Financial Analysis Of Accent Group Limited In Essay.

Financial performance and position of Accent Group Limited. You should refer to the notes to the financial statements and the Director’s Report for further details and clarifications of changes in the financial statements. (You may find the Full Year Results CEO & CFO Presentation useful for this assignment).

Your analysis should be supported by profitability, liquidity, gearing and other appropriate ratios from Chapter 18 of the prescribed textbook. Calculate and analyse financial ratios (percentage and ratio analysis)  Use the 2018, 2017 and 2016 published annual reports to obtain the financial statement.

Profitability position

Accent Group Limited is an Australian company listed on Australia’s Securities Exchange. It had started its business operations in year 1981 and is headquartered at Waterloo, Australia. The company is engaged in the retail, distribution as well as franchisee business of footwear, Apparel and the various types of accessories across Australia as well as New Zealand. Accent Group was initially known with the name of RCG Corporation Limited. The company is operating as the regional leading distribution of lifestyle footwear and it currently owning over 420 stores and 10 distribution brands across both the countries of its operations. The brand portfolio of the company includes Athlete’s Foot, Hype DC, Platypus Shoes, Podium Sports, Sketchers, Merrell, CAT, Vans, Dr. Martens, Saucony, Timberland, Sperry Top-Sider, Palladium, and Stance (Bloomberg, 2018).

The present report is prepared to carry out the financial analysis of the Accent Group using different techniques such as horizontal analysis (also known as trend analysis), vertical analysis and ratio analysis. Under this report the financial performance of the company over last three financial years i.e. 2016, 2017 and 2018 has been analysed using different financial ratios.  Financial performance of business is based on various aspects such as its profitability position, liquidity position, solvency position and its efficiency in managing and using different assets of the business (Higgins, 2003). These aspects have been taken into consideration in order to assess the overall financial position of Accent Group.

Profitability is the state when the firm has sufficient amount of earnings left after meeting all the costs and expenses of the business. There are various rations which determine the profitability position of the business. (Tracy, 2012).  The use of the key profitability ratios has been made in the present case to analyse the profitability position of business of Accent Group Limited.

The return on net sales ratio is commonly known as Net Profit Margin Ratio. This ratio measures the amount the earnings that are left in the business after making payment for the expenses of the business in the given period of time. A firm with higher net profits is able to offer higher returns to its owners and hence higher net profit is preferred in all types of businesses. In the present case of Accent Group Limited, the net margin ratio was lowest in 2017 among all the three years under consideration. Though, the business of Accent Group has experienced inclining trend in terms of sales revenue generation since 2016 to 2018. However, the operating expenses in 2017 are relatively higher in 2017. The increased net profit margin in 2018 as compared to 2018 reflects that company has earned better profits for its owners in 2018.

The ratio of return on total assets measures how effectively and efficiently the firm is utilising its total assets in the business to generate returns for its owners. The ROA of Accent Group is highest in 2018. It shows that the company has been able to utilise its total assets in most efficient manner in 2018 when compared to 2016 and 2017. The increased operating expenses and declining profit before interest have led to minimum ROA in 2017. Moreover, increase in the level of fixed assets held in the business of Accent Group must have also contributed to the lowest ROA in 2017 as the company could not have utilised its total assets efficiently and therefore some of the assets must have remained idle in 2017. The excessive investment in total assets has blocked the surplus funds of the business which could have distributed among the owners of company if prudent investment in fixed assets was made where minimum finance cost could be incurred to finance the assets (Accent Group Limited, 2018).

Liquidity position

Asset turnover ratio is the type of efficiency ratio which is used to assess the efficiency of firm in deploying the overall business in the business. Higher Asset turnover ratio is desirable in any business as higher the asset turnover ratio, more is the efficiency of the firm in utilising its assets to generate sales revenue (Tracy, 2012).  Accent Group has highest ATR in 2017 despite of the fact that in this particular year company has achieved lowest ROA. This shows that the company has earned highest sales revenue in 2017 by utilising its assets due the reason that it has maintained fixed assets in highest proportion as compared to other years i.e. 2018 and 2016. However, in order to invest more in assets in 2017, the company must have had borrowed funds from the external market where cost of financing such assets had to be paid which in turn must have reduced its level of profits. This has resulted in lower ROA but higher ATR in 201. Moreover, the ratio of 1.15 shows that Accent Group must have earned $ 1.50 sales by making investment of each dollar in assets (Accent Group Limited, 2018) (Refer Appendix Table 3).

The return on equity ratio measures the quantum of profits which have been passed to the shareholders of the company (Nissim & Penman, 2001). Accent Group has generated maximum returns for its shareholders in 2018 and this shows that it has effectively utilised the funds provided by its shareholders in its business and through the effective utilisation, it has distributed highest returns for its shareholders. Moreover, the earning per share of Accent Group Limited is highest in 2018 which depicts that the company had strongest profitability position in 2018. The reason of highest EPS in 2018 is that the company has earned highest quantum of profits that are distributable among the shareholders is earned.

The liquidity is the state which is achieved when the firm has sufficient amount of current assets available with us to meet its current liabilities which falls due within next one year. To determine the liquidity position of Accent Group Limited, use of various prominent ratios has been made such as current ratio, quick ratio. If the company has implemented best working capital management practices then it will certainly have the strong liquidity position in the market.

A company must have at-least maintained quantum of current assets which is equivalent to its current liabilities. In the present case of Accent Group, the current ratio in all the 3 years is higher than 1 which shows that the company has adequately invested in its current assets  so that it can meet its short term financial obligations as and when they become due without requiring to dispose-off its fixed assets (Accent Group Limited, 2016). However, Accent Group had experienced strongest liquidity position in 2016 and thereafter its liquidity state had started weakening due to increase in the current liabilities like short term borrowings, employees benefit expenses and deferred lease incentives. Moreover the total current assets have been declined considerably in 2018 as compared to that of 2017 (Refer Appendix Table 1). In 2016, the company held lesser current financial obligations than that of 2017 and 2018. However, in 2017, it has enhanced its investment in current assets to maintain its liquidity. But, in 2018 the quantum of its current asset has reduced which had ultimately resulted in weakened liquidity position.

Solvency position

The lowest quick ratio in 2018 as compared to that of 2017 and 2016 shows that although the company has sufficient current assets to meet its short term financial obligations but the balance of liquid asset which can easily and quickly be converted into cash is not sufficient enough due to weaker cash conversion cycle (Higgins, 2012).

The inventory turnover ratio of a firm shows the number of times the business inventory has been converted into sales in the given period of time, generally a year (Foster, 2004).  The ITR of Accent Group has not varied significantly over the last three financial years. However, the highest ITR was reported by the company in 2017 which shows that the inventory was converted into sales more frequently in 2017 as compared to 2018 and 2016. Also, the company has taken relatively lesser time to convert its inventory into sales in 2017 than 2018 and 2016. The highest ITR in 2016 reflects the inefficient working capital management practices of the company.

In 2018, highest quantum of revenue was generated out of sales. However, the cost of goods sold which has been incurred in the lesser proportion of total sales as compared to 2017 and 2016.Due to this highest GP rate has been achieved in 2018.

The receivables turnover ratio measures the frequency with which the receivables were converted into cash. Higher receivable turnover ratio is generally preferred. In 2018, highest RTR is achieved which shows that Accent Group has managed its accounts receivables in the most efficient way in 2018.

In terms of management of accounts receivable of the business, the company has performed best in 2018 as it has taken least time to convert its trade receivables into cash sales as compared to other two years. It clearly shows that Accent Group has strongest cash operating cycle in 2018 due to which it quickly convert its credit sales into cash.

The gearing ratios are used to determine the appropriateness of capital structure of the business.

The debt to asset ratio measures the proportion of total assets which has been financed through the use of external debt sources (Cull, Demirgu Kunt & Morduch, 2007). Accent Group had strongest solvency position in 2016 as it had relied more on equity financing i.e. the internal sources of finance to invest in the business assets. Hence, it had to face least financial leverage in 2016.But in 2018 the company is facing higher insolvency risk because it has higher proportion of debt in its total capital structure.

Debt to equity ratio shows the proportion of total debt and total equity in the total capital structure of the firm. As the proportion of debt is quite lower in the total capital structure of the company, it can be said that Accent Group is facing lesser risk of insolvency.

In 2017, Accent Group Limited had lowest interest coverage ratio which reflects higher chances of its bankruptcy. The interest coverage ratio shows the quantum of earnings available with the company to meet its financing costs. As the proportion of external debt is highest in 2017, higher is the chance of not meeting its interest obligations on timely manner.

Conclusion: 

From the above analysis it can be said that, the profitability position of Accent Group was best in 2016 and lowest in 2017. However, in 2018, the company has managed to improve again its profitability state by making effective utilisation of its overall assets as well the investments made by its shareholders. Also, it has been found that the company has paid maximum returns to its equity shareholders in 2018. Further, the liquidity position of business was strongest in 2016 due to limited short financial obligations but the same is not the case in 2018 due to which it does not have satisfactory liquidity position. It must therefore enhance its investments in current assets. Lastly, it can be said that Accent Group has strongest financial position in 2016 as it had relied less on external debt financing sources to acquire its fixed assets.

References:

Accent Group Limited. (2016). Annual Report: 2016. Retrieved from: https://onlinereports.irmau.com/2016/RCG/index.html#27/z 

Accent Group Limited. (2018). Annual Report: 2018. Retrieved from: https://onlinereports.irmau.com/2018/AX1/26/#zoom=z 

Bloomberg. (2018). Company Overview of Accent Group Limited. (2018). Retrieved from: https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=10636950 

Cull, R., Demirgu¨ ç?Kunt, A. and Morduch, J. (2007). Financial performance and outreach: A global analysis of leading microbanks. The Economic Journal, 117(517), pp.F107-F133.

Foster, G. (2004). Financial Statement Analysis, 2/e. Pearson Education India.

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

Nissim, D. and Penman, S.H. (2001). Ratio analysis and equity valuation: From research to practice. Review of accounting studies, 6(1), pp.109-154.

Tracy, A. (2012). Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet. Ratio Analysis. Net.