Harvay Norman Holdings Limited is an Australian incorporated company. Being a public listed company, its shares are traded on Australian Securities Exchange. It deals in products that include electrical, computers and communications, other furniture and appliances, both in a retail trade form and by giving franchisee to business owners. The following business report analyses the company’s financial performance with respect to capital structure, dividend history and share price trend over a period of five years (mid 2013-mid 2017) through various ratio analysis. The company doesn’t only operate in Australia but at various other countries being Ireland, New Zealand, Northern Ireland, Slovenia, Croatia, Singapore and Malaysia (Harvey Norman Holdings Limited, 2013).
CAPITAL STRUCTURE OF COMPANY
Any entity that functions its business requires money. There stand two possible sources of raising funds, debt and equity. Debt refers to the sum total of all the money be it for long or short term, that company has borrowed from outside sources in any form to finance its business. Equity on the other hand means the owner’s money, i.e. retained earnings, common stock and preferred stock. Capital structure of any entity depicts the way the company has backed its finances, i.e. the state of debt and equity in company’s overall finance structure. Debt to equity ratio is a common measure to analyse whether the capital structure is optimum or not (Gitman, Juchau,. and Flanagan, 2015).
The capital structure is optimum when it maximises the shareholder’s wealth. A company must resort to debt financing if its financial leverage is sound to reduce weighted average cost of capital. But if the operating incomes are not in line to cover the interest expense on debt financing, or the interest expense is already high it should resort to equity financing.
In case of Harvey Norman Holdings Limited, the company is under operating losses at a declining rate since 2013 to 2016 and a moderate level of operating profits in 2017. The interest expense could be seen declining, which indicates that company has drifted from debt financing to equity financing. Other signals also support the same observation as, the common stock has ever since 2012 shown an increased graph and retained earnings too with an exception of year 2015 have grown (Brigham, and Ehrhardt, 2013). This shows the efforts taken by management for changing their finance resort from debt to equity, to make its financial stability potent(Harvey Norman Holdings Limited , 2014).
The capital structure, as observed in the line of above discussion could be moderately optimal as there has been fundamental shift in the financing structure. Though there still lies the scope of improvement with regards the same. In the year 2017, as the earnings have improved, the long-term debt has been increased by the company to take the benefit of the deduction of interest expense, reducing the overall tax expense. It has also levered up the financial standing. The current liabilities also seem to have been paid off.
The revenue position of Harvay Norman holdings limited has shown continuous growth since 2013. But the same is not able to cope up with the rising cost of goods sold, sales and general administrative expenses and other operating expenses, with year 2017 being an exception. So, if latest year is to be highlighted, the company’s effectiveness seems to have improved and along with that, the company could take an action to increase debt funding to the extent it doesn’t degrades earning per share beyond target and strengthens financial leverage (Brigham, and Ehrhardt, 2013).
ANALYSIS OF DIVIDEND HISTORY
Dividend refers to the part of company’s profits after paying off all the expenses and taxes that is dispersed by the company to the shareholders. Dividend need not be in cash form only. All the publicly traded company strives to maintain a stable dividend policy. By stable dividend policy, one means that the company shall maintain a stable growth pattern in dividend distribution and at the same time shall consider that the current retained earnings are all not distributed but are invested back into the business as per needs. The balance retained funds can even be used in future to maintain stability (Harvey Norman Holdings Limited , 2015).
All the publicly traded company strives to maintain a stable dividend policy. By stable dividend policy, one means that the company shall maintain a stable growth pattern in dividend distribution and at the same time shall consider that the current retained earnings are all not distributed but are invested back into the business as per needs. The balance retained funds can even be used in future to maintain stability (Brigham, and Ehrhardt, 2013).
There exists nothing like a perfect dividend policy. It can be two different theories if talked from the view of both shareholders and company. The shareholders may want higher distribution of earnings as dividend, while the company may be requiring own funds to be invested back into the business. The company must achieve a balance between the controversies and attain such policy that maximises wealth and boosts share price.
It’s observed that even though there had been operating losses since 2013 except 2017, the net income available to common shareholders have shown a rising trend. This has lead to a growing earning per share pattern, even when the common stock increased in year 2016 and 2017.
The company had been observed regular in payment of dividends. The dividend amount seems increasing every year after 2012 with an exception being year 2016 and less growth in year 2017 (as new shares also issued). This shows almost stable policy of dividend payments being followed earlier, with certain ups and downs in the year 2016-17.
Over year 2012, the most important thing that can be observed is that out of the profits available for the common stockholders, more than half amount is being paid in form of cash dividends, which in a manner is an absolute advantage for the shareholders if they intent to receive regular income in form of dividends. But the critical assessment of it doesn’t sound satisfactory. The company is in much need of owned funds to firm the capital structure and this practice of dividend pay-out might act as hurdle (Ehrhardt, and Brigham, 2016).
As a better practice, the company should conduct a meeting with the stockholders to discuss with them its plans for investment of earnings to make future dividends strong and company’s foundation stable. On a common parlance an agreement should be reached between both management and stockholders to even out the dividend payment for a while till the financial stress comes to normal (Harvey Norman Holdings Limited , 2017).
ANALYSIS OF SHARE PRICE TREND
Any concern is said to have added value to the shareholders, only when its activities as a conglomerate aid in maximising shareholders wealth. This could only be achieved if the market price per share of the company’s share boost up. This will let the shares to be traded much frequently and add more people to the company (Gitman, Juchau,. and Flanagan, 2015). It is observed that Harvey Norman Holdings Limited has increased its share price since last five years. It is observed that in 2013, company had to face high down fall in its share price due to the reduced turnover of its business. After that, since 204, share price of company consistently increased and went down in 2018. The main reason of downfall in its share price in 2018 was based on the reduced profitability, less turnover and loss of its business (Laeven, and Valencia, 2013).
ATTRACTIVENESS OF COMPANY’S SHARES FOR INVESTMENT
Any company that’s trading publicly attract potential investors when it had some financial stability and shows growth potent. Harvay Norman Holdings Limited is operating effectively if we talk about the revenue of the concern. Apart from the revenue, the company has witnessed stable dividend pay-out to the stockholders. Even when the operating losses hit hard the finances, the company had risen with positive net income available for the shareholders and more than half of the same is even distributed as cash dividend to the shareholders. The company is on the verge to try capital restructuring which is evident from the financial trends to smoothen out its financial leverage (Prasad, et al. 2015).
Now, if an investor is lured with a benefit of proper and timely dividend receipt with a promising earning per share growth history, the company might seem attractive as a probable investment venture. But if an investor is examining the operating results, then he might take a setback from investment by observing continuous operating losses (Sanlorenzo, et al. 2015).
LIMITATIONS OF CURRENT ANALYSIS
RISK AFFECTING COMPANY’S INVESTMENT ATTRACTIVENESS
The operating effectiveness of the concerned entity is sceptical. On one hand the revenues are rising since 2012 and even the operating losses are declining with profit being made in year 2017, there seems issue in cash portion. A deep analysis of financial trends highlights the cash crunch that company is facing, even when company is performing well as compared to past. The expenditure is at higher side in this case including investments made, plant and equipment being purchased etc. As already discussed, any investor who is much fond of the past performance and digs deeper into the operating result may find it a bad investment option (Vogel, 2014).
ANALYSIS OF FIRM VALUATION BY MARKET
As any other commodity is valued by the market using the demand and supply forces, the firm’s value is also ascertained by the market using the demand and supply of its shares. The company whose shares are traded highly stands at a high valuation due to market price per share being high (Weygandt, Kimmel, and Kieso, 2015). But, this valuation doesn’t count the internal working conditions and methodology of the company like working environment, labourer’s satisfaction, pricing policy etc.
Much consideration is given to the financial and quantitative aspects rather than qualitative factors. Even though the qualitative factors aren’t reflected while valuation, but the operations of the company indirectly speaks about them in form of revenue, cost of goods sold and other administrative expenses. If the normal trend is followed, no questions are required to be raised on the valuation of the company as per the market, but if experts are to be involved then every subject matter affecting the value of the entity shall be perceived (Harvey Norman Holdings Limited , 2017).
It’s a matter of judgement on behalf of every investor to raise suspicion about the valuation or to invest with a faith looking into the budding efforts that the company is making (Zhu, 2014).
Conclusion
The Harvey Norman Holdings Limited has faced high loss in its business. The determination of the optimum capital structure is highly dependent upon the nature of business, profitability, and turnover and gearing ratio of company. Harvey Norman Holdings Limited needs to manage its capital structure with a view to increase the overall return on capital employed and reducing the overall return on capital employed.
References
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage learning.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.
Harvey Norman Holdings Limited , 2013, annual report, accessed on 9th May,
Harvey Norman Holdings Limited , 2015, annual report, accessed on 9th May,
Harvey Norman Holdings Limited , 2016, annual report, accessed on 9th May,
Harvey Norman Holdings Limited , 2017, annual report, accessed on 9th May,
Laeven, L. and Valencia, F., 2013. The real effects of financial sector interventions during crises. Journal of money, credit and Banking, 45(1), pp.147-177.
Laudon, K.C. and Traver, C.G., 2013. E-commerce. Pearson.
Prasad, E., Rogoff, K., Wei, S.J. and Kose, M.A., 2005. Effects of financial globalization on developing countries: some empirical evidence. In India’s and China’s Recent Experience with Reform and Growth (pp. 201-228). Palgrave Macmillan UK.
Sanlorenzo, M., Wehner, M.R., Linos, E., Kornak, J., Kainz, W., Posch, C., Vujic, I., Johnston, K., Gho, D., Monico, G. and McGrath, J.T., 2015. The risk of melanoma in airline pilots and cabin crew: a meta-analysis. JAMA dermatology, 151(1), pp.51-58.
Treanor, S.D., Rogers, D.A., Carter, D.A. and Simkins, B.J., 2014. Exposure, hedging, and value: New evidence from the US airline industry. International Review of Financial Analysis, 34, pp.200-211.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.
Zhu, J., 2014. Quantitative models for performance evaluation and benchmarking: data envelopment analysis with spreadsheets (Vol. 213). Springer
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