Financial Statement Analysis of AP Eagers - Case Study Example

Executive Summary The report focus on financial statement analysis of AP eagers by examining their annual report for the financial period 2011-2014 and conducting thetrend analysis and ratio analysis. The importance of financial analysis is that, it will aid uses of the report to have a clear understanding of the company situation at the close of financial period. The trend analysis for AP eagers depicts growth in revenue and retainedearning implying that there is a growth in company’s financial performance. Forecasting is important in financial statement analysis since it can be prepared with the assumption that the corefinancial facts concerning a company will be similar for a specified period in the future. The forecast exemplifies where a company will stand if the status quo is upheld. In examining the impact of changes in consideration due to fluctuations in market conditions or customer preference, we attain greater comprehension concerning the financial correlations at work. The importance of preparing and analyzing the financial statement for ApEagers limited is that it will aid managers and the shareholders to identify the problems that experts consider as the leading causes of business failures. In making a comparison of the last five years (2011/ 2015) financial statements, we may determine trends, select appropriate management decisions, and revise the financial forecast before small problems turn into bigger problems (Barbara Smith, 2014). The asset and liabilities depicts a growth due to growth in six of the business. On the basis of ratio analysis, it can be e depicted that AP eagers portray a reduction in profitability as ROE and ROA both declines. The reduction in asset turnover and days debtors depict that AP Eagers is less effective in employing the assets, hence it might spend less time to collect the debts. The liquidity for AP eagers is improving, nevertheless, the low value in the current ratio and quick ratio depict that the company might experience stern liquidity risk of the current situation continues. In this regards, the long term financial stability for Ap Eagers might as well experience some risk. The growth in price to earnings ratio depicts that investors might have high confidence on the company’s performance and going concern. Table of Contents Executive Summary 1 Table of Contents 2 Introduction 3 About AP eagers limited 3 Trend Analysis 3 Income statement 3 Balance sheet 4 Ratio Analysis 6 Profitability 6 Return on Assets (ROA) 6 Efficiency 7 Liquidity 8 Current Ratio 8 Quick Ratio 8 Capital structure 9 Market performance 11 Conclusion 11 Bibliography 13 Introduction Financial reports of the company are important since it depict some vital information for analysis the company business situations. Our report entails analysis of financial report for AP eagers limited for the financial period 2011/14. the analysis is categorised into three main sections; section one entails the background information for AP limited, second part entails the trend analysis and last part entails the ratio analysis which will comprise of efficiency ratios, profitability ratio and liquidity ratio in order to establish the company existing financial performance (Borio, 2008). About AP eagers limited AP Eagers limited is an automotive retail company with the main objective being operation of vehicles dealerships and provision of sales of new and used cars, spare parts and facilitation of allied consumer funding. Trend Analysis The trend analysis is important in providing a proper comprehension in changes made in the company’s financial performance. The trend analysis for Ap Eagers limited depicts a growth in sales levels, the EBIT and the retained earnings. The implication is that the financial performance for the company is improving with a growth in assets, liabilities and equity capital depicting a growth signifies expansion in business operations for AP eager limited (Burton, 2003). Income statement The company’s net income for the financial period 2011/14 has been increasing which implies a growth in the level of retained earnings. From the figure above, it can be observed that there is an increase in sales level which has direct on growth of EBIT. The implication of growth in sales level and EBIT for AP eagers would imply that the dividend paid to equity holders would grow as well. The growth in sales level has been attributed to the growth in productivity, improved customers service and production of quality products (Campbell, 2012). Balance sheet The trend analysis in the company’s statement of financial position is growing which implies that the company’s total assets and liabilities as well as owner’s equity increased. From the figure above, it is apparent that the net asset fore AP eagers limited is growing from $932 million to $1489 million in 2015. The net liabilities are growing as well as from $552 Million to $ 795 million in the year 2015. The owners’ equity is growing from $380million to $ 695 million in the year 2015. It is apparent that the growth in revenue leads to improved company size hence leading to investment in diversified portfolios which justifies the reasons for the growth in the net assets the growth rate in equity capital is due to growth in retained earning unlike the growth rate in liabilities (Dahlquist, 2015).   2011-12 2012-12 2013-12 2014-12 2015-12 Total assets 100% 58% 59% 68% 77% Total current liabilities 100% 149% 150% 174% 198% Total non-current liabilities 100% 290% 292% 340% 385% Total liabilities 100% 98% 99% 115% 130% Total stockholders' equity 100% 143% 144% 167% 189% A comprehensive analysis of the statement of financial positiondepicts that the non-current asset for AP eagers limited grows faster unlike the growth in current assets, which is due to investment in long term venture. Because the company extend its debt to a longer period as depicted in the long termliability for AP eagers limited, the current liability depicts a decline in spite of the company’s growth in total liabilities. Ratio Analysis The ratio analysis for AP Eagers limited depict that the company is having a decline in the profitability as measured in ROE and ROE. The reduction in asset turnover and the days debtors depicts that the company is effective in debtors collection which will have less risk in working capital management, the liquidity for Ap eagers limited is growing, nevertheless, the low value in the current ratio is depicts that the company is experiencing a growth in financial leverage, the dent funding is the main source of finance for Ap eagers limited. The long terms financial stability might be at risk. The growth in price to earnings ratio depicts that investors for Ap Eagers limited might have strong trust on the company’s going concern and the financial performance (Deegan, 2014). Profitability Return on Assets (ROA) The ratio measures the extent to which cash invested in the company by equity shareholders canrealizereturnon their investment. The net margin for AP Earges limtiedfor the financial period 2011-15 depicts a growing. The implication is that the profitability of the company is improving since a growth in net margin would imply an increase in the dividend paid. Hence, cash will be spent on repaying the debt. Profitability 2011-12 2012-12 2013-12 2014-12 2015-12 Return on Assets % 4.39 5.25 5.31 5.92 6.06 Return on Equity % 10.86 13.06 12.64 13.59 13.49 It can be observed from the above that the there is an increase in the level of profitability as ROE and ROA is increasing. It turns to be that growth in ROE implies that AP eagers limited is capable of realising moire profits for every equity capital. The ROA depicts a growth implying that for every dollar of assets, the company realises more in terms of net profit as observed in the profitability ratio. The company growth in revenue and EBIT has been growing. Nevertheless, the current economic situation makes the company depicts a growth in price of the product ion the competitive market which leads to growth in profitability due to increase in demand of the company’s product and services (Deventer, 2013). Efficiency Efficiency ratio evaluates the extent to which the company uses the assets and liabilities internally. The ratio works out the turnover of receivables, the repayment of debt, the amount and use of equity and the inventory consumptions rates. With declines in receivables turnover and inventory turnover during the periods under consideration, AP Eager’s efficiency ratio is improving. This suggests the Company’s cash management policy is effective due to improved working capital management. The effect is that presence of cashadequacy would affect business operations due to ehanced working capital. The company is in a position to diversify its investment alternative and consequently affecting business expansion in terms of growth in size and business operations (Borio, 2008). Profitability 2011-12 2012-12 2013-12 2014-12 2015-12 Asset Turnover (Average) 2.61 2.49 2.22 2.18 2.25 Days Debtors 14.42 13.39 13.22 13.48 14.46 As depicted in the table above, the asset turnover is decline and Days debtors for APeager is growing. This depicts the diverse transformation of the effectiveness of the company which implies that the working capital for the company is enhanced. The asset turnover ratio might evaluate effectiveness of the company to make use of assets in generating more returns in terms of revenues. The reasons for the changes as depicted in the table above is due to growth in assets base hence, as much as the company is depicting a growth in sales level, the larger the asset , theless the effectiveness in using the assets to create the revenue. The day’sdebtors is improving which implies that the company would collect more of its debt leading to improved working capital management. The large percentage of cash for the company’s net revenue might be the main justifications form the short debtor’s collection period as observed by the short debtor’s day ratios (David, 2015). Liquidity Current Ratio This is the ratio of a current asset to current liabilities. The short-term creditors finance considers currentratio because it minimizes their risk. The shareholders of the company prefer low current ratio to ensure that there are sufficient funds for business growth. Quick Ratio The current asset employed in the quick ratio is cash, account receivables and the notes to receivables. The quick ratio for the company is declining from the financial year 2011 to 2015. Therefore, the company dollar amount of liquid cash existing to the dollarvalue of current liabilities is improving. 2011-12 2012-12 2013-12 2014-12 2015-12 Current Ratio 1.29 1.15 1.26 1.21 1.29 Quick Ratio 0.3 0.23 0.25 0.26 0.32 From the table, it can be observed that the liquidity for AP eagers limited is enhanced. The current ratio is slight growing implying that for every dollar of the current debt, the company might have $0.15 value of the current assets, this changes might chiefly attributed to the reduced externalsource of finance to long terms funding’s so as to capitalise on the low interest rate on loans. The quick ratio points out that AP Eagers limited depict small percentage of non-inventory short term assets to cover for the current debt. Even though the quick ratio for the company is growing from 0.3 to 0.32 in the year 2015, nevertheless, the low value might exposure the company toe liquidity risk (Eugene F. Brigham, 2015). AP Eagers limited depicts a high value in the current ratio and low value in quick ratio which implies that the company is not exposed to liquidity risk since; the current asset can cover its current liabilities effectively which is an indication that there is improved working capital management.The liquidity for AP eagers is improving, nevertheless, the low value in the current ratio and quick ratio depict that the company might experience stern liquidity risk of the current situation continues. In this regards, the long term financial stability for Ap Eagers might as well experience some risk. The growth in price to earnings ratio depicts that investors might have high confidence on the company’s performance and going concern. Capital structure An appraisal of the company’s equity as well as debt structure, the kind of equity and the kind of debt, the gearing ratio will be deem significant in appraising the business situation for Ap Eagers limited company. The significance of undertaking an analysis of capital structure is that it will provide an understanding of the company’s current financing risk situation as well as recommend on an optimal capital structure which is a mix of debt and equity that will lead to low cost of capital and high value of the company. We used the values of long-term debt as well as shareholder’s equity to understand the debt to equity ratio for the company (Gregoriou, 2012). The result of the analysis is depicted in the figure below 2011-12 2012-12 2013-12 2014-12 2015-12 Financial Leverage 2.45 2.52 2.26 2.33 2.14 Debt/Equity 0.43 0.45 0.39 0.37 0.3 Interest Coverage 3.26 4.17 4.74 5.66 6.68 From the table above, it can be observed that debt ratio for AP Eagers limited is declining from 0.43 to 0.3 in the financial year ending 2015. This is due to the fact that the profitability growth leads to accumulation of large amount of retained earning which lead to internal funding of the new ventures. As results, the growth rate in owner’s equity for AP Eagers limited might be faster unlike the growth rate in total debt which makes the debt financing insignificant in the company’s capital structure. However, because the debt ratio for AP Eager limited is less than 50%, the debt source of finance might still be the main source of financing for AP eagers limits since, a debt level of 30% as at 2015 is less volatile and would have impact on the company’s performance and going concernassumptions, which depicts a high financial leverage that AP Eagers uses. The growth in profitability ensures that the company depict a growth in interest coverage from 3.26 to 6.68 by the year ending 2015 which implies that the EBIT for AP Eagers limited is sufficient to settles 6.68 times of the interest expense it incurred in the year 2015. As results, even though AP Eagers makes use of high financial leverages, the improved profitability would lead to long terms financial stability.The table above depicts that the debt to equity ratio in the company is growing which implies therefore that debt financing level is increasing. This is ideal since, debt source of funding is cheap and attainable because debt financing do not attract tax (Campbell, 2012). Market performance From the table above, it is apparent that the EPS for APeagers limited is growing with a growth in price earning and price ratio.The growth is attributed to growth in profitabilityhence; the investorswill have positive confidence in the company’s going concern assumption. In this regards, it will lead faster growth in share price and price to earnings ratio improves Conclusion It can therefore be concluded that AP eagers limited is improving in its business operations due to growth in revenue and the retained earnings. The implication is that it will lead to increase in financial performance. The asset and liabilities as well as the owner’s equity depict a growth from the year 2011 to 2015 which led to expansion in business operations. The ratio analysis depicts an improved profitability for the business since ROA and ROE is increasing each financial periods. The improved asset turnover ratio and days debtors depicts that AP eagers limited is having an improved working capital management since, the company makes good use of the assets to generates more revenues while spending less time to collect its debts. The liquidity risk of AP Eagers limited has been improving, the high value of current ratio and quick ratio depicts that the company will not be subjected to liquidity risk in the future hence guaranteeing the company’s going concern assumption and effective working capital management. Even though there is a reduction in financial leverage for AP Eager limited, the debt source of finance might still be the company’s main source of external; finance. As results, the long terms financial stability for the company might as well experience some problems. The growth in price to earnings ratio depicts that investors might have good trust and confidence on the company performance.The overall trend in business situation for AP Eagers limited indicates an improving trend as observed in net margin, liquidity ratio and efficiency ratio. If this continue, the impact could be that the performance of the company’s stock price will grow in the stock market which will make the Company’s business operation improves in terms of capital and cash inflows. Free cash flows are improving from 2011 to 2015 which makes the business able to finance its debt and dividend payments. Bibliography Barbara Smith, ‎.K., 2002. Personal Financial Planning and Superannuation. Barbara Smith, ‎.K., 2014. DIY Financial Planning: Creating Wealth Through Careful. Borio, C., 2008. The Financial Turmoil of 2007-?: A Preliminary Assessment. London : Cingage learning. Burton, M., 2003. The Financial System and the Economy - Page 445. Sydney: Springer. Campbell, J.Y., 2012. The Econometrics of Financial Markets. Dahlquist, C., 2015. Technical Analysis: The Complete Resource for Financial. New York: John Wiley. David, M., 2015. Statistics and Data Analysis for Financial Engineering. New York: John Wiley & Son's. Deegan, C., 2014. Financial Accounting Theory. New York. Deventer, D., 2013. Advanced Financial Risk Management: Tools and Techniques. New York: John Wileys $ Son's. Eugene F. Brigham, ‎.F.H., 2015. Fundamentals of Financial Management - Page 294. London. Gregoriou, G.N., 2012. Reconsidering Funds of Hedge Funds: The Financial Crisis. London. Appendices Balance sheet   31/12/2015 31/12/2014 31/12/2013 31/12/2012 Total current assets 720 635 546 543 Total non-current assets 769 723 671 635 Total assets 1489 1358 1217 1178 Total current liabilities 558 525 432 471 Total non-current liabilities 210 215 212 210 Total liabilities 786 767 678 710 Total stockholders' equity 296 242 231 206             2011-12 2012-12 2013-12 2014-12 Total current assets 100% -12% -14% -1% Total non-current assets 100% -6% -7% -5% Total assets 100% -9% -10% -3% Total current liabilities 100% -6% -18% 9% Total non-current liabilities 100% 2% -1% -1% Total liabilities 100% -2% -12% 5% Total stockholders' equity 100% -18% -5% -11% Profitability Ratios Return on Asset (ROA) EBIT x 100 = x% Average assets Return on Equity (ROE) Profit available to owners x 100 = x% Average owners’ equity Ape Eager ROE 31/12/2015 31/12/2014 31/12/2013 31/12/2012 Retained Earnings/Owner's equity retained Earning 86 76 64 55 Owner’s equity 296 242 231 206 ROE 0.29 0.31 0.28 0.27 ROE 31/12/2015 31/12/2014 31/12/2013 31/12/2012 ROA EBIT/Net Asset EBIT 143 117 106 102 Net Asset 1489 1358 1217 1178 0.096 0.086 0.087 0.087 Efficiency Ratios Asset Turnover Sales revenue = x times Average total assets Days Debtors Average accounts receivable x 365 days = x days Sales revenue AP Eager’s Asset Turnover Sales/Average total Assets 31/12/2015 31/12/2014 31/12/2013 31/12/2012 Sales 3246 2858 2673 2673 Average Total Asset 744.5 679 608.5 589 days 365 365 365 365 Asset Turnover 1591.4 1536.3 1603.4 1656.4 Days Debtors Average accounts receivable/ x 365 days = x days Average accounts receivable 70.5 56.5 47.5 48.5 Sales revenue 3246 2858 2673 2673 365 days 365 365 365 365 Days Debtors 7.93 7.22 6.49 6.62 Liquidity Ratios Current Ratio Current assets = x times Current liabilities Quick Ratio Current assets – inventory = x times Current liabilities AP Eager’s 31/12/2015 31/12/2014 31/12/2013 31/12/2012 Current Ratio Current/Current Liability Current Asset 720 635 546 543 Current Liability 558 525 432 471 Current Ratio 1.29 1.21 1.26 1.15 Quick Ratio Current-stock/Current Liability Current Asset 720 635 546 543 Stock 530 469 419 410 Current Liability 558 525 432 471 Quick Ratio 0.341 0.316 0.294 0.282 Capital Structure Ratios Debt Ratio Total liabilities x 100 = x% Total assets Debt Coverage Ratio Non-current Liabilities = x times Net Cash Flows from Operation Activities Interest Coverage EBIT = x times Net finance costs AP Eager’s 31/12/2015 31/12/2014 31/12/2013 31/12/2012 Debt Coverage Ratio Non-current Liabilities /Net cash flows from operating activities Non-current Liabilities 210 215 212 210 Net Cash Flows from Operation Activities 85 99 76 56 Debt Coverage Ratio 2.5 2.2 2.8 3.8 Interest coverage 31/12/2015 31/12/2014 31/12/2013 31/12/2012 EBIT/ Newt finance cost EBIT 143 117 106 102 Net finance cost -56 -43 -10 26 Interest coverage -2.6 -2.7 -10.6 3.9 Market Performance Ratios Price to Earnings Ratio Current market price = x times Earnings per share AP Eager’s 2011 2012 2013 2014 Earnings per Share 0.25 0.33 0.35 0.46 Price 21.70 22.10 27.49 33.42 Price to earnings $86.8 $67.0 $78.5 $72.7 Read More