Financial Analysis of Kathmandu Ltd - Case Study Example

Kathmandu Ltd Financial analysis Name: Lecturer: Course name: Course code: Date: Executive Summary Financial ratios are the company’s main financial indicators for its financial performance and position. Financial ratios are used by potential investors and users in evaluating the firm’s relationship between the items of financial statement and determining the company’s viability of investment (James Wahlen, 2010). Financial ratios are classified based on the financial they provide they include profitability ratios, asset efficiency, liquidity, and capital structure and market performance ratios. Kathmandu Limited is represented the following financial ratios in the year 2010, 2011, 2012 and 2013 financial statements. Table of Contents Executive Summary 1 Profitability ratios 3 Return on equity 3 Return on assets 5 Gross profit margin 6 Profit margin 7 Asset efficiency ratios/ Asset Management ratios 8 Asset turnover ratio/ Total Assets Turnover 9 Days inventory turn over 10 Days debtors turn over 11 Liquidity ratios 13 Current ratio 13 Cash flow ratio 14 Capital Structure ratio 16 Debt ratio 16 Equity ratio 17 Market efficiency ratios 18 Conclusion 19 Reference List 20 Appendix One 22 Appendix Two 23 Introduction Kathmandu Limited is an incorporated limited liability company which engages in designing, marketing and retailing of clothing and outdoor equipments, adventuring and traveling. Kathmandu Limited geographically operates in Australia, New Zealand and the United Kingdom with over 70 stores located Australia, 40 located in New Zealand and 6 United Kingdom based stores. Kathmandu Company is a parent to Kathmandu Pty Limited, Milford Group Holdings Limited, and Kathmandu (U.K.) Limited subsidiaries. Kathmandu Limited is vested in apparel product line that include fleece jackets, down jackets, waterproof jackets, footwear and socks, shirts and pants, merino apparel and thermals. The company’s the equipment product line includes sleeping bags, camping accessories, tents, and traveling accessories. Profitability ratios Profitability ratios are ratios used to evaluating the company’s ability in generating earnings relative to the equity, assets and turnover. Profitability ratio measures the company’s ability in generating earnings and the cash flows in relative to the firm’s investment (Gary Porter, 2012). This ratio entails returns on investment return on equity capital employed, and gross profit margin. Return on equity Return on equity ratio is used determining the company’s profitability of the in relation to shareholders equity. The prospective investors and the company stakeholders are interested in the earnings generated by the company (Thomas, 2008). However this ratio evaluates the company’s efficiency in generating earnings through the shareholders investment. ROE ratio provides comparison compares the extent of net profit to the amount shareholders equity invested in the company. It is arrived at using the formula = net profit / average shareholder's equity x 100. Particulars/ FY 2010 2011 2012 2013 Net Profit 9,387 39,066 34,852 44,174 Average Shareholders’ Equity 239,127 254,926 279,634 294,189 ROE 3.93% 15.32% 12.46% 15.02% From the tables above, Kathmandu Limited shows a variable trend of the company’s return on equity invested. The company reveals return on equity of 3.93%, in financial year 2010 and tremendous increase to 15.32% in subsequent year 2011 with a sequential decrease to 12.46% in 2012 and increase to 15.02 in 2013 financial years. This reveals that for every one dollar company shareholders invested, they earn an average of more than 10 cents thus Kathmandu Ltd is viable for investment. Return on assets This ratio is used in assess the companies’ profits in relation to the average total assets used to generating profits. Return on assets ratio gives comparison between the company’s earnings generated to the total company assets (Riahi-Belkaoui, 2008). In case of higher ratios the companies operates efficiently while lower ratio’s reveals that the competitors has found strategic ways that they operates efficiently thus suppressing the companies’ profitability on the assets. It is arrived at using the formula = earnings before interest and tax / average total assets x 100 From the information revealed from the table above, Kathmandu Limited shows an increasing trend on return on every dollar invested on assets. Although the company reveals a fluctuating trend from 2010 towards 2011, 2012 and 2013 by 6.88%, 16.83%, 13.71% and 15.68%. it still shows a determine increment on the return of each dollar invested on the company’s assets since the company reveals an increase from 2012 towards 2013 financial years. Gross profit margin Gross profit margin evaluates the company's gross profit in relation to sales revenue. It shows the amount of earnings from sales without accounting of indirect cost that reduces the gross margin (Roman Weil, 2012). Companies’ that generate revenue through selling stock will have their main expenses being cost of goods sold. Gross profit margin ration determine the companies efficiency in converting inventory into revenue through sales. It is arrived at using the formula = gross profit / sales revenue x 100 Particulars/ FY 2010 2011 2012 2013 Gross profit 155,289 200,583 219,545 242,025 Sales revenue 245,812 306,143 347,104 383,983 Gross profit margin 63.17% 65.52% 63.25% 63.03% From the table above Kathmandu Limited shows their profitability in meeting their cost of goods sold by utilizing their revenue. Kathmandu Limited shows define and steady gross profit margin from 63.17%, in 2010, 65.52% in 2011, 63.25% and 63.03% in financial year 2013. This describes that Kathmandu Ltd has a stable gross profit margin of 63.77% over the four financial years. Profit margin Profit margin ratio is used in determining sales revenue of a company relative to the earnings before interest and tax. Profit margin is used in evaluating the average amount each dollar of sales contribute to the company's earnings before interest and tax EBIT. Profit margin ratio is considered decisive measure for investors in evaluating the comprehensive company’s profitability (Edward, 1999). It behooves the investors on the measures taken into consideration on evaluating the companies’ performance. It is arrived at using the formula = earnings before interest and tax / sales revenue x 100 Particulars/ FY 2010 2011 2012 2013 EBIT 21,964 57,217 51,126 58,982 Sales revenue 245,812 306,143 347,104 383,983 Profit Margin 8.94% 18.69% 14.73% 15.36% From the tables above, Kathmandu Limited reveal an increasing trend of profit margin although fluctuates in the year 2011 and 2012. Kathmandu Limited profit margin ratio shows that the company is profitable since it has a gradual increase in its profit margin from 8.94% in 2010, an increase to 18.69% in 2011 a slight decrease in financial year 2012 to 14.73% and increase to 15.36% in financial year 2013. This evidence the viability of Kathmandu Ltd for every each of income Kathmandu generates from sales, it has a fluctuating return hence Kathmandu Limited is profitable enough for investors and shareholders. An increase in Profit margin ratio indicates that the company executives as exercise precautionary measures on the issues affecting entities earnings. Asset efficiency ratios/ Asset Management ratios Assets efficiency ratios measure the companies’ efficiency in utilizing assets to generate earnings out of sales. Assets efficiency ratios are also considered as assets management ratio. These ratios indicate the company’s efficiency in utilizing its assets to generate revenues incomes. It portrays a comparison of the company assets and its sales revenue (Chowdhury, 2008). These ratios involves inventory asset turnover that establish the lead time of inventory stock reacquired, Asset turnover ratio which determines the general company’s efficiency of the in making profits per dollar of the total assets investment and debtors turnover that indicates the time debtors pay their financial obligation. Asset turnover ratio/ Total Assets Turnover Asset turnover ratio indicates the companies general efficiency of the in utilizing its assets to generates earnings to the business. These ratios ascertain the efficacy of the firm in generating profit that eases the companies in meeting their expenses (Pamela P. Peterson, 2012). Thus this ratio reveals the going concern of the company and its capability making profits from assets invested. Potential investors and the shareholders utilize this ratio in making decisive responses on the viability of the companies. Particulars/ FY 2010 2011 2012 2013 Sales Revenue 245,812 306,143 347,104 383,983 Average Total Assets 319,414 339,890 372,830 376,217 Assets Turnover Ratio 0.77 0.90 0.93 1.02 From the tables above, Kathmandu Limited shows a steady increasing trend of the efficiency in utilizing its assets to generate earnings (Lev, 2004). Kathmandu Ltd reveal an increase in asset turnover form 0.77 in 2010, 0.90 in 2011, 0.93 in 2012 and 1.02 in financial year 2013. However, the increase in the company’s assets turnover ratio signifies that the company’s has effected measures to increase its efficiency in generating earnings attributable to the shareholders. Days inventory turn over Inventory turnover ratio is a fundamental ratio that evaluates the period of time a company takes to sale the inventory in a financial period. Companies will efficiently pay the short term financial obligation using revenue from sale of their inventories when inventory turnover will be higher (Elaine Henry, 2012). Firms who keep slow moving inventory have a greater of meeting its financial short term obligation. It is arrived at using the formula = average inventory / cost of goods sold x 365 Particulars/ FY 2010 2011 2012 2013 Average inventory 37,416 54,001 73,295 80,031 Cost of goods sold 90,523 105,560 127,559 141,958 Inventory turnover ratio 151 days 186 days 209days 205days The table above shows that Kathmandu limited a decreasing efficiency in converting its inventory into sales thus inefficient in paying its obligations using sales revenue. The company reveals a worsening conversion of inventory into sales from 151 days in 2010, 186 days in 2011 209days in 2012 and 205days in 2013. Steady inefficiency in converting its inventory into sales describes it efficiency position of meeting its financial obligation when they fall due by using sales. Days debtors turn over Day’s debtors evaluate the average time range it takes for a firm to receive money for their trade receivable in a financial year. Business firms should be collecting the amount owed by its credit customers ‘in a short period of time so as to enhance its financial liquidity in meeting obligations of the firm (Riahi-Belkaoui, 2008). Efficient debtor’s collections increases cash flows hence resulting to proper realization of debt from accounts receivable that can be used in settling financial obligations. The lesser the number of days defines the more efficient the company in collecting cash from the debtors. The companies will be inefficient if the foremost debtors are not efficient in paying their company owing. Days debtors turnover = average trade debtors / sales revenue x 365 Particulars/ FY 2010 2011 2012 2013 Average trade debtors 3,903 2,339 3,503 3,668 Sales revenue 245,812 306,143 347,104 383,983 Days debtors turn over 6 days 3 days 4 days 3 days From the tables above, Kathmandu Limited shows a predictable increase in efficiency of collecting of cash from their trade receivables. The company shows increasing efficiency in collection cash outstanding for its debtors from 6 days in 2010, 3 days in 2011, a slight inefficiency of 4 days in 201 an 3 days in financial year 2013. Kathmandu Limited indicates an average efficiency of 3 days in collecting cash by during the four year ending 2013. However, this describes that the company does not have more amounts held by trade receivables at any time during the financial period. Liquidity ratios Liquidity ratios are monetary ratios that evaluate the company’s ability in meeting its short term financial liabilities. These ratios shows the numbers of times that short term financial obligations are gathered for by liquid assets and cash. If the liquidity ratio is greater than one, then it indicates that the company’s financial health is in a good condition (Pamela P. Peterson, 2012). The higher the liquidity ratios indicates higher margin of safety that the companies has in settling its current financial obligations. It includes current ratio, cash ratio, acid test ratio and working capital ratio. Current ratio Current ratio is a financial measure used in evaluating the ability of the firm in meeting short term financial obligation using the current assets. Firms used current assets in financing short term liabilities of the business (Lev, 2004). Current ratio reveals the dollars of current assets the firm has per dollar of current liabilities. Current ratio does not consider the timing of the cash flows thus this ratio can mislead the users. It is arrived at using the formula = current assets / current liabilities Particulars/ FY 2010 2011 2012 2013 Current assets 46,055 59,916 78,609 93,931 Current liabilities 26,007 38,183 38,707 38,820 Current ratio 1.77 1.57 2.03 2.42 From the tables above, Kathmandu Limited reveals an increasing liquidity in meeting their short term financial obligation in using their current assets. Kathmandu Limited current ratio reflects a stable financial state in four consecutive years ending 2013 the ratio is more than one. Although a decrease in 2011 financial year, the company’s management enhances measure that conceptualize on improving its liquidity to meet it’s the short term financial obligations. The company current ratio reveals improvement in utilizing its current assets in paying short term financial obligations from 1.77 in 2010, 1.57 2 in 2011, 2.03 in 2012 and 2.42 in 2013. However this accentuates the viability of Kathmandu Ltd for investment. Cash flow ratio Cash flow ratio is used in evaluating the firm’s ability in settling off its current liabilities using cash and cash items from operating activities (James Wahlen, 2010). Cash and cash items from operating activities are utilized in paying the companies short-term financial obligations. Cash flow ratio determines the extent of firm’s capacity in paying off its short liabilities using cash from operating activities. It is arrived at using the formula = net cash flows from operating activities / current liabilities Particulars/ FY 2010 2011 2012 2013 Net cash flow from operating activities 32,603 39,774 32,528 45,676 Current liabilities 26,007 38,183 38,707 38,820 Cash flow ratio 1.25 1.04 0.84 1.18 From the table above, Kathmandu Limited shows a variable liquidity trend in utilizing its cash and cash items from operating activities to settle current financial obligation. Kathmandu Limited shows 1.25 in 2010, 1.04 in 2011, 0.84 in 2012 and 1.18 in financial year 2013. The decreasing trend from financial year 2010 towards 2012 and immense increase in 2013 accentuates the fact that the management as probably enhances effective measures that promote cash flow from operating activities to meet current financial obligations. Capital Structure ratio Capital structure ratio involves combination of both long term sources of finances and short term sources of finances (Gary Porter, 2012). Capital structure ratios evaluate the companies’ long term financial strength which is delineated by the coverage and structural ratios such as debt ratios, debt equity ratios. This ratio reveals the percentage ratio of the debt and firm's equity and provide a benchmark on extend to which the firm utilizes its long term debt. Debt ratio Debt ratio is used in determining the amount of liabilities that exist per dollar of assets in the firm (Edward, 1999). Usually if debt ratio is more than 50%, it is considered that the corporate finances its investments in assets by using debt than the equity available in the firm. It is accounted for as follows= total liabilities / total assets x 100 Particulars/ FY 2010 2011 2012 2013 Total liabilities 80,287 84,964 93,196 82,028 Total assets 319,414 339,890 372,830 376,217 Debt ratio 25.14% 25.00% 25.00% 21.8% Kathmandu Limited reveals that they rely mostly on debt as compared to equity since their debt ratio is less than 50%. Kathmandu Limited reveals a decreasing trend of debt ratio from 25.14% in 2010, 25.00% in 2011 and 2012 and a decrease to 21.8% in 2013. However, this signifies that the company is not worth to invest. Equity ratio Equity ratio reveals the amount of dollars of equity in every dollar of assets (Roman Weil, 2012). According to the accounting equation total equity is equal to total assets plus liabilities thus if equity ratio is less than 50%, then it reveal that the company was more dependent on debt funding than equity funding. This reveals that the company had more liabilities over its assets. It is accounted for as follows = total equity / total assets x 100 Particulars/ FY 2010 2011 2012 2013 Total equity 239,127 254,926 279,634 294,189 Total assets 319,414 339,890 372,830 376,217 Equity ratio 74.86% 75.00% 75.00% 78.20% Kathmandu Limited table above shows more than 50% equity ratio in four consecutive years ending 2013 thus this means that the company are more dependent on equity as compared to debt. Kathmandu Limited shows an increasing trend of equity ratio from 74.86% in 2010, 75.00% in 2011, 75.00%in 2012 and 78.20% in financial year 2013. However this shows that company has more assets as compared to their obligation thus good for investment. Market efficiency ratios This entails company’s financial behavior ratios in relation to the market performances. This ratio involves, earning per share ratio, and dividend per share ratio. Earnings per share ratio, this is the amount of earnings attributable to ordinary shareholders per share of common stock (Chowdhury, 2008). E.P.S is one of the common ratios used to determine the intrinsic value of a share. Earnings per share can either be diluted or basics. Kathmandu Limited basic EPS ratio shows 0.3 cents in 2010, 19.5 cents in 2011, 17.4 in 2012 and sturdy increase to 22.1 cents in 2013 financial year. Diluted earnings per means that the earnings were calculated presuming that all outstanding convertible shares or options were converted to maximum allowed number of shares of common stocks (Chowdhury, 2008). Diluted earnings per share are shows 0.3 cents in 2010, 19.2 cents in 2011, 17.2 in 2012 and sturdy increase to 21.9 cents in 2013 financial year. Kathmandu’s increasing trend of basic and diluted earnings per share ratio shows viability of investing since the company is retaining some profit as reserves to finance future investments in issue of the shares. Conclusion From the financial analysis of Kathmandu Limited profitability performances of the company disclosed define and steady gross profit margin from 63.17%, in 2010, 65.52% in 2011, 63.25% and 63.03% in financial year 2013. This describes that Kathmandu Ltd has a stable gross profit margin of 63.77% over the four financial years. The profit margin, return on assets and return on equity defines the increasing trend of company in generating earnings thus describing its viability in investing. The liquidity position reveal by the company’s current assets ratio and cash flow shows an improving trend from financial year 2010 as compared to 2013. The recommended liquidity ratio should be 1 but according to the current ratio, the analysis indicates that its more than1 thus the company is in good financial health. The analysis of asset efficiency ratios reveals that the company was more efficient in managing its assets from financial year 2010 as compared to 2013. Kathmandu Limited shows a steady increasing trend of the efficiency in utilizing its assets to generate earnings. Kathmandu Ltd reveal an increase in asset turnover form 0.77 in 2010, 0.90 in 2011, 0.93 in 2012 and 1.02 in financial year 2013 thus showing that the company is efficient in managing its assets to generate returns. The analysis of Capital structure ratio shows an improvement in the company financial stability since the equity ratio shows increasing from 74.86% in 2010, 75.00% in 2011, 75.00%in 2012 and 78.20% in financial year 2013. However this shows that company has more assets as compared to their obligation thus good for investment. Kathmandu Limited ratio analysis accredits viable investment since the company reveals increasing trend in the major ratios. Reference List Chowdhury, A., 2008. Fundamentals of Accounting and Financial Analysis. Pearson Education India. p.189. Edward, I., 1999. Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The journal of finance, 23, pp.589-609. Elaine Henry, W.L.P.M.A.B., 2012. International Financial Statement Analysis. John Wiley & Sons. Gary Porter, C.N., 2012. Using Financial Accounting Information:Ratio Analysis Model. 234-256: Cengage Learning. James Wahlen, S.B.M.B., 2010. Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective. Cengage Learning. pp.51-63. Lev, B., 2004. Financial statement analysis: a new approach. Prentice-Hall. Pamela P. Peterson, F.J., 2012. Analysis of Financial Statements. John Wiley & Sons. Riahi-Belkaoui, A., 2008. Financial Analysis and the Predictability of Important Economic Events. Greenwood Publishing Group. pp.8-19. Roman Weil, K.S.J.F., 2012. Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning. Thomas, A.L., 2008. Financial Reporting and Corporate Financial Statements. John Wiley & Sons. p.218. Appendix One Appendix Two Appendix Three Appendix Four Read More