Comparative Analysis Of Two Public Limited Companies On ASX

Owners Equity

In this study, the annual report of two companies trading in Australian Securities Exchange has been taken to carry out the study. The two companies which has been taken are Kathmandu Holdings Limited and the other one is Myer Holdings Limited. The code in which the company is traded in the Australian Stock Exchange is KMD and MYR for Kathmandu Holdings Limited and Myer Holdings Limited respectively. This research paper analyses and interprets the cash flow statement, owner’s equity and accounting for taxation of the two companies. Analysis of owner’s equity helps to understand how the book value of the equity of the owner has changed over a specific period of time (Coleman, Cotei and Farhat, 2016). Cash flow statement of an organization helps to understand the cash inflow and outflow of the organization through various activities. Finally, the statement related to accounting for taxation helps to find out various tax related information of companies.

Retained Earnings –The accumulated profits of any organization is known as the retained earnings. Myer Holdings Limited has an amount of $16,426,000 as contributed capital at the end of 2016 and the end of 2017 it has a contributed capital of $49,276,000. The change in the contributed capital is due to the profit, which has been generated by Myer Holdings Limited in 2017.

Contributed Equity –When the shareholder pays a particular amount to get hold of the share of that organization it is known as contributed equity. Contributed equity includes additional paid up capital as well as paid up share capital. At the end of 2016 Myer Holdings Limited has an amount of $739,329,000 as contributed capital whereas at the end of 2017 the contributed capital declined to the amount of $73,329,000. The reason behind the decline of the contributed capital is due to the issue of share capital and acquisition treasury amounting to $187000 and $196,000 respectively.

Reserves – Any organization keep or retain a portion of the accumulated profit for further expenses that a company may incur in the near future. At the end of 2016 the reserves of Myer Holdings Limited were -$11,056,000 whereas at the end of 2017 the amount Myer Holdings Limited has reserved is -$8,67,000. It can be concluded that the change in the reserve from 2016 to 2017 due to various reasons including the share scheme provision of employees and other comprehensive income.

Contributed equity –From the annual report of Kathmandu Holdings Limited it has been found that at the end of 2016 the contributed capital, which has been incurred by the company, amounts to $200,191,000 whereas at the end of 2017 the contributed capital changed to $200,209,000. It can be concluded that the increase in the contributed capital from 2016 to 2017 is due to the share capital issue (Kathmandu Holdings Limited, 2017).

Cash Flows Statement

Reserves – At the end of 2016 the reserves of Kathmandu Holdings Limited amounts to -$24,541,000 whereas at the end of 2017 it amounted to -$23,002,000. The change in this reserve is due to share based payment reserves (Kathmandu Holdings Limited, 2017).

Retained earnings- At the end of 2016 the retained earnings of Kathmandu Holding Capital were $149,893,000 and at the end of 2017, the retained earnings changed to $136,033,000. The change in retained earnings has occurred due to change in the profit of the organization and due to the dividend payments.

An ideal format of the debt and equity of a company should be in such a way where the debt of the company should be lower as compare to the equity of the company. More debt involves more payment of loan, which decrease the profit of any organization. In the table below, the debt-equity of both the company has been shown and the analysis is being done accordingly.

Table 1: Debt and Equity

	Myer Holding Limited	Kathmandu Holding Limited
Debt	42.89%	25.50%
Equity	57.11%	74.50%

From the above table it can be concluded that the debt-equity ratio of Myer Holding Limited is more as compared to the debt – equity ratio of Kathmandu Holding Limited. Thus, it can be said that Myer Holding Limited is earning more profit than Kathmandu Holding Limited.

Table 2: Items of Myer Holdings Limited

Items of cash flows	Change in items and reason for the changes
Payment to employees and suppliers. It is the cash outflow of the organization	The cash outflow has decreased by an amount of $170,816,000. This has occurred due to the disruption in the payment of employees and suppliers.
Receipts from customers are also one of the important cash flow component. It represents the cash inflow of the organization.	The cash flow statement shows that there is a decline in cash inflow amounting to $169,26,000 which says that there is a reduction in the total sales of the organization.
Another component is payment of interest. It reveals the cash outflow of the organization because interest is being paid by the organization on the principal amount of loan being borrowed (Chen and Teng, 2015.).	There is a decline in cash outflow amounting to $5,729,000 during the period.
Intangible assets are that asset of a company which is abstract in nature for example goodwill of the organization. Payment made for the intangible assets of the organization also includes cash outflow.	The cash outflow has increased by &12,326,000. This occurred due to more purchase of intangible assets by the company.
Payment of Tax is necessary for every organization so this also falls under the cash outflow because money is being paid by the organization.	Cash flow has increased by an amount of $7,390,000. It shows that the company has to pay more amount of taxes in the current year.
Purchase of plant, factory equipment, buildings and property. This also indicates cash outflow of the organization.	In this aspect the cash outflow has increased amounting to $47,973,000. It means that the company has purchased more number of fixed assets including plant, equipment etc in the current year.
Other income. This is the operating income of the organization and this is the cash inflow of the organization.	In the current period a decline in the cash inflow has been seen amounting to $71,000. It means that the company has not earned any operating income.
Dividend payment. It is the cash outflow of the organization because dividend is paid by the organization to its shareholders.	The cash dividend payment of the company has increased by an amount of $32,850,000. Thus, it means that the cash outflow of the company has increased.
Cash inflow due to the lease and other investing incomes.	The company has seen an increase in cash inflow by $14,902,000 because more number of lease and contributions was received on that particular year.
Investment in associates leads to cash outflow of the organization.	There has been a decrease in cash outflow amounting to $7,714,000.
Receive of interest is also considered to be the cash inflow of the company.	The company has witnessed a decline in cash inflow amounting to $7,714,000 because the interest earned is less in that particular year.
Repayment of debt or other borrowing is considered to be the cash outflow of the organization.	In that period there is a decline in the cash outflow of the organization amounting to $290,000,000. This means the company has lowered the amount of borrowing from any other entity.
Payment made on treasury shares. It also indicates the cash outflow of the organization.	In the current period the company has seen an increase in the cash outflow amounting to $196000. This means that the company has purchased more number of treasury shares in the current financial year.
Transaction costs which are proceeded from the issue of shares. It indicates cash inflow of the organization because cash is received when the shares of the company is issued by any other entity.	According to the cash flow statement there exists decline in the cash inflow amounting to $212,011,000. This indicates there has been no issue of the company’s share by any other entity or individual in the current year.
Other: Cash inflow of the organizations is mentioned here due to other financing activities.	In the current period the company has seen decline in the cash inflow amounting to $26000. This means the cash receipts of the organization has decreased as compared to the previous year.

Table 3: Items of Kathmandu Holding Limited cash flow statement

Items of Cash flows and explanation	Increase or decrease in various items of cash flows and the reason for these changes
Refunds from the income tax. It is considered to be the cash inflow.	In the current period the company has seen a decline in the cash inflow amounting to $1,357,000. This means that the company has received no significant amount of refund in tax in the current year.
Company receives interest and this is the cash inflow for the organization (Choudhary, Koester and Shevlin, 2016.).	In the current year, there has been an increase in the cash inflow amounting to $2000. This occurred due to the higher amount of interest being incurred.
Payment of tax- It is the cash outflow of the organization because the company has to pay a significant amount of tax each year (Campbell, 2015).	In the current period the company has seen a decline in the cash outflow amounting to $2,117,000. This means that the company has paid less amount of tax as compared to the previous year.
Payments made to suppliers and to the employees.	It has been seen that the company has witnessed a decline in the cash outflow amounting to $23,154,000. This means that the payment to suppliers and employment has decreased.
Payment of Interest- It is considered the cash outflow because payment has to be made by the organization itself.	The company has seen a decline in the cash flow amounting to $667,000. The reason behind this is the increase in the rate of interest of the organization.
Purchase of Fixed assets like land, building and factory equipment etc. This involves cash outflow of the organization (Hribar and Yehuda, 2015).	According to the cash flow statement there has been a decline in the cash outflow of the organization amounting to $9,310,000.  This means the company has purchased less number of fixed assets as compared to the previous year.
Repayment of loan- Loan which is taken by the organization should be repaid and this involves cash outflow of the organization.	The cash flow statement of the company has seen an increase in the cash flow amounting to $35,875,000. This means that the company has repaid the loan in the current year, which it has borrowed in previous years.
Payment of dividend- The company has to pay dividend to those who take company’s share and invest in the company (Wu, et al., 2016). This is cash outflow because the company has to pay cash to its shareholders.	It has been that in the current year that the cash outflow of the company has increased amounting to $8,060,000. This means that in the current year the company has to give more number of dividends as compared to the previous year.
Proceeds related to advances of loan- This indicates the cash inflow of the organization because the loan advances are borrowed by the organization (Mohanram, 2014).	The cash flow statement has seen an increase in the cash inflow amounting to $27,283,000. This indicates the company in higher amount borrows the loans.
Sale of fixed assets- The sale of fixed assets of the company includes sale of land, property, plant, factory equipment etc. This involves cash inflow of the organization because the company is getting money by selling the assets (Campbell, Downes and Schwartz, 2015).	It has been seen that there is a decline in the cash inflow amounting to $4000. This happened because the company has sold lesser number of fixed assets in the current period.

This kind of income statement shows the earnings and expenses which is not realized even at the end of the financial year. This generally happens if the transaction has not occurred (Black, 2016).

In the other comprehensive income statement of this company the two statements has been shown. They are the difference in the exchange on foreign transaction and the second one is cash flow hedges. They are not being shown in the income statement of the company. The meaning of cash flow hedge is the value of future cash inflow and outflow, which can be, incurred ore received by the organization in the future period of time. In a cash flow statement, the increase and decrease of the cash inflow and cash outflow is identified. In case of cash flow hedge organization cannot shown it in to the income statement as profit or loss because the amount is not realized at the end of the financial year.

On the other hand, the difference in exchange for the foreign transaction reveals or shows the gain or loss incurred by the organization due to the change in the value of currency of various nations in respect to the value of Australian currency. Organization record this as future foreign exchange receivable increased or future foreign exchange payable decreased. However, it cannot be recorded in the profit and loss statement of the organization if the amount is not realized at the end of the financial year.

Other comprehensive Income Statement

The cash flow hedge reserves of the organization movement are the exposure of the value change of the future cash inflow and outflow of the organization. In the current year the organization recognized the income amounting to $209000. It can be concluded that this amount cannot be mentioned in the profit and loss statement of the organization if the amount is not realized at the end of the financial year.

Table 4: Comparative Analysis on comprehensive income statement

	Kathmandu Holding Limited	Myer Holding Limited
Difference in exchanges on translation of foreign operations	$209000	$547000
Cash Flow hedges	$209000	$329000
Total comprehensive income	$418000	$876000

From the comparative analysis of both the company it can be identified that both the company has similar items when it comes comprehensive income statement but it can also be seen that the comprehensive income of Kathmandu Holding Limited is less than as compared to the comprehensive income of Myer Holding Limited.

If these items of comprehensive income are shown in the profit and loss statement of both the organization, then the profit which is attributable to the shareholder of the organization along with that retained earnings will also increase.

The other comprehensive income statement of the organization helps to increase the available information to make a change regarding the appropriateness of the investment (Gazzola and Amelio, 2014). It also helps to make decisions by the management department of the organization. So, it is very important to consider the comprehensive income statement of an organization when the management department of the organization formulates the performance evaluation of the organization.

Tax expenses are calculated by multiplying the appropriate tax rate of an individual or business by the income received or generated before taxes, after factoring in such variables as non-deductible items, tax assets, and tax liabilities. Recent year 2017, the tax expenses of the Myer Holdings are $18,274,000 until 30 June 2017 ((Myer holding limited, 2017). Next, the Kathmandu Holdings limited for the same year 2017 until 30 June 2017 is $16,395,000 (Kathmandu Holdings Limited, 2017).

Below here tabulated rates of the effective tax of Myer Holdings Limited and Kathmandu Holdings

Table 5: Calculation of Effective tax rate and PBT

	Myer holding limited	Kathmandu holding limited
Income tax expenses	$      18,274,000.00	$  16,935,000.00
Profit before tax	$      30,213,000.00	$  54,974,000.00
Effective tax rate	60.48 %	30.81 %

Hence can be concluded that Kathmandu Holding limited have lower effective tax rate than Myer Holdings limited, since its effective tax rate is much higher.

Tax assets and tax liabilities are two different entities, which occur at certain point of time when required. An asset on a company’s balance sheet that may be used to reduce any subsequent period’s income tax expense. Deferred tax assets can arise due to net loss carryover. Deferred tax liabilities generally arise where tax relief is provided in advance of an accounting expense/unpaid liabilities, or income. Recently both the companies showed deferred tax liabilities. Myer Holding limited of $9,817,000 and Kathmandu Holdings limited of $84,574,000. Kathmandu Holdings limited acquired timing differences due to its properties and its executive brand (Kathmandu Holdings Limited, 2017). Myer Holdings limited acquired timing differences due to its beneficial factors and highly reserve amenities (Myer holding limited, 2017).

Deferred tax liabilities	Myer holding limited	Kathmandu holding limited
At the end of year 2016	$  88,444,000.00	$    33,247,000.00
At the end of year 2017	$  84,574,000.00	$    34,027,000.00

	Myer Holding Limited	Kathmandu Holding Limited
Cash Tax amount	$27,795,000	$14,613,000
PBT	$30,213,000	$54,974,000
Cash tax rate	92%	26.58%

Accounting for Croporate Income Tax

From the above table, it can be inferred that Myer holding limited is having higher cash tax rate than the other.

	Myer Holding Limited	Kathmandu Holding Limited
Effective tax rate	60.48%	30.81%
Cash tax rate	92%	26.58%

Cash tax rate varies from the effective tax rate because it is considered the liability portion whereas effective tax shows the tax expenses of the organization (Gordon, et al., 2017). Effective tax on the other hand, affects the sum of income tax expenses made by the firm as per the norms of the tax authorities for that particular period and the amount of deferred taxes for that year (J. Lewellen and K. Lewellen, 2016).

Conclusion

From this research paper the items which generates the cash inflow and the cash outflow of the organization has been analyzed. The research paper has also helped to understand the topic of owner’s equity and its importance while carrying out the business operations. In this study the analysis on the comprehensive income statement of the organization is also done. The research paper has discussed about various important topic like cash flow hedging andits importance in a company. An analysis is being done on the deferred tax liabilities, effective tax rate of both the selected companies.

Reference List

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Campbell, J.L., 2015. The fair value of cash flow hedges, future profitability, and stock returns. Contemporary Accounting Research. 32(1), pp.243-279.

Campbell, J.L., Downes, J.F. and Schwartz, W.C., 2015. Do sophisticated investors use the information provided by the fair value of cash flow hedges?. Review of Accounting Studies. 20(2), pp.934-975.

Chen, S.C. and Teng, J.T., 2015. Inventory and credit decisions for time-varying deteriorating items with up-stream and down-stream trade credit financing by discounted cash flow analysis. European Journal of Operational Research. 243(2), pp.566-575.

Choudhary, P., Koester, A. and Shevlin, T., 2016. Measuring income tax accrual quality. Review of Accounting Studies. 21(1), pp.89-139.

Coleman, S., Cotei, C. and Farhat, J., 2016. The debt-equity financing decisions of US startup firms. Journal of Economics and Finance. 40(1), pp.105-126.

Gazzola, P. and Amelio, S., 2014. Is total comprehensive income or net income better for the evaluation of companies’ financial performance? Central European Review of Economic Issues – Ekonomická Revue. 45(3), pp. 39-51.

Gordon, E.A., Henry, E., Jorgensen, B.N. and Linthicum, C.L., 2017. Flexibility in cash-flow classification under IFRS: determinants and consequences. Review of Accounting Studies. 22(2), pp.839-872.

Hribar, P. and Yehuda, N., 2015. The mispricing of cash flows and accruals at different life?cycle stages. Contemporary Accounting Research. 32(3), pp.1053-1072.

Kathmandu Holdings Limited (2017) Annual report 2017. [online] Kathmandu Holdings Limited. Available at: <https://www.kathmanduholdings.com/wp-content/uploads/2012/08/Kathmandu-Annual-Report-2017_online.pdf> [Accessed 5 October 2018]

Lewellen, J. and Lewellen, K., 2016. Investment and cash flow: New evidence. Journal of Financial and Quantitative Analysis. 51(4), pp.1135-1164.

Mohanram, P.S., 2014. Analysts’ cash flow forecasts and the decline of the accruals anomaly. Contemporary Accounting Research. 31(4), pp.1143-1170.

Myer holding limited (2017) Annual report 2017. [online] Myer holding limited. Available at: <https://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_MYR_2017.pdf> [Accessed 5 October 2018]

Wu, J., Al-Khateeb, F.B., Teng, J.T. and Cárdenas-Barrón, L.E., 2016. Inventory models for deteriorating items with maximum lifetime under downstream partial trade credits to credit-risk customers by discounted cash-flow analysis. International Journal of Production Economics. 171, pp.105-115.