Financial Analysis of Acquisition

This assignment requires you to analyze the consolidated financial statements provided, focusing on an acquisition made by Austin Engineering. The analysis should specifically evaluate the profitability and solvency of the acquired subsidiary company, taking into consideration its performance relative to Austin Engineering's overall financials. You will need to interpret key financial ratios and metrics to determine if the acquisition is financially sound.

Prepare Complex
Corporate Financial
Reports

Table of Contents
INTRODUCTION...........................................................................................................................1
PART 1 (A)......................................................................................................................................1
PART 1 (B)......................................................................................................................................4
PART 2............................................................................................................................................8
REFERENCES..............................................................................................................................11

INTRODUCTION
In an organisation it is necessary that every financial transactions that took place in a
financial year should be recorded in proper format. Under this project, analysis is done on the
basis of corporate financial report of Billabong International Limited (Altman and Hotchkiss,
2010). Various ratios and calculated to determine its financial position and future sustainability.
PART 1 (A)
Company Overview
Billabong International Limited is a well known as surf company. It is associated with
clothing retailer that produces other accessories such as watches, backpacks and snowboard
products with the other brand names. It is public Ltd company founded in 1973. Its headquarter
is situated at Queensland and Australia. The company is having 6000 employees and have
positive relation with so many customers (Wang and Qian, 2011). It is traded as ASX with the
total assets of $ 25.5 million.
Organisational structure:
It consists of Non- Executive chairman which is at current held by “Ian Pollard”. They
held a large range of senior business roles. It followed by a Executive directors. There are
various members working under their head such as HR & Remuneration committee, audit and
risk committee or Nomination body.
Subsidiaries: It major subsidiary units is Element skateboards, Von Zipper and RVCA.
Accounting standards:
According to the interim financial report for the half year reporting period ended as on
31st December2012. They used to prepare their financial statements by using accounting standard
AASB 134. Interim financial reporting and the corporation Act 2001. Billabong group entities is
operating in Australia which is bound by the Australian privacy principles as per there Privacy
Act 1988. They are responsible for handling personal information relying on the staffs records
exemption and the associated bodies corporate exemption in the privacy Act.
Comparison:
Billabong international limited Element Skateboards
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As per the financial statements of this company
present a fair and true view in all material
respects.
According to the annual report the subsidiaries
is showing annual loss of $773million which is
more than 3 times from the earlier.
This particular segment is mostly dealing into
wide range of accessories for upper class
people.
They are associated with providing facilities to
the young generation.
Because of wide range of products they are
incurring sufficient amount of profit to meet
out their outstanding debts.
They are purchasing maximum product such as
skateboard that made huge impact on there
financial position.
Calculation of ratios:
Liquidity ratio:
Current ratios: Current assets / Current liabilities
2016 : 461502 / 201379 = 2.29
2017 : 421718 / 174489 = 2.41
Acid test ratio: Current assets- (Stock + Prepaid expenses) / Current liabilities
2016 : 461502 -182604 / 201379 =1.38
2017 : 421718 – 162311 / 174489 =1.48
From the above ratio's calculation, it has been found that liquidity position of the
company is sufficient enough from the two year. Current ration is also in the range of ideal ratio
which is 2:1 (Choi, Kwak and Choe, 2010). whereas, acid test ratio is also effective with 1.38,
1.48 respectively. Company is having great chance to cover their debts with the availability of
cash.
Assets turnover ratios: It is used to measure the company's total sales and revenue
generated relative to the total value of its assets. It is used as effective indicators to determine
efficiency of the company.
Assets turnover ratio: Total sales / Total assets
2016: 1075634 /741296 =1.45
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2017: 979452 /578124 =1.69
According to the above calculation, it has been seen that company's total assets providing
enough sales to them. The position of turnover is well enough as they are repeating in balance
manner.
Leverage ratio:
Financial leverage ratio: Average total assets / Average equity
2016: (741296/2) / (252890/2) = 370648/126445 =2.93
2017: (578124/2) / (175244/2) = 289062/87622=3.29
Debt to assets ratio: Total debt / Total assets
2016: 488406 /741296=0.65
2017: 402880/ 578124=0.69
Operating performance:
Operating profitability ratio: Net income / Common equity
2016: -30426/1094274= 0.027
2017: -130484/1094274=0.11
Operating efficiency ratio: Total operating expenses/ Total operating revenue
2016: -533922+(-410243)/1075634=0.8
2017: -479255+ (-364123)/979452= 0.8
Profitability ratio:
Net profit ratio: Net income/ Net sale*100
2016: -22582/ 1075634*100= -2.09%
2017: -120792/ 979452*100=-12.33%
Gross profit margin: Gross profit/ Net sales*100
2016:(1075634-533922)/1075634*100= 50.3%
2017: (979452-479255)/979452*100=51.06%
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Issues from the analysis:
According to the above ratio's calculation, it has been found that there are certain issues
related with profitability aspects of the company. As they are incurring maximum expenses for
the production of products and services. Because of which efficiency of the company is not get
up to the set standards. This is can be the major problem is making huge impact on the
performance and growth of the company.
To overcome these issues:
After examining the above issues, the best possible way is to reduce the total operating
expenses with the help of operating tools and techniques. Such as cost accounting system which
is used to record total cost which is incur by the company during the year. The Billabong group
is required to use latest techniques so that total labour, material and extra costs are analysed. It
will incur great chance of getting sufficient profitability and better future for the company.
PART 1(B)
Acquisition is a corporate action under which a company buys maximum of another
company's ownership stakes to take over control of it. It arises when a buying company obtain
more than 50% of ownership in a target company.
Austin Engineering limited which is a public listed company with its core business in the
mining and resources areas. It is a planning to acquire Hastie Group to increase its value in the
market (Malmendier, Tate and Yan, 2011). They are trying to expand their business operations
by acquiring other companies business operations. This company is associated with mechanical,
electrical and hydraulics in Australia. They are having latest techniques and ideas which will be
beneficial for the Austin Engineering company.
Share prices of last 12 month of Hastie group pvt Ltd:
Date Open High Low Close* Adj. close** Volume
14 Dec. 2017 0.38 0.38 0.36 0.37 0.37 250217
01 Dec. 2017 0.3 0.38 0.3 0.38 0.38 3771916
01 Nov. 2017 0.26 0.38 0.25 0.3 0.3 11312674
01 Oct. 2017 0.22 0.27 0.21 0.26 0.26 7251606
01 Sep. 2017 0.21 0.26 0.19 0.22 0.22 12033061
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01 Aug. 2017 0.16 0.22 0.15 0.2 0.2 11980794
01 Jul. 2017 0.09 0.16 0.09 0.15 0.15 8284484
01 Jun. 2017 0.09 0.09 0.08 0.09 0.09 3382568
01 May 2017 0.09 0.09 0.09 0.09 0.09 2071180
01 Apr. 2017 0.09 0.09 0.09 0.09 0.09 4468495
01 Mar. 2017 0.1 0.1 0.09 0.1 0.1 8626626
01 Feb. 2017 0.09 0.1 0.08 0.1 0.1 7573674
01 Jan. 2017 0.07 0.08 0.07 0.08 0.08 2037142
01 Dec. 2016 -0 -0 -0 -0 -0 -0
Calculation
Valuation ratio: It is the process of determining company's total worth. Such kind of
ratio put that insight into the relation of a company market share price in which they can serve as
useful tools for analyse investment potential.
EPS= Net income / Average outstanding shares
2017: -9.515 / 48811 = 0.19
Book value per share: Net worth/ Number of share
2017: 42015794/ 8927500= 4.7
Altman Z- score analysis:
It is the outcome of a credit strength test that standard a publicly traded production
company's probability of bankruptcy (Ameer and Othman, 2012). It is supported with five
financial ratios that can be influence from data founded on a company's annual 10k reports.
X1: Working capital / Total assets
: 4728.685-3333.506 /45349.3= 0.030
X2: Retained earning / Total assets
: -6985.796/45349.3=-0.15
X3: EBITDA / Total assets
: -1523.429/ 45349.3= -0.033
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X4: Market value of equity /Total liabilities
: 48/3333= 0.0144
X5: Net sales / Total assets
: 196700/45349.3=4.33
From the above analysis, it has been seen that X1 is 0.030 which means that total assets is
not under the control of working capital. Retain earning, EBITDA is not at the positive side
which means company is not having sufficient amount of capital to manage their outstanding
debts.
Sustainable growth rate analysis: It is the maximum growth rate a firm can attain
without external equity funding while keeping a constant debt to equity ratio. It is the total SGR
% suggests the total revenue growth that an organisation can carry on under its present situation
such as: profit margin, leverage, assets turnover etc.
SGR: ROE*b/ 1-ROE*b
ROE: Net income/ shareholders equity
: 196700/3072(48*64Price of Dollar)= 64
SGR: 64/ 1-64= 0.029
Valuation method: For the purpose company analysis there are various methods which
can be used by company's to make profitability. Such as Discounted cash flow analysis and
multiple methods are the two important valuation methods by which efficiency of the company
can be judged in appropriate manner. It can also be notified that it will be probability for the
longer period of time.
Issues during analysis:
According to the above analyses, it has been found that there are certain issues which is
associated with the company health. It has been examine through Z-score analysis. It has been
seen that there is huge fluctuation is share prices as the values are less than 1. the company is
going towards loss so to control their rest of the losses Austin engineering company is trying to
acquire their share.
Applicable laws and regulation:
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According to the ASX(Australian stock exchange) rule and regulation they need to follow
proper guidelines at the time of acquiring their ownerships. Local government assistance and
financial institutional law are also taken into consideration before making any planning related
with the acquisition.
Controlled entity policy: These are internal controls that help to ensure that
management should direct pertain to the whole entity are carried out. They are termed as second
level of top down approach to determine the risks of an organisation. It consists of :
Name of the policy: This particular policy is controlled entity policy 2012
Commencement: 1march 2012
Policy is binding: It is applicable to the extent that a contrary intention is to expressed
this specific policy that binds the staffs and other affiliates.
Application: It is associated with all the controlled entities of corporate or incorporated
bodies in Australia or whose operations are performed in Australia.
Acquiring controlled entities:
 The company must be established a controlled entity for the objective of taking
commercial activities.
 The person proposing the estimation of a controlled entity can be first consulted with the
vice-president of that company.
Board of directors:
 The directors of a controlled entity should possess the experience and expertise essentials
to provide effective control of the entity.
 The board members should have:
 At least three members
 They can meet at least twice a year
 Appointment of group secretary as company personal information that must be concern
with vice-president of that particular organisation.
 All directors are comply with the code of conduct and external interest policy 2010.
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Governance generally:
Some controlled entity should be adhere to the following concepts:
 The related role and responsibilities of board members are need to be clearly stated.
 They must have effective composition, size and commitment to discharge its duties.
 The board and authorities must be actively promote ethical and respective decision-
making.
 They needed to have proper information about the legal laws and obligation and interest
of the shareholders.
Reporting and review:
 A controlled entity need to submit an annual report on its activities to vice-president by
30 April of every year in the form mentioned in the procedures.
 It is the responsibilities of vice-president to consult with deputy vice-president before
reaching to any particular solution.
 The account of each controlled entity will be submitted into consolidated accounts
format.
PART 2
Consolidated statements which prepared during acquisition of the company.
Consolidated entity Change 2017 2016
% $000 $000
Austin
Engineering Hastie Group
Continuing operations
Revenue 24 234344 188169
Statutory EBITDA 62.5 -7730 -20590
Normalised EBITDA 100.2 14263 7126
Loss before tax 33.9 -25026 -37859
Loss after tax 8 -27633 -30022
Basic loss per share 75.4 -4.94 -20.07
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Dividend per share
Net assets -18.1 112178 137021
NOTE: The above data taken in the above mentioned table is used as on assumption basis.
Income statement:
Consolidate profit and loss statements as on year ended 30
June 2017
Austin
Engineering
Hastie
Group
2017 2016
$000 $000
Revenue from continuing operations 234344 188169
Expenses
Raw materials and consumables used -68535 -39938
Changes in inventories and work in progress 15803 -6973
Employment expenses -102018 -87593
Subcontractor expenses -14388 -10451
Occupancy and utility expenses -6431 -13054
Depreciation expense -10311 -10277
Amortisation expense -883 -863
Production operational expenses -13239 -10055
Other expenses -33451 -31608
Finance costs -6102 -6156
Impairment expense -19815 -9060
Loss before income tax -25026 -37859
Income tax (expense)/benefit -2607 7837
Loss for the year from continuing operations -27633 -30022
Loss from discontinued operation - -10433
Loss for the year -27633 -40455
Other comprehensive income
Item that may be reclassified to profit or loss
Foreign currency translation differences, net of tax -5135 -1991
9

Blank
Other comprehensive income for the year -5135 -1991
Total comprehensive income for the year -32768 -42446
Loss for the year is attributable to
Owners of Austin Engineering Ltd -27633 , -40455
Total comprehensive income for the year is attributed to:
Owners of Austin Engineering Ltd -32768, -42446
Balance sheet:
Consolidated Balance sheet Austin Engineering Hastie Group
2017 2016
$000 $000
Current assets
Cash and cash equivalents 3923 12832
Trade and other receivables 45312 29371
Inventories 31617 15814
Current tax assets 545 1809
Assets classified as held for sale -0 8740
Other receivables and other assets 14814 11985
Total current assets 96211 80551
Non-current assets
plant and equipment, property 105327 112308
Intangible assets 16768 37268
Deferred tax assets 13242 17632
Total non-current assets 135337 168208
Total assets 231548 248759
Current liabilities
Trade and other payables 55661 36509
Financial liabilities 17045 19657
Current tax liabilities 1931 0
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Provisions 5927 8247
Total current liabilities 80564 64428
Non-current liabilities
Financial liabilities 32446 32593
Deferred tax liabilities 5862 10512
Provisions 498 4205
Total non-current liabilities 38806 47310
Total liabilities 119370 111738
Net assets 112178 137021
Equity
Share capital 153927 145829
Retained earnings -30500 -4595
Reserves -11249 -4213
Total equity 112178 137021
According to the above consolidated financial statements, it has been seen that seen that
acquisition of the company is done in the relation to the subsidiaries company which is going
into loss. The profit and loss statements prepared by the company at the time of acquisition is in
the favour of the company Austin Engineering. It would be good decision to acquire the
company.
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