Financial Analysis for Collins Food Ltd - Case Study Example

Financial analysis for Collins Food Ltd Name: Course: Course code: Tutor: Date: Executive Summary This report covers the financial analysis of Collins Food Company, one of the leading companies in Australia that administers and manages various hotel segments. This report will also analyze the company’s annual reports for the financial years between 2012 and 2015. In addition, the company’s trend analysis and ratio analysis will be conducted so as to assist the users of the company’s financial reports to have insight information in regards to the company so as to make informed decisions As far as the trend analysis is concerned, Collins Food Company has shown a great increase in sales, EBT, together with profits due to equity holders of the parent company, which is an indication of some great financial performance of the company. Additionally, Collins Food Company has increased in its assets, liabilities and owners’ equity during the period 2012-2015 due to increase in the company’s market operations. The company’s ratio analysis has shown that its profitability has slightly reduced, where ROE and ROA has also reduced between 2012 and 2015. The reduction in asset turnover ratio and days debtors ratio clearly shows that CFK least uses its assets, spends less number of days to collect its debts. The company’s liquidity has been slightly improved during the period, although the low value in the company’s current ratio may be an indicator that the company could face some liquidity risks if at all things will never change. Though Collins Food Ltd has reduced its financial leverage in the recent past, debt financing still remain the better option of sourcing of funds to finance its financial operations. The company still has a problem of achieving long term financial stability. Despite of its challenges, the increasing prices to earnings ratio is a clear indication that the investors still have the confidence to invest in the company Contents Executive Summary 2 Contents 3 1.0 Introduction 4 2.0 Collins Food Company 4 3.0 Trend analysis 4 3.1 Income Statement 5 3.2 Balance Sheet 6 4.0 Ratio Analysis of Collins Food Ltd 8 4.1 Profitability of Collins Food Ltd 9 4.2 Liquidity 9 4.3 Capital structure of Collins Food Ltd 10 4.5 Collins Food Ltd Market performance 11 5.0 Conclusion 11 References 13 1.0 Introduction Company’s financial report contains important information that can be used by financial analysts and other stakeholders of a company to make sound decisions. This report therefore provides the financial analysis of Collins Food Company, one of the leading companies in Australia that administers and manages various hotel segments. The analysis will be done in three parts where the first part covers the general information of the company; second part covers the trend analysis of the company covering both the company’s balance sheet for the period 2012-2015 and also the income statement. The third section will cover the company’s profitability, efficiency, market performance and capital structure of the company. All the findings will be summarized at the end of the report 2.0 Collins Food Company The company was found in 1968 and has its headquarters in Newmarket, Australia with its mission being to be a leading holding company that runs premier brands where customers could love eating and being proud of their work. The company runs, administers and operates various restaurants. It runes four segments namely KFC Restaurants Western Australia/Northern Territory, Sizzler Restaurants, KFC Restaurants Queensland/New South Wales, and Shared Services. In addition, the company has several brands within Australia such as Sizzler Restaurants, KFC Restaurants, and Snag Stand joint venture outlets. The company runs over 150 franchised restaurants in northern New South Wales, Western Australia, Queensland and the Northern Territory. The company has also ventured into several other countries such as China, Thailand and Japan. It Collins food company has been one of the successful companies in the industry have a big size of the business operations in the market. 3.0 Trend analysis Trend analysis provide useful information that aids the financial report users to have some insights on the financial position and the company’s financial report and position during a given period of time. In this case, horizontal financial analysis assist several companies to better understand how their accounts have transitioned over time, and also analyze the trends so as to come up with projections for the coming years. According to this report, it has been found that Collins Food Company has shown a great increase in sales, EBT, together with profits due to equity holders of the parent company, which is an indication of some great financial performance of the company. Additionally, Collins Food Company has increased in its assets, liabilities and owners’ equity during the period 2012-2015 due to increase in the company’s market operations 3.1 Income Statement The company’s trend analysis for its income statement shows that the Collins food Company has been strongly growing between 2012 and 2015 which is an indication of growth in the company’s business operations All figures in $ m As it can be seen in the diagram above, it is seen that during the period between 2012 and 2015, CKF has been able to increase its sales revenue, EBT and profit. Improvement of sales revenue and the profits of CKF is remarkable considering the size and complexity of the market that the company is facing. With the weak economic conditions, customers have adopted leaner budgets and have resorted for cheaper products in the supermarkets and this has resulted to the boost of the company’s sales and profits. Another factor that has led to the growth of the company’s sales and profits is the strategic ability of the Company’s top management to meet the demand of its customers by launching online retailing, which has contributed largely to the growth of sales of the company 3.2 Balance Sheet CKF trend analysis for the balance sheet shows that the company’s total assets, liabilities all increased between 2012 and 2015 All figures in $ m As shown in the diagram above, the company’s total assets have been increased from $350 million in 2012 to $420 million in 2015. The total liabilities for Collins Food Company Ltd have been reduced from $309 million in 2012 to $229 in 2015. It can be deduced that huge increase in the sales revenue as mentioned before is a clear indication that the company’s business operations are increasing with time. Therefore, it could be wiser if the company invest more in its assets as this could be a justification in its growth in asset base. Since CKF is continually increasing its profits, its retained earnings accumulated over time could assist the company in financing other projects of its capital investment. Thus the rate at which the company’s equity grows could be faster than that of its total liabilities   2012 2013 2014 2015 Current Assets 100.00% 91.71% 98.41% 113.40% Non-current Assets 100.00% 108.81% 110.50% 117.44% Total Assets 100.00% 103.61% 106.83% 116.21% Current liability 100.00% 84.34% 85.59% 94.22% Non-current Liabilities 100.00% 128.39% 122.65% 123.41% Total Liabilities 100.00% 101.17% 99.75% 105.37% Owner's Equity 100.00% 107.65% 118.54% 134.15% All figures in $ m If the details of the company’s balance sheet is critically analyse, it can be deduced that the non-assets for Collins Food Company can grow easily than the company’s current assets. This could mean in the long run that increase in the company’s asset base could be as a result of the company’s long term investments. On the contrary, since the company increases its borrowing from short term to long term, there is a negative growth in the company’s current liability, irrespective of the entire growth of the company’s total liabilities 4.0 Ratio Analysis of Collins Food Ltd The company’s ratio analysis has shown that its profitability has slightly reduced, where ROE and ROA has also reduced between 2012 and 2015. The reduction in asset turnover ratio and days debtors ratio clearly shows that CFK least uses its assets, spends less number of days to collect its debts. The company’s liquidity has been slightly improved during the period, although the low value in the company’s current ratio may be an indicator that the company could face some liquidity risks if at all things will never change. Though Collins Food Ltd has reduced its financial leverage in the recent past, debt financing still remain the better option of sourcing of funds to finance its financial operations. The company still has a problem of achieving long term financial stability. Despite of its challenges, the increasing prices to earnings ratio is a clear indication that the investors still have the confidence to invest in the company 4.1 Profitability of Collins Food Ltd As it can be seen in the table above, Collins Food Company has reduced in its profitability since both ROE and ROA slightly reduced during the time periods between 2012and 2015. As shown in the table above, it can be clearly seen that for the period of four years, the company’s ROE reduced from 25.15 % to 21.13%, an indication that the company has less chances of making profits for every dollar invested. The revenue that the company could have earned has been slightly reduced. This is true to the company’s ROA where the company’s ROA has also been reduced from 14.76% in 2012 to 13.65 in 2015. As seen previously on the trend section of analysis, CKF has some continuous growth in sales revenue and in profits. During this period, CKF has been able to raise its sales, EBIT and profits. Nonetheless, as a result of economic recession, within the country, the company may encounter lots of pressure which in turn may affect the profits of the company therefore affecting the entire performance of the company 4.2 Liquidity   2012 2013 2014 2015 Current ratio 0.89 0.96 0.95 0.98 Quick ratio 0.42 0.41 0.37 0.43 From the table above, it can be clearly seen that the liquidity of Collins Food Ltd has improved over the period of four years. The current ratio for the company slightly increased from 0.89 in 2012 to 0.98 in 2015 which is an indication that for every dollar worth of the current liabilities the company could have current assets of $0.17 dollars to cover. Such changes come as a result of large number of short term loans that the company needs to repay so as to take the advantage of the current low interest rates in the market. On the contrary, by reducing the inventory from the current assets of the company, the quick ratio clearly shows that the company has a smaller percentage of non-inventory assets to cover the company’s current liabilities. Though there is an increase in the company’s quick ratio, nonetheless, with such a low value the company might likely face some liquidity challenges Collins Food LTD has a relatively lower value in its current ratio and quick ratio show that the company may have some difficulties in its liquidity risks if at all things go the way they are. In such instances, the company may find itself in such a situation where its current assets may not cover its current liabilities. Nonetheless, the company has an option of disposing its long term assets or may go for a loan from other financiers so as to provide more liquidity to finance its operations. The disadvantage part of this option is that this type of financing may be costly to the company therefore caution has to be taken by the top management so as to save the company form some extra cost that may be incurred. 4.3 Capital structure of Collins Food Ltd   2012 2013 2014 2015 Debt Ratio 64.13% 62.96% 59.30% 58.72% Debt Coverage Ratio 1.92 1.93 2.13 2.23 Interest Coverage 11.34 10.72 8.56 13.32 From the table above, Collins Food company has its debt ration reduced from 64.13% in 2012 to 58.72% in 2015. This is as a result of the company’s profitability in the recent years that has allowed it to accumulate some retained earnings which aids the company in financing its market operations. Therefore the rate at which the company’s owner’s equity grows is much more than the growth rate of its total liability and option of debt financing becomes less important in the capital structure of the company, and the option of debt financing can be the last option of the company’s capital structure. Nevertheless, since the company’s debt ratio is still more than 50%, debt financing is still considered the option of sourcing the funds for the company, which an indication of high financial leverage that CKF considers. On the contrary, the growth in the company’s profitability will allow the company to increase its interest coverage where its EBIT will be enough to pay its expenses incurred during the year. Even though the company utilizes its high financial leverage, its strong profit base would lead to high financial stability for CKF to be acceptable 4.5 Collins Food Ltd Market performance   2012 2013 2014 2015 Earnings per share $11.73 $11.79 $11.81 $15.07 Price $3.71 $3.51 $4.9 $4.6 Price to earnings $5 $6.5 $6.0 $6.5 From the table above, CKF has seen the increase in its earnings per share, share price, and price to earnings ratio for the period between 2012 and 2015. Increase in the company’s earnings per share is as a result of the strong profitability of the company. Therefore, most of the investors could have all the reasons to invest in the company. As a result of all these, the company’s growth in the market will thrive thus marking the price to earnings ratio of CKF increased as a result of such reason 5.0 Conclusion From this financial report of Collins Food Ltd, it has been seen that the company has had some great improvement in its sales, EBIT as well as profits attributable to the equity holders of the mother entity, which is an indication of the growth in the company’s financial performance. On the contrary, the Collins Food company has seen the increase in its assets, liabilities and the owners’ equity during the financial years between 2012 and 2015. All these are attributed to the company’s growth in its market operations. Through the company’s trend analysis, the company’s trend analysis for its income statement shows that the Collins food Company has been strongly growing between 2012 and 2015 which is an indication of growth in the company’s business operations. From this report, it can be clearly seen that the liquidity of Collins Food Ltd has improved over the period of four years. The current ratio for the company slightly increased from 0.89 in 2012 to 0.98 in 2015 which is an indication that for every dollar worth of the current liabilities the company could have current assets of $0.17 dollars to cover. Such changes come as a result of large number of short term loans that the company needs to repay so as to take the advantage of the current low interest rates in the market. The growth in the company’s profitability will allow the company to increase its interest coverage where its EBIT will be enough to pay its expenses incurred during the year. Even though the company utilizes its high financial leverage, its strong profit base would lead to high financial stability for CKF to be acceptable References IBIS World 2015, Supermarkets and Grocery Stores in Australia: Market Research Report, retrieved on 30th April, 2015, Read More