In this report, an attempt is made to analyses the income statement, balance sheet and cash flow of the company. The report also analyses significant ratios and identifies important factors before making investment decision. The company selected for evaluation is Wools Worth limited. The Wools worth is an Australian company that is engaged in retail in Australia and New Zeeland. The main aim of this report is to analyses the financial statement of the company and make decision for investment.
The financial statement that reports the performance of the company over a specific accounting period is known as income statement. The purpose of the income statement is to provide financial earning of the company so that better economic decision can be made. The income statement can be analyzed using the Horizontal analysis. In horizontal analysis, the financial information over of a series of reporting period is compared to understand the trend and significant changes of the income and expenses. In this case, the horizontal analyses of the income statement is conducted for a period of six years from 2011 to 2016. The income and expenses of 2011 is taken as base for conducting the horizontal analyses (Vogel, 2014).
|
Wools Worth Limited |
|||||
|
Income Statement |
|||||
|
Item |
% change in 2012 |
% change in 2013 |
% change in 2014 |
% change in 2015 |
% change in 2016 |
|
Operating Revenue |
2% |
8% |
12% |
12.14% |
7% |
|
Other Revenue |
-76% |
6% |
4% |
16.26% |
15% |
|
Total Revenue Excluding Interest |
2% |
8% |
12% |
12.16% |
7% |
|
Operating Expenses |
1% |
8% |
12% |
11.77% |
9% |
|
EBITDA |
15% |
12% |
14% |
16.79% |
-14% |
|
Depreciation |
3% |
10% |
12% |
51.66% |
36% |
|
Amortization |
4% |
30% |
44% |
-80.80% |
-82% |
|
Depreciation and Amortization |
3% |
13% |
16% |
33.16% |
19% |
|
EBIT |
18% |
12% |
14% |
12.57% |
-23% |
|
Interest Revenue |
17% |
-3% |
-57% |
-100.00% |
-100% |
|
Interest Expense |
6% |
37% |
-7% |
-15.07% |
-18% |
|
Net Interest Expense |
5% |
40% |
-3% |
-8.01% |
-11% |
|
Pretax Profit |
19% |
10% |
15% |
14.44% |
-24% |
|
Tax Expense |
1% |
14% |
21% |
19.84% |
-19% |
|
Net Profit after Tax Before Abnormal |
26% |
8% |
13% |
12.27% |
-26% |
|
Abnormal |
1373% |
245% |
-100% |
1020.79% |
2423% |
|
Abnormal Tax |
|||||
|
Net Abnormal |
1373% |
153% |
-100% |
710.79% |
1914% |
|
Reported NPAT After Abnormal |
-15% |
6% |
15% |
-0.14% |
-210% |
|
Outside Equity Interests |
-97% |
-68% |
-59% |
-152.76% |
-6929% |
|
Shares Outstanding at Period End |
1% |
3% |
4% |
4.12% |
5% |
|
Weighted Average Number of Shares |
0% |
2% |
3% |
3.32% |
4% |
|
EPS Adjusted (cents/share) |
26% |
6% |
10% |
9.55% |
21% |
|
EPS After Abnormal (cents/share) |
-15% |
4% |
12% |
-2.49% |
-156% |
Table 1: Horizontal Analysis
(Source: Created by Author)
The table shows the percentage change in the income and expenses over a period of six years. The figure below shows the change in net profit figures:
Figure 1: Net Profit change
(Source: Created by Author)
The figure above shows that the net profit of the company increased by 26% during the year 2012. Then in 2013, the net profit of the company has increased by 8% as compared to the profit of 2011. It can be seen that there is 18% decline in profit between the year 2012 and 2013. In 2014 the performance of the company improved and the profit increased by 13%. The figure above shows that in the year 2016 the net profit of the company has declined by 26%. On analyzing the income statement, it can be seen that three significant items that should be analyzed are operating revenue, operating expenses and the interest expenses. These three items are selected because they have significant impact on the profitability of the company (Cucchiella & Rosa, 2015).
The operating revenue forms significant part of the income statement. The operating revenue indicates the income that is received from operations and it forms the main component of that influences the profit of the company so it is selected for analysis. The figure below show changes in operating revenue:
Figure 2: Operating Revenue
(Source: created by Author)
It can be seen from the above figure shows that the operating revenue of the company has continuously increased by 2% in 2012, 8% in the year 2013, 12% in 2014, 12% in 2015 and 7% in 2016. It can be seen that the operating revenue of the company has constantly increased until 2014 and it remained stable in 2015. The increase in operating revenue of the company declined by 5% to the 7%. The revenue in 2016 has increased as compared to that of 2011. However, the percentage increase has declined and it is not a positive sign for the company (Dewachter et al., 2015).
Figure 3: Operating Expenses
(Source: Created by Author)
The figure above shows the changes in operating expenses of the company as compared to the expenses of 2011. The operating expenses are the significant component of the financial statement. The operating expenses are referred to the expenses that are incurred for operation of the business. The operating expenses is selected for analysis because it significantly influences the profits of the company (Kallala et al., 2015). The figure shows that the operating expenses have increased by 1%, 8% and 12% in the years of 2012, 2013 and 2014. Then in 2015, the operating expenses remained stable at 12% but in 2016, it declined and became 9%. The main reason for increase in operating expenses from 2012 to 2015 period is that during the same period the operating revenue has increased. However, in 2015, the operating revenue remained stable but the operating expenses have shown significant decline. In 2016 the operating revenue declined but the operating expenses increased by 9%. This is not a positive sign for the company (Pierson et al., 2015).
Figure 4: Interest Expenses
(Source: created by Author)
The figure above shows the interest expenses. The interest expenses is a significant item of the income statement and it influences the profit. The interest expenses represents the financing cost of the business. The less the interest expenses the better it is for the company. The interest expenses increased by 6.10% in 2012 and in 2013 there was a significant increase in profit by 36.7%. Then in 2014, 2015 and 2016 the interest expense declined by 7.4%, 15.07% and 18.3% respectively. The decrease in interest expenses is a positive sign and indicates the dependence on the external funds by the company is declining (Abu-Bakar et al., 2015).
The balance sheet represents the current financial position of the business. The analysis of the balance sheet helps to understand the changes in the assets and liabilities over a series of period. The assets and liabilities of 2011 is taken as base for conducting the horizontal analysis of the balance sheet that is given below:
|
Wools Worth Limited |
|||||
|
Balance Sheet |
|||||
|
Particulars |
% change in 2012 |
% change in 2013 |
% change in 2014 |
% change in 2015 |
% change in 2016 |
|
CA – Cash |
-45% |
-44% |
-39% |
-12.25% |
-38% |
|
CA – Receivables |
-32% |
-21% |
-31% |
-34.32% |
-51% |
|
CA – Prepaid Expenses |
14% |
16% |
33% |
29.27% |
42% |
|
CA – Inventories |
-1% |
13% |
26% |
30.39% |
22% |
|
CA – Investments |
-80% |
-55% |
-89% |
56.04% |
-54% |
|
CA – NCA Held Sale |
301% |
58% |
561% |
306.39% |
1072% |
|
CA – Other |
|||||
|
Total Current Assets |
-12% |
-6% |
9% |
16.20% |
13% |
|
NCA – Receivables |
64% |
11% |
626% |
683.22% |
477% |
|
NCA – Inventories |
|||||
|
NCA – Investments |
100% |
201% |
155% |
317.10% |
435% |
|
NCA – PP&E |
11% |
7% |
11% |
16.73% |
-4% |
|
NCA – Intangibles(ExGW) |
3% |
19% |
22% |
20.38% |
17% |
|
NCA – Goodwill |
0% |
5% |
20% |
18.54% |
13% |
|
NCA – Future Tax Benefit |
26% |
21% |
34% |
47.92% |
117% |
|
NCA – Other |
|||||
|
Total NCA |
9% |
10% |
17% |
21.89% |
11% |
|
Total Assets |
2% |
5% |
15% |
20.11% |
11% |
|
CL – Account Payable |
-5% |
-3% |
11% |
14.03% |
16% |
|
CL – Short-Term Debt |
-96% |
-88% |
-85% |
11.85% |
-67% |
|
CL – Provisions |
-3% |
-2% |
2% |
-0.90% |
55% |
|
CL – NCL Held Sale |
|||||
|
CL – Other |
28% |
55% |
-100% |
-46.36% |
-88% |
|
Total Curr. Liabilities |
-18% |
-17% |
-9% |
10.62% |
8% |
|
NCL – Account Payable |
|||||
|
NCL – Long-Term Debt |
39% |
27% |
23% |
-8.73% |
15% |
|
NCL – Provisions |
-5% |
-21% |
66% |
57.77% |
48% |
|
NCL – Other |
26% |
78% |
-52% |
-41.42% |
-41% |
|
Total NCL |
28% |
23% |
23% |
1.53% |
15% |
|
Total Liabilities |
-1% |
-2% |
3% |
7.22% |
11% |
|
Share Capital |
9% |
10% |
18% |
24.83% |
34% |
|
Reserves |
6% |
-111% |
-184% |
-140.16% |
-140% |
|
Retained Earnings |
7% |
20% |
39% |
49.59% |
-20% |
|
Other Equity |
|||||
|
Convertible Equity |
|||||
|
SE Held Sale |
|||||
|
Outside Equity |
2% |
8% |
8% |
17.89% |
23% |
|
Total Equity |
8% |
19% |
34% |
41.88% |
12% |
Table 2: balance Sheet Analysis
(Source: Created by Author)
The table above shows the changes in significant items of assets and liabilities over a period of six years. The three significant items of balance sheet that are analyzed are the cash and cash equivalent, short term debt and long term debt.
Figure 5: Cash and cash equivalent
(Source: Created by Author)
The figure above shows the cash available in the hands of the company. This item of assets is selected for analysis because it represents the liquidity if the company. On analyzing the above figure it can be seen that cash available of the company has declined by 45% in 2012, 44% in 2013, 39% in 2014, 12% and 2015 and 38% in 2016 as compared to the cash available in 2011. Therefore, it can be said that the cash in company is continuously decreasing and it is not a positive sign for the company (Johnson et al., 2015). The main reasons for such decrease in cash could be the increase in prepaid expenses and inventories.
Figure 6: Short-term debt
(Source: Created by Author)
The figure above shows the short-term debt of the company. The short-term debt is selected for analysis because it represents the financing of the working capital needs. In addition to this, the analysis of this item also indicates the liquidity and solvency position of the company. The figure above shows that the short-term debt of the company has continuously declined except in 2015. In 2015, the short-term debt of the company increased as compared to 2011 level by 12%. The most significant decline in short term debt was in 2012 by 96%. It can be said that one of the reason for decline in cash balance could be the repayment of the short-term loan.
Figure 7: long-term debt
(Source: created by Author)
The figure above shows the change in the long-term debt for a period of six years. The long-term debt is selected for analysis because it indicates the financing of the business. The analysis shows that the long-term debt has increased by 39% in 2012, 27% in 2013, 23% in 2014 and 15% in 2016. In 2015, the long-term debt has declined by 9%. The increase in the long-term debt indicates that the business is relying on debt funds for financing the business. This could increase the solvency risk of the company (El Kasmioui & Ceulemans, 2013).
|
Wools Worth Limited |
|||||
|
Cash Flow Statement Analysis |
|||||
|
Item |
% change in 2012 |
% change in 2013 |
% change in 2014 |
% change in 2015 |
% change in 2016 |
|
Receipts from Customers |
5% |
8% |
12% |
11.85% |
11% |
|
Payments to Suppliers and Employees |
5% |
9% |
11% |
11.60% |
13% |
|
Dividends Received |
|||||
|
Interest Received |
19% |
-1% |
-56% |
-100.00% |
-100% |
|
Interest Paid |
19% |
44% |
5% |
-6.56% |
-13% |
|
Tax Paid |
12% |
16% |
38% |
25.45% |
1% |
|
Other Operating Cash flows |
-100% |
-100% |
-100% |
-100.00% |
-100% |
|
Net Operating Cash flows |
-4% |
-9% |
16% |
11.84% |
-21% |
|
Payment for Purchase of PPE |
1% |
-7% |
-11% |
2.33% |
-7% |
|
Proceeds From Sale of PPE |
-49% |
130% |
-51% |
114.30% |
84% |
|
Investments Purchased |
|||||
|
Proceeds From Sale of Investments |
|||||
|
Payments for Purchase of Subsidiaries |
-67% |
-47% |
-16% |
-80.02% |
-95% |
|
Proceeds from Sale of Subsidiaries |
|||||
|
Loans Granted |
|||||
|
Loans Repaid |
|||||
|
Other Investing Cash flows |
-412% |
-1016% |
220% |
-284.00% |
-228% |
|
Net Investing Cash flows |
-4% |
-45% |
-7% |
-38.74% |
-42% |
|
Proceeds from Issues |
18% |
52% |
-20% |
-35.65% |
-56% |
|
Proceeds from Borrowings |
-7% |
-55% |
-41% |
-62.25% |
-95% |
|
Repayment of Borrowings |
11% |
-44% |
-32% |
-54.74% |
-91% |
|
Dividends Paid |
5% |
11% |
20% |
23.11% |
-4% |
|
Other Financing Cash flows |
-101% |
-101% |
-100% |
-98.16% |
-98% |
|
Net Financing Cash flows |
209786% |
217100% |
195886% |
230014.29% |
210600% |
|
Net Increase in Cash |
-183% |
-100% |
-91% |
-50.75% |
-147% |
|
Cash at Beginning of Period |
113% |
18% |
19% |
29.32% |
87% |
|
Exchange Rate Ad |
-119% |
-191% |
-159% |
-252.94% |
-199% |
|
Other Cash Adjustments |
|||||
|
Cash at End of Period |
-44% |
-44% |
-39% |
-12.25% |
-37% |
Table 3: cash flow analysis
(Source: created by Author)
The table above shows the horizontal analysis of the cash flow statement. The cash flow statement is a part of the financial statement that shows the change in the cash and cash equivalent due to change in income. The cash flow analysis is conducted to understand the reason for increase or decrease in cash balance.
Figure 8: Operating Cash flow
(Source: created by Author)
The figure above shows the operating cash flow as compared to the level of 2011. It can be seen that the operating cash flow has declined by 4% in 2012, 9% in 2013 and 21% in 2016. The operating cash flow has increased by 16% in 2014 and 12% in 2016. The main reason for such increase or decrease in the operating cash flow are the receipts of the customers and payments made to employees.
Figure 9: Investing cash flow
(Source: created by Author)
The cash flow generated from the investing activity is known as the Investing cash flow. If the investing cash flow is negative, that means that the company is investing in fixed assets or capacity building of the company. The figure above shows that the cash out flow from investing activity has declined by 4% in 2012, 45% in 2013, 7% in 2014, 39% in 2015 and 42% in 2016. The main reason for such decline in the net investing cash flow is the purchase of plant and equipment (Reeb et al., 2015).
Figure 10: Cash flow from financing activity
(Source: created by Author)
The figure above shows the net cash outflow from financing activity. The cash out flow from financing activity has significantly increased. The main reason for such increase is in cash out flow is repayment of borrowings.
The ratio analysis indicates the relationship between the two items of the financial statement. The ratio analysis is very important as it helps in analyzing the performance of the business. The calculation of ratios is shown below:
Figure 11: Profitability ratio
(Source: created by Author)
The profitability ratio indicates the ability of the company to earn profit. The profitability of the company is measured by calculating the profit margin ratio and return on assets. The figures shows the profit margin and the return on assets of the company has remained stable but it has declined in 2016 (Isberg & Pitta, 2013).
The leverage ratio indicated the financing patter of the business. The two ratio that have been calculated for this purpose are the debt equity ratio and the interest coverage ratio.
Figure 12: Debt Equity Ratio
(Source: created by Author)
The debt equity ratio indicates the proportion of debt and equity used in the total financing of the company. The figure shows that the debt is less than the equity and the company has maintained a stable level of debt.
Figure 13: Interest coverage ratio
(Source: Created by Author)
The figure above shows the interest coverage ratio. This indicates the amount of profit that the company has to repay the debt. The ratio shows that that company has an interest coverage ratio and it is a positive sign for the company.
Figure 14: Solvency Ratio
(Source: Created by Author)
The solvency ratio indicates the ability of the company to remain solvent by paying the long-term liability. The figure above shows that the total assets of the company are largely financed using equity. Therefore, it can be said that the company will remain solvent (Sharma & Mehra, 2016).
Figure 15: Efficiency Ratio
(Source: created by Author)
The efficiency ratio indicates the ability of the company to use the assets and liabilities for generating income. The two efficiency ratio that are calculated are the working capital ratio and the assets turnover ratio. The ratios indicates that the company has been satisfactorily using the assets of the company for earning income.
The analysis above has highlighted significant factors. In addition to this the two other relevant factors that should be analyzed before making the decision of investments are earning per share of the company and final dividend paid by the company. It is important to analyses the earning per share because it indicates the earning that are available for the shareholders. The dividend is an income for an investor so the amount paid by the company as dividend should be analyzed before making the investment decision (Anand, 2014).
Conclusion
Based on the above discussion it can be said that the performance of the company is satisfactory. Therefore, it is advised that the investment can be made in the company.
References
Abu-Bakar, S. H., Muhammad-Sukki, F., Ramirez-Iniguez, R., Munir, A. B., Yasin, S. H. M., Mallick, T. K., … & Rahim, R. A. (2014). Financial analysis on the proposed renewable heat incentive for residential houses in the United Kingdom: A case study on the solar thermal system. Energy policy, 65, 552-561.
Anand, M. (2014). A study of financial analysis in textile sector. Journal of Business Management & Social Sciences Research, 3(6), 80-86.
Cucchiella, F., & Rosa, P. (2015). End-of-Life of used photovoltaic modules: A financial analysis. Renewable and Sustainable Energy Reviews, 47, 552-561.
Dewachter, H., Iania, L., Lyrio, M., & de Sola Perea, M. (2015). A macro-financial analysis of the euro area sovereign bond market. Journal of Banking & Finance, 50, 308-325.
Doss, D. A., Sumrall III, W. H., McElreath, D. H., & Jones, D. W. (2013). Economic and financial analysis for criminal justice organizations. CRC Press.
El Kasmioui, O., & Ceulemans, R. (2013). Financial analysis of the cultivation of short rotation woody crops for bioenergy in Belgium: barriers and opportunities. BioEnergy Research, 6(1), 336-350.
Grant, R. M. (2016). Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.
Isberg, S., & Pitta, D. (2013). Using financial analysis to assess brand equity. Journal of Product & Brand Management, 22(1), 65-78.
Johnson, S. G., Gruntowicz, D., Chua, T., & Morlock, R. J. (2015). Financial analysis of CYP2C19 genotyping in patients receiving dual antiplatelet therapy following acute coronary syndrome and percutaneous coronary intervention. Journal of managed care & specialty pharmacy, 21(7), 552-557.
Kallala, R. F., Vanhegan, I. S., Ibrahim, M. S., Sarmah, S., & Haddad, F. S. (2015). Financial analysis of revision knee surgery based on NHS tariffs and hospital costs. Bone Joint J, 97(2), 197-201.
Kamin, C., & Morton, D. (2015). A financial analysis of different scenarios for using autonomous vehicles to deliver packages. In Transportation Research Board 94th Annual Meeting (No. 15-6041).
Ogiela, L. (2013). Data management in cognitive financial systems. International Journal of Information Management, 33(2), 263-270.
Pierson, K., Hand, M. L., & Thompson, F. (2015). The Government Finance Database: A Common Resource for Quantitative Research in Public Financial Analysis. PloS one, 10(6), e0130119.
Reeb, C. W., Venditti, R., Hays, T., Daystar, J., Gonzalez, R., & Kelley, S. (2015). Environmental LCA and financial analysis to evaluate the feasibility of bio-based sugar feedstock biomass supply globally: Part 1. Supply chain analysis. BioResources, 10(4), 8098-8134.
Sharma, A., & Mehra, A. (2016). Financial analysis based sectoral portfolio optimization under second order stochastic dominance. Annals of Operations Research, 1-27.
Sher, F. A. I. S. A. L., TARIQ, M., & JAN, F. A. (2015). Financial Performance of Banks in Pakistan: A Comparative Analysis of Public and Private Sectors. VFAST Transactions on Education and Social Sciences, 6(2).
Simpson, S., Fischer, B. D., & Rohde, M. (2013). The conscious capitalism philosophy pay off: A qualitative and financial analysis of conscious capitalism corporations. Journal of Leadership, Accountability and Ethics, 10(4), 19.
Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download