Financial Statement Analysis And Valuation Of Tassal

Reformatted Financial Statements and Financial Analysis

Analyse the financial statements and valuation.
 

This report is a financial statement analysis and firm valuation report assessing the financial performance and position of the company, Tassal. Tassal is a Tasmanian Salmon company trading Atlantic salmon. The company has been into operations since 1986 and is a public listed company since 2003 (Tassal, 2016).

In this report, the last five years financials i.e., from 2010 till 2015 are analyzed with the help of financial ratios to assess the financial performance and financial position of the company. The details of the analysis have been discussed in the further sections of the report. The financials are obtained from their website from the Annual reports section and the annual reports of 2015, 2013 and 2011 are downloaded to obtain the data for the years 2010 to 2015. Based on the existing data, forecasts have been projected for the coming five years i.e., from 2016 to 2020. The forecasted projections have been used to value the company and the valuation methods considered in the report include Price multiple method, Discounted Dividend model, Discounted Abnormal Earnings model, Discounted Abnormal Operating Earnings model and the Discounted Free Cash Flow model.

Thus the report has been majorly classified into two sections: Section I which discusses about the financial statements analysis based on the existing financials of the company from 2010 to 2015; Section II which discusses about the valuation models of the company.

Overall it is observed that the company has been doing good business with its profit margin improving from 2010 onwards generating profit margin upto 16% as on 2015. Even the returns of equity and assets are observed to be satisfactory with ROE at 13% and ROA at 8% respectively as on 2015. The company has not given any dividend in the year 2010 and 2011 but then onwards, dividend has been paid to the potential investors of the company. The earnings per share also have been observed to be improving year on year.  Regarding financial position of the company, the liquidity and leverage position of the company is quite strong and stable. The assets turnover position is observed to be very less with only 50% of the total assets being realized as sales as on 2015. Rest all aspects of the company are satisfactory and stable (Ready Ratios, 2016).

Further details are discussed in depth in the following sections of the report.

Financial Ratios

Financial Statements

Financial statements refer to those statements of the company where the financial information has been recorded. Being a public listed company, Tassal has to be share the financial statements in public to keep the investors updated about the operations of the business and its performance. The key financial statements are Income Statement or Statement of Comprehensive Income, Balance Sheet or Statement of Financial Position and Cash Flow statement (Warren et al., 2008).

Income statement or statement of comprehensive income captures the revenue generation and expenses details of the company and thus helps in assessing the financial performance of the company during year and facilitates in assessing the performance by comparing the financials across the periods (Weygandt et al., 2009).

Balance Sheet or statement of financial position records the sources and utilization of the funds by the company. The sources have been categorized as the liabilities and the equity while the utilization has been made in terms of assets. Thus this statement recording the sources and utilization of funds helps in assessing the financial position of the company (Porter & Norton, 2016; Spurga, 2004).

Cash flow statement refers to the actual cash flows happening in the company. The revenues and expenses are accrual in nature while the cash flow statement captures the actual cash inflows and outflows to the company thus giving a detailed view about the liquidity and cash position of the company. (Accounting Tools, 2016).

The financials of the company Tassal have been obtained from their annual reports and re are formatted as tabulated below for the study and analysis. The reformatted financial statements include the key particulars in each of the financial statements including Income sheet, Balance Sheet and the Cash flow statement.

The financials of the last 6 years from 2010 to 2015 are tabulated as below:

Income Statement (Amt in $000)	2015	2014	2013	2012	2011	2010
Revenue	304405	260777	272805	262683	225635	216775
Finance Costs	-4722	-5067	-5999	-6491	-6752	-5465
PBIT	70875	58061	47502	38705	40580	34568
Net Profit	49992	41061	33457	28087	30280	28009
EPS	0.3405	0.2803	0.2287	0.192	0.2078	0.1996
Balance Sheet  (Amt in $000)	2015	2014	2013	2012	2011	2010
Cash & Equivalents	13324	7656	14998	15830	7960	4265
Trade Receivables	14034	7636	13349	8677	8477	24627
Inventories	60151	53407	50150	60230	48346	39965
Current Assets	313603	260982	241695	232035	214060	196822
Total Assets	612927	536545	506784	490708	460543	420072
Current Liabilities	83582	77258	81073	90412	89094	62613
Borrowings	61273	37144	30674	42258	49116	55943
Total Liabilities	239594	194622	191237	195650	184862	174870
Equity	373333	341923	315547	295058	275681	245202
Cash Flow Statement  (Amt in $000)	2015	2014	2013	2012	2011	2010
Cash flows Operations	42696	50626	49718	50387	41522	28487
Cash flows Investing	-36639	-29842	-19945	-29570	-39398	-47797
Cash flows Financing	-389	-28126	-30605	-12947	1584	19880
Dividends paid	-19097	15383	-12436	-8778	0	0
Net Cash flow	13324	7656	14998	15830	7960	4252

Based on these financials, ratios have been computed to assess the financial performance and position of the company. The various financial ratios computed and discussed in this report are explained in the next sections of the report.

Financial Ratios analysis refers to the financial statements analysis using financial ratios. Financial ratios are the tool to assess various aspects of the company including Liquidity, Leverage, Turnover and Profitability aspects. This section discusses about each of those ratios considered in this study and their implications.

The study has considered the following ratios under Profitability to assess the profit earning capability of the study and its financial performance. These include Gross Margin, Net Margin, Return on Equity (ROE), Return on Assets (ROA) and the Earnings per share (EPS).

Gross and Net profit margin refers to the ratio of the Gross Earnings and Net Earnings to the Sales respectively. Higher is the margin, better is the financial performance of the company (Tracy, 2012 ).

To assess the liquidity aspect of the company, Current and Quick Ratios have been computed which refer to the ratio of the Current Assets to the Current Liabilities and Quick Assets to the current liabilities. Current assets include the cash equivalents, Inventories, receivables and other short term assets of the company. These current assets if excluded with Inventories will lead to quick assets. The ratio of these assets to the current liabilities would compute current and quick ratios respectively. The ratio if maintained above 1 indicates satisfactory position, with the company able to meet its current liabilities with the help of current assets (Gibson, 2008).

Further leverage ratios, which assess the debt or long term borrowings position with respect to the assets or equity position of the company, have been computed. The leverage has to be optimally used to avoid the higher credit risk but to take advantage of the leverage having debt facilities.

Turnover ratios assess the performance of the company by computing ratio of the assets of the company with respect to its own sales during the year. Higher is the ratio, better is the performance of the company with higher percentage of the assets realized into sales. (Joe Lan, CFA, 2012)

The results of the financial ratios as computed for the years 2010 to 2015 for the company Tassal are as tabulated below:

FINANCIAL RATIOS
	2015	2014	2013	2012	2011	2010
Gross Profit Margin	23%	22%	17%	15%	18%	16%
Net Profit Margin	16%	16%	12%	11%	13%	13%
ROE	13%	12%	11%	10%	11%	11%
ROA	8%	8%	7%	6%	7%	7%
EPS	0.34	0.28	0.23	0.19	0.21	0.20
Current Ratio	3.75	3.38	2.98	2.57	2.40	3.14
Quick Ratio	3.03	2.69	2.36	1.90	1.86	2.51
Debt to Equity	0.64	0.57	0.61	0.66	0.67	0.71
Debt Ratio	0.39	0.36	0.38	0.40	0.40	0.42
Assets Turnover (ATO)	0.50	0.49	0.54	0.54	0.49	0.52
Inventory Turnover	5.06	4.88	5.44	4.36	4.67	5.42

Financial risk ratios which assess the cash flows of the company include the Net Operating Cash Flows to the Sales, Free Cash Flow to the Sales, Coverage ratios and Dividend Payout ratios. These ratios assess the cash flow position of the company and evaluate the liquidity risk position of the company (Sawyer, 2014 ).

NOCF (Net Operating Cash Flow) represents the net cash flow from the operating activities during the period considered. This component NOCF with respect to the sales indicates actual cash flow happening with respect to the revenues recorded under sales. Higher is the ratio; better would be the performance of the company. Similar to above is an assessment based on the free cash flow to the company with respect to the sales (Sawyer, 2014 ).

Capital expenditure coverage ratio is the ratio between the net operating cash flow with the capital expenditure or the fixed assets of the company. It assesses the realization performance of the company in terms of its fixed assets getting converted to operating cash flows. Better the performance better is the ratio (Sawyer, 2014 ).

Dividend payout ratio referring to the % of the net earnings paid as dividends to the investors. The dividend payout attracts investors accordingly and thus affects the investments into the company. (Ready Ratios, 2016)

The cash flow risk indicator ratios computed for this study are as below:

CASH FLOW INDICATOR RATIOS
NOCF / Sales	0.14	0.19	0.18	0.19	0.18	0.13
FCF/ Sales	0.04	0.03	0.05	0.06	0.04	0.02
Capex Coverage	0.14	0.18	0.19	0.19	0.17	0.13
Dividend Payout Ratio	0.38	0.37	0.37	0.31	–	–

This section of the report interprets and discusses the results obtained as discussed above. The financial ratios of the company are computed as discussed above with the help of MS Excel, used as the tool to perform financial ratios analysis.

• The profit margin of the company Tassal are noted to be at 23% at gross level and 16% at net level as on 2015 which are quite good. It is also observed that the margin ratios have been constantly improving since 2012 indicating an improving performance of the company. Thus having profit generating capacity to the tune of 16% of the total revenues and in the pace of increasing margin, the performance of Tassal is good.
• The ROE, ROA which are considered as the return ratios are observed to be at 13% and 8% respectively. These are ok and satisfactory but needs to be improved to generate higher returns especially equity if looking forward for higher investment. Compared to previous years, the ratios have been observed to be improving.
• The EPS also has been observed to be increasing since 2010.
• The current and quick ratios are very strong with the current assets positioned almost at 3 times the current liabilities indicating very strong liquidity position of the company. Even these ratios have been observed to be improving year on year.
• The leverage position of the company is stable with the debt raised to the tune of requirement. The debt has been cleared by the company every now and then indicating a fall in debt ratio in between showing the capability of the company to meet its borrowing liabilities.
• The weaker aspect of the company is its turnover position which is observed to be poor with only 50% of the assets are being realized as sales even after these many years of operations. This indicates that the assets of the company are realized only to the tune of 50% during 2015.
• Overall the company has been improving its sales and net profits which have strongly affected the profitability ratios and the turnover position improving them year on year. The liquidity position of the company is also noted to be very strong with the current assets positioned at a very high level as compared to the current liabilities. Thus the company as mentioned above is stable and strong with improving performance.

This section of the report forecasts the results of the company and assesses the prospects of the company in future. It performs the valuation of the company using different methods possible and discusses the results. Before forecasting the financials and performing the valuation, the assumption becomes very critical for the estimates. The assumptions considered are as discussed below.

• The growth rate in sales is assumed to be at 7% which is the average growth rate in the last 6 years from 2010 to 2015. The sales are forecasted at this growth rate every year for the years 2016 to 2020.
• Further for estimating the Net Operating Assets (NOA), Asset Turnover Ratio of 0.50 has been assumed which is the last ATO as on 2015.
• The net profit margin also has been assumed to continue at the same rate of 16% as on 2015 for the forecasts.
• The dividend payout ratio is noted to be at 38% as on 2015 and the same has been assumed to continue for the year 2016 to 2020 for the forecasts
• The cost of debt is computed using the finance costs and the long term borrowings and is observed to be at 8% as on 2015. The same cost of debt has been assumed to continue for the following years from 2016 onwards.
• Along with these assumptions considered for forecasts, while valuation 13% cost of equity which is the ROE estimated as on 2015 has been assumed to continue.

With these assumptions, the forecasts and the valuation models are computed to determine the value of the company Tassal as on 2015.

Forecasts have been estimated using the following steps which include:

• Estimate the sales using the assumed sale growth rate
• Estimate the Net Operating Assets using the assumed ATO (Assets Turn Over ratio)
• Estimate the NOPAT using the assumed PM (Profit Margin)
• Estimate the FCF (Free Cash Flow) using the NOPAT and change in NOA
• Estimate the Dividend payouts estimated using dividend payout ratio assumed
• Estimate the payments to the debt holders from the FCF and the dividend payouts
• Calculate the cost of debt
• Estimate the comprehensive income from the NOPAT and the cost of debt estimated above

The forecasted results of the Tassal salmon company is as below for the years 2016 to 2020.

FORECASTS OF TASSAL
	2016	2017	2018	2019	2020
1.Forecast sales
Sales growth rate – estimated	7%	7%	7%	7%	7%
Sales	326737	350707	376435	404051	433693
2.Forecast ATO and calculate NOA
forecast ATO	0.50	0.50	0.50	0.50	0.50
Calculate NOA (NOA=sales/ATO)	657892	706157	757962	813567	873252
3.Revise sales forecasts
4.Forecast PM and calculate NOPAT
Forecast PM	16%	16%	16%	16%	16%
Calculate NOPAT (NOPAT = Sales x PM)	53660	57596	61821	66357	71225
5.Forecast any other operating income (unusual items)
6.Calculate free cash flow (NOPAT – change in NOA)
change in NOA	44965	48264	51805	55605	59685
calculate FCF	8694	9332	10016	10751	11540
7.Forecast net dividend payout
estimated as a % of NOPAT	38%	38%	38%	38%	38%
	20498	22002	23616	25348	27208
8.Calculate net payments to debt holders
payments = FCF – dividend	-11804	-12670	-13599	-14597	-15668
9.Forecast cost of debt and debt balance	8%	8%	8%	8%	8%
Forecast cost of debt after tax
Opening debt balance	61273	77799	96464	117498	141150
Calculate cost of debt (net financing after tax)	4722	5996	7434	9055	10878
Calculate closing debt (opening + interest – repayment)	77799	96464	117498	141150	167696
check leverage (debt/noa ratio)	0.12	0.14	0.16	0.17	0.19
10.Calculate comprehensive income
NOA	657892	706157	757962	813567	873252
NOPAT	53660	57596	61821	66357	71225
Dividend payment	20498	22002	23616	25348	27208
Cost of Debt (NFEAT)	4722	5996	7434	9055	10878
Closing NFO	77799	96464	117498	141150	167696
NOPAT – NFEAT	48938	51600	54387	57302	60347
11.Calculate equity (and check it works both ways)
equity = assets – liabilities	580094	609692	640464	672417	705556
closing equity = opening equity + income – dividend	580094	609692	640464	672417	705556

From the forecasted results above, the valuation of Tassal is performed using different models. They are as discussed below:

In this model, a price multiple has been assumed to determine the various particulars including Sales, Earnings and based on these forecasts the average valuation of the company is estimated. This company Tassal being into niche business of trading Atlantic Salmon, assuming multiples would be difficult and thus only four models of Discounted techniques have been applied to estimate the value of the company in this study.

In this model, the dividend payouts forecasted as per forecasts above have been discounted at the cost of equity assumed at 13%. The growth rate in dividend is observed to be constant at 7% and thus discounted dividend perpetuity model with constant growth has been applied as below:

MODEL 1- Discounted Dividend	Actual	Forecasts
	2015	2016	2017	2018	2019	2020
Year		1	2	3	4	5
1.Forecast net dividend payout	19097	20498	22002	23616	25348	27208
2. estimate cost of capital for equity	13%	1.13	1.29	1.46	1.65	1.87
3. Calculate forecast dividend growth patterns			7%	7%	7%	7%
estimate TV method
4. Calculate TV (div from next year / cost capital – growth)					449381
5. Discount dividend stream to TV year (2015)	66721	18077	17112	16198	15333	14515
Discount TV	271835				271835
Total Equity value =	338556
No of shares outstanding	146819
Share price	2.31

The Terminal Value (TV) of the company as on 2019 is estimated by computing the formula:

Applying discounting technique on the forecasted dividends at the cost of capital on equity at 13%, the net value of the company as on 2015 is computed to be $ 338, 556,000 and the share price is estimated to be $ 2.31.

Another approach to estimate the value of the company is based on the abnormal or the net earnings of the company. The future net earnings of the company are discounted at the cost of capital on equity to determine the value of the company as on today. The results are as below:

MODEL 2- Discounted Abnormal Earnings	Actual	Forecasts
	2015	2016	2017	2018	2019	2020
Year		1	2	3	4	5
1.Forecast comprehensive income	49992	48938	52510	56344	60457	64870
2. Forecasted Dividend payout	19097	20498	22002	23616	25348	27208
3. Residual Income	30895	28440	30508	32728	35108	37662
3. Discounting factors	13%	1.13	1.29	1.46	1.65	1.87
3. Discount earning stream to TV year (2015)	112587	25081	23728	22448	21237	20092
4. Growth rate in Earnings			7%	7%	7%	7%
5. TV					615745
6. Discounted TV	372470
Total Equity value =	485056
No of Shares outstanding	146819
Share price	3.30

The equity value as on 2015 is computed to be $ 485,056,000 as shown above and the share price is computed to be $ 3.30.

Similar above, discounting only the operating earnings of the company as forecasted above, the value of the company is as computed below:

MODEL 3- Discounted Abnormal Operating Earnings	Actual	Forecasts
	2015	2016	2017	2018	2019	2020
Year		1	2	3	4	5
1.Forecast NOPAT		53660	57596	61821	66357	71225
2. Change in NOA		44965	48264	51805	55605	59685
3. Residual Operating Earnings		8694	9332	10016	10751	11540
4. Discounting factors	13%	1.13	1.29	1.46	1.65	1.87
5. Discount earning stream to TV year (2015)	212659	47323	44796	42404	40140	37997
6. Growth rate in NOPAT			7%	7%	7%	7%
7. TV					190601
8. Discounted TV	115296
Total value =	327955
No of shares outstanding	146819
Share Price	2.23

The discounted operating earnings of the company at the discounting rate of cost of capital on equity at 13% as on 2015 are estimated to value at $ 115,296,000 and the share price is estimated at $ 2.23.

Another approach to estimate the value is to compute the value on the basis of the free cash flow to the company as forecasted above. The free cash flows are discounted at the cost of capital of 13% and the terminal value of the company on the basis of FCF is as below:

MODEL 4- Discounted FCF	Actual	Forecasts
	2015	2016	2017	2018	2019	2020
Year		1	2	3	4	5
1. Forecast FCF	13324	8694	9332	10016	10751	11540
book value of debt	61273
2. estimate cost of capital for the firm	13%	1.13	1.29	1.46	1.65	1.87
3. Calculate forecast FCF growth patterns			7%	7%	7%	7%
4. Calculate TV (perpetuity with growth)					190601
5. Discount ae to TV year	28299	7667	7258	6870	6504	6156
Discount TV	115296				115296
Total value of the firm	143595
value of debt	61273
Total value of equity	82322
No of shares outstanding	146819
Share Price	0.56

The value of debt as on 2015 is $ 61,273,000 and thus the discounted value of FCF with terminal value as per formula explained above is noted to be $ 143,595,000. Thus the value of the company as on 2015 is $ 143,595,000 and deducting the debt obtained, the value of equity as on 2015 is $ 82,322,000. The share price is estimated to be $0.56.

These are the various models of valuation and their discussion. On comparing the different model derived share prices, the decision on the shares of the Tassal Group are as tabled below:

Valuation Model	Share Price ($3.12)	Equity Value	Buy or Sell
DDM	$2.31	338556	Sell
DAE	$3.30	485056	Buy
DAOE	$2.23	327955	Sell
DCF	$0.56	82322	Sell

The opening price of Tassal group as on 30^th June 2015 is noted to be $3.12. Thus comparing the derived prices, it may be noted that only DAE (Discounted Abnormal Earnings) model derived price infers to buy the stocks at current price as it is likely to increase to derived price to establish equilibrium. All other models have share price derived at lower price as compared to current market price and thus better to sell it at current price as it intends to reduce.

Sensitivity analysis has been performed to assess the change in share price with respect to different parameters which include Sales Growth, ATO (Asset Turn Over), Profit Margin, Dividend Payout, Cost of Debt and Cost of Capital.

The above valuation models have been used to estimate the share prices on different values of the above mentioned parameters and the changes are as explained below:

Sales Growth	%Δ	Share Price	%Δ
10.27%	40.00%	$5.29	60.12%
8.80%	20.00%	$4.60	39.24%
7.34%	0.00%	$3.30	0.00%
5.87%	-20.00%	$2.56	-22.51%
4.40%	-40.00%	$2.07	-37.34%
ATO	%Δ	Share Price	%Δ
0.70	40.00%	$3.41	52.66%
0.60	20.00%	$2.93	31.17%
0.50	0.00%	$2.23	0.00%
0.40	-20.00%	$1.25	-44.04%
0.30	-40.00%	-$0.43	-119.25%
PM	%Δ	Share Price	%Δ
22.99%	40.00%	$4.86	47.11%
19.71%	20.00%	$4.08	23.50%
16.42%	0.00%	$3.30	0.00%
13.14%	-20.00%	$2.53	-23.42%
9.85%	-40.00%	$1.75	-47.03%
Dividend Payout	%Δ	Share Price	%Δ
53.48%	40.00%	2.34	-29.17%
45.84%	20.00%	2.82	-14.64%
38.20%	0.00%	3.30	0.00%
30.56%	-20.00%	3.78	14.42%
22.92%	-40.00%	4.27	29.25%
Eiat (+/- 2%)	%Δ	Share Price	%Δ
9.71%	25.95%	2.94	-11.01%
8.71%	12.98%	3.13	-5.26%
7.71%	0.00%	3.30	0.00%
6.71%	-12.98%	3.46	4.73%
5.71%	-25.95%	3.59	8.66%
Cost of capital (+/- 2%)	%Δ	Share Price	%Δ
12.97%	18.24%	3.30	0.00%
11.97%	9.12%	3.30	0.00%
10.97%	0.00%	3.30	0.00%
9.97%	-9.12%	3.30	0.00%
8.97%	-18.24%	3.30	0.00%

Highest variation in share price is observed with change in Sales growth and Asset Turnover as may be observed form table above while the Profit Margin (PM) and dividend payout affect the share price to medium extent followed by Cost of debt and capital.

Conclusion

Thus overall, from this study various concepts of financial statements analysis and valuation are understood. It is noted from this study that the company Tassal has been doing good in terms of financial performance and has a strong financial position as discussed above through financial statements analysis. Based on these financials, forecast for the years 2016 to 2020 are made for the Tassal salmon company. These forecasts include forecasted dividend payouts and the free cash flow estimates as well. With the help of discounting techniques, the valuation of the company Tassal has been completed and the share price varies at $ 3.00 per share as on 2015 based on forecasted dividends and free cash flows valuations discussed above. The market share price as on 30 June 2015 is noted to be $ 3.12. Overall it is observed that Sales growth and Asset Turnover act as strong factors which control the share price of the Tassal Group. 

References

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Joe Lan, CFA, 2012. Financial Ratios. 

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Ready Ratios, 2016. Cash Flow Indicator Ratios. 

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Tassal, 2016. Tassal Tasmanian Salmon About Us. 

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