The three main component of balance sheet are asset, liability and equity. If these are analyzed by the investor carefully it can help him evaluate the true performance of the company.
Cash, equipments, properties and other assets are owned by the company with the intention to earn profits and increase future wealth. Evaluation of effectiveness of assets in the balance sheet can be done by assessing the Return on Asset (ROA). Asset are considered as investment to earn future profit, Return on Asset should be higher than rates paid by other investments, also ROA should be higher than the rate of borrowed funds in the business.
Total assets normally remains stable in the company therefore increasing ROA shows higher profitability whereas decreasing ROA indicates less profitability.
Return on asset = Operating Profit (EBIT)
|
Particular |
2012 |
2013 |
2014 |
|
Total Assets |
$53906 |
$74164 |
$80426 |
|
Operating Profit (EBIT) |
$12645 |
$22865 |
$20358 |
|
ROA (Refer excel) |
23% |
31% |
25% |
(Source: Annual Report)
ROA is used to measure ability of the company to generate profit. Total Assets of the Nick scali is increasing every year however the earnings in 2013 is considerably low with good returns however operating profit of the company increased in 2014 but due to increase in assets of the company the ROA was reduced.
While evaluating the balance sheet liabilities plays a supporting role. Liabilities are obligation to be paid to another party. Liabilities can be divided in current liability and noncurrent liabilities. It can include short term liabilities and long term liabilities. Decreasing the amount debt indicates good sign. When the debts in the company are higher than the asset it requires more diligence to be examined. If there is more debt in relation to amount of interest required be paid on debt there are risk that company can go bankrupt.
Solvency ratio, return on capital employed can be used to analyze the liabilities of the company.
|
Particular |
2012 |
2013 |
2014 |
|
EBIT |
$12645 |
$22865 |
$20358 |
|
Capital Employed |
$31,162 |
$45,686 |
$49,273 |
|
Total Liabilities |
$26553 |
$37830 |
$40296 |
|
Share Holders Equity |
$27353 |
$36334 |
$40130 |
|
interest |
$3621 |
$6863 |
$6122 |
Return on capital employed = EBIT
Capital Employed
Debt-equity ratio = Total Liabilities
Shareholders equity
Debt to Asset ratio = Total Debts
Total Assets
|
Particular |
2012 |
2013 |
2014 |
|
ROCE |
41% |
50% |
41% |
|
Debt to Asset Ratio |
6% |
9% |
8% |
|
Debt-equity ratio |
$0.97 |
$1.04 |
$1.00 |
(Source: Excel Sheet)
Debt to asset ratio is used to measure the overall risk of the company.
Equity is the difference between total assets and total liabilities. Main components of equity are retained earnings and paid up share capital. Return on equity is an important ratio while considering the equity component of the balance sheet. ROE measures the income earned on its equity. ROE is sometimes also referred as return in investment (ROI).
Return on investment = Net Income
Total Equity
ROE is considered as a helpful tool while evaluating balance sheet since it compares relationship between profitability, financial leverage and asset management as all these have a positive impact on ROI.
|
Particular |
2012 |
2013 |
2014 |
|
Net income |
$9,024 |
$16,002 |
$14,236 |
|
Total equity |
$27353 |
$36334 |
$40130 |
|
ROE (Refer Excel) |
33% |
44% |
35% |
(Source: Annual Report)
Income statement helps in comparing the income of the company as against the expenses. Operating income, EBIT, Net income and cash flow are the important calculations while evaluating the income against the expenses.
|
Particular |
2012 |
2013 |
2014 |
|
Operating income |
$22,298 |
$25,847 |
$27,457 |
|
EBIT |
$12645 |
$22865 |
$20358 |
|
Net income |
$9,024 |
$16,002 |
$14,236 |
|
cash flow |
$7,697.00 |
$14,268.00 |
$12,289.00 |
(Refer excel for calculations)
Operating income does not include investment in other firms and non recurring items. It represents the income earned from the core operations as reduced by day to day expenses. Since the operating income of the company is increasing it shows working base of profitability of the company is increasing.
EBIT is a major component of income statement of the company; it helps in determining the financial performance of the company. Since the EBIT of the company is increasing it shows the company is performing well.
Net income is the total profit of the company, since it is calculated after considering all the expenses of the company it is an important tool to measure the profitability of the company. Since in the given company
Cash flow is also crucial for the companies as it ensures that the companies have enough cash to pay its creditors, employees and others on time. Since Nickscali has increasing cash flow it shows that the company has enough cash to pay to its creditors.
Sales is the most common and important tool to earn profit by the company. Evaluation of inventory thus becomes necessary to evaluate the performance of the company. One way in which inventory can be evaluated is by looking at inventory turnover ratio. Another ratio used is inventory to sales ratio. Increase in inventory to sales ratio showcase investment in inventory is increasing however the sale is decreasing and vice versa.
Inventory turnover ratio = Cost of goods sold
Inventories
Inventories to sales = Inventories
Revenue
|
Particular |
2012 |
2013 |
2014 |
|
Inventory |
13,649 |
14,569 |
19,013 |
|
Sales revenue |
109,391 |
127,431 |
141,442 |
|
COGS |
42,883 |
49,925 |
56,019 |
|
Inventory turnover ratio |
3.14 |
3.43 |
2.95 |
|
Inventory to sales |
0.12 |
0.11 |
0.13 |
(Refer excel for solution)
This expenditure is done by the company to purchase or renovate the assets like property, equipments etc. Cash flow to capital expenditure ratio is used to measure the ability of the company to acquire long term assets by utilizing it free cash flows.
Cash Flow to Capital expenditure = Cash flow from operations
Capital Expenditure
|
Particular |
2012 |
2013 |
2014 |
|
Cash flow from operation |
$12853 |
$19703 |
$22416 |
|
Capital expenditure |
$2203 |
$9268 |
$2933 |
|
Cash flow to cap exp ratio |
5.83 |
2.13 |
7.64 |
(Refer excel)
Higher Cash flow to capital expenditure ratio is considered as a good sign and vice versa. In the present case the ratio in 2013 fallen considerably due to high expenditure in relation to the cash flows which is not a good indicator however the ratio in 2014 again raised considerably which reflects that the company has sufficient capital to fund its operations.
Account receivable means outstanding amount the company owes to its customer for the product or service sold by it for which payment has not been received. Company should have good collection policy to ensure timely collection of cash by the company. Accounts receivable turnover ratio is used to measure the effectiveness of collection process of the company.
Accounts receivable turnover ratio = Annual credit sales
Accounts receivable
Accounts payable means amount owed to company for the products or services used by it. Account turnover ratio is used to measure the rate at which company pay off to its creditors.
Accounts payable turnover ratio = Total credit purchase/ COGS
Accounts payable
|
Particular |
2012 |
2013 |
2014 |
|
Total sales |
109,391 |
127,431 |
141,442 |
|
COGS |
42,883 |
49,925 |
56,019 |
|
Accounts receivable |
808 |
6,397 |
164 |
|
Accounts payable |
20,660 |
23,465 |
27,407 |
|
Accounts receivable turnover ratio |
|||
|
Accounts payable turnover ratio |
2.08 |
2.13 |
2.04 |
When accounts payable turnover ratio reduces it shows that the company takes longer period of time to pay to its suppliers as compared to the previous year. Nickscali turnover ratio in 2012 was 2.08 which has increased to 2.13 in 2013 which means company was paying off its supplier relatively faster in 2013 however in 2014 the ratio has fallen to 2.04 which is lower than the ratio in 2011 which indicates slow processing of payments to suppliers by the company.
Sale of Nick Scali has shown an increasing trend in all the consecutive years from 2011 to 2014. Sale for the year ended June 2012 was $109391000 which has shown increase of 9.4% as compared to 2011, similarly sale in 2013 and 2014 was $141442000 and $127431000 which has increased by 16.5% and 11% respectively.
There were no significant changes in the last three years in the state of affairs of the company. No significant circumstances have arisen in any financial year which has been evaluated in this report.
Debt equity ratio (Already discussed above)
Current ratio: current ratio is used to measure the company’s ability to pay its current liabilities using its current asset.
Current Ratio = Current Assets
Current Liabilities
|
Particular |
2012 |
2013 |
2014 |
|
Current Assets |
35,751 |
48,545 |
55,180 |
|
Current Liabilities |
22,744 |
28,478 |
31,153 |
|
Current Ratio (Refer excel) |
1.57 |
1.70 |
1.77 |
(Source: Annual report)
Current ratio of 1 and more than one is considered as good liquidity condition of the company. Since the company has more than 1 the company is in good liquidity condition.
Return on equity (ROE): Discussed above
Liquidity ratio: liquidity ratio is divided in two current ratio and quick ratio. Current ratio is already discussed.
Quick ratio: Quick ratio is calculated by dividing quick assets by current liability.
Quick Ratio = Quick Assets
Current Liabilities
|
Particular |
2012 |
2013 |
2014 |
|
Quick assets |
22,102 |
33,976 |
36,167 |
|
Current Liabilities |
22,744 |
28,478 |
31,153 |
|
Quick Ratio |
0.97 |
1.19 |
1.16 |
Quick ratio shows the assets readily available to pay off its short term liabilities. Quick ratio of Nick Scali is improving in every year. Hence it can be said that the company is in good liquidity condition.
Profitability Ratio: ROE, ROA and EPS are the major ratios calculated under profitability ratios. ROE and ROA are already discussed above in the report.
Earnings per share are the amount of profit allocated to the share holders of the company on the equity shares outstanding at the end of the year.
EPS = Profit attributable to equity share holders
Number of equity shares
|
Particular |
2012 |
2013 |
2014 |
|
Profit attributable to equity share holders |
9,024 |
16,002 |
14,236 |
|
Number of equity shares |
81,000,000 |
81,000,000 |
81,000,000 |
|
EPS |
0.11 |
0.20 |
0.18 |
EPS is majorly considered while investing in the company. Since the EPS of Nick Scali is in increasing trend, it can be considered as a good option for investment.
KPI defines the factors company should benchmark and monitor. It is used to evaluate the performance and success of the organization. After analyzing the above data KPI of Nick Scali can be
Since in the recent time the online sale have become popular and people are relying and ordering small furniture items online company should focus on its online sale and make plans accordingly. Company also opened two stores which will also lead to increase in the sale.
At the end the last thing which is used to measure the performance and be successful is to increase the profit.
Net income = Sale – cost – operating expenses.
|
Particular |
2012 |
2013 |
2014 |
|
Net income |
$9,024 |
$16,002 |
$14,236 |
Since the net profit of the company has increased consistently it can be said that the company is maintain it profitability. However the net profit of the company decreased due to capital expenditure done by the company during this period.
This tells the investor that the company is pricing appropriately for goods and services.
Gross profit margin = Revenue – COGS/ Revenue
|
Particular |
2012 |
2013 |
2014 |
|
Total sales |
109,391 |
127,431 |
141,442 |
|
COGS |
42,883 |
49,925 |
56,019 |
|
GP margin |
0.61 |
0.61 |
0.61 |
Since the company is maintaining the same GP ratio, it can be said the company has good pricing strategy.
Current ratio describes the ability of the company to pay bills. The ratio of 1.5 to 3 is considered as standard. Current ratio of less than one is considered that the company does not have enough cash to pay its short term liabilities.
Since the company has current ratio of 1.77 it is considered in good liquidity condition.
References
Nick Scali, 2012, Annual report, accessed on 29 April from: https://member.afraccess.com/media?id=CMN://2A695998&filename=20120921/NCK_01335517.pdf
Nick Scali, 2013, Annual report, accessed on 29 April from: file:///C:/Users/Akansha%20Sogani_ABSAS/Downloads/c6093475-de6e-41d0-a7e0-2d129c738660-NCK758001.pdf
Nick Scali, 2014, Annual report, accessed on 29 April from: https://www.nickscali.com.au/media/wysiwyg/pdfs/AnnualReport2014.pdf
Fast trac, 2006, Evaluate Performance: Balance Sheet, accessed on 29 April from: file:///C:/Users/Akansha%20Sogani_ABSAS/Downloads/Evaluate%20Performance%20Balance%20Sheet%20(2).pdf
Business Builder, 2017, how to prepare and analyze a balance sheet, accessed on 29 April from: https://www.zionsbank.com/pdfs/biz_resources_book-2.pdf
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