A simple financial statement analysis is carried out (Appendix II) which is based on the extracts from the Best Pty Ltd financial statements. This analysis concludes:
- Revenue: The company revenue has increased by 160% as compared to 2003. However, on YoY basis the revenue growth rate has been reducing with just 6.61% growth posted in 2007. This may be due to incorrect pricing strategy or other factors such as lower demand, increased competition etc.
- Depreciation and Amortisation: The depreciation and amortisation of assets has been increased by 164.27%. The YoY% change indicates that a fall in depreciation rate from 2006 to 2007 which implies either asset sale or write off.
- Other Selling and Administration Expenses: The selling and administrative expenses have increased by 178.47% since 2003. These expenses have been increasing at a rate more than revenue growth which indicates inefficiency in company’s operations or higher costs of carrying out sales in its respective market.
- Finance Costs: The finance costs for company’s debt have increased by 354.75%. The YoY% indicates a steady increase in the company’s finance cost which indicates the company’s reluctance to borrow for financing its operating activities.
- Profit after tax from Operating Activities: The PAT from operating activities has increased by 52.53% in a period 2003-07. However, in the last year it declined and posted a negative growth rate of -12.57% which can be worrying as the company inefficiency in its operations may require careful planning and improvement.
- Profit after tax: The PAT has increased by 52.53% in a period of 2003-07. However, YoY change indicates a decline of 49.16% in PAT in the last year after posting a tremendous growth of 116.45% in 2006. This could be due to losses from company’s other investing activities.
From the basic financial analysis (See Appendix II) we could draw some important conclusions regarding the solvency and profitability of the company under review. Two of the ratios in Appendix II debt to total assets (Debt/TA) and times interest earned (TIE: EBIT/Interest) indicates the company is considered to be ‘solvent’. By solvency we mean that ability of the company to meet its short and long term obligations implying its financial soundness.
Increasing debt ratio indicates that the company’s assets are accumulating at higher proportion averaging at 132% than its borrowing averaging for 4 years to only 43%. This shows that the growth in assets is sufficient to cover company’s debt obligations. Lowering TIE ratio indicates that the company’s earnings are reducing over last 4 years which implies that the company will have fewer earnings to meet its interest payment. However, TIE still hovers at higher level which shows business capability to pay its interest commitments.
The company’s ability to generate profit could be viewed from examining other ratios calculated in Appendix II. The profit margin calculated from profit after tax and profit from operating activities indicates decline over the 4 years. This could be due the company’s inability to control its production and selling costs which could be seen from the trend analysis in Appendix I. It could further be due to the pricing strategy which is resulting in reduced growth in the revenue.
High asset turnover ratio transpires higher revenue per $ invested in assets. However, the ROA is at lower levels. This implies that the company may indicate that the company operations are asset intensive and require heavy investment in assets to generate revenue. The ROE indicates a steady return on shareholder’s investment with an exception in 2006. However, it may be considered as low but requires further information to draw conclusions about the company’s overall profitability position.
The investment decision in the company requires supplement information which could be available from company’s records and other resources. The company’s provided information may include a detailed business plan and its forecasts for the future. This would also involve details of any new projects and independent reviews of these projects. Further information could be retrieved from the creditors report, management’s report and external auditors report. However, the content of these reports should be assessed in view of their weaknesses and subjectivity.
Furthermore, industry analyses including that of its products, competitors, customers and technological issues render useful information for investment decisions. Other information for making investment decision can be drawn from equity market. This may include technical analysis of its share price and responses from market participants including banks, regulatory authorities, minority shareholders and independent research analysts.
Appendix I
Table1: Figures based on extracts from The Best Pty Ltd financial statements.