Myer Company - Credit Scoring Models, Credit Ratings, Credit Risk Models - Example

CREDIT ANALYSIS REPORT MYER LIMITED 2015 Table of Contents : Executive Summary 3 Introduction: 3 Myer Company Information 4 Australine Economy 5 Industry Analysis & Industry Trends 8 Myer Revenue 10 Four C’s, Error: Reference source not found Capacity..………………………….…………………………………………………………11 Ratio Analysis Error: Reference source not found Collateral. 16 Covenants 16 Character.. 17 Credit Models Error: Reference source not found Z-score 16 Springate Analysis: Error: Reference source not found Median rating 17 Distance to Default Error: Reference source not found Conclusion/Credit Rating.…………………………......……………………………………..28 Reference List……….…….………………………………………………………………….30 1.0 Executive Summary The research focusing on creating a consistent credit rating of MYER Limited to establish the credit worthiness of the company. The assessment commands the comprehensive appraisal of the company state of financial performance by employing the significant ratio analysis to ascertain the liquidity risk, profitability risk as well as the investment risk of the company as well as performing the forecast concerning the company future business trend and situation (Altman, 1983). The assessment entail as the comparison with the industrial average in order to depict the business performance against other firms in the industry. The assessment of the economic as well as industrial tend provides the external factors impacting the performance Myer limited as well as its financial situation for the 2015.The median rating is also significant tool for ascertaining the performance of the company. This model is significant for the investor. The Z-score model is employed to depict the investors the extend to which the business is efficient and effective. 2.0 Introduction: Ascertaining the credit of a company is significant since, it portray the ability to which the debt can be paid. This anticipation is appraised from the firms’ financial structure as well as economic situation impacting it. The investors depict important concern in the credit worthiness of the firm. This ion appraisal of the of the capability of the firm to comply with its financial commitment, appraisal of tis credit risk. The credit worthiness of the firm can therefore be appraised using the following approach. Credit scoring models Credit ratings Credit risk models Traditional credit analysis 2.1 MYER Company Information: MYER is Australia largest departmental store group. Listed in Australian stock market with its ASX code MYR. The business is in retail industry the company deals with fashion styles and clothing the performance of MYER limited is below those of the market. It can be depicted that the market returns of the security is 1.000 while of the MYER is -1.0408 which therefore implies that the securities of MYER is underperforming. Departmental stores The retail stores major in premium end of the market by way of brand as well as product. The business. The company focus on improving the volume of fashion styles. At present the business place more concern on producing unique brand and at present it have more than 300 portfolio of brands. The brands is used across Australia 3.0 The Australian Economy: Present, the Australian economy is of the first test growing economy globally with its gross domestic predict worth $U1560.6 as of 2014 .The country depict a growth rate of 0.5 .the economy of Australia is overlooked by the service sector amounting to more than 65% of the entire gross domestic product (Anthony Saunders, 2002). The very significant well as robust growing sector of the economy is the industry. Mining is worth 13.6% of the entire economy while manufacturing is 10% with 10.5% as construction section, with the remaining 1.9% as agriculture sector. . The economy of Australia has been affected by the GFC. The impact on Australia’s bank market has been less affected due to less people going for mortgage securities as well as its derivative of the US market. Furthermore, the major industry mining in Australia is significantly declining after the GFC. The GDP growth rate is upheld and growing at a constant rate which therefore predicting a growing trend for the effect of GFC and the statistic provides that there is much more growth as compared to previous years economy growth. According to the reserve bank of Australia, the forecast for the Australia’s economy and its key trading partners is growing. The average growth in trading partner is anticipated grow much faster unlike the growth of 2014/13.this is due to the recovering economy (Bernd Engelmann, 2011). Furthermore, the less exchange rate depicts a positive trend on the GDP. The rate is anticipated to provide some increase to the activities in the traded economy due to enhancement in numerous indicators for the last few years of economic growth rate. By 2016, the economy forecaster by RBA anticipates that the Australia economy will be at its pick. The annual cash rate remain constant in the year 2008 hence, the reserve bank of Australia declined the value to 3.75% leading to an improvement by 2010 to 4.5% and continue being stable for the next subsequent years to date. To improve the economy. The RBA commended on reducing the cash rate of interest rate from movement 2011 and by 2015, the interest rate is way down. The effect of the low interest rate is that it will advantage the company since; there is less cost of borrowing for loan. 4.0 Industrial and Trends Analysis: For the last 6 years, the department stores have strived to operate profitability consequential from weak retail business environment with no confidence by customers due to effect of global financial crisis (Bernd Engelmann, 2011). The customers are increasingly conscious ion the price as well as unwilling to spend much of their income but considering to pay more on debt and savs more. The department store industry will keep on facing the intricacy of the effect of global inflation. It is anticipated the income will contract at a yearly rate of 2.7% to year ending 2016. As much as the reaction from the customers is growing as well as the interest rate is declining, the customers are anticipated to remain prudent since, the forecast depict that there will a d3cline in the year 2015-16. The growth in extra income is driven by the latest opening of new departmental stores. The benefit is that the players in the market will have an ideal positioning the market and to benefit from the improving economy. Nevertheless, the industry will encounter growth in the level of competition from online retailers as well as the em4rgence of new global fashion Style Company to Australia for the next five years. It is antiquated for the financial year 2018-2019; the revenue growth rate will improve at an annualised rate of 0.4% as depicted in the table below. Revenue Outlook Year Revenue $ million Growth % 2014-15 18,955.0 1.1 2015-16 19,366.1 2.2 2016-17 19,454.2 0.5 2017-18 19,143.5 -1.6 2018-19 19,126.0 -0.1 2019-20 19,202.5 0.4 For the next 6 years, the industrial net profit margin will grow to 6.3%.the firm anticipation on enhancing the supply effectiveness as well as proper inventory management is assumed to increase the economy as well as the company’s reported net profit and the sales revenue. It is projected that there will be an improving trend in product from the manufacturer in low cost nation (Christian V. Petersen, 2012). The redesigning process is robust in the next 6 years. The key players will experience structural alteration in an effort of curbing the growth rate as well as the effect of competition from the local company as well as the entrance of global company. Myer limited has therefore focused on redesigning its departmental stores by strengthening its grasp on the premium market. The probable mergers of upmarket for MYER and David Jones will drastically transform the structure of the industry with the integrated market between the two sectors projected to be roughly to be more than 265.the merger proposal is worth $ 3million and it is anticipated that it will save the cost by $85 million within the next three years. 5. MYER Revenue The company place more reliance on the cash flows from sales to appraise the worth of the business in a given financial year. The analysis of revenue stream for MYER is [portrayed in the table below. Period Ending 26/07/2014 27/07/2013 28/07/2012 30/07/2011 Total Revenue 2,741,000   2,748,000   2,726,000   2,776,000 From the above table analysis, it can be concluded that there is an increasing trend in the level of revenue from 2748000 in the financial year 2013 to 2741000 in the year ended 2014. The Four C’s The Four C assessment to approximate the possibility of defaulting consequential from the traits, security for loan as well as the capability. The approach commands assessment of the borrower on the basis of qualitative and quantitative techniques. It is key constituent in a credit report of whichever corporation since; the approach is significantly employed by the lender to appraise the credit worthiness of the borrowers (Dickie, 2006). The constituent of the assessment might be extended as per the situation of the corporation. This component is expounded in detail below. 1. Capacity The financial report of MYER limited depict a decreasing level of revenue income from 2748000 in the financial year 2013 to 2741000 in the year ended 2014 as well as the pre tax profit improved with small changes. The company realised a decline in cash flows Profitability ratios: The ratio appraises the busies over effectiveness as well as the performance. The ratio relevant for the research is the use of newt profit margin as well as the gross profit margin. Gross Profit Margin: The ratio is used to appraise the company performance based on revenue and cost of goods sold. It depict the extent to which the company is best controlled since, the bigger the margin the better the business and its operation. Gross profit margin is arrived as follows The gross profit margin for MYER limited for the year 2014 is 46.91 which is low since it implies that 0.4691will be retained in the company as reserves in order to be used to imburse the selling, general expense and other miscellaneous cost Operating Profit Margin: Operating profit is also known as EBIT. The operating profit ratio is an appraisal tool for the entire operating efficiency of the company by including g the entire cost of the ordinary, day to day as well as business expense The EBIT for MYER limited is 5.05 in the year 2014 and 6.8 in the year 2013.The ratio depict that the business ought to focus much more on enhancing operating cash flows because, it permits the company to place emphasise on using internal source of finance instead of going for external source. Profit Margin: It is deem that the net profit margin to be more significant as an appraisal tool for assessing the net profit margin for Myer limited. The net profit margin depicts the extent to which every unit of sales show up as net income when the entire expense is deducted. The net profit margin therefore appraises the profitability after deducting the entire operating cost. 2010 2011 2012 2013 2014 Net profit Margin 2.29 5.75 5.11 4.65 3.59 From the above trend in net profit margin, it can be observed that there has been an increasing trend from the year 2010 to 2014 which implies that the profitability ratio for MYER is improving. Cash Flow Margin: The cash for margin for MYER limited is 6.8% which implies that link between the cash flow and the sales is improving due to inverse relationship depicted between the cash flow and the sales level (Dickie, 2006). The company requires the cash in their daily operation in order to finance its daily business operation and consequently, the more the reported sales level, the higher the amount of operating cost to paid. Hence the cash flow margin ratio appraises the capacity of the company to change sales into cash. Return on Assets (also called Return on Investment This ratio measures the effectiveness of the company to control its investment in asset as well as employing the asset effectively in order to create more profit to the business. The ratio appraises the amount of profit realized from the company’s level of venture in total asset. The ratio is derived as follows. 2010 2011 2012 2013 2014 Return on Asset 3.53 8.12 7.15 6.59 5.09 The above ratio analysis depict that the return on asset is improving every year from 2010 to 2014 which implies that the company is effective in employing the asset to generate more net profit to the business which implies that the management are efficient in utilising the asset to create more revenue to the business. Return on Equity: The Return on Equity ratio is measure the extent to which money invested inform of equity is used in the business (Krishna G. Palepu, 2007). The ratio is significant since shareholders look at the extent to which the company is using the equity capital in generating more wealth as well as it is used by new stakeholders to decide on whether to invest in company or mot/the ratio is derived as follows. 2010 2011 2012 2013 2014 Return on Equity 8.42 18.67 16.19 14.42 11.01 It can be observed from the table above that the return on equity is improving each here which further implies that the business operation is effective since, the shareholders equity is fully utilised to increased shareholders wealthy which is encourage. Coverage Ratio: This ratio is significant since it is employed in appraising the extent to which the company pay interest on debt. Where there is less value, it depicts more business to the company in repaying the interest. 2010 2011 2012 2013 2014 coverage ratio 3.1 6.83 6.98 7.26 7.04 The coverage ratio above provides an increasing trend from the year 2010 to 2014.This might is due to heavy reliance on external debt to finance the business operation. C Interpretation: MYER ratio Analysis It can be observed from the ratio analysis for MYER limited for the financial year 2010-2014 that the entire ratio is depicting an increasing trend which implies that the company is effective and improving in tis business operation each year due to effective administration of inventory management as well a the debt. The return on asset and equity ratio as well as depict an increasing trend which implies that the equity capital for shareholder is put for right use and thus the shareholder are deriving wealth from their investment Collateral: This is an appraisal of the quality as well as the worth of the security pledged asset as well as the capability of refinancing the debt by appraising its steadiness of cash generation so as to fiancé the debt capital. Short term solvency ratio is employed to assess the relevance of the liquid asset to meet its short term obligation as and when they fall due for repayment 1. Covenants: The short term borrowing for MYER limited portray a positive trend with specific covenant that the company ought to comply with (Ong, 2002). Also, the worth owing under the unsecured bank loan facility depict some changes in that will restructure the optimality of capital structure. 2. Character: The character assessment entails the following five parts Report on the remuneration The Audit and risk management The ownership structure and influence Independence Ownership Structure & Influence: The structure ownership as well as external impact comprehending of the company is important specifically when there is known key stakeholders. Conversely the presence of huge number of nominee shareholder will create assessment of the consideration of share ownership intricacy. Report on the remuneration: The remuneration report of MYER limited for the year ending 2014 is in conformity with section 400A of the corporation Act. Audit and Risk Management: Integrity in financial reporting and regulatory conformity Audit and risk management committee The Audit and risk management committee is accountable for helping the board in complying with the requirement of the financial reporting framework, risk management as well as compliance accountability. The risk framework; MYER limited is adopted the a comprehensive as well as structured risk framework to guarantee that risk is identified, assessed, checked and controlled. External Auditor The risk and Audit committee has a central role of appraising as well as checking the performance and independence of the external auditor in providing a free and reliable audit report. Independence: The provision of true and fair view of the comprehensive annual report for the year ended 2014 of its performance for the year ended 2014 as well as in compliance with Australian accounting standard and the corporation regulation act 2001 and the international financial reporting standards. Character Conclusion: The company (MYER Limited) has adopted stern appraisal in diverse features so as to charge the accountability as well as duties to shareholders (Paul Healy, 2012). The corporation related to the function of shareholder. The business firmly comply with the AS recommendation guidelines to disclose information pertaining the business performance. The board of directors for MYER limited comprise of both directors from diverse background as well as corresponding competency and know how. The company depict stern disciplines i9nattaining its objectives as well the responsibility. There is independence of auditing services as well as the board comprise of both internal and external executive and frequently holds meeting which utmost 8 times every year as well as the executives is frequently part of the meeting. As a result, promising a reduction in the extent of the agency problem existing in the company. Credit Models: Credit analysis: The credit analysis approach by is a methodology of the technique of multiple discriminate assessment in order to work out the credibility as well as the consistency of the issuers. The process entails the consideration huge number of financial traits concurrently such s the profitability ratio. Liquidity ratio and the solvency ratio. 1. Z-score: The Z-score model methodology is employed to appraise the performance of MYER limited. The method is worked out on the basis of projected comprehensive statement of financial position as well as the integrated income statement for MYER limited 2014. Z-score 2013 2014 2015 Working capital/Total asset -0.0078 0.083  -0.0097  Retained earnings/Total assets 0.14 0.16 0.19 Sales/Total assets 1.5 1.6 181  Pre-tax profits/Total assets 0.11  0.113 0.112 Book Value of equity/Book value of debt 6.2  6.2 6.2 Z=1.2X1+1.4X2+3.3X3+0.6X4+1.0X5 6.7  7.6 8.92  It can be observed from the above table that MYER limited depict Z-score of 8.92 in the year ending 2014 with it the level of z-score implying that the company business operation is healthy. This is because; The Corporation with values of Z-score tend to portray some distinct traits. They are deeming to be steady and operating well in terms of profitability. The scores range between 1.5 to 3 with the score for less than one which point out some distress possibility. 2. Springate Analysis: The approach is on the basis of the Altman’s Z-score model but merely merge the four ratios as integrated. Limitations of the models The model assumes that the sample data to be normally distributed about a mean as well as it doesn’t get rids of the entire problems linked to accounting ratio (Penman, 2010). The poorer is unreliable since, subsequent to two years, the predictive potency is unreliable unlike the random approach model. The model is on the basis of small samples and consequently it might turn out to be unbiased since not all information is included for assessment. The springate assessment for MYER limited is depicted below. Springate Analysis 2015 Working capital/Total asset -0.0097  Retained earnings/Total assets 0.19 Sales/Total assets 181  Pre-tax profits/Total assets 0.112 Book Value of equity/Book value of debt 6.2 Z=1.2X1+1.4X2+3.3X3+0.6X4+1.0X5 8.92  3. Median rating: The model uses the ratio and they are considered significant for assessment in MYER limited. The worth of debt is appraised using amortized cost the credit issuer has as well as depicts same progression for the ratios. Rating ratio FY 2013 FY 2014e Rating FY13 Rating FY14 Operating income before D&A/ Revenues .15 .16 CCC CCC ROC 12.16 11.45 B B EBIT Coverage 16.78 14.78 A A EBITDA Cover 20.68 21.08 AA AA Funds from operation/ Total debt .28 .32 BBB BBB Free operating cash flow/Total debt % .19 .29 BBB BBB Discretionary cash flow/Debt % -0.11 -.029 CCC CCC Debt/EBITDA (x) .621 .72 AAA AAA Debt/Debt + Equity .11 8.0 AAA AAA From the above assessment, it can be therefore concluded that the ideal rating for MYER limited is BB. The assessment and conclusion is reached as per the Median rating and the S&P 200. 5. Distance to Default: The anticipated rate of default is slightly diverse model from the prior Z-score model. From our assessment, an introduction to risk model. The logic of the model is that assumption of the diverse between the worth of the asset as well as the liabilities. A greater change of default is realized where there is a close between the value of liabilities and asset of the company. The distance to default is the variability between the asset worth and the liabilities portrayed as the standard deviation. This variation is replaced with Z-score in the cumulative density function to realize a probability which is thereafter correlated to standard and poor’s risk ratting decisive factor. Conclusion/Credit rating: The Comprehensive annual report for MYTER limited for the year 2013-2014 provides useful data for appraising the company credit worthiness. The assessment as per the ratio analysis provides that the business operation is improving in terms of profitability. Liquidity and solvency. It can be observed that the trend in revenue growth is improving every financial year but with decline in reported net profit due to unsystematic risk affect the industry. In making industrial analysis, it can be observed that the performance of MYER limited is superior against other companies in the same industry as David Jones limited. As a result, MYER limited portray an exemplary performance in the market. The cash flow for MYER limited portray is improving use improved profitability trend which implies that working capital for the company is effect. The return on equity for MYER limited is 11.04 in the year 2014 while 14.01 in the year 2013.this depict a declining trend and thus the company reputation is affected in that investor will discourage in shay to invest their funds in a company that will not guarantee the wealth maximisation in term of positive returns from investment. The debt ratio depict a value of 0.11 implying that the company is able to control its debt worth effectively and thus reducing the risk of debt financing leading to improved working capital management. The company must deem reviewing its Z-score model frequently in order to ensure that shareholders maximization is the main objective of the business operation and equity funds utilization. The Model therefore provides a value of more than 1.9 implying that is effective in terms of working capital management an liquidity position which imply that the going concern Assumption ism ideal. This is a good sign that the business is operating well and consequently investor will encourage to the company since, they RE Guaranteed of their returns from investment. Nevertheless, it is appropriate to consider the Z-sch0ore as a measure of relative financial performance of MYER limited instead of using is as a predictor model in appraising the business performance. The credit rating result provides in comparison with the mean rating average as per the grating rating agency depict that some ratios is classified 8inmder the BBB rating other under the CCC rating. The distance to default model provides that there is significantly low opportunity of default which implies that the performance of MYER limited is effective and has an improved working capital management. It must be realized that the rating is merely a sign of venture advantage since the rating rarely holds solution or an appraisal of the value of assert hence the rating is not meant to be relevant for a venture since, rating considered as a feature of venture verdicts. Reference list Altman, E. I. (1983). Corporate Financial Distress: A Complete Guide to ... - Page 101. Altman, E. I. (1988). The Prediction of Corporate Bankruptcy: A Discriminant . Anthony Saunders, ‎. A. (2002). Credit Risk Measurement: New Approaches to Value at Risk . Bernd Engelmann, ‎. R. (2011). The Basel II Risk Parameters: Estimation, Validation. Christian V. Petersen, ‎. P. (2012). Financial Statement Analysis: Valuation, Credit Analysis, . Dickie, R. B. (2006). Financial Statement Analysis and Business Valuation. Krishna G. Palepu, ‎. M. (2007). Business Analysis and Valuation: Ifrs Edition. Ong, M. K. (2002). Credit Ratings: Methodologies, Rationale and Default Risk. Paul Healy, ‎. P. (2012). 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