Essay: Financial Analysis Of ABR And Pavilion Holdings Ltd.

Overview of Financial Analysis

Discuss about the Uses and limitations of profitability ratio analysis.

Financial analysis means analysing and evaluating the books of accounts and financial statements of a company y. financial analysis can be done company wise or for comparing the financial results of one company with other company or for comparing the financial statements of any company segment wise. Financial analysis is border in its concept and includes analysis on the basis of intercompany analysis or intra company analysis.

Our report is regarding the financial analysis of two different companies namely, ABR Holdings Ltd and Pavilion Holdings Ltd. Our analysis is intercompany analysis and we will compare these two companies on the basis of SWOT analysis, ratio analysis and segment analysis. We will also analyse the cash flow statement and vertical and horizontal analysis of both the companies.

ABR Holdings Ltd is a food and beverages company they offer fine dining restaurants and casual dining restaurants to many families. It holds the franchise of Swensen’s in Singapore and also has the franchise for Yogen Fruz. The company is also engaged in manufacturing ice cream. It has major four segments which are restaurants and confessionary, pubs, chocolates retail and distribution, distribution of bathroom shower system and import and export of wines.

Pavilion Holdings Ltd. is an investment holding company, manages, operates and franchises restaurants in Singapore, the People’s Republic of China and internationally. The company operates in three segments: Corporate and Franchising Services, Restaurant Operations and Leasing and Financing Services.  It owns self-managed restaurants and franchise restaurants. This company also provides car financing services and equipment leasing services in addition this it is also involved in trading, import, business development, export and import of machineries.

Ratio analysis is used to measure the financial viability of the company in terms of profitability, liquidity, efficiency and capital structure of the company. Ratio analysis is done in order to analyse the final accounts of both the companies. Ratio analysis helps to know about different aspects of the company (Achelis, 2001).

These ratios measure the liquidity of a company. They are used to determine how quickly a company can convert its assets into liquid. Two types of ratios are current ratio and quick ratio (Higgins, 2012).

The current ratio of Pavilion Holdings has fallen as we see appendix 1.1 in 2015 is was 16.91 and in 2016 it gradually decreased to 6.31 and the same happened with quick ratio as well as in 2015 it was 16.29 and in 2016 it decreased to 6.09.

On the other hand, the Current Ratio of ABR Holdings was 6.23 in 2015, which reduced to 5.82 in 2016. The Quick Ratio also decreases and reported at 5.67 in year 2016. Both of the ratios of ABR are less than the Pavilion Holdings, but still the ratios are satisfactory which implies that the company’s liquidity position is better and it has enough assets to pay off its short term liabilities.

These ratios help in knowing the ability of a company to generate profits from its operations. They provide an overview of the company’s profits made during the year (Coelli, Rao, O'Donnell and Battese, 2005).

Introduction to ABR Holdings Ltd and Pavilion Holdings Ltd

As we see there is 5% decrease in the operating profit ratio of Pavilion Holdings, whereas ABR’s Operating Profit Ratio reduced by 3% only. This shows that ABR is good at maintaining its profits. Similarly net profit ratio of ABR is better than Pavilion Holdings and in 2015, both companies has same ratio (Abr.com.sg. 2018). The reason for having a better ratio is that the decrease in the amount of net profit of ABR is less than the reduction in the profit of Pavilion Holding Ltd. Refer Appendix 1.2

They shows the degree of financial leverage maintained by a company. It basically includes debt equity ratio and interest coverage ratio (Palepu and Healy, 2007).

As we analysed the ratios and we can say that the D/E ratio of Pavilion Holding Ltd is 69% in 2016, whereas the same for ABR was 17%. This implies that most of assets of Pavilion Holding is financed through debt rather than equity. As a result, having high debt portion would lead to high risk. Also ABR has high interest coverage ratio which means it can pay its interest expense more effectively. Refer Appendix 1.3

This shows efficient management of available resources by the company. They indicate the potentiality of the company to use its assets and manage its liabilities in an effective and efficient manner (Lesakova, 2007).

The DTR and CTR of ABR Holdings is less than the former company. This reflects that company is not efficient enough in collecting its receivables and paying its creditors. Inventory turnover ratio of ABR is 24.2 and of Pavilion Holdings is 25.30. The ATR of former company was reported at 2.37 cents, which is more than the latter company’s ATR of 0.89 cents. So, on a whole it means that Pavilion Holdings is much more efficient than ABR in maintaining its resources.

It is one of the tools used for financial statement analysis in which relationship between various items of the statement is measured (Gibson, 2011). On balance sheet, each item is represented as a percentage of total assets and liabilities, whereas on income statement, each item is shown as percentage of sales. The financial statements prepared are known as common-size statement (Lee, Lee and Lee, 2009)

The analysis shows that, the COGS of Pavilion Holdings have increased not only in terms of dollars but also in terms of percentage. In 2015, it was 34% of the sales and in 2016, it was 36% of sales. The same goes with ABR Holdings but comparatively, the cost of sales of the company is less than the former company. ABR’s gross profit reported at 44.37% in 2016 is less than Pavilion group’s GP of 64% in the same year, though reduced as compare to 2015. The expenses of both the companies have risen in 2016. The net profit of Pavilion Group is negative in 2015 and in next year, it incurred profit of 6%. In contrast to it, ABR Holdings has a net profit of 7.55% in 2015 and 5.40% in 2016, which was much more than Pavilion Group Ltd (Abr.com.sg. 2016).

SWOT Analysis

The vertical analysis of the balance sheet shows that Pavilion’s portion of current assets is 78.66% of the total assets in 2015, which fallen to 73.90% in 2016. Whereas, the current liabilities comprises of 4.66%, that increased to 11.72% in 2016. This shows that Pavilion Group has strong position of its working capital and can meet its financial obligation easily. Moreover, the percentage of total equity is also higher than the liabilities. Similarly, ABR Holdings also has higher portion of assets and equity than the liabilities but when compare to Pavilion, it has more assets and equity and very less portion of liabilities. In 2016, ABR’s equity comprises 85.45% of total liabilities and equity, current assets were 77.98% of total assets and current liabilities were only 13.39% of total liabilities. This implies that, ABR is better at maintaining its capital structure and meeting its short term and long term obligations. Refer Appendix 1.5

It measures year to year change in each and every item of financial statement. The change is determined in the terms, dollar and percentage by taking one year as a base. In other words, the analysis shows increase or decrease in the items of statement (Sharan, 2015).

Referring to Appendix 1.6, in income statement, the revenue of Pavilion Group has been increased by $2204 and 16.54% in 2016 along with the increase in gross profit of $1143 and 13.04%. In contrary to this, revenue of ABR has increased by $3514 and 3.5% with a rise of 0.1% in gross profit. But in terms of amount, revenue and GP of ABR is much more than Pavilion Group. The net profit of both the companies has reduced in 2016 but comparatively, the decrease in the profit of ABR is less than that of in the profit of Pavilion Group Ltd. So overall, it can be said that, though the change in the revenue earned by ABR is less but the company is making profits which are more than Pavilion Group.

The analysis on the balance sheet shows that, former company’s total assets decreases by $644 which is less than the increase in the total assets of latter company that is $1815. The total liabilities of Pavilion group have increased by 29.24%, whereas in case of ABR, same has risen by 6.25%. Moreover, an increase of 0.82% is been noticed in the total equity of ABR Holdings as compare to Pavilion Group. This reflects that, the financial position of ABR Holdings is better than Pavilion Group Ltd, because of high percentage of assets and equity and less debt.

Cash flow statement shows the inflow and outflow of the cash in the business (Weygandt, Kimmel and Kieso, 2009). In Appendix 1.7, the cash flow statements of both the companies are analysed. In year 2016, ABR has generated more cash from its operations than Pavilion, amounted to $9376, though less than that of in 2015. This is because the changes in working capital of the company are comparatively less, creditors has increased which leads to the inflow of cash in the business. Talking about investing activities, Pavilion only has cash outflow of $2016 and $602 for the purpose of purchasing property and acquiring shares. On the other hand, major cash outflow in ABR’s investing activities was in purchase of property amounted to $5839 in 2016. This resulted in net cash used worth $5074, which is more than that of Pavilion group. Similarly, in financing activities, ABR and Pavilion group has more cash outflow than inflow. But comparatively, the net cash used in the financing activities of Pavilion group Ltd, is less than ABR because of its gross proceeds from IPO worth $7518. This overall analysis shows that, the former company is slightly more effective and efficient in managing its cash position than the latter company (Jury, 2012).

The analysis of each and every segment of the companies is done. The revenue generated from the segments is determined. Referring to Appendix 1.8, Pavilion’s most of the revenue is generated from Singapore amounted to $54,941 and the non-current assets used are worth $6,798 .On the other hand, ABR has its revenue mostly form Singapore and Malaysia amounted to $89,611 and $14,239 respectively. Also its Non-current assets are in the same countries worth $20,828 and $4,866. This shows that segments of ABR produces more revenue than Pavilion Group Ltd., reason being the company not only operates in Singapore but also in Malaysia and rest of the Asia.

From the above analysis, it can be recommended that ABR Holding is performing well in comparison to Pavilion Group Ltd. It has high liquidity and profitability position and is also less risky because of less debt financing. Though it generate less returns on its assets and equity, but from other aspects it is way better than Pavilion Group. For an investor, it will be better to choose ABR over Pavilion Group for the purpose of investment because of its high profits, high sales and less borrowings or debt. Moreover, it is capable of generating enough cash from its operations. So, ABR Holdings is a desirable option for investing the funds.

References

Abr.com.sg. 2016, ANNUAL REPORT 2016. [Online] Available at: https://www.abr.com.sg/pdf/ABR_Annual_Report_2016.pdf  [Accessed 08 Mar. 2018].

Abr.com.sg. 2018, Company Profile. [Online] Available at: https://www.abr.com.sg/profile.html [Accessed 08 March 2018].

Achelis, S.B., 2001. Technical Analysis from A to Z. New York: McGraw Hill.

Coelli, T.J., Rao, D.S.P., O'Donnell, C.J. and Battese, G.E., 2005. An introduction to efficiency and productivity analysis. Springer Science & Business Media.

Gibson, C.H., 2011. Financial reporting and analysis. South-Western Cengage Learning.

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

Lee, A.C., Lee, J.C. and Lee, C.F., 2009, Financial Analysis, Planning and Forecasting: Theory and Application Second Edition. 2nd ed. Singapore: World Scientific Publishing Company.

Lesakova, L., 2007, June. Uses and limitations of profitability ratio analysis in managerial practice. In International Conference on Management, Enterprise and Benchmarking (pp. 1-2).

Palepu, K.G. and Healy, P.M., 2007. Business analysis and valuation. Cengage Learning EMEA.

Sharan, V., 2015, Fundamentals of Financial Management. 3rd ed. New Delhi: Pearson Education India.

Swotanalysis24.com. 2018, ABR Holdings Ltd SWOT Analysis - Strengths, Weaknesses, Opportunities, Threats of ABR Holdings Ltd. [Online] Available at: https://www.swotanalysis24.com/swot-a/924-swot-analysis-abr-holdings-ltd.html  [Accessed 8 March 2018].

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2009, Managerial accounting: tools for business decision making. 5th ed. New Jersey: John Wiley & Sons.