Analysis of Financial Ratios : Doc

BUSINESS
FINANCE

ABSTRACT
As per the above report it has been summarised that business finance is important part of
any organisation because any business can not survive without finance. It is considering as basic
need. There are analysis ratio of Estia health limited which can help to know performance of the
company in effective manner. The report define to investors to recognise that it is good or not for
investing purpose.

Table of Contents
ABSTRACT.....................................................................................................................................2
INTRODUCTION...........................................................................................................................1
FINANCIAL ANALYSIS...............................................................................................................1
Description of the Company.......................................................................................................1
Calculation and Analysis of Financial Ratios.............................................................................3
Graphs and Comparison of share price movements..................................................................11
Calculation of cost of equity.....................................................................................................13
Identify the Capital Structure....................................................................................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Business Finance means the funds and credit employed in the business. It is the basic of
every organisation because without without finance can not conduct operational activities. There
are including modernizing or diversifying operations and expansion (Gelsomino And et.al,
2016) . With the term of business finance obtains and uses money in reference to loans. The
purpose of the report to provide financial advice to their client who wants to invest in Australian
market. There are selected that company which have the most promising future for investment.
To better understand the report selected company Estia health limited which is listed into
Australia Security Exchange. It is an Australian aged care operator floated by Quadrant private
equity in December 2014 when it was valued at $725 million. The company has been trading
across Australia and founder of the company Peter Arvanitis. The following report consist of
detailed information of operation and comparative advantages of chosen company then recognise
and conduct a trend analyse with the help of financial ratio such as profitability and operating
efficiency. Apart from evaluate of monthly share price movements of two years then it will
compare with All-Ord-Index. There are calculating cost of equity, recognise capital structure and
compute WACC of selected company. After all analysis the selected company given
recommendations regarding to investment decision.
FINANCIAL ANALYSIS
Description of the Company
Estia Health an Australian Aged care operator floated by Quadrant Private Equity in
December 2014 when it was valued at $725 Million. The company has been conducted approx
69 facilities across Australia. The company has listed into Australia Securities exchange, where
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registered approx 200 companies. They has the largest the proportion on women in its executive
team because from nine position, women taken six position. There are working about 7000
employees and it vis engaged in operating and developing owned and leased residential aged
care facilities through out Australia. There are included those services which is provided b
company it is personal assistance, meals, therapies and lifestyle activities. It is also provided
services in residents like gardening, movies, music, cultural celebrations and lifestyle
coordinators. It offers . The main core activities of business to provide homes in a range of care
services from providing semi independent living, to specific and broad care for those with
memory or cognitive support needs (Cumming, Hou and Lee, 2016) .
The company have many competitive advantage that in competitive market they
innovating new products and services. These products can attract to new customer as well as
provide equipments on lower rate. They will build economies of scale which is related to lower
fixed rate Estia health limited can tackle situation of Bargaining power of the suppliers that
experimenting with product design and use several types material so as a result prices go up of
one raw material then company can shift to another. As per the financial year 2017, the executive
remuneration framework open up a mix of set annual remuneration and short and long term
performance linked incentive plans. The aim of the group to reward executives with a level and
mix of remuneration appropriate to their position and responsibilities while being market
competitive. As per the market perspective they can plan for several factors which is designing
for short term incentive and long term incentive. To operate market they can consider on their
strength and weakness and try maintain balance between.
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As per the history of company there are consider two factors revenues and employment.
Both are important and influence to growth and success of the company. As per the chart
analysis it is getting that in 2018 they generate much more profit but after some time amount will
decrease as per the quarter 2019. The Employment history will be gone down in 2018 of quarter
third but it will again increase and remain that (Brown and Earle, 2017) .
Calculation and Analysis of Financial Ratios
As per the financial statement of the company calculate financial ratio because it will
provide accurate picture of company. So present profitability ratio and operating ratio to their
clients -
Profitability Ratio – These ratios are a class of financial metrics which can use to
measure ability of business and create earnings as compare with their expenses. There are cost
related to generation of income regarding to specific period of time. In this ratio includes gross
profit, net profit and equity of share.
Net Profit ratio = Net profit/Sales * 100
Ratio Analysis 2017 ($000) 2018 ($000)
Net profit 40698 41154
Sales 524630 547054
Net Profit Ratio 7.76% 7.52%
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2017 ($000) 2018 ($000)
0
100000
200000
300000
400000
500000
600000
40698 41154
524630 547054
7.76% 7.52%
Net profit
Sales
Net Profit Ratio
As per the above table and chard it has been analysed that company has earn much more
profit because they sale out things in much more way so as a result it is getting that company has
stable regarding to their net profit.
Gross Profit = Gross Profit / Net sales *100
Ratio Analysis 2017 ($000) 2018 ($000)
Gross Profit 68677 64444
Sales 524630 547054
Gross Profit ratio 13.09% 11.78%
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2017 ($000) 2018 ($000)
0
100000
200000
300000
400000
500000
600000
700000
68677 64444
524630 547054 Sales
Gross Profit
The above chart and table it has been provided that on the basis of financial year of 2017
& 2018 the sales of the company 524630 & 547054. As a result get gross profit turn over which
is 13.09% and 11.78%. The gross profit of the company 68677 and 64444 respectively.
Return on Assets = Net Profit / Total assets
Ratio Analysis 2017 ($000) 2018 ($000)
Net Profit 40698 41154
Total Assets 1798527 1823900
Return on Assets 2.26% 2.26%
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2017 ($000)
2018 ($000)
0 500000 1000000 1500000 2000000
Net Profit
Total Assets
Return on Assets
As per the above table it is getting that Total assets of the Estia Health limited in 2017 &
2018, 1798527 & 1823900. Net profit of the company increase in 2018 as compare to 2017. so it
is showing good performance of company.
Return on capital Employed = Net operating profit / Capital employed *100
Ratio analysis 2017 ($000) 2018 ($000)
Net Operating Profit 68677 64444
Capital Employed 994687 948504
Return on Assets 6.90% 6.79%
Capital Employed = Total assets – Current Liability
2017 = 1798527 – 803840 = 994687
2018 = 1823900 – 875396 = 948504
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2017 ($000) 2018 ($000)
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
1000000
68677 64444
994687 948504
6.90% 6.79%
Net Operating Profit
Capital Employed
Return on Assets
As per the above chart it has been analysed that company have good return on assets and
they are stable in market. Many times company achieve growth for long time perspectives. The
ratio of the company 6.90% in 2017 and 6.79% in 2018. so there are releasing that
Operating Efficiency Ratio – It shows the efficiency of the company which is presented
by company then compare total operating expenses of a company to net sales. These operating
ratio indicated that how efficient a company's management is at keeping costs low while
generating revenues or sales (Julien, 2018) .
Accounts Receivable Turn over ratio = Revenue / Average accounts Receivable
Ratio analysis 2017 ($000) 2018 ($000)
Revenue 524630 547054
Average accounts Receivable 10359 9485
Accounts Receivable Turn
over ratio
50.64% 57.68%
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2017 ($000) 2018 ($000)
500000
510000
520000
530000
540000
550000
560000
Accounts Receivable Turn
over ratio
Average accounts Receivable
Revenue
As per the above table it is getting that revenue of the company increase in 2018 as
compare to 2017 and it has been analysed that average accounts receivable remain same which is
good and maintain their time period.
Working Capital Ratio = Sales / Average working capital
Ratio analysis 2017 ($000) 2018 ($000)
Sales 524630 547054
Average working capital 383176 423007
Working Capital Ratio 1.37% 1.29%
Working capital = Current assets – Current liabilities
2017 = 37488 – 803840 = -766352
2018 = 29382 – 875396 = -846014
8

2017 ($000) 2018 ($000)
0
100000
200000
300000
400000
500000
600000 524630 547054
383176
423007
1.37% 1.29%
Sales
Average working capital
Working Capital Ratio
When calculate working capital so it was gone in negative so it is getting that working
capital will be negative which is not good for the company. So there is need to manage of
average working capital. There are current liabilities more than to current assets which is not
good so need to pay loans and accounts receivable on time and try to reduce liabilities in
effective manner.
Total assets Turn over ratio = Sales / Total Assets
Ratio analysis 2017 ($000) 2018 ($000)
Sales 524630 547054
Total Assets 1798527 1823900
Total assets Turn over ratio 0.29% 0.30%
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2017 ($000) 2018 ($000)
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
2000000
524630 547054
1798527 1823900
0.29% 0.30%
Sales
Total Assets
Total assets Turn over ratio
As per the above table it is getting that total assets turn over stable and can not change
come in total assets which is indicate that company maintain their assets. It is show good
position to maintain their internal system. From the table it is get that in 2017, 0.29% and in
2018, 0.30% total assets turn over ratio.
All the above ratio it is getting that company have good profitability ratio and operating
efficiency ratio. After that it is getting that it get growth in market on time to time. As a result
company performance good in market and get success for long time and stable in market.
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Graphs and Comparison of share price movements
As per the above chart compare movements of share price it is getting that the share price
movements continuous change of the company. On the basis of days activities it has been
analysed that from 24 may to 31 may share price will be come down so company has been go
down in their market position (Harrison Botelho and Mason, 2016).
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The particular chart shows that the share price movement change that will affect to
capital structure of the company (Sodeyfi, 2016) .
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The movement of share it is getting that it is continuously change and on the basis of
monthly record company wants to make w but it can not make easily due to changes of market
activities in randomly (Cole and Sokolyk, 2016). Different market activities can affect to market
position so as a result the company can not survive for long time. In present time company share
price record as 2.74 and open on 2.74 and mainly go high on 2.74 and low on 2.64. It means they
can change as growth rate -1.5%.
Calculation of cost of equity
Cost of Equity - Cost of equity is the return of a company that requires to decide an
investment meets of capital return requirements. As firm often use budgeting threshold for an
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required rate of return. It represent compensation of the marketplace that demands fore
exchange for owning assets and bearing cost of risk ownership. Moreover, it is traditional
approach of cost of equity that are divided with capitalisation model and capital asset pricing.
It is the rate of return of a share holder that requires of investing equity into business.
Cost of equity = dividend per share / current market value of stock
= 718762 / 2.74
= 262321
Identify the Capital Structure
Capital Structure – Capital structure refers to the types and relative proportion of fixed
and variable cost that a business incurs (Adomako, Danso and Ofori Damoah, 2016) Fixed cost
are those cost that remain unchangeable regardless of the amount of output of a company that
produces variable cost with the production of volume line. Moreover, it differs from relational
and service provider along with expense accounts on a financial statement. Each and every
company have maintained their cost structure that may vary between product lines, division or
business units due to district type of activities as they performing each and a every business
function.
There are identified capital structure of the company and it is getting that capital structure
adjust of adjustments in light of changes in economic condition. There are requirement of it for
financial covenants. To arrange and adjust the capital structure the company may adjust the
dividend payments in reference to share holders, return to shareholders as well as issues related
to new shares. In the context to Estia Health limited attain to their over all objectives so they
manage their capital in effective manner as well as other things also. The aim of the company to
assure about to meet their covenants which is attached to the interest bearing loans and
borrowings which have been directly related to capital structure requirement. Break in meeting
the financial covenants would permit the bank to directly call loans and borrowings. There have
been no breaches of the financial covenants of any interest bearing loans and borrowings in the
current period. The changes in the objectives has been done in the objectives, policies or
processes for arranging capital during the year ended (Bezemer and Hudson, 2016)..
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CONCLUSION
It has been concluded from the above project report that the business finance is an
essential part of an organisation which drives them ahead from their rivals if available funds are
maximum utilised. For this, management plays an important role in managing and monitoring
the investments made in different It is an essential for every organisation as lack of finance
restrict an organisation in executing pre-determined business activities in desirable way. To
achieve financial stability, it is important for the management to formulate an effective decision
and plans in terms of selecting sources of finance such as banks, venture capital etc. For this, it
must required to calculate financial ratios which clearly shows the actual financial position of
company in competitive market. Considering the factors and employment in the project it has
been identified that there is a significant decline in the profits whereas numbers of employees in
the business risen. The undertaking of different types of ratio are crucial when attempting to
determine the overall image of the company.
There is a marginal decline in the gross profit and return on the capital employed which
means that this business needs to work for the improvement of their operations. This business
have been successful in raising their sales which can be reflected through the marginal decline in
the working capital ratio. Share price for this organisation have fell down in the drastic manner
as it have declined from 2 million to .5 million. Therefore it has been essential for a business to
focus on their capital structure so that improvements could be carried out. The economic
circumstances which are prevailing in the country are to be taken into consideration when
identifying capital structure of the company. To stay above financial covenants, it is essential for
this organisation to manage their capital through adjusting the dividends which are being paid to
the shareholders.
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REFERENCES
Books And Journals
Gelsomino, L. M. And et.al, 2016. Supply chain finance: a literature review. International
Journal of Physical Distribution & Logistics Management. 46(4). pp.348-366.
Cumming, D., Hou, W. and Lee, E., 2016. Business ethics and finance in greater China:
Synthesis and future directions in sustainability, CSR, and fraud. Journal of business
ethics. 138(4). pp.601-626.
Brown, J. D. and Earle, J. S., 2017. Finance and growth at the firm level: evidence from SBA
loans. The Journal of Finance. 72(3). pp.1039-1080.
Julien, P. A., 2018. The state of the art in small business and entrepreneurship. Routledge.
Cole, R. and Sokolyk, T., 2016. Who needs credit and who gets credit? Evidence from the
surveys of small business finances. Journal of Financial Stability. 24. pp.40-60.
Adomako, S., Danso, A. and Ofori Damoah, J., 2016. The moderating influence of financial
literacy on the relationship between access to finance and firm growth in
Ghana. Venture Capital. 18(1). pp.43-61.
Bezemer, D. and Hudson, M., 2016. Finance is not the economy: Reviving the conceptual
distinction. Journal of Economic Issues. 50(3). pp.745-768.
Sodeyfi, S., 2016. Review of literature on the nexus of financial leverage, product quality, &
business conditions. Journal of Economic & Management Perspectives. 10(2). pp.146-
150.
Harrison, R. T., Botelho, T. and Mason, C. M., 2016. Patient capital in entrepreneurial finance: a
reassessment of the role of business angel investors. Socio-Economic Review. 14(4).
pp.669-689.Aljandali, A., 2016. Quantitative Analysis and IBM® SPSS® Statistics: A
Guide for Business and Finance. Springer.
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