Financial Analysis of a Growing Company

This assignment delves into the financial analysis of a growing company. It examines various financial ratios such as profitability, liquidity, and solvency to assess the company's financial health. The analysis also investigates the company's capital structure, specifically the proportion of debt and equity financing, and its impact on profitability. The goal is to provide an in-depth understanding of the company's financial performance and position within the competitive landscape.

1
By student name
Professor
University
Date: 16 September 2017.
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Contents
Question No.1…………..……………………..........……………………………..……………………...3
Question No.2…………..……………………..........……………………………..……………………...7
Introduction and Executive Summary…......………………………………………...7
Report and other analysis.………………..........………………………………………...7
Conclusion…..…………………………………..........……………………………..………...13
Refrences.....……………………………………………………………….....................................14
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Question No.1
Based on the inputs given in the question, following is the calculation of the depreciation and the cash
flows for all the 3 cases namely best case, worst case and base case.
Amount to be capitalised for Lab Amt (in $)
Capital cost incurred 1,650,000
Less: Salvage value of the Lab (100,000)
Cost to be depreciated 1,550,000
Life in no. of years 8
Depreciation cost each year 193,750
1 2 3 4 5 6 7 8
Revenues (A) 1,445,000 1,589,500 1,748,450 1,923,295 2,115,625 2,327,187 2,559,906 2,815,896
Less: Costs
Depreciation 193,750 193,750 193,750 193,750 193,750 193,750 193,750 193,750
Staff cost 900,000 954,000 1,011,240 1,071,914 1,136,229 1,204,403 1,276,667 1,353,267
Material cost 210,000 222,600 235,956 250,113 265,120 281,027 297,889 315,762
Marketing cost 46,000 48,760 51,686 54,787 58,074 61,558 65,252 69,167
Other cost 25,000 26,500 28,090 29,775 31,562 33,456 35,463 37,591
Research cost 100,000 - - - - - - -
Total costs (B) 1,474,750 1,445,610 1,520,722 1,600,340 1,684,735 1,774,194 1,869,021 1,969,537
Profits before tax (C) (29,750) 143,890 227,728 322,955 430,889 552,993 690,885 846,359
Tax (30%) - 43,167 68,319 96,887 129,267 165,898 207,265 253,908
Profits after tax (D) (29,750) 100,723 159,410 226,069 301,622 387,095 483,619 592,451
Cash Flows after tax(D+Depn*70%) 105,875 236,348 295,035 361,694 437,247 522,720 619,244 728,076
1 2 3 4 5 6 7 8
Revenues (A) 1,445,000 1,531,700 1,623,602 1,721,018 1,824,279 1,933,736 2,049,760 2,172,746
Less: Costs
Depreciation 193,750 193,750 193,750 193,750 193,750 193,750 193,750 193,750
Staff cost 900,000 990,000 1,089,000 1,197,900 1,317,690 1,449,459 1,594,405 1,753,845
Material cost 210,000 231,000 254,100 279,510 307,461 338,207 372,028 409,231
Marketing cost 46,000 50,600 55,660 61,226 67,349 74,083 81,492 89,641
Other cost 25,000 27,500 30,250 33,275 36,603 40,263 44,289 48,718
Research cost 100,000 - - - - - - -
Total costs (B) 1,474,750 1,492,850 1,622,760 1,765,661 1,922,852 2,095,762 2,285,964 2,495,185
Profits before tax (C) (29,750) 38,850 842 (44,643) (98,573) (162,026) (236,203) (322,439)
Tax (30%) - 11,655 253 (13,393) (29,572) (48,608) (70,861) (96,732)
Profits after tax (D) (29,750) 27,195 589 (31,250) (69,001) (113,418) (165,342) (225,707)
Cash Flows after tax(D+Depn*70%) 105,875 162,820 136,214 104,375 66,624 22,207 (29,717) (90,082)
Base case workings
Worst case workings
Particulars Years
Particulars Years
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1 2 3 4 5 6 7 8
Revenues (A) 1,445,000 1,661,750 1,911,013 2,197,664 2,527,314 2,906,411 3,342,373 3,843,729
Less: Costs
Depreciation 193,750 193,750 193,750 193,750 193,750 193,750 193,750 193,750
Staff cost 900,000 927,000 954,810 983,454 1,012,958 1,043,347 1,074,647 1,106,886
Material cost 210,000 216,300 222,789 229,473 236,357 243,448 250,751 258,274
Marketing cost 46,000 47,380 48,801 50,265 51,773 53,327 54,926 56,574
Other cost 25,000 25,750 26,523 27,318 28,138 28,982 29,851 30,747
Research cost 100,000 - - - - - - -
Total costs (B) 1,474,750 1,410,180 1,446,673 1,484,261 1,522,976 1,562,853 1,603,926 1,646,231
Profits before tax (C) (29,750) 251,570 464,340 713,404 1,004,338 1,343,558 1,738,447 2,197,498
Tax (30%) - 75,471 139,302 214,021 301,301 403,068 521,534 659,249
Profits after tax (D) (29,750) 176,099 325,038 499,383 703,037 940,491 1,216,913 1,538,248
Cash Flows after tax(D+Depn*70%) 105,875 311,724 460,663 635,008 838,662 1,076,116 1,352,538 1,673,873
Best case workings
Particulars Years
 The cash flows after tax has been represented by the last row of the above tables for all the 3
cases.
 Payback period: This is generally the period of time within which the initial investment is
recovered from the project. This technique ignores the time value of money. Profits have been
taken from the above calculation.
Initial Investment 1,650,000
Particulars Base Worst Best
Payback period 6 years > 8 years 5 years
(1650000 / cash profits)
 Calculation of discounted payback period, net present value and Profitability Index for 3 cases:
Years Amount (in $) Discounted @ 16% Discounted amount
0 (1,550,000) 1 (1,550,000)
1 105,875 0.86 91,272
2 236,348 0.74 175,645
3 295,035 0.64 189,016
4 361,694 0.55 199,760
5 437,247 0.48 208,179
6 522,720 0.41 214,546
7 619,244 0.35 219,107
8 728,076 0.31 222,082
(30,393)
> 8 years
0.98
Case 1: Base Case
NPV (Sum total of PV of inflows - PV of outflows)
Discounted payback period
Profitability Index (PV of the future cash inflows) / Initial Outflow)
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Years Amount (in $) Discounted @ 16% Discounted amount
0 (1,550,000) 1 (1,550,000)
1 105,875 0.86 91,272
2 162,820 0.74 121,002
3 136,214 0.64 87,267
4 104,375 0.55 57,645
5 66,624 0.48 31,721
6 22,207 0.41 9,115
7 (29,717) 0.35 (10,515)
8 (90,082) 0.31 (27,477)
(1,189,972)
> 8 years
0.23
Case 2: Worst Case
NPV (Sum total of PV of inflows - PV of outflows)
Discounted payback period
Profitability Index (PV of the future cash inflows) /
Initial Outflow)
Years Amount (in $) Discounted @ 16% Discounted amount
0 (1,550,000) 1 (1,550,000)
1 105,875 0.86 91,272
2 311,724 0.74 231,662
3 460,663 0.64 295,127
4 635,008 0.55 350,709
5 838,662 0.48 399,298
6 1,076,116 0.41 441,683
7 1,352,538 0.35 478,568
8 1,673,873 0.31 510,574
1,248,892
6 years
1.81
Case 3: Best Case
NPV (Sum total of PV of inflows - PV of outflows)
Discounted payback period
Profitability Index (PV of the future cash inflows) /
Initial Outflow)
Other Approaches of capital budgeting that can be used besides the best and worst cases projections
are mentioned below.
 Internal rate of return: It is one of the theories in capital budgeting which gives the rate fo
return being given by a project such the total inflows from the project and total outflows of the
project are equated and using trial and error method, a rate is determined. If the internal rate of
return is found to be greater or atleast equal than the required rate of return, then the project
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should be accepted and if the IRR is found to be lower than the expected rate of return, the
project should be rejected.
 Return on investment (ROI): This is the actual return for which the investor makes the
investment in the project. This is the rate of return the person would be earning post the
decuction of the taxes.
 The other factor which could have been used is weighted average being given to the best, worst
and base cases or the probability of occurrence of these 3 options based on the current market
trend such that the average return can be computed. If the result is found to be positive, the
proposal should be accepted else it should be rejected. (Bena, Ferraira, Matos, & Pires, 2017)
Decision on the above Project
On the basis of the inputs given in the question and output shown above, the project could be
accepted if the decision is based solely on the best and the base case. However, from the
perspective of the worst case, the project is cash flow negative and the it is not breaking even in the
8th year also. Th results are negative from the perspective of all the capital budgeting decisions like
discounted payback period, net present value and the profitability index. In order to take the
objective decision, several other factors would be required like the probability of occurence of the 3
cases, whether there is any other alternative available or there is any other benefit which we can get
from the vendor. (Fay & Negangard, 2017)
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Question No. 2
Introduction and Executive Summary
APN Outdoor group is one of the Australian giants in the business of advertising services. It is
listed on the Australian Stock exchange and as been growing widely over the last 5 years. It is a market
leader and dealing in services like advertisements through billboards, roadside, rail and airport
advertisement across the geopgraphies of Australia and New Zealand. It has its headquarters in
Pyrmont, Australia and was founded in 2004. In this report, we are going to do the analysis of the annual
report of the company and comment upon the capital structure and other key ratios which depict its
financial status. (Boccia & Leonardi, 2016)
Report on the company
Based on the dat appoints given in the question, beta (risk coefficient) for the company is 1.3 for
year 2016, the market rate of interest is 7% and the risk free rate of interest based on Australian
Government Bonds’ yield is 2.4%, the required rate of return by the company as per Capital Asset Pricing
Model would be: (Qi, Roth, & Wald, 2017)
R = RF + (RM-RF) * Beta
Or, R = 2.4 + (7-2.4) * 1.3 = 8.38%
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In the last 2 years, the company’s capital structure has not undergone major changes, the following is
the brief excerpt of the capital structure and the credit facility being employed by the company:
FQ2 2017 (J un- 30- 2017) Capital Structure As Reported Details
Description Type Principal Due (AUD)
General Corporate Facility A * Revolving Credit 80.0
General Corporate Facility C * Revolving Credit -
Working Capital Facility B * Revolving Credit 23.0
FY 2016 (Dec- 31- 2016) Capital Structure As Reported Details
Description Type Principal Due (AUD)
General Corporate Facility A Revolving Credit 80.0
General Corporate Facility C Revolving Credit -
Working Capital Facility B Revolving Credit 23.0
APN Outdoor Group Limited Capital Structure
Details
In table given below, we can clearly see the composition of the debt and equity in the capital structure.
The company has gone on to increase the proportion of debt since the last year indicating that the
company wants to take the benefit of trading on equity and the leveraging effect. Since, debt comes at
the lower cost as compared to quity, it makes the weighted average cost of capital much lower than the
market rate. The ratio of debt to equity has increased from 21:79 in 2015 to 28:72 in 2016. (Aitchison,
2016)
Capital Structure Data
For the Fiscal Period Ending
Currency AUD AUD AUD
Units Millions % of Total Millions % of Total Millions % of Total
Total Debt 65.9 21.0% 102.7 27.6% 107.0 28.9%
Total Common Equity 248.1 79.0% 269.2 72.4% 263.3 71.1%
Total Capital 314.0 100.0% 371.9 100.0% 370.3 100.0%
Debt Summary Data
For the Fiscal Period Ending
Currency AUD AUD AUD
Units Millions % of Total Millions % of Total Millions % of Total
Total Revolving Credit 66.5 100.8% 103.0 100.3% 103.0 96.3%
Total Principal Due 66.5 100.8% 103.0 100.3% 103.0 96.3%
Total Adjustments (0.6) (0.8%) (0.3) (0.3%) 4.0 3.7%
Total Debt Outstanding 65.9 100.0% 102.7 100.0% 107.0 100.0%
APN Outdoor Group Limited Capital Structure
12 m onths Dec-31-
2015
12 m onths Dec-31-
2016
3 m onths Jun-30-
2017
12 m onths Dec-31-
2015
12 m onths Dec-31-
2016
3 m onths Jun-30-
2017
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The major inputs which would be required to calculate the weighted average cost of capital includes the
ratio of debt and equity (27.6%:72.4%) in the capital structure along with the cost at which thay are
coming. Here, the return expected by the shareholders for equity is 8.38% as calculated above, and the
cost of debt is 2.4% post tax as the bank loan rate pre tax is 2.87%. Based on these numbers, the
weighted average cost of capital comes to: (Das, 2017)
The formula for calculating WACC is ((Cost of equity * proportion of equity) + (Cost of debt * proportion
of debt)) / (total of debt and equity)
Capital Structure Data
For the Fiscal Period Ending
Units Ratio
Cost of
funds Ratio
Cost of
funds
Total Debt 21.0% 2.4% 27.6% 2.4%
Total Common Equity 79.0% 8.4% 72.4% 8.4%
Total Capital 100.0% 100.0%
Weighted average Cost of capital 7.12% 6.73%
12 m onths Dec-31-
2015
12 m onths Dec-31-
2016
APN Outdoor Group Limited WACC
The above result shows that the company is utilising the debt to optimum use as the WACC is lower the
market cost of capital. This will make the company cost effective besides earning more for the
shareholders, but the risk with the excessive use fo debt in the capital structure is the dilution of the
control in the company. (Goldmann, 2016)
The below table from the annual report of the company for 2016 shows the gearning ratio of the
proportion of debt in the total capital of the company. There is just a partial increase in the proportion
of debt by 5% in 2016.
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oOh!media Limited has been selected as the competing company to compare the capital structure with
that of the APN Outddor group. The logic behind choosing it is that it is also one of the growing
advertising and media company and is working in Australia and is listed on the Australian Stock
Exchange. This company is trying to reduce the share of debt in the overall capital with the view of
increasing profist for shareholders and increasing the ownership. The debt equity mix has decreased
from 29.2% to 27.2% in the last year. (Heminway, 2017) Even though the range of debt remains the
same in between 25% - 30% but still the approach is different in this company.
Capital Structure Data
For the Fiscal Period Ending
Currency AUD AUD AUD
Units Millions % of Total Millions % of Total Millions % of Total
Total Debt 105.0 29.2% 122.4 27.2% 145.4 31.3%
Total Common Equity 256.4 71.2% 328.2 73.1% 320.3 69.0%
Total Minority Interest (1.5) (0.4%) (1.4) (0.3%) (1.6) (0.3%)
Total Capital 360.0 100.0% 449.3 100.0% 464.1 100.0%
Debt Summary Data
For the Fiscal Period Ending
Currency AUD AUD AUD
Units Millions % of Total Millions % of Total Millions % of Total
Total Revolving Credit 105.0 100.0% 123.0 100.5% - -
Total Capital Leases 0.1 0.1% 0.1 0.1% - -
General/Other Borrow ings - - - - 145.4 100.0%
Total Principal Due 105.1 100.1% 123.1 100.5% 145.4 100.0%
Total Adjustments (0.1) (0.1%) (0.7) (0.5%) - -
Total Debt Outstanding 105.0 100.0% 122.4 100.0% 145.4 100.0%
oOh!media Limited Capital Structure
12 m onths Dec-31-
2015
12 m onths Dec-31-
2016
3 m onths Jun-30-
2017
12 m onths Dec-31-
2015
12 m onths Dec-31-
2016
3 m onths Jun-30-
2017
On analysis of the key financial ratios for the APN, following were the conclusions drawn.
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For the Fiscal Period Ending 12 m onths
Dec-31-2012
12 m onths
Dec-31-2013
12 m onths
Dec-31-2014
12 m onths
Dec-31-2015
12 m onths
Dec-31-2016
Profitability
Return on Assets % NA 3.6% 4.4% 10.5% 11.0%
Return on Capital % NA 4.3% 5.3% 12.8% 13.5%
Return on Equity % NA 0.2% (6.5%) 17.7% 18.7%
Return on Common Equity % NA 0.2% (7.3%) 17.7% 18.7%
Margin Analysis
Gross Margin % 76.4% 76.0% 76.8% 79.8% 82.5%
SG&A Margin % 55.1% 55.3% 55.0% 51.0% 51.6%
EBITDA Margin % 15.6% 14.2% 14.6% 24.4% 26.1%
EBITA Margin % 12.9% 11.1% 11.7% 21.9% 23.4%
EBIT Margin % 11.6% 9.9% 10.7% 21.0% 22.3%
Net Income Margin % 1.4% 0.1% (4.9%) 13.6% 14.6%
Asset Turnover
Total Asset Turnover NA 0.6x 0.7x 0.8x 0.8x
Fixed Asset Turnover NA 3.7x 3.7x 4.0x 3.8x
Accounts Receivable Turnover NA 5.4x 4.9x 5.0x 5.3x
Inventory Turnover NA 78.9x 79.7x 96.2x 83.3x
Short Term Liquidity
Current Ratio 3.9x 3.6x 2.5x 1.9x 1.9x
Quick Ratio 2.1x 2.0x 2.2x 1.6x 1.8x
Avg. Days Inventory Out. NA 4.6 4.6 3.8 4.4
Avg. Cash Conversion Cycle NA 65.3 54.5 51.0 60.9
Long Term Solvency
Total Debt/Equity 105.6% 104.4% 39.4% 26.6% 38.2%
Total Debt/Capital 51.4% 51.1% 28.2% 21.0% 27.6%
APN Outdoor Group Limited Ratio Analysis
 The profitability ratios shows that all of them, return on assets, return on capital and the return
on investment has multiplied almost thrice in the past 5 years implying that the company is on
the growing trend and meeting the expectation of the shareholders. (Meroño-Cerdán, Lopez-
Nicolas, & Molina-Castillo, 2017)
 The Margin analysis shows that both the gross margin and the net margin has shown growth
from 76% to 82% and 1% to 15% over the past 5 years which shows that alongwith the increase
in revenue, the company has also been able to cut on the costs, both direct and indirect.
 The turnover ratios namely the asset turnover ratio, receivables turnover ratio, fixed assets
turnover ratio and the inventory turnover ratio has all been constant and as per the industry
trends which shows that the internal control mechanism is being strongly managed in the
company and both the receivables and inventory management is good.
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 Both the short term liquidity ratios, namely current ratio and liquid ratio has decreased over the
past 5 years and almost halved indicating the firm is managing its working capital in a good
manner and is not blocking the funds in the current assets. Also, both the ratios are as per the
industry trend.
 The long term solvency ratio of the company has been stabilised over the past 5 years and now
the proportion of debt has come down from 51% in 2012 to 27% in 2016. This shows the that
the company does not wants to dilute the ownership and maintain the equilibrium. (Heminway,
2017)
Significant changes to the capital structure during the past 3 years
From the above ratio analysis it is clear that the company wants to put a limitation on the share of debt
in the capital structure and does not want to dilute the ownership in the company and that’s the reason
why it is increasing the share of equity.
Wealth maximisation for the shareholders in the past 3 years
Both the efficiency ratios ROI and ROC have increased almost thrice in the past 3 years which is evident
of the fact that the company is growing fast and generating wealth for its shareholders. (Jefferson, 2017)
It is on the rise and is expected to be the market leader in the future years both in terms of revenue and
profits.
Why is it important to minimise the cost of capital and how can the cost of capital be reduced
The cost of capital is the measure of the cost being incurred by the company to earn the revenue from
the funds deployed in the business. The major form of cost is in the form of interest cost, etc. and this
needs to be minimised in order to have maximise returns for the investors. This is possible by increasing
the debt share in the capital structure as this will increase the profit share for the investors. (Murray &
Markey Towler, 2017)‐ Some of the alternatives model of capital structure includes raising funds from
the market or public or issuing debentures, etc.
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Conclusion
From the above in depth analysis of the ratios and the capital structure, it can be concluded that the
company is growing at a rapid pace and is trying to increase the profit share for the shareholders by
properly apportioning the amount of debt in the entire capital. The major competing firms like oOh!
media Limited ismaking it difficult to sustain the profitability but it also provides opportunity to the
company to deliver the best.
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References
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http://www.mondaq.com/australia/x/291480/Contract+Law/When+is+a+done+deal+not+done
+a+legally+enforceable+contract
Bena, J., Ferraira, M., Matos, P., & Pires, P. (2017). Are foreign investors locusts? The long-term effects
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Boccia, F., & Leonardi, R. (2016). The Challenge of the Digital Economy. Markets, Taxation and
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Das, P. (2017). Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
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Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland .
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Meroño-Cerdán, A., Lopez-Nicolas, C., & Molina-Castillo, F. (2017). Risk aversion, innovation and
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Murray, C., & Markey Towler, B. (2017). A Theory of Return-Seeking Firms.‐ SSRN, 1-14.
Qi, Y., Roth, L., & Wald, J. (2017). Creditor protection laws, debt financing, and corporate investment
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