This Business Valuation and Financial Analysis Report targets to critically analyze the financial statements of InvoCare Pty Ltd., a leading international provider of funeral, cemetery, crematorium, and related services. This report assess the financial statements of InvoCare by adopting:
Financial Statements consists of crucial documents such as Income Statement, Statement of Financial Position, and Statement of Changes in Equity and Statement of Cash flows. Financial Statements serve the information needs of various stakeholders and each stakeholder’s need for information is different from another stakeholder. For example, the company itself may use the financial statements for making various operational and financial decision making. The government is concerned about the tax liability aspect in the financial statements while the investors and researchers are concerned with the performance and stability of the company and focuses on relevant information in the financial statements. Reformatting of the financial statements refers to an act of making the financial information reorganized in such a way that depicts various aspects of business in a more meaningful and accurate way (Bizfluent, n.d.). The first 2 pages of appendix contains detailed reformatted financial statements which can be used for the purpose of analyzing ratios.
Ratio analysis involves application of quantitative techniques in analyzing the financial information of a company by establishing and understanding the plausible relationship among various items within the financial statement and in another financial statement. Ratio analysis is instrumental in evaluating performance of the company in terms of company’s operations, financial performance, liquidity, efficiency, solvency and profitability (Investopedia, n.d.).
The following ratios are computed as a part of analysis of financial statements of InvoCare
Revenue growth (or) sales growth refers to percentage by which the sales volume of the company’s products or services has grown, during the intermittent period (say from year to year, or any other period under conideration) (BusinessDictionary.com, n.d.). InvoCare has excelled in terms of revenue growth since the company achieved steady growth in revenue in absolute terms. However if we consider the relative growth rate, the growth rate of the company is declining as depicted in figure 1.1
In the light of fact that the cemetery land is limited in supply in Australia, the main area of operations of InvoCare and with an estimated increase in burial fee, the company should gear up and increase its sales in order to retain its position as a leading funeral company in the market. The overall growth rate of funeral industry in Australia during the same period is 2.5% (Ashtonmanufacturing.com.au, n.d.) and the company has fallen below the industrial average for the first time in last 5 years.
Dividend growth rate is the most important metric which is closely observed by a marginal investor. Dividend growth rate is the annualized percentage of rate at which the dividend paid out for a particular stock grow ywar after year. InvoCare is doing pretty good when it comes to payment of dividend to investors. The growth rate of the company is continuously more than the industrial average dividend growth rate of 1.2% (Research, n.d.).
Profit margin is the percentage of profit earned per $ revenue generated. In other words it refers to how much percentage of sales has turned into profits (Investopedia, n.d.). The company has clearly outsmarted the industry by scoring more in each and every year during the past 5 years. While the industrial average is comfortable 10.31%, the rates pertaining to each of the year between and including 2013 and 2017 are given in 2.1.
InvoCare’s performance in comparison to industry is better. While the industrial average is just 3.92%, the lowest recorded RoA of the company is 5.12% in the year 2017. However InvoCare’s comparison with self exposes the fact that the RoA of the company is showing declining trend since 2016 where it saw peaks of RoA (at 6.85%). The company should increase the operational efficiency of the assets to have a steady increase in RoA and to utilize the available assets to the optimum level. The RoA of the company is depicted in figure 2.2
Return on equity is the financial metric which measures financial performance by dividing net profit attributable to equity shareholders divided by shareholders’ equity (Investopedia, n.d.). In other words, it is the percentage of return per $ invested by the equity shareholder and accumulated thereon. While maintaining better rate than the industry, the ROE of the company is continuously declining and is a concern. The decline is depicted in figure 2.3 below
Let us analyze the reason behind the decline in Return on Equity with the help of DuPont Analysis. As per DuPont Analysis, the ROE is function of Profit Margin, Asset Turnover and Proprietory Ratio (the inverst of which is Equity Multiplier) (Elearnmarkets – Financial Market Learning, n.d.).
As observed above, net profit margin is inclining and hence is certainly not contributing to the decline of ROE. Let us look at the equity multiplier. The Equity multiplier for the past 5 years is as follows:
|
Year |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Proprietary Ratio (PR) |
0.29 |
0.30 |
0.31 |
0.32 |
0.35 |
|
Equity Multiplier = 1 / PR |
3.45 |
3.33 |
3.23 |
3.125 |
2.857 |
Here we can see that the equity multiplier is declining continuously thereby resulting in decline of Return on Equity. The company should maintain proper capital structure to ensure that the Return on Equity is enhanced.
Return on Net Operating Assets is nothing but the percentage of return generated by $ invested in operating assets of the company. It is measured as proportion of net Profit to the aggregate of fixed assets and net working capital of the company (Investopedia, n.d.). The RNOA of the company is declining after reaching peak at 15.62% in 2016. This may due to decrease in operational efficiency of operating assets. The Company should optimize the utilization of assets.
Asset turnover is a financial metric that measure the value of company’s sales or revenues relative to the value of assets (Investopedia, n.d.). In other words, it is the ratio of sales generated per $ invested in operating assets of the company. While there is no such value which can be said to be an ideal asset turnover ratio, it is largely dependent upon the industry with in which the company operates. The asset turnover of the company is not up to the mark as it is declining. There is much scope for improvement and the company should utilize its assets maximum to achieve better sales growth rate as well as Return on Equity.
The financial leverage is nothing but the degree or extent till which the company deploys fixed interest bearing securities (Investopedia, n.d.). The higher the portion of debt in total assets, the higher the financial leverage will be. Financial leverage is the indicator of financial risk to the investor as higher debt implies higher borrowing costs and hence lower EPS. The financial leverage of the firm decreased over the period of past 5 years and the main reason for the decrease is the accumulated profits. The decrease in financial leverage results in higher EPS to the shareholder and hence is a positive sign from the perspective of an investor who wants to invest in equity.
Current Ratio is a metric which measures the capacity of the company to meet its short-term and long-term commitments. It is computed as current assets divided by current liabilities (Investopedia, n.d.). While there is no value that can be treated as ideal for current ratio, any value which is greater than 1 will be treated as healthy sign since the company will at least be in a position to settle its immediate obligations. The current ratio of InvoCare is lesser than the industrial average of 1.20 across all the years thereby highlighting the major weakness of the company. The company may fall short of its obligations and hence the company should consider maintaining adequate gap between the current assets and current liabilities.
Quick ratio measures the capability of an entity to meet its short-term obligations with all its liquid assets available (Investopedia, n.d.). It is also known as acid test ratio. The aspect that differs quick ratio from current ratio is that the current ratio considers current assets such as inventories and prepaid expenses as part of numerator the quick ratio is more specific and allows only those current assets which can be converted into cash on immediate basis. Therefore inventory which take substantial period of time to realize cash and prepaid expenses which will never get converted into cash are eliminated from the total of current assets and is considered as the numerator for computation of quick ratio. While there is no value which can be said to be ideal quick ratio, usually the value of quick ratio should be greater than 1 and otherwise it can be treated as an inability of the company to meet its short term debts. The quick ratio of the company is dissatisfactory as it couldn’t surpass 1 in any of the previous 5 years which means that the company has no ability to discharge all of its short-term obligations at a time. This poses a serious threat on the life of the company as the company may become insolvent.
The cash ratio computes the proportion of cash (and its equivalents) available to discharge its current liabilities. It is helpful in computing the company’s ability to repay all the short term obligations of the company. It is computed as cash and cash equivalents divided by current liabilities. Cash ratio of company alone by itself cannot predict anything. It should be accompanied with industrial averages or cash ratio of competitor or cash ratio of previous year of the same company. Sometimes cash ratio less than 1 indicates that the company may have the risk of financial difficulty (Investopedia, n.d.).
Conclusion of Ratio Analysis:
The overall performance of InvoCare is a little on the higher side. In areas such as profitability and always surpassing the industrial average. While in cases of operational efficiency and solvency, the company lags behind the industry. Especially speaking about the liquidity of the company as analyzed using the cash flow ratios, the quick assets of the company are not in a position to settle the short-term obligations of the company.
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Investopedia. (n.d.). Ratio Analysis. [online] Available at: https://www.investopedia.com/terms/r/ratioanalysis.asp [Accessed 18 Dec. 2018].
Ashtonmanufacturing.com.au. (n.d.). The latest findings on the state of the Australian funeral industry | Ashton Manufacturing. [online] Available at: https://ashtonmanufacturing.com.au/the-latest-findings-on-the-state-of-the-australian-funeral-industry/ [Accessed 18 Dec. 2018].
Research, Z. (n.d.). Should I Invest in stocks in the funeral services Industry? – Zacks.com. [online] Zacks Investment Research. Available at: https://www.zacks.com/stocks/industry-rank/industry/funeral-services-78 [Accessed 18 Dec. 2018].
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Investopedia. (n.d.). Asset Turnover Ratio. [online] Available at: https://www.investopedia.com/terms/a/assetturnover.asp [Accessed 18 Dec. 2018].
Investopedia. (n.d.). Return On Net Assets – RONA. [online] Available at: https://www.investopedia.com/terms/r/rona.asp [Accessed 18 Dec. 2018].
Investopedia. (n.d.). Financial Leverage. [online] Available at: https://www.investopedia.com/walkthrough/corporate-finance/5/capital-structure/financial-leverage.aspx [Accessed 18 Dec. 2018].
Investopedia. (n.d.). Quick Ratio. [online] Available at: https://www.investopedia.com/terms/q/quickratio.asp [Accessed 18 Dec. 2018].
Investopedia. (n.d.). Cash Ratio. [online] Available at: https://www.investopedia.com/terms/c/cash-ratio.asp [Accessed 18 Dec. 2018].
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