (2016). Contesting the removal of a Director by the Board of Directors under the Companies Act. South African Law Journal, 133(1), pp.133-159.

Christ, M. H., Masli, A., Sharp, N. Y., & Wood, D. A. (2015). Rotational internal audit programs and financial reporting quality: Do compensating controls help?. Accounting, Organizations and Society, 44, 37-59.

de Villiers, C., Rinaldi, L. and Unerman, J. (2014). Integrated Reporting: Insights, gaps and an agenda for future research. Accounting, Auditing & Accountability Journal, 27(7), pp.1042-1067.

Delen, D., Kuzey, C. and Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Hambrick, D.C. and Quigley, T.J. (2014). Toward more accurate contextualization of the CEO effect on firm performance. Strategic Management Journal, 35(4), pp.473-491.

Kou, G., Peng, Y. and Wang, G. (2014). Evaluation of clustering algorithms for financial risk analysis using MCDM methods. Information Sciences, 275, pp.1-12.

Ordanini, A., Parasuraman, A., & Rubera, G. (2014). When the recipe is more important than the ingredients: A qualitative comparative analysis (QCA) of service innovation configurations. Journal of Service Research, 17(2), 134-149.

Tang, F., Tang, F., Ruan, L., Ruan, L., Yang, L. and Yang, L. (2017). Does regulator designation of auditors improve independence? The moderating effects of litigation risk. Managerial Auditing Journal, 32(1), pp.2-18.

www.kathmanduholdings.com, (2017). Available from: https://www.kathmanduholdings.com/wp-content/uploads/2017/03/1H-FY17-ASX-release.pdf [Accessed on 11 Sep. 2017].

Zadek, S., Evans, R. and Pruzan, P. (2013). Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.

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