RHS Limited that was initially known as Reproductive Health Science is engaged in commercialising of the methods and proprietary technologies for providing the screening of total human genome that is generated from the small number of cells or from single cells. The leading products of the company are “DOPlify Whole Genome Amplification Kit (WGA)” and “Embryo Cellec for Pre-implementation Genetic Screening (PGS)”. The main activities of the company is marketing and developing the biotechnology techniques. The samples collected by the company are labelled with the fluorescent dyes and it is compared and measured with each chromosome (Rhsc.com.au 2018).
From the annual report of the company it is identified that the maximum shareholding of the shareholder for the company is 15.10%. Therefore, no shareholder has the holding of more than 20%. Further, under the substantial shareholders “Mr Colin and Mr Johnathon Matthews <Acorn Trust A/C>” holds 15.10% shares that is 11,960,700 shares and “Rosherville Pty Ltd” holds 10.74% shares that is 85,10,000 shares. Further, among the key personnel of the company no one holds more than 20% or 20% shares of the company. However, Mr Colin and Mr Johnathon Matthews together hold 15.10% shares and therefore will be considered as substantial shareholder.
Return on Equity (ROE) = (Net profit after tax / Ordinary equity)
Debt ratio = Total liabilities / Total assets
|
Ratio |
Formula |
2016 |
2015 |
2014 |
2013 |
|
Return on assets |
NAPT / Total asset |
-1.015 |
-0.840 |
-2.852 |
-0.761 |
|
Return on equity |
NPAT / Ordinary equity |
-1.470 |
-1.211 |
-3.510 |
-0.876 |
|
Debt ratio |
Total liab / Total assets |
0.309 |
0.306 |
0.187 |
0.132 |
Proving –
“(EBIT/ TA) x (NPAT/EBIT) x (TA/OE) = (NPAT)/(OE)”
“(EBIT/ TA) x (NPAT/EBIT) x (TA/OE) = EBIT x NPAT/EBIT x 1/OE”
“EBIT x (NPAT/EBIT) x (1/OE) = (NPAT)/(OE)”
Hence, “(EBIT/ TA) x (NPAT/EBIT) x (TA/OE) = (NPAT)/(OE)”
It is the percentage of the total asset that is owned by owner’s equity. If the total asset to owner’s equity ratio goes up it will indicate that the company is strong and can be considered as long-term sustainable (Lara, Osma and Penalva 2016). The total asset to owner’s equity depends on various internal and external factors like type of the industry to which the company belongs, companies return earning capability and economic status of the country.
When the ROE is more than the ROA it indicates that the company’s total asset is higher than the shareholder’s equity. If the company’s debt goes up the equity will be reduced which will lead to increase of the ROE. Further, the additional borrowing will lead to increase of the ROE as compared to ROA (Levy 2015).
RHS Limited –
|
RHS Limited |
||
|
Date |
Adj Close |
Changes |
|
12/31/2015 |
0.12097 |
|
|
1/31/2016 |
0.07742 |
-0.360 |
|
2/29/2016 |
0.0871 |
0.125 |
|
3/31/2016 |
0.11613 |
0.333 |
|
4/30/2016 |
0.13065 |
0.125 |
|
5/31/2016 |
0.13065 |
0.000 |
|
6/30/2016 |
0.13548 |
0.037 |
|
7/31/2016 |
0.095 |
-0.299 |
|
8/31/2016 |
0.075 |
-0.211 |
|
9/30/2016 |
0.073 |
-0.027 |
|
10/31/2016 |
0.065 |
-0.110 |
|
11/30/2016 |
0.09 |
0.385 |
|
12/31/2016 |
0.095 |
0.056 |
|
1/31/2017 |
0.08 |
-0.158 |
|
2/28/2017 |
0.075 |
-0.063 |
|
3/31/2017 |
0.14 |
0.867 |
|
4/30/2017 |
0.155 |
0.107 |
|
5/31/2017 |
0.155 |
0.000 |
|
6/30/2017 |
0.135 |
-0.129 |
|
7/31/2017 |
0.14 |
0.037 |
|
8/31/2017 |
0.14 |
0.000 |
|
9/30/2017 |
0.135 |
-0.036 |
|
10/31/2017 |
0.14 |
0.037 |
|
11/30/2017 |
0.14 |
0.000 |
All Ordinary Index –
|
All Ordinary Index |
||
|
Date |
Adj Close |
Changes |
|
31-12-2015 |
5005.5 |
|
|
31-01-2016 |
4880.899902 |
-0.025 |
|
29-02-2016 |
5082.799805 |
0.041 |
|
31-03-2016 |
5252.200195 |
0.033 |
|
30-04-2016 |
5378.600098 |
0.024 |
|
31-05-2016 |
5233.399902 |
-0.027 |
|
30-06-2016 |
5562.299805 |
0.063 |
|
31-07-2016 |
5433 |
-0.023 |
|
31-08-2016 |
5435.899902 |
0.001 |
|
30-09-2016 |
5317.700195 |
-0.022 |
|
31-10-2016 |
5440.5 |
0.023 |
|
30-11-2016 |
5665.799805 |
0.041 |
|
31-12-2016 |
5620.899902 |
-0.008 |
|
31-01-2017 |
5712.200195 |
0.016 |
|
28-02-2017 |
5864.899902 |
0.027 |
|
31-03-2017 |
5924.100098 |
0.010 |
|
30-04-2017 |
5724.600098 |
-0.034 |
|
31-05-2017 |
5721.5 |
-0.001 |
|
30-06-2017 |
5720.600098 |
0.000 |
|
31-07-2017 |
5714.5 |
-0.001 |
|
31-08-2017 |
5681.600098 |
-0.006 |
|
30-09-2017 |
5909 |
0.040 |
|
31-10-2017 |
5969.899902 |
0.010 |
|
30-11-2017 |
6065.100098 |
0.016 |
Stock movement report depicts the information related to the movement of the stocks over the specific period of time (He and Krishnamurthy 2013). It is used by the investors for evaluating the performance of particular stock. From the movement of stock for RHS Limited and All Ordinary Stock over the last 2 years period it s observed that the All Ordinary Stock is moderately upward moving. On the contrary, the stock of RHS Limited is significantly fluctuating and had no specific trend (Zhuo-hua, Wen-nan and Zong-yi 2015). Therefore, the stock of RHS Limited is more volatile as compared to All Ordinary Stock. Further, the correlation among two stocks is 0.43. Hence, the stocks are uncorrelated.
Therefore, required rate of return of the company’s share =
R = Rf + β ( Rm – Rf )
R = 4% + 3.07* (6% – 4%) = 10.14%
Conservative investment is the protective strategy for the investors when the risk taking approach of the investor is low and the return is preferred in the short – term period. The investors are generally segregated based upon his return preference and risk taking level (Master and Hao 2014). The conservative investment safeguards the investor against the inflation and the situation of economic downturn. However, investing through this strategy the investor losses the opportunity of gaining higher returns from his portfolio. From the above analysis of RHS Limited it is observed that the company’s beta is 3.07 which are considerably high (Renneboog and Szilagyi 2015). Further, the company did not pay any dividend and was not able to earn any positive income over the last two years. Therefore, the stock of RHS Limited will not be considered as Conservative investment (Guerard 2013).
WACC = E/V * Re +D/V * Rd * (1-Tc), Where,
E/V = Equity percentage in capital structure = 91%
D/V = Debt percentage in capital structure = 9%
Re = Cost of equity = 10.14%
Rd = Rate of debt = 7.22%
Tc = corporate tax rate = 30%
Available information for computing WACC is as follows –
|
Amount in $’000 |
|
|
Amount of Debt |
115,753.00 |
|
Amount of Equity |
1,231,155.00 |
|
Total |
1,346,908.00 |
|
Percentage of debt |
9% |
|
Percentage of equity |
91% |
Thus, WACC = 91*10.14% + 9*7.22% (1- 0.30)
= 9.23% + 0.45 = 9.68%
WACC is the required rate of return for the company after meeting all the expenses associated with the capital and the minimum amount which the company must earn for providing return to the shareholders. It is computed through taking into consideration all the component of capital structure and the cost of each component (Arsov, Shanahan and Williams 2013). It is used to analyse the profitability of a project. If the WACC of the company is high it indicates that the company is highly leveraged and it shall find for cheaper source of capital. Further, the higher WACC represent that the company is heading towards un-sustainability as the burden of higher debt will lead to more interest burden for the company (Chandra 2017).
|
Debt ratio |
Year 2016 = 0.309 |
Year 2015 = 0.306 |
The optimal capital structure is the balanced structure of capital components under which the cost of the capital is minimizes with the maximisation of value. The debt ratio is calculated by dividing the total assets of the company by total liabilities of the company (DeFusco et al. 2015). Generally the capital structure is comprised of equity and debt. If the debt portion becomes high the company becomes exposed to interest risk. Generally, the debt ratio of 40% or lower than that is considered as ideal for any company; It is observed from the above table that the debt ratio of the company for the last 2 years are 30.6% and 30.9% for the year 2015 and 2016 respectively. Therefore, the debt ratio of the company is ideal (Eisdorfer, Giaccotto and White 2013).
Gearing ratio is measured for assessing the leverage level of the firm. It reveals the part of the asset of company funded through equity and part that is funded through debt (Amba 2014). Higher gearing ratio indicates that the debt part of the company is higher which in turn will expose the company to interest risk and sustainability risk. It is observed that RHS Limited’s debt component is 9% only and the equity part is 91%. However, for adjusting the gearing ratio the company reduced its equity from $ 13,50,384 to $ 12,31,155 from the year 2015 to 2016. Any notes regarding this has not been pointed out in the report released by the directors (Zabarankin, Pavlikov and Uryasev 2014).
The directors of the company did not pay or declared any dividend for the financial year. Further no recommendations have been made by the directors to pay any amount through dividend for the financial year closed on 31st December 2016.
Taking into consideration all the above analysis, the client will be suggested not to invest in the company. The reason behind this is that the risk that is the beta of the company is as high as 3.07. Further, the stock movement of the company for the last 2 years period are highly volatile. If the return is considered, the company is not paying any dividend and it was not able to earn any positive return for the last 4 years. Therefore, it risk and return aspect is considered the company is not ideal for investment.
Reference
Amba, S.M., 2014. Corporate governance and firms’ financial performance. Journal of Academic and Business Ethics, 8, p.1.
Arsov, I., Shanahan, B. and Williams, T., 2013. Funding the Australian resources investment boom. RBA Bulletin, March, pp.51-61.
Chandra, P., 2017. Investment analysis and portfolio management. McGraw-Hill Education.
DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E., 2015. Quantitative investment analysis. John Wiley & Sons.
Eisdorfer, A., Giaccotto, C. and White, R., 2013. Capital structure, executive compensation, and investment efficiency. Journal of Banking & Finance, 37(2), pp.549-562.
Guerard Jr, J.B., 2013. Introduction to financial forecasting in investment analysis. Springer Science & Business Media.
He, Z. and Krishnamurthy, A., 2013. Intermediary asset pricing. The American Economic Review, 103(2), pp.732-770.
Lara, J.M.G., Osma, B.G. and Penalva, F., 2016. Accounting conservatism and firm investment efficiency. Journal of Accounting and Economics, 61(1), pp.221-238.
Levy, H., 2015. Stochastic dominance: Investment decision making under uncertainty. Springer.
Master, X.X. and Hao, Y., 2014. An Empirical Study of the Relationship between Capital Structure and Financial Performance–Based on Neural Network Analysis. International Journal of Business and Social Science, 5(4).
Renneboog, L. and Szilagyi, P.G., 2015. How relevant is dividend policy under low shareholder protection?. Journal of International Financial Markets, Institutions and Money.
Rhsc.com.au., 2018. ASX Announcements | RHS. [online] Available at: https://www.rhsc.com.au/investor-centre/asx-announcements/ [Accessed 6 Feb. 2018].
Rhsc.com.au., 2018. RHS. [online] Available at: https://www.rhsc.com.au/ [Accessed 6 Feb. 2018].
Zabarankin, M., Pavlikov, K. and Uryasev, S., 2014. Capital asset pricing model (CAPM) with drawdown measure. European Journal of Operational Research, 234(2), pp.508-517.
Zhuo-hua, Z.H.O.U., Wen-nan, C.H.E.N. and Zong-yi, Z.H.A.N.G., 2015. Application of cluster analysis in stock investment.
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