Seven Group Holdings is usually a diversified investment and operating firm operating in construction, mining and media industries (Reuters.com 2018). The company was established in the year 1991 by the receivers with the aim of bundling together assets Christopher’s failed business. Its segment comprises of Wes Trac Australia that is currently the authorized caterpillar seller in the Australian Capital Territory as well as in New South Wales (Investsmart.com 2018). The second segment is Wes Trac China that is currently the only authorized caterpillar trader in North Eastern China. Finally, there is AllightSykes that operates in sales, assembly, manufacture as well as support of the lighting, dewatering equipment and power generation as well as in distribution of the Perkins engines. The company operates in two key countries; that is, China and Australia (Market Index 2018). Seven Group Holdings has great assets, strong management team as well as engaged personnel that enable it to capture any opportunity of improving markets where it operates. As such, the paper present analysis of financial ratio analysis based on five categories; that is, profitability, market value, liquidity, efficiency and financial leverage in determining strength and weakness of the firm (Seven Group Holdings 2017). It also presents historical share trend and value of the company’s stock based on dividend growth rate model. These would help in the researcher in evaluating Seven Group Holdings and provide financial advice to the client on whether or not the client should include share of Seven Group Holding in his investment portfolio.
Financial ratio analysis is usually the tool developed in performing quantitative analysis on figures reported on the financial statements (Lewellen 2004). This assists in linking the three forms of the financial statements all together and provides figures which are comparable between firms and across sectors. Basically, ratio analysis if the most widely utilized fundamental analysis approaches (Halkos & Salamouris 2004). Nonetheless, ratios differ across different sectors and comparisons in between completely different forms of organization are usually not valid (Kumbirai & Webb 2010). Ratios falls into numerous categories and for this purpose, the analysis would use the five commonly used categories to analyse financial performance and position of Seven Group Holdings in the past two years. These categories include profitability ratios, asset utilizations, liquidity ratios, market value as well as financial leverage ratios.
Liquidity or short-term solvency ratios are the widely used financial ratios. These ratios are very significant especially to the creditors as they measure an organization’s capacity of meeting its immediate or short-term debts (Lewellen 2004). In this case, quick as well as current ratio would be used in evaluating liquidity of Seven Group Holdings over the past two years.
This form of financial ratio would be useful in measuring Seven Group Holdings current assets against current liabilities (Halkos & Salamouris 2004). It would indicate or signals whether Seven Group Holdings could settle its short-term debts obligations by liquidating all its current assets (Kumbirai & Webb 2010). In this case, a low ratio would signal that Seven Group Holdings might be experiencing hard times in settling its current debts and therefore require immediate investigations; nonetheless, high ratio means that Seven Group Holdings is having easier times in settling its short-term debts. . In this case, Seven Group Holdings current ratio for the past two years was as follows:
2016 = 1,783.1/907.4 = 1.97
2017 = 1,909.4/686.6= 2.78
Figure 1: trend in current ratio 2016-2017
Based on the above results, it is evident that Seven Group Holdings current ratio increased over the last two years moving from 1.97 in 2016 to 2.78 in 2017. The increase in current ratio is attributable to introduction of assets held for the sales in 2017. Besides, the increase in this ratio implies that for the last two years, Seven Group Holdings has been having easy time in settling all its short-term debts.
The ratio is a bit stringent compared to current ratio. It would help in comparing cash, the short-term marketable stocks as well as the account receivables of Seven Group Holdings to its current liabilities (Halkos & Salamouris 2004). In this case, Seven Group Holdings quick ratio for the past two years was as follows:
2016 = 1,783,100- 831,300 /907,400 = 1.05
2017 = 1,909,400- 654,700 / 686,600 = 1.83
From the above outcome, it is evident that Seven Group Holdings quick ratio increased over the past two years. The increase implies that the company has been having easy time in turning its most liquid assets to settle its short-term debts.
Financial leverage are the financial ratios used in measuring an organization’s capacity of meeting most of its long-term debts (Kumbirai & Webb 2010). This offers some insights on an organization’s capital structure and level of the financial leverage the company is utilizing. In this case, financial leverage ratios such as debt to asset, interest coverage and the debt/equity ratios would be useful in Seven Group Holdings case since it would permit Seven Group Holdings’ potential investors to determine whether SVW has enough cash flows in settling its interest expenses and other expenses (Halkos & Salamouris 2004).
This ratio is one of the most common solvency ratios and would be used in measuring percentage of Seven Group Holdings total assets which is mostly financed by the debts. It is usually computed by dividing the total debts by the total assets (Halkos & Salamouris 2004). Here, higher figure implies that the company is utilizing huge amount of the financial leverage that increases their financial risks. In this case, Seven Group Holdings debt to assets ratio for the past two years was as follows:
2016 = 2,632,700/ 5,330,900 = 0.49
2017 = 2,410,800 / 4,836,000 = 0.50
Figure 2: trend in debt to assets 2016-2017
Based on the above results, it is evident that Seven Group Holdings debt to asset was relatively low below 1. This means that Seven Group Holdings is utilizing significantly low amount of the financial leverage which in turn lessen its financial risks.
The ratio would be used in measuring amount of the debt Seven Group Holdings utilizes in comparison to amount of the equity used (White, Sondh & Fried 2005). In this case, Seven Group Holdings debt to equity ratio for the past two years was as follows:
2016 = 2,632,700/ 2,698,200 = 0.98
2017 = 2,410,800 / 2,425,200 = 0.99
As from the above computations, it is evident that Seven Group Holdings debt/equity ratio decreased in the last two years. Besides, the ratio for the last two years was below one meaning that Seven Group Holdings was relying on equity financing rather than the debt financing.
This ratio would help in measuring Seven Group Holdings cash flow generated in comparison to the interest paid. It is computed by dividing the EBIT by the interest expenses (White, Sondh & Fried 2005). In this case, Seven Group Holdings interest coverage for the past two years was as follows:
2016 = 284,400/ 82,400 = 3.45
2017 = 124,600/ 77,300 = 1.61
Based on the aforementioned calculations, it is evident that Seven Group Holdings interest coverage for the past two years decreased from 3.45 in 2016 to 1.61 in 2017. The ratio was also relatively high meaning that the company was not experiencing hard times in settling its interest expenses over the period.
Asset utilization or efficiency ratios are mostly used in measuring how efficiently an organization employs its assets (Kumbirai & Webb 2010). This offers potential investors with a rough idea of overall operational performance of the company. In essences, asset utilization or efficiency ratios would be useful in this case since they will help in measuring rate at which Seven Group Holdings is turning its assets into sales (White, Sondh & Fried 2005). In this case, inventory turnover, asset turnover and receivable turnover would be used in measuring efficiency of Seven Group Holdings over the past two years.
This ratio usually computed by dividing COGs by inventories would be useful in determining how fast Seven Group Holdings turns its inventories or how faster the company sells its inventories (Gapenski & Reiter 2008). A high turnover could means that the firm’s inventories are too lean and the company might be unable to correspond to the high demand (White, Sondh & Fried 2005). In this case, Seven Group Holdings inventory turnover for the past two years was as follows:
2016 = 2,040,000 / (831,300 + 929,200)/2 = 2,040,000/ 1,760,500 = 1.16
2017 = 2,073, 100 / (654,700 + 831,300)/2 = 2,073,100 / 1,486,000 = 1.40
Based on the above computations, it is evident that Seven Group Holdings inventory turnover increased over the period. The ratio was relatively low implying that Seven Group Holdings inventories were less lean and that the firm was able to correspond or to meet the relatively high demand.
The ratio helps in measuring how efficiently or quickly Seven Group Holdings turns its assets into revenue or sales (Gapenski & Reiter 2008). It is usually computed by dividing sales by the average total assets. Where lesser asset turnover is said to imply that the company is inefficient in utilizing its assets. In this case, Seven Group Holdings assets turnover for the past two years was as follows:
2016 = 2,418,700 / (5,330,900 + 5,372,900)/2 = 2,418,700/5,351,900 =0.45
2017 = 2,286,400 / (4,836,000 + 5,330,900)/2 = 2,286,400/ 5,083,450 = 0.45
The results above show that Seven Group Holdings asset turnover was relatively constant over the past two years. In essence, given that the ratio was relatively low in the past two years, this implies that Seven Group Holdings was inefficient in utilizing its total assets to generate revenue.
The ratio which is usually computed by dividing sales by the average receivables would be used in measuring how efficiently and quickly Seven Group Holdings collects most of its outstanding bills from debtors (Gapenski & Reiter 2008). In essence, it would be used in measuring how many times Seven Group Holdings collects money owed to them or turns into cash the account receivables (Kumbirai & Webb 2010). In this case, Seven Group Holdings receivable turnover for the past two years was as follows:
2016 = 2,418,700 / (551,300 + 482,100)/2 = 2,418,700/516,700 = 4.68 times
2017 = 2,286,400 / (336,500 + 551,300)/2 =2,286,400 /443,900 = 5.15 times
Figure 3: trend in receivable turnover 2016-2017
As from the above results, it means that Seven Group Holdings receivable turnover increased from 4.68 in 2016 to 5.15 in 2017. The ratio is relatively high meaning that Seven Group Holdings was efficient in collecting the amount of money owed to them from debtors.
These are financial ratios widely used in an investment analysis. In this case, Gross profit margin, ROE and ROA would be used in measuring profitability level of Seven Group Holdings (Kumbirai & Webb 2010). In essence, profitability ratios would help in measuring Seven Group Holdings capacity in earning enough return or income.
This single profit is usually computed by dividing gross profit by sales. It shows pricing decisions as well as product costs (Sulaiman Jili & Sanda 2001). Basically, gross margin measures Seven Group Holdings’ capacity of translating sales to gross income. In this case, Seven Group Holdings gross margin ratio for the past two years was as follows:
2016 = 378,700/ 2,418,700 * 100% = 15.66%
2017 = 213,300/2,286,400 * 100% = 9.33%
Figure 4: trend in gross margin 2016-2017
Based on the above ratio computation, it is clear that Seven Group Holdings gross margin decreased from 15.66% in 2016 to around 9.33% in 2017. The decrease implies that Seven Group Holdings is unable to translate revenue or sales into gross income.
The ROA is mostly computed by dividing net income or profit by assets. The ratio measures how efficiently Seven Group Holdings utilizes its total assets in generating income (Sueyoshi 2005). Here, a higher ratio means that Seven Group Holdings is capable of efficiently generating income using assets while vice versa is true. In this case, Seven Group Holdings ROA for the past two years was as follows:
2016 = 196,800/ 5,330,900 * 100% =3.69%
2017 = 44,500/4,836,000 * 100% = 0.92%
As from the above results, it is clear that Seven Group Holdings ROA decreased from 3.69% in 2016 to around 0.92% in 2017. The decrease means that over the last two years Seven Group Holdings was inefficient in utilizing its assets to generate income or revenue.
The ROE measures Seven Group Holdings net income against shareholders’ equity. It measures level of the Seven Group Holdings’ income that is attributable to the shareholders against investment shareholders put in the company (Sueyoshi 2005). In this case, Seven Group Holdings ROE for the past two years was as follows:
2016 = 196,800 / 2,698,200 * 100% = 7.29%
2017 = 44,500 / 2,425,200 * 100% = 1.83%
Figure 5: trend in ROE 2016-2017
The above results show that Seven Group Holdings ROE decreased from 7.29% in the year 2016 to around 1.83% in 2017. The decrease signifies that Seven Group Holdings has been inefficient over the last two years in utilizing its equity to generate income.
These financial ratios are mostly utilized in assessing current share price of Seven Group Holdings (Kumbirai & Webb 2010). They are useful to both potential and current investors in determining whether Seven Group Holdings’ shares are under-priced or over-priced (Sulaiman Jili & Sanda 2001). In our case, EPS and P/E ratios would be used in evaluating Seven Group Holdings market value.
The ratio is gotten through division of total earnings by share outstanding. In essence, it would be used in determining or deriving price of the Seven Group Holdings share which investor thing the share is worth (Sulaiman Jili & Sanda 2001). In this case, Seven Group Holdings EPS ratio for the past two years was as follows:
2016 = 0.60
2017 = 0.07
From the above results, it is clear that over the last two years Seven Group Holdings EPS decreased from 0.60 in 2016 to around 0.07 in 2017. The decrease means that Seven Group Holdings was undervalued in the financial year 2017.
It is computed by dividing market price per share by EPS. It would be useful in evaluating whether Seven Group Holdings shares are under-priced or over-priced (Sulaiman Jili & Sanda 2001). In this case, Seven Group Holdings P/E ratio for the past two years was as follows:
2016 = 56.5%
2017 = 107.1%
Based on the above computations, it is evident that Seven Group Holdings P/E ratio increased from 56.5% in 2016 to 107.1% in 2017. The increase implies that Seven Group Holdings is properly priced
Based on the Figure 6 below, it can be stated that Seven Group Holdings share price increased over the past two years experienced an upward movement. Basically, based on the graph, it is evident that recently Seven Group Holdings share price has gained momentum by swiftly increasing to around 102.5 from 79.42. This is a good picture to current shareholders and to potential investors willing to invest in the company.
Figure 6: Seven Group Holdings historical share price
Figure 7: Comparison between SVW and All Ordinaries Index
Further, from Figure 7 above, it can be indicated that Seven Group Holdings monthly share prices was relatively higher compared to All Ordinaries Index. In essence, Seven Group Holdings share price are less volatile in comparison to the compared to All Ordinaries Index. This is based on the fact that the share price for Seven Group has been experiencing an increasing trend since 2016 marked by significantly lesser volatility over the period. In essence, Seven Group Holdings share price is was above the index for the past two years.
The dividend growth rate model is usually the model for computing intrinsic value of the stock, excluding the existing market situations. This approach usually links share’s value to its PV on forthcoming dividends. In other words, dividend growth rate technique is the assessment approach which computes fair values of a specific stock making assumptions that its dividends is growing at an even rate. It determined whether a given stock or company’s share is either over or undervalued assuming that organization probable dividends growth at the value g in perpetuity (Aduda & Kimathi 2011). Therefore, the stock’s value under the constant dividend growth rate model is computed as follows;
Value of the stock = D/ (k-g)
In this case, the D represents dividends per share
K is the required rate of the return
With the following facts, and assuming that Seven Group Holdings dividends are projected to experience constant growth rate of around 4% every year with required rate of return being 9%, it would be easier to compute the value of Seven Group Holdings shares. Besides, given that Seven Group Holdings dividends per share in 2018 was 42%, here Seven Group Holdings stock value would be = D /(9-4) = D/5% = 42%/5% = 840
This means that the intrinsic value of Seven Group Holdings stock value was 840. This means that Seven Group Holdings stock is worth 840 per share though it is currently trading at 42. Hence, based on this analysis, it can be stated that Seven Group Holdings share is undervalued.
Conclusion
Based on share price evaluation, it can be stated that Seven Group Holdings share price increased over the past two years. This movement is very important since it means that the stock share price is gaining momentum over the period. Furthermore, it can be concluded that Seven Group Holdings is financially stable and healthy. This is based on the fact that the company current ratio and quick ratios were relatively higher meaning it was experiencing easy times in settling its debts. Besides, with the relatively high solvency ratios like debt to equity and the debt to assets ratios, it can be stated that Seven Group Holdings is doing relatively better financially. In fact the ratios indicates that the firm is not at any financial risks since it not burdened by debts but instead uses its shareholders’ equity in financing most of its operations. Further, based on the efficiency ratios and market value ratios, it can be concluded that Seven Group Holding is efficient enough in generating revenue from its resources. Further, based on the inventory turnover and receivable turnover it can be stated that Seven Group Holdings inventories were less lean and that the firm was able to correspond or to meet the relatively high demand. In fact, the company seems to be efficient enough in collecting money owed by debtors. On overall, the company seems to be relatively financially stable and healthy; hence, stands as a better investment opportunity for potential investors.
Based Seven Group Holdings financial ratio, share price and share valuation, it is recommendable that the company offers better investment opportunity for potential investors. In essence, given that the company experienced increasing trend in its share price which was relatively higher compared to the All Ordinaries Index, it is recommendable for current shareholders and to potential investors willing to invest in the company. Therefore, the client should include Seven Group Holdings shares in his investment portfolio which is expected to give him additional return or yield.
References
Aduda, JO & Kimathi, H (2011), ‘The applicability of the Constant dividend model for companies listed at the Nairobi Stock Exchange,’ Journal of Financial Studies & Research, 11.
Gapenski, LC & Reiter, KL (2008), Healthcare finance: an introduction to accounting and financial management. Chicago, IL: Health Administration Press.
Halkos, GE & Salamouris, DS (2004), ‘Efficiency measurement of the Greek commercial banks with the use of financial ratios: a data envelopment analysis approach,’ Management accounting research, 15(2), 201-224.
Investsmart.com (2018), Company Financials: Seven Group Holdings Ltd: Viewed from: https://www.investsmart.com.au/shares/asx-svw/seven-group-holdings-limited/financials (Accessed at 21st September 2018)
Kumbirai, M & Webb, R (2010), ‘A financial ratio analysis of commercial bank performance in South Africa,’ African Review of Economics and Finance, 2(1), 30-53.
Lewellen, J (2004), ‘Predicting returns with financial ratios,’ Journal of Financial Economics, 74(2), 209-235.
Market Index (2018), Seven Group Holdings: Viewed from: https://www.marketindex.com.au/asx/svw (Accessed at 21st September 2018)
Reuters.com (2018), Seven Group Holdings Ltd (SVW.AX): Viewed from: https://in.reuters.com/finance/stocks/company-profile/SVW.AX (Accessed at 21st September 2018)
Seven Group Holdings (2017), Seven Group Holdings Limited annual report 2017: Viewed from: (Accessed at 21st September 2018)
Sueyoshi, T (2005), ‘Financial ratio analysis of the electric power industry,’ Asia-Pacific Journal of Operational Research, 22(03), 349-376.
Sulaiman, M, Jili, A & Sanda, A (2001), ‘Predicting corporate failure in Malaysia: An application of the Logit Model to financial ratio analysis,’ Asian Academy of Management Journal, 6(1), 99-118.
White, GL Sondh, AC & Fried, D (2005), ‘Analysis of Financial Statement,’ Analysis
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