Analysis Of Short-term And Long-term Solvency And Efficiency Position Of Adalta And Acrux Limited

Short-term solvency position

Analysis of short term solvency position:

Short term solvency ratios intend to measure the ability of organization to meet their short term financial obligations. Solvency position of Adalta and Acrux limited is analyzed by computing current ratio, quick ratio and cash ratio. Current ratio is obtained by dividing current assets by current liabilities. Current ratio of Adalta limited stood at 6.426 in year 2016 as against 23.475 in year 2017 indicating a considerable increase in figure. Acrux limited on other hand, has its current ratio computed at 5.95 in year 2016 compared to 11.778 in year 2017. This increase in current ratio of Adalta is attributable to increase in amount of current assets as well as current liabilities. It can be inferred from figures that the ability of company to finance the short term obligations using current liabilities has increased (Burns 2016).

Quick ratio of Adalta stood at 6.426 in year 2016 as against 23.475 in year 2017 and that of Acrux limited stood at 5.95 in year 2016 compared to 11.778 in year 2017 respectively. It is suggested from the figures that for both the organization, there are enough liquid assets available for making the payment of short term obligations. For every one dollar, company has $ 23.47 and $ 11.77 of quick assets for making payment of short term liabilities. It can be seen that the value of current ratio is same as value of quick ratio as Acrux limited and Adalta limited does not have any amount of inventories. However, the ideal ratio is dependent upon the industry in which company is operating. It is required to make comparison of the ratio with the industry standard. Organizations operating in life cycle and pharmaceuticals industry have a shorter operating cycle depicting that they do not required higher quick ratio.

Cash ratio on other hand increased from 2.256 in year 2016 to 18.068 in year 2017 for Adalta. This increase in figure is indicative of the fact that ability of firm to make payment of its current liabilities using cash and cash equivalent has increased. For Acrux limited, cash ratio stood at 5.117 in year 2016 as against 10.105 and this depicts that there is availability of cash and cash equivalent for making payments. A high cash coverage ratio is indicative of the fact that company is more liquid and can easily fund their debt amount. Enough cash is available on part of both the organization with Adalta limited having more cash available compared to Adruz limited. Furthermore, Adalta limited has more cash as well as current assets for financing its short term obligations compared to Acrux limited. Therefore, Adalta limited is more liquid compared to Acrux limited as indicated by the figures of short term solvency ratio.

Analysis of long term solvency:

Evaluation of long term solvency of companies is done by the computation of debt ratio, equity ratio and debt to equity ratio. Debt ratio of Adalta limited has decreased from 0.156 in year 2016 compared to 0.043 in year 2017. This decline in debt ratio is attributable to increase on amount of total assets at higher rate compared to increase in total liabilities. Debt ratio for Acrux limited on other hand has reduced from 0.178 in year 2016 to 0.071 in year 2017. This fall is witnessed in light of increasing total liabilities by considerable amount compared to fall in total assets. It can be inferred from the figures that value of debt ratio for Adalta limited is less as against Acrux limited. This implies that financial leverage of Acrux limited is low compared to Adalta limited. However, increase in total amount of liabilities is not a problem as long as operations of company are generating enough revenues. A lower value of debt ratio is regarded as favorable as it implies a more stable business. Therefore, the financial position of Adalta limited is more stable compared to Acrux limited.

Analysis of long-term solvency:

Equity ratio is an investment leverage ratio that intends to measure the amount of assets financed by equity compared to the availability of total assets in business. This increase in value of equity ratio is because of increase in total assets and total liabilities. It is preferred by organization to have higher equity ratio as it depicts that it is worthy to make investment in company and company is less risky to lenders (Cole and Sokolyk 2016). Now, looking at the values of equity ratio for Adalta limited, it can be seen that there has been an increase in figures from 0.844 in year 2016 compared to 0.957 in year 2017. On other hand, equity ratio for Acrux limited stood at 0.822 in year 2016 compared to 0.929 indicating that ratio has increased in recent year. This increase in ratio is attributable to increase in value of total equity at a higher rate compared to decline in total assets. However, equity ratio of Acrux limited is more than that of Adalta limited at value of 0.929 and 0.957 in year 2017 respectively. Therefore, the long term solvency position of Adalta limited is comparatively better than Acrux limited depicted from equity ratio figures. Thus implies that shareholders of Adalta limited is contributing to the company for financing its assets in higher proportion compared to Acrux limited. However, the total amount of equity of Acrux limited is significantly higher than Adalta limited. Lower equity ratio on other hand, is indicative of higher risk to creditors and they are more prone to losses as they pay large portions of their earnings in making payment to creditors. Hence, it is preferable to have higher equity ratio that enable them to obtain loans from financial institutions and improve the credit worthiness of company.

Looking at values of debt to equity ratio for Adalta limited, it can be seen that ratio has reduced from 0.184 in year 2016 to 0.044 in year 2017. This fall in ratio is attributable to the fact that there has been increase in amount of total equity as well as total liabilities. Debt to equity ratio for Acrux limited on other hands stood at 0.216 in year 2016 compared to 0.077 in year 2017. This figure is indicative of the fact that there is considerable decline in the debt to equity ratio that is driven by fall in total amount of total liabilities from $ 9482000 in year 2016 compared to $ 3381000 in year 2017. Having a lower debt to equity ratio implied that the business is financially stable. When comparing the financial position of both the organizations using debt to equity ratio, it can be inferred that company with higher debt to equity ratio is regarded as good when the debt obligations are is serviced using leverage that helps in increasing the return generated from equity. In this case, debt to equity ratio of Acrux limited is favorable as against Adalta limited. Therefore, from the above analysis, the overall long term solvency position of Adalta limited is favorable compared to Acrux limited.

Analysis of efficiency position:

Analysis of efficiency position:

Efficiency position of company is evaluated by analyzing the accounts receivable turnover, asset turnover ratio and accounts payable turnover. This particular ratio intends to measure the efficiency of business to collect its receivables. Higher ratio implies that receivables are collected by organization at more frequent basis and there is more likelihood that credit sales would be collected (Moffett et al. 2014). Accounts receivable turnover for Adalta limited has been computed at 0.832 in year 2016 compared to 1.056 in year 2017. This increase in value is attributable to a significant increase in revenue generated and increase in accounts receivable. Efficiency of Adalta limited in collecting its receivables has increased in year 2017. For Acrux limited, accounts receivable turnover ratio has reduced from 5.971 in year 2017 compared to 4.256 in year 2016. It can be seen that revenue generated by Acrux limited in year 2017 has reduced considerably whilst increase in total amount of account receivable. A fall in ratio provides an opportunity to collect old accounts receivable that is unnecessarily tying up in the business. Such lower ratio might be due to absence of any credit policy and they might have customers who are not making payment on time.

Assets turnover ratio indicates the ability of organization to produce sales efficiently and companies having higher ratio would require can carry out their operations with fewer amounts of assets and equity (Perotti and Wagenhofer 2014).  

Now, looking at the figures of assets turnover ratio for Adalta limited, value has declined considerably from 0.54 in year 2016 compared to 0.243 in year 2017. This fall in ratio is due to declining revenue and increase in considerable amount of total assets. Such fall in the ratio is reflective of the fact that company requires more assets for generating more sales and thereby depicts that the assets are not utilized efficiently. Assets turnover ratio for Acrux limited on other hand is computed at 0.535 in year 2016 compared to 0.506 in year 2017. It is indicated by the figure that there has been fewer fall in the asset turnover ratio indicating that assets are not as efficiently utilized in year 2017 as it was utilized in year 2016. Assets are not used optimally for generating revenue. Comparing the ratio of these two companies, it can be seen that asset turnover ratio for Adalta limited is significantly lower than Acrux limited and therefore, the assets are not efficiently utilized by former in generating revenue.

Accounts payable turnover ratio is implies the time taken by organization for making payments to their suppliers. A fall in ratio is indicative of the fact that payment to suppliers are made slowly as the financial condition is not suitable enough to make payment. It is always preferable on part of organization to have higher ratio compared to lower ratio.

Accounts payable turnover ratio for Adalta limited stood at 7.908 in year 2016 as against 12.587 in year 2017. This figure indicates that there is increase in ratio depicting that the ability of company for making payment to its suppliers have increased and higher ratio can be used by organization for negotiating favorable credit terms in future. The payment to suppliers is made on prompt basis by organization depicting that enough money is available for making the payment.  Such availability of enough money is because of increase in total amount of revenue generated from operations of business (Kovács and Gál 2017). This increase in accounts payable ratio is also attributable to credit terms allowed to suppliers by organization. Adalta limited does not provide longer credit period to the suppliers for making the payment. Furthermore, it is always desirable to have higher ratio. Now, looking at the value of ratio for Acrux limited, it can be seen that it is computed at zero. This is because no cost of services has been incurred by organization in the recent years. From the analysis of above figures pertaining to efficiency ratios, it can be inferred that Acrux limited is more efficient in generating revenue using its assets compared to Acrux limited.

Analysis of profitability position:

Profitability position of companies is evaluated by analyzing the ratios such as gross margin, net profit margin and return on assets. Gross profit margin is the measure of profitability that depicts the proportion of gross sales made in relation to sales made. It is favorable on part of organization to have higher gross profit margin. Looking at the figures of Adalta limited, it can be seen that value of gross profit margin is computed at -89.30 in year 2016 as against -82.89% in year 2016. The negative figure is indicative of the fact that revenue generated is significantly lower than cost of sales by Adalta in both the years. There has been considerable increase in total cost of sales along with increase in revenue for both the years. However, the rate of increase in revenue is higher than increase in cost of sales resulting in reduction of gross loss generated in year 2017 as against 2016. When looking at gross margin figures for Arcux limited, it can be seen that the gross profit generated remained constant at `100% for both the years and there are no cost incurred in making sales (Swift and Piff 2016). However, the total amount of revenue generated has reduced from $ 2855700 in year 2016 to $ 23934000 in year 2017. The negative value is indicative of the fact that the costs of sales are not at all managed by company.

When computing net profit margin that is attributable to Adalta limited stood at -155.71% in year 2016 compared to -143.95% in year 2017. There has been fall in net loss generated due to increase in revenue derived from operations of company as against the net loss generated. Looking at the net profit figures for Acrux limited, there is significant fall in value from 45.46% in year 2016 to -1.02% in year 2017 respectively. This negative value is attributable to net loss that is generated in year 2017 of amount $ -243000 as against amount of $ 12981000 in year 2016. This negative value is reflective of the fact that company not at all efficient in converting sales into actual profit and controlling cost. In this regard, the position of Acrux limited is better as compared to Adalta limited. Acrux limited is more efficient in converting sales into actual profit and controlling costs.

Return on assets measures the efficiency of management in using the assets for generating profit. Higher ratio is preferable as it depicts that resources are utilized properly for generating income and the business is more profitable if higher values are earned by company on its assets. Return on assets of Adalta limited stood at -84.09% in year 2016 as against -35.01% in year 2017. It is indicated by the figures that the amount of total assets for generating income has increased. For Acrux limited, return on asset ratio has reduced from 24.32% in year 2016 compared to -0.51% in year 2017. This is due to fall in total amount of assets along with net loss generated in year 2017.

Business is more profitable if there is value of return generated by assets. An increasing trend of profitability ratio that company’s profitability in increasing. However, it is suggested from the figures computed that the performance of company is not aligned with the capital that is invested in the business in the form of assets. Now, comparing the profitability position of both the companies, it can be seen that Acrux limited is more efficient in generating profits by utilizing their assets.

Analysis of market value:

Market value of companies is evaluated by analyzing the ratios such as price to earnings and dividend yield rate. Such ratios are used for evaluating the current share price of companies help in Australian stock exchange. This particular tool is used by company in determining whether the share price of company are under priced or overpriced (Amir et al. 2015).

Price to earnings ratio is used by investors for evaluating the earnings potential of company and whether the shares are under priced and overpriced. This ratio decides how many earnings are willing to be paid by investors for the shares and helps in establishing direct relationship between earnings and market price of company. For Adalta limited, price to earnings ratio has increased from -0.83 in year 2016 to -8.89 in year 2017. It can be inferred from figure that there is considerable improvement in value of price earnings ratio and this increase in value depicts that investors are willing to pay more for shares of company and a positive future performance is indicated by higher values. This improvement in price to earnings ratio is because of value of earning per share that improved from -0.3259 in year 2016 to -0.0315 in year 2017. Moreover, the market value of share has increased in recent year. For Acrux limited, the value of price earnings ratio has deteriorated from 9.23 in year 2016 to -15 in year 2017. This fall in value is because of fall in earning per share of company from 0.078 in year 2016 to -0.015 in year 2017. It is inferred from figure that investors does not expect the performance of company to improve in future as the current performance is poor as indicated by the value of earning ratio.

Dividend yield ratio is the proportion of market share that the company is willing to make payment to its shareholders by way of dividends (Caselli and Gatti 2017). This particular ratio is considered important to investors who have the intention of purchasing shares for earning dividend income. Now, the value of dividend yield rate for Adalta limited stood at 0% for both the years. The value of ratio is zero because no dividend is paid to the shareholder of company for two consecutive years. Stockholders of company have not received dividend and this is indicative of the fact that not a single percentage of market price of share is distributed by company by way of dividend.  

Looking at the figures of Acrux limited, it can be seen that dividend yield rate stood at 8.33% in year 2016 as against 0% in year 2017. This drastic fall in value from 8.33% to 0% is because of the fact that company has not paid any amount of dividend to its shareholder in year 2017. Moreover, there was fall in market value per share from 0.72 in year 2016 to 0.225 in year 2017. Such a significant fall in value of dividend yield of Acrux l,imited is because of fall in value of dividend down to zero that has the ultimate impact on the market value of stock. Declining value of dividend yield is not always regarded as unfavorable situation because higher dividend value might reduce the future amount of dividend that would have impact on the market value of stock negatively.

Recommendation:

From the above analysis, it can be inferred that Adalta limited is more efficient in meeting its short term obligations using current assets such as cash and cash equivalent and inventories compared to Acvrux limited. For the long term solvfecny position, it is recommended to Acrux limited that they should reduce the total; amount of liabilities in light of declining total assets. The efficiency of Adalta limited should be increased so that enough returns are generated using the assets of organization. Furthermore, it is required by Adalta limited to lower the cost of sales by way of sourcing the raw materials at lower cost from suppliers.

Conclusion: 

It can be inferred from analysis of all the ratios above that the overall performance of Acrux limited and Adalta limited in terms of solvency and efficiency position. However, from investment viewpoint by investors, making investment in both the organization does not seem attractive in the current year because no amount of dividend is being paid on shares. On other hand, the market value of shares of Adalta limited is more compared to Acrux limited at value of 0.28 as against 0.025. Therefore, it would be better for investor to make investment in shares of Adalta limited in current scenario.

The report is prepared for evaluating and comparing the performance and operations of two companies listed on Australian stock exchange. Financial performance of companies is done by using the technique of fundamental analysis. For the evaluation of performance, two companies operating under the biotechnology, pharmaceutical and life science industry are chosen. Adalta limited and Acrux limited are the two companies for which the analysis is done by extracting the information from latest year financial statements.

Adalta limited is a public biotechnology company of Australia that is primarily involved in commercialization and development of i body technology platform and having an initial focus on treating of fibrotic diseases. It is a highly innovative development company engaged in development of drugs having the potential to treat the challenging medical conditions. Acrux limited is a pharmaceutical company that helps in development and commercialization of generic and specialty topical pharmaceuticals. Some of the marketed products of company involve Evamist, Axiron and Lenzetto. A range of generic products is currently being developed by company for US market by leveraging manufacturing sites, on site laboratories and commercial and clinical experience that helps in bringing affordable products to the market. Comparison of performance of these two companies is done in terms of five aspects by determining the liquidity ratios, financial leverage ratios, efficiency turnover ratios, market value ratios and profitability ratios.

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