Finance for Business Analysis Report

This analysis report delves into the financial aspects of Kathmandu Holding Limited, covering key ratios, ownership structure, share price movements, dividend policy, and investment recommendations.

Finance for business

Table of Contents
Question 1:.......................................................................................................................................4
A description of the company:.........................................................................................................4
Question 2:...................................................................................................................................5
Specify ownership-governance structure of the company:..........................................................5
i) Name the main substantial shareholders: .............................................................................5
ii) Name the main people involved in the firm governance:...........................................................7
Question 3........................................................................................................................................9
I. Calculate the following key ratios for your selected company for the past 4 years.................9
II. Explain what phenomenon is being “captured” by the variable TA/OE, and.................10
III. Explain why the ROE (EBIT) is significantly greater than or less than the ROA (EBIT)......11
Question 4......................................................................................................................................12
Using the information from the ASX website: www.asx.com.au you must complete the following
tasks:..............................................................................................................................................12
i) Prepare a graph/chart for movements in the monthly share price over the last two years for
the company that you are investigating. Plot them against movements in the All Ordinaries
Index...........................................................................................................................................12
ii). Write a report which compares movements in the companies’ share price index to the All
Ords Index. For instance, how closely correlated is the line with the All Ords Index. Above or
below?........................................................................................................................................13
Question 5......................................................................................................................................14
Explain the factors that affect the share prices of empire resources:.............................................14
Question 6:.....................................................................................................................................15
I. What is their calculated beta (β) for your company?..........................................................15
II. If the risk-free rate is 4% and the market risk premium is 6%, use the Capital Asset
Pricing Model (CAPM) to calculate the required rate of return for the companies' shares.......15
III. Is the company you have chosen a “conservative” investment? Explain your answer...15
Question 7:.....................................................................................................................................16
Weighted Average Cost of Capital (WACC)................................................................................16

i. Using information from the latest company report for the company (i.e. interest rate on
their major source of long-term loans) and the estimated cost of equity capital calculated (in
part 6ii above), calculate the WACC for your company............................................................16
ii. Explain the implications that a higher WACC has on management’s evaluation on
prospective investment projects.................................................................................................16
Question 8......................................................................................................................................17
Consider the debt ratio for your company over the past two years:..............................................17
i) Does it appear to be working towards the maintenance of a preferred optimal capital
structure? (i.e., does it appear to be “stable”?). Explain your answer.......................................17
ii). what have they done to adjust/amend their gearing ratio? Increase or repay borrowings?
Issue or buy back shares? Has the Director’s Report given any information as to why they
have made any adjustments?......................................................................................................18
Discuss what dividend policy of the management of the company appears to be implemented.
Explain any reason related to that particular dividend policy....................................................19
Question 10:...................................................................................................................................20
Based on your analysis above, write a letter of recommendation to your client, providing an
explanation as for why you would like to include this company in his/her investment portfolio. 20
References:....................................................................................................................................21

Question 1:
A description of the company:
Kathmandu Holding Limited:
Kathmandu Holding Limited is a retailing company which engaged in the designer marketing,
clothing retailing, retail of fabrics & products & deals with tools of travel or tourism adventure.
This company had founded in 1987 & located in Christchurch, New Zealand. The company has
been expanding its market Australia, New Zealand US & UK with 98 branches across the world.
The company offers its potential customers technical wearing, down gown & jackets, fleece &
casual wear in merino fabrics. Kathmandu Holding Limited also deals in clothing packs, sleeping
bags, canvas tents, camping-projects accessories & footwear as well as home appliances and
products for children. Family camping products like tents, shelter, furniture-fitting and kitchen
appliances in good and value varieties are also manufactured in KMD Company for their
customers.
The actual headquarter of the company is in New Zealand only that operates its business
activities & overall network of approx. 180 stores in New Zealand. Kathmandu holding limited
has been delivering a sufficient & improved result as shown in its financial statements. Sales
growth in last year was 4.0% which is around $425.6 million. Company has increased its gross
[profit margin around 62.5% which is hike of total 1% from 2016. Profit before earning and tax
were 54 % from NZ$33.4 million to NZ $50.3 million. Total dividend earning was enhanced by
38% t0 13% per share & EPS earning per share was increased from 10.2cent in financial year
2016 to 16.6 cent (Maher and Andersson, 2014).
Figure 1: Kathmandu Holding Limited.
(Source: Kathmandu Holdings Limited, 2016)

Question 2:
Specify ownership-governance structure of the company:
i) Name the main substantial shareholders: 
 With higher than 20.00% of shareholdings. Based on this argument you should classify a
firm as a family or non-family company
 With higher than 5.00% of shareholdings.
Ownership Governance structure of Kathmandu Holding Limited: -
The ownership structure of any organisation can be considered by the level of focusing on the
right of shareholders or ownership & shareholding of owners. Ownership governance structure
basically involves inside and outside shareholders. Managers, BUD, CEO, MDs’ & so on
internal owners are righted to hold internal shareholding.
Figure 2: Ownership structure
Source: Kathmandu Holdings Limited, 2017)
David Kirk & Xavier Simonet is major or substantial shareholder of Kathmandu Holding
Limited from 2013 & 2015 respectively. The actual ownership structure of KMD is following: -

II. With higher than 5.00% of shareholdings.
Other shareholders with their shareholding formation: -
Names equities %
Briscoe Group Ltd. (substantial
shareholding)
40,095,432 19.8%
TA Universal Investment Holdings Ltd. 24,212,664 12.0%
Challenger Ltd. (Investment Management) 15,313,741 7.57%
Nova Port Capital Pty Ltd. 15,194,513 7.52%
Unit Super Ltd. 13,858,777 6.86%
Harbour Asset Management Ltd. 12,374,372 6.12%

ii) Name the main people involved in the firm governance:
 The Chairman
 Board members
 CEO.
 Whether any of these people have the same surname as any of substantial shareholders
(>20% share capital). If yes- you could use this as an argument for the presence of an
owner or family member(s) in the firm’s governance.
 Whether any of shareholders with more than 5% share capital is involved in firm
governance.
The name of the people included in the management team of Kathmandu Holding Limited is:
Chairman name: -
1. David Kirk: - he is appointed to the company as non-executive officer and the member of
Audit and Risk Committee in 2009. Afterward, he is appointed as a chairman of the
company from 2013 & continues its work from 31 January 2014.
2. Xavier Simonet: - he was appointed a company’s managing director and CEO from 9TH of
November 2015 (Kathmandu Holding Limited, 2016).
CEO: -
David Kirk is the CEO of the company from 2009. Xavier Simonet is recently on the post of
CEO from 2015 of KMD Company.
Board members: -
1. John Harvey: - he was appointed a chairman of risk and audit committee & non-
executive officer of remuneration and nomination committee on 21th of November 2014.
2. John Holland: - he was appointed as non-executive officer and member of risk and audit
committee on 20 November 2015 (Kathmandu Holding Limited, 2017).

3. Sandra Mcphee: - Sandra was also appointed as member of Audit & risk committee and
chairman of Remuneration & Nominee Committee.
4. Christine Cross: - Christine got a re-appointment as a non-executive officer on 20
November 2013.
5. Mark Todd: - Mark Toad was appointed as executive director of the company in 2014 &
get appointed as finance director in 2009 & held the post of director executive on 24
August 2015.
These all people are board members of the Kathmandu holding limited and meeting
attended by members are given below:-
Director
Name
Meetin
gs
David
Kirk
Xavier
Simonet
John
Harvey
John
Holland
Sandra
Mcphee
Christine
Cross
Mark
Todd
Director
meeting
I 8 8 8 8 8 7 1
II 8 8 8 8 8 8 1
Auditing
& risk
committee
meeting
I 6 XX 6 6 6 5 XX
II 6 XX 6 6 6 6 XX
Remunerat
ion &
Nominee
committee
meetings
I 4 XX 4 4 4 3 XX
II 4 XX 4 4 4 4 XX

Question 3
I. Calculate the following key ratios for your selected company for the past 4 years.
Annual reports are accessible via company websites (show all working out)
i) Return on Assets (ROA) = (NPAT / Total Assets)
ii) Return on Equity (ROE) = (Net Profit after Tax / Ordinary Equity)
iii) Debt Ratio = Total Liabilities / Total Assets
Solution: -
Calculation of year ended 2017 of KMD retailing company:-
1. Return on Asset (ROA) = 38,039/ 439,067 = 0.086
2. Return on Equity (ROE) =38,039/200,209 = 0.189
3. DEBT RATIO = 111,967/439,067 = 0.255
Calculation of year ended 2016 of KMD retailing company: -
1. Return on Asset (ROA) = 33,521/449,050 = 0.074
2. Return on Equity (ROE) =33,521/200,191 = 0.167
3. DEBT RATIO = 137,367/449,050 = 0.305
Calculation of year ended 2015 of KMD retailing company: -
1. Return on Asset (ROA) = 20,419 /430,451 =0.047
2. Return on Equity (ROE) =20,419/200,191 =0.101
3. DEBT RATIO = 45,700 /430,451 =0.082
Calculation of year ended 2014 of KMD retailing company: -
1. Return on Asset (ROA) = 42,152/408,297= 0.103
2. Return on Equity (ROE) =42,152/198,228 =0.212
3. DEBT RATIO = 43,458/408,297 =0.106

II. Explain what phenomenon is being “captured” by the variable TA/OE, and how
it is impacting on the relationship between Return on Assets and Return on
Owners Equity.
The component in above analysis helps in analyse actual figures related to return on investments.
The relation between total return on assets and return on investment (owner equity) indicates
actual liabilities regarding organisation owner leverages which would be applied or used in
manage financial operations in the business. The relation of total assets and ownership equity
allows company to measure actual financial performance of the company related to sales,
company performance & another economic situation of the organisation. In the finance where
total assets include total property of the company whether tangible or intangible it is. Total assets
include sticks, debtors etc. on the other hand, total equity ownership means difference between
overall value of assets and total liabilities (Financial Times, 2013).
Equity can be determined as capital stock or inventory of the organisation. When the relation of
total assets and equity increases and goes high it indicates high value of assets whereas lower
value of equity, such values shows that company is in condition to meet its long-term
requirement and cover its high term risks and debts. This situation is known as trading on an
equity position. When company estimate low value of assets and high value of equity then this is
the situation, company is not in any condition to cover its debts. A low value of assets over
equity shows foolishness & low skilled ability. In such situation, a company cannot get expected
returns on borrowed capital & cost of capital (Financial Times, 2013).

III. Explain why the ROE (EBIT) is significantly greater than or less than the ROA
(EBIT).
Return on equity creates a crucial measurement related to financial statements and company
liquidity position. Return on equity analysis allows the company to define as strategic profit in
the terms of sales, net profit margin and asset turnover and financial leverages. ROE = net
incomes. Sales x sales/ total assets X assets / and related to shareholder equity. Increase in the
level of net margin obtains each and every sale enhances the net income & ROA. Decrease the
level OF ROE (net income margin) will push the performance to the negative path and sales
level would be decline. Due to this ROA would be less than ROE (EBIT) (Entrepreneur, 2017).
Asset turnover can be taken as sales per unit on total sales. Such amount of sale is an amount
which would be generated per unit asset as a toll of ROE. Decrease asset turns over
predetermines revenue obtained would not match the total cost based on total assets to
manufacture the services of products. In any company, ROE is called a return on investment that
is obtained in financial statement of the organisation through expected return. When ROE would
be considered as greater than COEC cost of capital equity, organisation can easily enhance its
productivity and proficiency level to achieve organisational goals. On the other hand, high ROE
over ROA is taken as company's strong holding upon its properties and assets in an effective
manner. Higher gearing possession would enhance higher ROE than ROE earnings before
income and tax. In this situation, a company would be not able to trade off over the corporate
cost. A lower value of ROE upon ROA will enhance the profit and income of the company
(Entrepreneur, 2017).

Question 4
Using the information from the ASX website: www.asx.com.au you must complete the
following tasks:
i) Prepare a graph/chart for movements in the monthly share price over the last two years
for the company that you are investigating. Plot them against movements in the All
Ordinaries Index.
(Source: The Sydney Moral Herald, 2018)

ii). Write a report which compares movements in the companies’ share price index to the
All Ords Index. For instance, how closely correlated is the line with the All Ords Index.
Above or below?
Introduction:
This report will explain actual share movement of Kathmandu Holding Limited Company
accurately and figure out changes in shares movements.
From above analysis & changes in shares prices with the changes in All Ords Index shows that
company's position is quite good in the market. Shares are fluctuating in a positive way. Rapid
growth in share's movement indicates substantially rise in the shares of company to stifle out
through the passage of period time 2016, 2017 & 2018. A share of the company has been
declined in January 2017 in comparison to All Ords Index. But slightly change has been made
and growth could be seen in the shares of Kathmandu Holding Limited since Feb. 2016 to
present 2018 (Maher And Andersson, 2014).
Conclusion:
This report has explained actual & competency growth in share movement of company that
shows company's financial position in the market.

Question 5
Explain the factors that affect the share prices of empire resources:
Solution:
Share prices of the company can be affected by following factor these factors are: -
1. The specific factor related to business activity: - there is some specific factor that could
reduce the share prices of the Kathmandu Holding Limited due to specific reason. These
are: issues of new debentures are issuing of shares, giving salary to employees, retained
earnings, production of new products and recall on unissued or unsubscribed shares.
Exchange rates, interest rates of debenture and shares. A trade-off policies and
government policies and mismanaged events and scandals etc.
2. Market behaviour: -
 Bull market: bull market shows strong economic position of the company in the
market. In such situation, a company can able to invest more in potential projects.
It is new and innovative perspective on economic recovery.
 Bear market: the situation of bear market could be analysed when stock prices
got reduced due to weak Sensex or slow market position. In such situation, stock
prices could be reduced and investor becomes weak and his / her confidence
could be faded.
3. Economic changes:
Economic changes are known as economic outlook which may occur due to changes in
economic trends. When economic scenario is going to be expanded then share prices
going to be increased and organisational profit could be enhanced and vice versa.
4. Inflation & deflation: inflation is known as raised prices of products when the prices of
products got increased, it creates negative impact upon share prices. On the other hand,
deflation occurs when prices get lower than as usual that time share prices increase and
interest rates would force to be reduced of share prices.
5. Political changes: changes in economic trends, a habit of customers, preferences &
political policies make effective changes in shares and stock value. If prices of energy
and stock cost would get reduced the share prices would be raised and vice versa.

Question 6:
I. What is their calculated beta (β) for your company?
The calculated beta of Kathmandu Holding Limited was .90 β. It is quite a stable situation when
company can able to achieve its long-term obligation. Stock prices of company are going well to
achieve such position.
II. If the risk-free rate is 4% and the market risk premium is 6%, use the Capital
Asset Pricing Model (CAPM) to calculate the required rate of return for the
companies' shares.
Capital Asset pricing model gives the following formulae for calculation of required rate of
return
Required rate of return = Risk-Free rate + Beta*(Market Risk Premium)
= 4% + 0.90*(6%)
= 9.4%
III. Is the company you have chosen a “conservative” investment? Explain your
answer.
The investment of the company is not more conservative and strong due to higher rate of return
than the market return. This is occurred due to investment is more risky and concerned to hold as
its negative returns. In such situation, only that investor could invest who has risk seeking ability
(Market Index, 2018).

Question 7:
Weighted Average Cost of Capital (WACC)
i. Using information from the latest company report for the company (i.e. interest
rate on their major source of long-term loans) and the estimated cost of equity
capital calculated (in part 6ii above), calculate the WACC for your company.
Weighted Average cost of Capital
= (Weight of Equity*required rate of return on equity + Weight of Debt*required rate of
return on debt
= (43,691 /439,067 *9.4%) + 111,967/439,067 *2.56%)
= (0.00935 + 0.0065)
= 1.101%
ii. Explain the implications that a higher WACC has on management’s evaluation
on prospective investment projects.
In the context of above weight Average cost of capital, if ant organisational project has the
highest return of WACC, then the returns of WACC requires an actual acceptance of projects
that would be higher compared to the one where WACC would be less. If WACC return is high
the company had to work hard to increase the revenues from overall project.

Question 8
Consider the debt ratio for your company over the past two years:
i) Does it appear to be working towards the maintenance of a preferred optimal capital
structure? (i.e., does it appear to be “stable”?). Explain your answer
The debt ratios of the company can be taken a measurement of financial status of company that
evaluates actual financial status of the company. It shows an actual relation between debt &
equity. The debt ratio is related to capital incentives activities if debt ratio is higher than 100%
then it indicates that company has greater capacity in relation to assets in spite of debt. In debt
ratio debt is greater than assets this situation would indicate that company has great investment
risk & low financial health of the company. In case of Kathmandu holding Limited, the debt
ration of this company has been analysed of past two financial years of 2016 & 2017. A debt
ratio of the company is ideal that shows that company is compatible to meet its obligation. Debt
ratio shows that company is position to meet its long-term obligation. In 2017, debt ratio is 0.255
% & in 2016 the debt ratio was 0.305% which indicates compatible debt-equity relation (Nesticò
and Pipolo, 2015).

ii). what have they done to adjust/amend their gearing ratio? Increase or repay
borrowings? Issue or buy back shares? Has the Director’s Report given any information as
to why they have made any adjustments?
Gearing ratio is the measurement of proportionate funds of company's borrowing related to
equity. Such ratios measure the financial risk to that company's activities is to b suspected. A
company knows that excessive size of debt could create a hurdle for company which leads to
financial shortfalls. The high proportion of gearing ratio indicates high percentage of debt to
equity and low percentage of gearing ratio shows low portion of debt to equity. Company should
make several adjustments related to gearing ratio to yield significant and variant results. From
company's annual report 2017, it is indicated that company has recorded lower level of debt &
created strong and effective operating cash flow arrangement to manage debt equity proportion.
Company has tried regulating its interest rates, restriction on alternate application of cash to
adjust gearing ratio and debt-equity relation. It is so because high gearing ratio could put their
investment & loans capacity on risks of not to be being paid (Next small-cap, 2017).

Question 9:
Dividend policy:
Discuss what dividend policy of the management of the company appears to be
implemented. Explain any reason related to that particular dividend policy.
Dividend policy:
Dividend policy is the concept in which set of guidelines & presentation of accounting regulation
is shown that helps to apply how to use and manage actual earnings & how much of amount of
dividend should be paid to shareholders. Sometimes investors are not concerned with the
dividend policies of companies. Kathmandu Holding Limited declared capital structure and
dividend policy twice a year to account their dividend an s a result and shows the context of their
ability to apply going concern approach to execute financial strategy & to deliver successful
plan. To adjust the dividend, imputation of debts which would arise from the paid amount of
dividend identified as a liability at the reporting period of financial year. Company had adjusted
Imputation of credits which could be raised from the dividend which could be revised as
receivables as the reporting period of financial year. Company has followed dividend per share
policy at par & declared final dividend in 2016 at 8% per share in which 35 of intern dividend is
included (Kent Baker, et. al., 2011)

Question 10:
Based on your analysis above, write a letter of recommendation to your client, providing an
explanation as for why you would like to include this company in his/her investment
portfolio.
Report:
To,
Investment client
Kathmandu Holding Limited is a company which deals in retailing and clothing material.
Through above analysis according to annual report of the company, it is observed that company's
financial condition is quite stable. This report will include company actual financial condition &
describe dividend policies and significance of investment portfolio in company’s report.
In the above analysis, it is clearly observed that company's financial position is quite stable and
positive. From above ratios analysis, the debt ration of last four years is lower compared to each
other which shows lower debt to the equity. Company is able to meet its obligations easily.
Company has followed retained earning dividend policy form last four years; retained earnings
in last two years 2015 & 2016 were 118,607 & 315,854 respectively. According to ords index &
ASX list Kathmandu holdings company shares are been increased form past two years. In
January the negative fluctuation has been seen but fluctuation became positive recently with
higher growth (Fin Data, 2018).
This report finally shows positive and flexible liquidity and profitability position of the company.
So this company is in favourable situation in including it in investment projects portfolio.

References:
1. Entrepreneur, 2017 Return on Investment (ROI). [Online] Entrepreneur, Available at:
https://www.entrepreneur.com/encyclopedia/return-on-investment-roi [Accessed on: 9
December 2017].
2. Financial Times, 2013. Definition of return on equity ROE. [Online], Lexicon, Available
at: http://lexicon.ft.com/Term?term=return-on-equity--roe [Accessed on: 15 January
2018].
3. Kent Baker, H. and Nofsinger, B., 2011. Dividend Policy Decisions. Behavioural
Finance.
4. Maher, M. And Andersson, T., 2014. Corporate governance: effects on firm performance
and economic growth. The OECD principles of corporate governance.
5. Nesticò, A. and Pipolo, O., 2015. A protocol for sustainable building interventions:
financial analysis and environmental effects. International Journal of Business
Intelligence and Data Mining, 10(3), pp.199-212.
6. Next small-cap, 2017. ERL to Go from Gold Developer to Producer: Mining to Begin in
Weeks. [Online] Next small-cap. Available at: http://www.nextsmallcap.com/erl-go-gold-
developer-producer-mining-begin-weeks/ [Accessed on: 15 January 2018].
7. Kathmandu Holding Limited, 2017. Annual report. Kathmandu Holding Limited.
8. Kathmandu Holding Limited, 2016. Annual report. Kathmandu Holding Limited.
9. Market Index, 2018. Kathmandu Hold Limited (KMD). [Online] Market Index, Available
at: https://www.marketindex.com.au/asx/kmd. [Accessed on: 15 January 2018].
10. The Sydney Moral Herald, 2018. The Ordinaries. [Online] The Sydney Moral Herald,
Available at: http://www.smh.com.au/business/markets/indices/detail/XAO/all-ordinaries.
[Accessed on: 15 January 2018].
11. Fin Data, 2018. Kathmandu Holdings Limited. [Online] in data.co, Available at:
http://www.findata.co.nz/markets/nzx/kmd/chart.htm. [Accessed on: 15 January 2018].