Discuss about the case study IRESS for Financial Valuation.
IRESS is an Australian based software company which specialises in software development and related services for financial markets, wealth management and mortgage sectors. It started with its business in 1993, and now it is one of the leading suppliers of innovative technology solutions. It has its business speared over in Australia, Asia, Canada, New Zealand, South Africa and the UK. It has over 1400 professionals working under it. IRESS has about 17 offices in 7 countries across 5 continents (IRESS, 2015). The main product for IRESS is to make software for financial services. This software is developed by best breed technology which help the companies to save time and cost. As of date IRESS has a market capitalisation of AUD $ 1.82 billion (IRESS, 2015). IRESS enjoys a good position in the Australian market as its products are used by most of the financial community. This provides for almost one third of the total revenues of the company. In the study below we will learn more about IRESS and its financials.
Summary of Key Financial Ratios
The financial ratio study of a company enables us to understand the financial of a company in a constructive way. It provides a basis of comparison and analysis among various companies of the same sector. Also, it helps to understand the factors which affect the cash flows of the company (Williams, 2012). Following ratios will help us understand in details the financials of IRESS along with factors which have driven the performance of the company over recent years.
These are the ratios which measure the company’s ability to generate profits as compared to its costs and other expenses in a given period of time. It helps to analyse how well the company has made use of its resources in order to generate profits and shareholder’s value (Albrecht et. al, 2011).
Return on assets ratio
This is a type of profitability ratio which helps to calculate profits per dollar invested in assets by the company. It is the indicator of profits of the company as compared to its assets. It helps to make an idea of how efficient the assets of the company are put to use in order to generate profits (Albrecht et. al, 2011). Sometimes it is also referred to as return on investment.
The return on assets of the company showed a significant change in the year 2013. The increase has been made in same proportions in the current year. Therefore, there has been no change in the return on assets of the company. The company, just like last year has made $ 0.09 on every dollar invested by it in assets. The company needs to adopt new measures in order to use its assets more efficiently. Use of assets will generate high returns for the company at the same level of investment. Hence, no variance from last year has been witnessed by the company for return on assets ratio (Choi & Meek, 2011).
Net profit margin
The net profit margin ratio calculates the profits earned by the company on total income. This profit is the net profit after taxes which are remained with the company. The profit which is left with the company before distribution of dividends and transfer to reserves is the net profit (Choi & Meek, 2011).
The company has constantly shown growth in net profits over the last five years. The revenue of the company in the year 2015 has gone up by 10% as compared to 2014. Also the net income has increased by almost 9% in the current year. The net profit margin of the company stays at almost 15%. Though the revenue and profits have increased, the net profit margin remains the same. This is so because of increase in revenue and profits in similar proportions. The company has increased the level of its operations, but in order to secure better results, it needs to work on its operational efficiency. Else, the investment made by the company shall increase every year, without providing for any growth opportunities.
This ratio is the tool used to calculate the company’s ability to meet up with its obligations. This ratio calculates if the state of the capital structure of the company is efficient enough to pay the debts and other obligations (Northington, 2011). It helps to determine the solvency of the company for the current period and few periods to come.
Debt Equity Ratio
The debt equity ratio calculates the proportion of debt as compared to equity in total capital of the company. The use of different sources of capital determines the cost of capital of the company, which has a great effect on the performance of the company. If the profits generated by the company are all used to pay the cost of capital, then it’s no use to carry on the business (Deegan, 2011).
The company had no debt till year 2012, but in 2013 it started to lever its firm. Lower the debt equity ratio better it is for the company. This is so because it depicts low use of loan funds. Less loan funds indicate low cost of capital. Also, use of excessive funds taken on loan creates a risk for the company (Horngren, 2013). The debt equity ratio of the company for the year 2014 was 0.54 and in the year 2015 was 0.59. There has been a slight increase in the ratio. This increase in debt was due to acquisition of Proquote and Pulse. Still the ratio is efficient for the company. The reasons for increase can be increased operations of the company.
This ratio calculates the company’s leverage. It is the ratio of total debts of the company is to total assets of the company. It can be interpreted as the percentage of assets of the company which are funded by debt. The ratio measures the debt funding of the assets of the company (Graham & Smart, 2012).
The company used n debt till the year 2012, but including debt has increased the operating performance of the company since 2013. The debt ratio of the company has stayed stable in the year 2015. The debt ratio is 0.31 for the current year. It can be interpreted as 31% of the assets of the company are funded by loan funds. Higher the leverage higher is financial risk. But in some cases it helps in growth, it results in sustainable use of debt. The debt and assets figure of the company have both increased in the same proportion. This shows that the company has not made any changes in its policy. It has just been increasing its investments which have provided same results.
The equity ratio calculates the portion of assets of the company which are financed by equity fund. As discussed, the capital structure is responsible for the cost of capital of the company. The capital structure can have debt up till the return on assets does not fall below the cost of capital (Graham & Smart, 2012).
The company has had high equity ratio till 2012, but after that it has a ratio ranging from 0.50 to 0.60. There has been a slight decline in equity ratio of the company from 2014 to 2015. The ratio in the current year was reported to be 0.53. This indicates that almost 53% of the assets of the company are funded by equity shareholders fund. The solvency shows what part of the assets will be remained with the investors after the liabilities have been paid off. The other shows the stake of the investors in the company, the part for which they are on hook with the company. Companies with high equity ratio show willingness of the shareholders to invest in the shares of the company (Northington, 2011).
The liquidity ratio is the class of financial ratios which determine the company’s capacity to its short term debts and liabilities. The higher the ratio, better it is considered as it depicts higher margin of safety the company owns to cover its liabilities (Horngren, 2013).
Current ratio is the ratio between the current assets and current liabilities of the company. Current liabilities are the obligations of the company which shall be due on the part of the company within 12 months. Current assets are the assets which can be converted into cash within 3 months (Libby et. al, 2012).
The current ratio of the company has been lowest in 2015 as compared to results of last four years. The ratio went down to 1.28 in 2015 from 3.13 in 2014. The ratio of 2 is considered good. In 2014 the ratio was very efficient. But in 2015 the company has diverted its funds from current asset; also the current liabilities have increased. The best explanation available is that the company has increased its operations which are due to more investment in fixed assets; also due to increased operations the current liabilities have shown a reasonable increase in the current year. The ratio of 1.28 needs to be improves; else the company may suffer lack of liquidity in near future which will affect the day to day operations of the company.
Market Value Ratios
These ratios are used to evaluate the market price of the shares of the company. These compare the performance of the company with the performance of the market value of the shares. They establish a relation between the performance of the company and its worth it’s the market (Fields, 2011).
Earnings per Share
The earnings per share are the ratio which calculates the profits after tax allocated to each issued share of the company. The EPS helps the experts and investors determine the value of the share of company with the help of certain other attributes. Also, EPS helps to calculate the Price earnings ratio of the company (Brealey et. al, 2011).
Except for the year 2013 the EPS of the company has been moderate. The earnings per share of the company have gone up to 35.17 cents in 2015 from 32.33 cents in 2014. Increase in earnings is due to increase in revenue of the company by almost 10% in the current year. Also, the number of shares issued has not many changes as compares to change in profits after tax. This increase in PAT has resulted in increased EPS of the company for the current year.
Dividend per share
The company distributes its earnings among its shareholders by giving them dividend. It is not mandatory for the company’s to pay dividends. Payout of dividends has a lot of affect on the growth of the company (Brealey et. al, 2011). If the company expects that the rate of return on assets of the company is more than the return required by shareholders, then it would be better for the company to retain its profits and vice versa.
Not much has changed in the dividend paid by the company. The company should retain its profits and utilise them in the operations of the company. This will reduce the debt burden of the company and also will protect the financial assets of the company (Needles & Powers, 2013).
Summary of Future prospects
Analysing the performance of IRESS in 2015 has shown us that the company has made development and also has seen growth prospects for the near future. Having a look at the above financial ratios it is evident that the company has witness some operating growth in the current year. The revenue of the company increased by 10% approximately in the current year. Though the revenues increased there was no efficiency shown in any of the ratios. The company has taken steps to improve the revenues but that is not sufficient. It needs to make plans which improve the efficiency of the operations of the organisation. The growth was literally expected to nil for the company, since it had covered almost the whole of client base in Australia. Growth could be expected only if the company went overseas with expansion opportunities but they involved high risks (Davies & Crawford, 2012). Company took the risk and it witnessed the increase. As per the board the company is confident for a string revenue growth in 2016. They also expect a momentum in the wealth management sector. They ensure to deliver strong profit growth in the coming year.
Description of the financial valuation methodologies
Since IRESS is a listed company, market valuation is selected as a method because it issued shares. The shares are traded therefore, it is easier to trace the details and availability of information because the financial reports are prepared that contains all the available information (IRESS, 2015). The market capitalization can be evaluated easily by multiplication of the stock price of the company by the shares that are outstanding. Once the value is computed, the amount is adjusted considering it would be sold for if the company is being sold. The price that a buyer is ready to pay is not projected in the share price. Therefore, considering the overall scenario market valuation best describes the situation (Parrino et al, 2012).
Valuation result and recommendation
The performance of the company has been very impressive in the current year. The company reports a net profit figure of $ 55.4 million which was 9% more than the year 2014. Most of the growth was seen in the second half of the year. Also the company has been making ways to reinvent the Australian financial market tools (IRESS, 2015). They also resulted in a double digit growth in South Africa and Australian wealth management market. As for the balance sheet the company has continued to show a conservative balance sheet position. High expectation in future is being kept from wealth management and lending business in the United Kingdom. Overall, the performance of the company has been satisfactory. If they continue to take risk and expand their business overseas more growth opportunities will be created (Brigham & Daves, 2012).
From the above report and study, it can be observed that the company IRESS has strong fundamentals and has shown stellar performances. The impressive run of the company is a clear cut indication that the company can be selected for long-term investments. This will provide strong returns to the investors. The company is growing steadily and is set to expand more on a grand scale that will provide benefits to the goodwill of the company. Moreover, as per the valuation and the ratio analysis it can be further said that that the profitability, liquidity and solvency is well aligned and the future prospect is strong.
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