Contents of Financial Statements and Ratio Analysis - Case Study Example

Ainsworth Game Technology Executive Summary The Ainsworth Game Technology Company was founded in 1995 by Len Ainsworth to presently become the leader in the gaming industry. The company has since been dealing in the development, design and manufacturer of gaming machines. Principally, the company designs, develops, leases, sells and services gaming equipment (Financial Times). Some of its products are the Ambassador video gaming machines, video games and Embassy Jackpot systems. These services are provided in both Australia and globally to include the US, South America, Asia, New Zealand and Europe at large (IBIS World). However the headquarters of the company is in Australis, specifically in Newington, New South Wales. Ainsworth is also a member of the Australian Stock Exchange (ASX) under the stock code AGI since December 2001 under the Consumer Services industry (Australian Stock Exchange 2016). The company presently has a market capitalization worth approximately 740.64M (Google Finance 2016) with 327.72M shares outstanding trading at the price 2.26 AUD (Financial Times 2016). Financial statements The Ainsworth Company prepares annual financial statements for each financial year ending in June of every year. The statements are consolidated reports for all the branches of the company. Moreover Ainsworth prepares segmental reports for each of its reportable segments as per the requirements of the International Accounting Standards. However, this report will only focus on the consolidated reports for the Financial Year 2016 ending June 2016. The reports prepared are the statement of financial position, statements of profit and loss, statement of changes in equity and statement of cash flows. The following are an extract of the reports as presented on the annual report of the company as of 23rd August 2016. statement of financial position ‘000 ‘000 2016 2015 assets cash and equivalents 26433 41300 receivables and other Assets 118800 110722 inventories 55717 58424 prepayments 7112 6177 investments 4557 total current assets 208062 221180 receivables and other Assets 37903 36312 deferred tax assets 1569 2771 property plant and equipment 109493 55279 intangible assets 74124 33090 equity accounted investee 4831 total current assets 227920 127452 total assets 435982 348632 liabilities trade and other payables 30298 29391 loans and borrowings 118 175 employee benefits 6950 9202 current tax liability 9527 12960 provisions 813 754 total current liabilities 47706 52482 loans and borrowings 67777 9250 employee benefits 679 905 deferred tax liabilities 3933 5508 total noncurrent liabilities 72389 15663 total liabilities 120095 68145 net assets 315887 280487 equity share capital 193754 182360 reserves 133610 116385 accumulated losses -11477 -18258 total equity 315887 280487 2016 2015 000 000 revenue 285477 240636 cost of sales -113779 -88640 gross profit 171698 151996 other income 887 445 sales, services and marketing expenses -52028 -38943 research and development expenses -28580 -25431 administrative expenses -19781 -18606 other expenses -4413 -3815 net finance income 6990 28666 share of profit of equity accounted investee 365 profit before tax 75138 94319 income tax expense -19435 -23966 profit for the year 55703 70353 statement of cash flows 2016 2015 ‘000 ‘000 net cash from operating activities 52853 20203 net cash used in investing activities -108566 -28530 net cash from financing activities 40241 -23346 net decrease in cash and cash equivalents -15472 -31673 cash and cash equivalents at July 31 41300 71929 effects of exchange rate fluctuations o cash held 605 1044 cash and cash equivalents at June 30 26433 41300 statement of changes in equity year ended June 2015 issue capital equity compensation reserve fair value reserve translation reserve profits reserve accumulated loss total equity balance at JULY 2014 182327 2426 9684 401 61980 -21516 235302 profit 70353 70353 transfer between reserves 67159 -67159 other comprehensive income 5428 5428 Total comprehensive income for the period 5428 67159 3194 75781 issues of ordinary shares on exercise of share options 33 33 dividends -32227 32227 share based payments transaction 1598 1598 share based payments adjusted on non-vesting options -64 64 total transactions with owners 33 1534 -32227 64 30596 balance at 30 June 2015 182360 3960 9684 5829 96912 -18258 280487 statement of changes in equity year ended June 2015 issue capital equity compensation reserve fair value reserve translation reserve profits reserve accumulated loss total equity balance at JULY 2014 182360 3960 9684 5829 96912 -18258 280487 profit 55703 55703 transfer between reserves 49063 -49063 other comprehensive income 951 951 Total comprehensive income for the period 951 49063 6640 56654 issues of ordinary shares on exercise of share options 52 52 issues of ordinary shares under reinstatement plan 11342 dividends -32245 -32245 share based payments transaction -403 -403 share based payments adjusted on non-vesting options -141 141 -141 total transactions with owners 11394 -544 -32245 141 21254 balance at 30 June 2016 193754 3416 9684 6780 113730 11477 315887 Interrelationship of the Statements The four financial statements are closely related as some of the figures from the different statements are used subsequently and interchangeably in other financial statements. The best links between these statements can be represented using the diagram below Other information in the Report The Ainsworth Company has set up a series of objectives that guide its operation among which are to increase its profits, especially from the global markets, thereby increasing the shareholders’ value: improve cash flows and invest in product research. The company is further seeking to invest in a social online gaming in order to increase the current revenue flows for their gaming activities. In their expansion activities, the Group has secured gaming licenses in other territories such as New Mexico and Puerto Ricco and a total of 37 tribal licenses (Annual Results Announcements 2016 pg. 32). The directors of the company have also set aside an interest within the company in terms of ordinary shares. Of all the directors, the chairperson, Mr. Ainsworth has the largest shares with176M shares, followed by other directors. However one director, Mr. Scheibenstock has no interest in the shares. The company’s directors also have a remuneration policy that is annually reviewed by the Remuneration and Nomination Committee. This policy has in consideration the experiences, performance of the personnel and the group financial performance in determining the appropriate remuneration levels. However, there is provided non cash benefits to the personnel. In compliance with the rules of the Australian government, the company’s reports have been prepared in accordance with Australian Accounting Standards and the rules given under Corporations Act. These regulations are also in compliance with the international Financial Reporting Standards (IFRSs). Contents of Financial Statements Statement of profit and loss The income statement of the company shows that 39% of the group’s revenue is from North America while Australia contributes 29% to this revenue. The least contributor is from the rest of the world. A large amount of this revenue was acquired from the sale of goods at a value of 243,464 with rental and participation revenue at a value of 34,343AUD. The company has categorized the expenses by nature. The largest component of the expenses for the group is raw materials and consumables, finished goods and work in progress at 101, 342, 000 followed by the employer benefits expenses. The large expenses in the material is reasonably so because the group main activities are in line with the acquisition, assembly and manufacture of gaming equipment. A good percentage of the employee benefits expenses are due to the large wages and salaries the companies pay to its staff. The company spends close to 23M in depreciation expenses while Legal expenses form the least part of the expenses. Statement of Financial Position The consolidated statements show that the company’s assets are tied up in the receivables and other assets at a value of 118,800,000 followed by property and equipment. In FY 2016 Ainsworth reported trade receivables in value of 122,054,000AUD.the property, plant and equipment assets include land and buildings, plant and equipment, and leaseholds improvements with plant and equipment having the greatest share. The composition of the property, plant and equipment reflects what would be the group’s asset combination as the products’ manufacturer is leading activity combined with the lease of the gaming equipment as part of their core business. On the other hand, loans and borrowing (the finance lese and bank loans) forms the largest part of the groups liabilities valued at 67,777,000AUD followed by trade and other payables. The group’s total equity is a combination of the share capital and the reserves, reduced by the accumulated loss of the company. The share capital forms the largest share at a value of 193,754,000. Statements of Cash Flows The cash flow statements indicate that the most of the group’s income is from the customers that purchase their product. Ainsworth core business is the sale and lease of gaming equipment making customer receipts as an income inflow a reasonable means of income. Another source of cash inflows was from proceeds from borrowing that amounted to 68,824,000 and issue of ordinary shares (Annual Report pg. 33). It also shows that the group spends a lot of money on paying suppliers and employees, the same impression that was given by the income statement. Another source of cash outflows for investment purposes is through purchases of property, plant and equipment, development expenditure, business acquisition and for acquisition of equity accounted investee. In the course of its financing activities, the group spends money on paying its borrowings, dividends payout and obligation of the lease liabilities. Ratio Analysis The main objective of the ratio analysis is to find out whether the liquidity, profitability and the activity of the Group is stable and whether it is profitable for an investor to invest in the company. Profit margin of any company reflects the percentage of its revenue after all obligations have been met that the company gets to keep as its profits. For the current year, Ainsworth reported a profit margin of =19.51% This shows that approximately 20% of the Groups sales volume is retained as its profits. Return on equity is also a measure of the Group’s profitability and it shows the return that the Group has earned on the shareholders’ investment in the c0ompany. A higher return implies that the shareholders are better off than with a smaller ratio. Ainsworth’s ROE is equated to (Profit after interest and tax – Preference Dividends) / Average Ordinary Shareholder’s Equity = 27.67% The ROE for Ainsworth shows that the investors earned 26.67AUD for each dollar of the common equity. The current ratio is an indication of the liquidity of the company and therefore shows the ability of the firm to meet its short term obligation without compromising of the profitability of the company. Ainsworth’s current ratio is found by =4.36 The current ratio shows that the Group’s current assets can be used to cover the current liabilities four times over. It is also an indication that Ainsworth Group is a relatively liquid company. The capital structure and components of a company are usually reflected on their debt ratio values. The debt ratio values shows what portion of the company’s activities is financed by debt instruments and the general leverage of the company. It is defined as the ratio of the total liabilities of a company to the total assets of the company. For Ainsworth Group, the debt ratio is found to be: = 0.2755 The Debt ratio value of 0.2755 shows that Ainsworth capital structure id=s composed of 27% debt instruments. This is quite a reasonable level. This ratio compares the cash flows of the company from operating activities to the revenues of the company and it shows the ability of the company to turn their sales into cash. It is also a link of the growth of the sales volume and the cash flows. The cash flow from operating activities to revenue ratio of the company is found by: =0.2691 This gives an approximate of 0.26 AUD of operating cash flows in every unit sale or revenue made by the company. References Ainsworth Game Technology Limited Annual Financial Report FOR Year Ended June 2016ABN 37068516665 Ainsworth Game Technology Limited FY16 Annual Results Announcements Financial Times 2016 Ainsworth Game Technology Ltd [online] available from: markets.ft.com/data/equities/tearsheet/profile?s=AGI:ASX accessed 9/9/2016 Google Finance 2016 Ainsworth Game Technology Limited [online] available from www.google.com/finance?q=ASX:AGI accessed 9/9/2016 IBIS World Ainsworth Technology Limited- Profile Company Report Australia [online] available from www.ibisworld.com.au/enterprisefull/growth.aspx?entid=9161 accessed 9/9/2016 Read More