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Report on New Zealand Largest Retail Market

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Added on  2019-10-09

Report on New Zealand Largest Retail Market

   Added on 2019-10-09

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Background:Alan Clarke is the owner of the ABC Golf Mart Limited, who is the potential client of M&M, requiring their assistance to provide audit assurance as part of ABC’S IPO.ABC have 15 retail outlets throughout the lower North Island and have gone into the expansion of business via franchising license and have already sold license for 5new stores and have received applications for 10 more.The main objective for ABC is to expand into New Zealand’s largest retail market i.e. Auckland, by opening ABC outlets in same and through the process of licensing.Therefore, in order to finance the upcoming projects and new ventures, the company’s banks has already informed them of their limits nearing the 80% and have to rule out a new way to finance, and thus have settles to take ABC public. Having been into the market for around 15 years, ABC finally deems fit to opt for initial public offering through which they would present the stock of the company to the public for the very first time, though the decision is pressed forward on the fact that the company is nearing the limitof 80% debt to total assets, it is a considerable move to ask for public financing.It is also important, to understand the implications and repercussions, going public would attract towards the company, involving public would stroll great deal of compliances, disclosures and strict eye of FMA and other securities regulation agencies, as the interest of the public would be at the stake. Therefore, any certification or statement issued in professional manner should be cautiously put forward, after taking all the scenarios in consideration as huge aftermaths would be meet, if the same is neglected. As, IPO aims as disbursing the stock of the company to the general public, it becomes very imperative to have an understanding as to what expectations and vision does the investors holds,as ultimately, it’s their money on the line.Company should be well aware of the fact that investors going for IPO’s have well versed knowledge, on a exception of few, as it’s companies first time, but not theirs, therefore, every requirement, formality, presentation of the financial facts should be precise, clear cut and should be an end to investor’s requirement.The financial information obtained from ABC Golf Mart Limited have been thoroughly spent and is made understood by adopting the following means of analysis tools.
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a. Ratio Analysis, comprising of liquidity ratios, asset turnover ratio, financial leverage ratio and profitability ratio, so that all plausible elements ranging from short –term liquidity to future solvency is studied properly and proper conclusions can be drawn from the same.b. Horizontal/ Trend Analysis, included percentage increase or decrease in the elements of the income statement or the balance sheet over the period od time to have an idea as to what trend is on display by the company, so that accurate forecast can be made and adjudged.c. Cash Flow Statements, have been drawn out of the provided information, to estimate the availability of cash on accrual basis and profitability on accrual grounds, as it showcases the financial position of the company in a better manner.Liquidity ratio, displays the ability of the company to meet it’s short term financial obligations. Under liquidity ratio, two basic and important ratios have been calculated, first being,The current ratio that is basically current assets to current liabilities, and from the information, it is made clear that ABC’s current ratio for both the years doesn’t give good signs, it is way belowthat than the ideal ratio of 2:1, moreover, it simply indicates to the fact that company’s liabilities are greater than the assets, and will not be able to pay off it’s debt when the time is due.Second is, Quick Ratio, which indicates availability of quick cash in the company to meet immediate requirements, the calculations done infer that ABC doesn’t posses a good quick ratio, and is made to draw that it doesn't have enough readily available cash, the ideal ratio stands at 1:1, and company in both the years , fail to meet its mark,And both these ratios, thus raise concerns, as these ratios are critical for Initial Public Offer’s audit assurance.Asset turnover ratio explains the value of company’s sales or revenue generated relative to the value of its assets, even though ABC company have a moderate asset base, the ratio is low for anideal liking, it depicts that the sales earned cannot cover the value of fixed assets, moreover company's bank has already raised flags on closing on the limits of the Debt to total assets, which indicates that company doesn’t have enough asset to pay off its debt, and hence, is not a good sign.
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Financial leverage ratio highlights the long term solvency of the company, in order to prosper and grow, it is inevitable for the company to remain solvent in its succeeding years, the ratios calculated under financial leverage are,Debt to equity ratio, which basically explains how much equity does the company have for each component of debt and in any scenario, should not exceed 2:1, but from the calculations drawn above, it is clearly drawn that in both the previous years, ABC have high Debt to equity ratio, which brings a big question mark on the solvency of the firm, and also indicates that, there would be close to non banks exceeding any sort of loan or guarantee to the bank because of the high ratio. Fixed charge coverage ratio should be on a higher side in order to emit positive signs for future growth, but this is not the case for ABC, as for both the years they have a fairly low fixed charge coverage ratio.Profitability ratio indicates, now much the company generates from the sale of goods or services and the ratio covered are Net profit ratio and return on equity.Net profit ratio reveals the reaming profit after all cost of production, administration, and financing have been deducted from sales, and income tax is recognized. ABC shows a decrease in the net profit from 2014, which would be unsettling for the investors, also the net profit rate is not that high to coerce the buyers into investing.Return on equity is a measure of profitability that calculates how many dollars of profit a company generates with each dollar of shareholder’s equity, calculating return on equity for ABC, gives an inside as to what the investor can expect as their rate of return in future from the company, though the return rate is not ideally high, it does showcase potential for future growth and high investment, even though it has reduced slightly from 2014. A trend analysis is a method of analysis that allows the traders to predict what will happen with astock in the future, on the basis of information gathered from historical data and try and manage to identify some sort of pattern.The objective behind doing a trend analysis for ABC limit, is to see exactly in which direction the stock and other elements of the financial statements are moving, to identify any sort of pattern and most importantly to validate the forecasted statement provided by the ABC Golf Mart Limited.
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