Financial Analysis and Evaluation of Myer and Kathmandu Holding Limited

This report document focuses on the analysis and evaluation of statement of equity, cash flow, income statement, and balance from comparing business health for Myer and Kathmandu Holding Limited, listed companies in Australian Security Exchange (ASX).

Executive Summary
This report document focuses on the analysis and evaluation of statement of equity, cash flow,
income statement, and balance from comparing business health for Myer and Kathmandu
Holding Limited, listed companies in Australian Security Exchange (ASX). The methods
employed in the analysis include leverage ratio, free cash flow method among others.
Further direct evaluation was done by comparing those companies against each other, the
services they offer and their market segmentation.
The result on analysis drawn from the two company's data indicates the need for restructuring
and performance improvement regarding profit margin and liquidity.
Lastly, this analysis report gives an overall overview of the financial position of the two
companies regarding cash flow, taxes and going concern.
Table of Contents

Introduction.................................................................................................................................................2
i) Items of Equity....................................................................................................................................3
Reasons for changes in the item of equity...............................................................................................4
Myer Equity Screenshot..........................................................................................................................5
Kathmandu Equity Screenshot.................................................................................................................6
Comparative analysis of the debt and equity position for the two firms..................................................6
ii) List of cash flow items.........................................................................................................................7
Reasons for changes in cash flow items...................................................................................................8
Comparative analysis and evaluation of the companies for the three years.............................................9
Corporative analysis of the two Companies...........................................................................................10
iii) Other comprehensive income statements.......................................................................................10
Reasons why other comprehensive income are not reported in the income statement...........................11
Effect of other comprehensive income to profit and loss statement.......................................................11
Comparative analysis of the two companies on regards comprehensive income analysis......................11
iv) Accounting for corporate income tax.............................................................................................11
Effective tax rate....................................................................................................................................12
Comment on the deferred tax rate..........................................................................................................12
Deferred tax increase or decrease on the both companies......................................................................12
Cash tax amount using book tax amount, change in deferred tax assets and deferred tax liability........13
Different between cash tax and book tax...............................................................................................13
Conclusion.................................................................................................................................................13
Introduction
In this report, I will focus on the two companies listed on the Australian Securities Exchange,
which are Myer Holding Limited and Kathmandu Holding Limited. Both companies operate in
the same line of business.
Myer Limited Company was founded in the year 1900 by Sidney Myer and is based in
Docklands, Australia. The company has approximately 60 stores in Australia and offers different
products for women, men youth and children. Myer main products include clothes, intimate

apparels, electrical goods, footwear, handbags and accessories, and general merchandise. Myer
Holding Limited is ranked number 145 out of top 2000 Australian companies. Myer has over
eleven thousand employees including staff from subsidiaries under Myer control.
Kathmandu Holding Limited was founded in 1987 by John Pawson and Jan Cameron in New
Zealand. The company has a proximately 163 chain of stores in the United Kingdom and New
Zealand. Kathmandu specializes in travel and adventure outdoor apparel and equipment.
Ordinary shares – these are share which owners are entitled to the right to vote, right to receive
dividend after preferred shares and the right to attend meetings. They also represent common
ownership of the company. Kathmandu has at least a minimum of 2000 employees,
http://www.kathmandu.co.nz/.
As I have mentioned, focuses here will be on evaluation and analysis of the financial statement
for the two companies, comparing their performance and market adaptability.
First, I will begin by defining what owners' equity is, items of the equity and reasons for the
equity changes of the two companies. This will be followed by solvency analysis for both
companies to measure the extent to which each is using debt and impact on the shareholders and
stakeholder.
Secondly, I will consider cash flow items as reported in the financial statement, then, discuss the
changes of such items as reported by both companies and further do the financial evaluation
using free cash flow method to determine the company's business health.
Also, I will consider the items of other comprehensive income and give reasons why they are not
included in profit and loss statement and their effect on inclusion.
Lastly, this analysis gives the broad overview on how the capable investor should look at the
investment company and also guide the company’s management on the areas they need to work
on and improve to remain going concern.
i) Items of Equity
Equity also is known as owners’ equity is described as the capital stocks for the corporation

Treasury Shares – These consist of outstanding shares and float which are bought back by the
issuing company. They have entitled no dividend or right to vote.
Employee Share – These are shares owned by the employees of the company they work for.
They give employees a sense of the company’s ownership.
Option Scheme – It's a right but not an obligation was given to someone especially an employee
to buy a certain number of shares at a fixed price in future within the company he/she is working
for.
Dividends – These are money paid or distribution of a portion of earnings to the shareholders by
a corporation. Dividends can be paid in the form of share stocks or cash payment form.
Reasons for changes in the item of equity
Fn Item of Equity Myer Holding Limited Kathmandu Holding Limited
1 Ordinary Shares The increase of Ordinary shares
was as a result of issuing new
shares on September 2015 –
Issued under Entitlement offer
(See Screenshot below)
The change resulted from the
issue of shares under executive
and senior management long-term
incentives plan for the year 2017
(See Screenshot)
2 Treasury Shares The changes were as a result of
the acquisition of shares on the
market by Myer Equity trust
plan, and at the same time issue
of shares under short-term
incentive plan and performance
rights grant on the year 2017.
The lapses of performance right
on 2015 which affected the
ordinary shares in 2016.
3 Dividends There was increased dividends
payout on the financial year
ending 2016 compared to 2015.
This was due to increased
earnings for 2016. Dividends
payout depends on corporate
Dividend paid in 2016 was more
compared to the dividend paid on
2015,

policy.
4 Employee Shares The change was as a result of
the issue of short-term incentive
shares on 2017 which did not
happen on 2016 and also the
issue of performance right
shares which were less on 2017
compared to 2016 (See
screenshot).
In 2017, there was the issue of
shares under Executive and
Senior management long-term
incentive plan which brought
changes on ordinary shares.
Myer Equity Screenshot

Kathmandu Equity Screenshot
Comparative analysis of the debt and equity position for the two firms
Debts/equity position gauges the company's financial leverage. It measures the extent to which
the company is using debts to finance the different project. The high the debts to equity ratio, the
higher the risk level.
Myer Holding Ltd Kathmandu Holding Ltd
There is the increase in debt since 2015 and
decrease in equity associated with dividends
paid to be higher than profit.
The increase of gearing ratio shows the
company is under high risk and the finance
should be restructured. For instance, the
gearing ratio for 2016 was 8.4%, and 2017 was
9.5% which shows a significant debt increase
(See screenshot)
The company remains at the average for
leverage ratio for the three years. Though there
was the slight increase in gearing ratio on 2016
(As shown below) followed by the decrease in
2017 which shows a decrease in the company's
debt.
Calc.
Gearing Ratio (GR) = debts/equity
Debts = total liabilities – cash and cash
equivalent
2017 GR = (11,967-3,537)/327,100 = 0.3
2016 GR = (137,367 – 6,891)/311,683 = 0.4
And,
2015 GR = (117,137 -1,700)/313,314 = 0.36

The leverage ratio shows that the company is at
safe side since the ratio decrease as profits
increases.
Myer Holding Limited
ii) List of cash flow items
Cash flows from operating activities – Shows the amount of money drawn from ongoing and
regular business activities such as receipts from customers, income tax received and paid,
interest received and paid and payment to suppliers and employees.
Cash flow from investing activities – Shows the amount of money spend on purchasing long-
term assets or money generated from investments such as bonds and stocks
Cash flow from financing activities – it is the amount of money used by a company to fund its
business activities or money generated by a company from funding activities. Finance activities
may include repayment of debts, dividends, capital lease, and equity.

Cash and cash equivalent – These include company assets which are cash or are convertible into
cash within less than three months. Such assets include checks, coins, commercial paper,
treasury bonds, and bills.
Reasons for changes in cash flow items
Fn Cash flow items Myer Holding Limited Kathmandu Holding Limited
1 Cash flow from Operating
Activities
There was the tremendous
increase in cash inflow
from operating activities in
2016 compared to 2015
due to increased receipts
and less interest and tax
paid. In 2017, the net cash
flow reduced at a margin
because no other income
was reported.
In 2016, the company
registered high receipts and
less payment compared to
2015, which resulted in
increased cash inflow from
operating activities on 2016.
In 2017, there was a slight
decrease in the net cash
inflow of operating activities
due to increased payments
compared to 2016.
2 Cash outflow from Investing
Activities
There was a huge
investment on 2017 for
long-term assets such as
PPE and acquisition of
assets from business
combination compared to
2016 and 2015. Also, in
2015, the investment was
more on assets compared
to 2016.
In 2016, the company spent
much on long-term assets
compared to 2015 and 2017.
3 Cash outflow from Financing
Activities
There was reduced cash
outflow in 2017 compared
to 2016 due to less
repayment of borrowings.
In 2015, the cash outflow
For the three years, there was
increased cash outflow from
financing activities resulting
from the repayment of loan
and dividends. In 2017,

was also less than in 2016
because there was no
transaction made on
borrowings.
shows that the company
spent much compared to the
previous years.
4 Cash and Cash Equivalents The difference in cash and
cash equivalents in three
years was as results of cash
in hand and cash in the
bank at that moment.
Different resulted from cash
in hand, cash in the bank and
the exchange rate effect on
the foreign currency.
Comparative analysis and evaluation of the companies for the three years
Cash flow statement is used to show how much money is remaining after payment of capital
expenses and other expenses. It also indicates the company's health. In this case, I will use free
cash flow analysis method for the evaluation of the company’s health.
Year Free cash flow formula Kathmandu Myer
2015 = Net operating profit
after taxes (NOPAT) –
Net Investment in
operating capital
Free cash flow =29,627 –
19,980 = 9,647
Free cash flow =96,915 -
62,350 = 34,565
2016 Free cash flow =69,080 –
23,191 = 45,889
Free cash flow =149,490 –
58,251 = 91,239
2017 Free cash flow =67,273 –
13,275 = 53,998
Free cash flow =149,278 –
109,456 = 39,822
For the three years, both companies show positive free cash flow. Kathmandu Holding limited
shows increasing free cash flow for the three consecutive years which is a good indicator of
some surplus after paying the running expenses. On the other side, Myer Holding Limited shows
falling free cash flow on 2017 which indicates some financial crisis with the company and the
inability of the company to meet long-term expenses and this may call for the restructuring of the
company.

Corporative analysis of the two Companies
Both companies have positive free cash flow, and this indicates the good business health.
Kathmandu has rising free cash flow and is considered to be doing well and can expand.
Investors tend to look for such companies and are assumed to be a hot cake for the investment
due to its prospect.
Myer on the other side may need to restore due to its unstable free cash flow which investors
may tend to down look.
iii) Other comprehensive income statements
Items reported on Myer Comprehensive income
 Cash flow hedges
 Exchange difference on the transaction of foreign operations
 Income tax relating to components of other comprehensive income
Screenshot sample
Items reported on Kathmandu comprehensive income
 Movement in cash flow hedge reserve
 Movement in foreign currency translation reserve

Reasons why other comprehensive income are not reported in the income statement
These items are reported in other comprehensive income when they have not yet been realized.
They are only recognized when the underlying transaction is completed. Those items are
designed to give an overview to the financial planners a sound status of the company's
operations.
Comparative analysis of items in comprehensive income
Fn Comparative items Myer and Kathmandu
2017 Hedge Reserve/ Currency
transaction reserve
In 2017, Myer reported high positive other comprehensive
income after tax compared to Kathmandu.
Myer – 876
Kathmandu -418
2016 Hedge Reserve/ Currency
transaction reserve
Myer (14,707) reported lower negative income compared to
Kathmandu(22,275)
2015 Hedge Reserve/ Currency
transaction reserve
Myer reported high positive income compared to Kathmandu
in 2015
Effect of other comprehensive income to profit and loss statement
Other comprehensive income improves reliability, accountability, and transparency of final
reporting. They provide the clear insight on reporting items which could not be considered like
unrealized gain or loss from foreign investments. When these items are included in the profit/loss
statement, they can dilute company net earnings if reported as a loss and therefore increasing
income volatility.
Comparative analysis of the two companies on regards comprehensive income analysis
Myer holding limited has reported high positive other comprehensive income and low loss
compared to Kathmandu. This means, Myer is on the possibility of reporting higher income
compared to Kathmandu and the investors may be at risk of investing at Kathmandu due to
reduced income.
Other Comprehensive Income (OCI) in evaluating Managers performance
OCI should be used in evaluating Managers performance, since the income or loss is as a result
of manager’s decision at the course of business.

iv) Accounting for corporate income tax
Corporate tax is the direct tax levied on the net income of the company both public and private.
Tax expenses are shown on the latest financial statement of the two companies
 Myer Holding Ltd - $ 18,274 for the year 2017
 Kathmandu Holding Ltd – NZ$ 16, 935 for the year 2017
Effective tax rate
Effective tax rate = income tax expense /earnings before tax
Myer Holding Company
Effective tax rate = 18,274/30213 = 0.60
Kathmandu Holding Limited = 16,935/54,974 = 0.30
Note: Myer Holding Company has the high effective tax rate of 60% compared to Kathmandu
30%
Comment on the deferred tax rate
It is the unpaid tax which is due to the current period resulting from the difference in timing
between when accrued and paid.
On the balance sheet, the deferred tax is recorded under non-current liabilities as a provision to
be paid in future. It is recorded in the balance sheet as a liability to show company's obligation
shortly.
Deferred tax increase or decrease on the both companies
There are unpredictable changes to deferred tax for both companies in three years.
On 2015 Myer recorded deferred tax of $75,112 which increase to $ 88,444 in 2016 and
subsequently reduced to $ 84,574 in 2017.

On the other side, Kathmandu registered $ 3,957 on 2015 as the noncurrent asset, $ 33,247 as the
non-current liability on 2016 and subsequent increase in 2017 to 34, 027.
Cash tax amount using book tax amount, change in deferred tax assets and deferred tax
liability
Cash tax is the amount of tax paid to the tax man and is based on the reported by the concerned
entity at the end of the financial year.
Please note, the tax shown on the company’s financial statement refers to the book tax.
Cash tax = Book tax + deferred tax liability – Deferred tax asset
Cash tax for Myer
Cash tax = 19,208 + 75,112 + 88,444 +84, 574 = 267,338
Cash tax for Kathmandu
Cash Tax = 16,935 – 3,957 + 33,247 + 34,027 = 80,252
Different between cash tax and book tax
Cash taxes is determined on yearly basis and includes both current and future tax liabilities while
book tax is calculated pursuant to recognized financial principles and reported on the financial
statement of the company.
Cash taxes recognize different times for the company’s revenue and expenses.
Conclusion
There are different ways to determine the business health. Financial analysis is the one of the
common method used for the determination. The common tool used for financial analysis is the
company's financial statement, which includes balance sheet, income statement, cash flow
statement and the statement of the changes in equity. Under this, different areas of the financial
statement are used for the analysis either to access adaptability or risk of the company.
On our case, i have looked at equity statement as the backbone of company's capital, its contents
and the results on the changes of items. Further, we have done the comparison of different
companies by their leverage and concluded that "The higher the leverage, the risk is the
company."

Secondly, was the consideration of the selected company’s cash flow by their items and effect on
the changes of such items. By evaluation, i have considered a free cash flow analysis method to
gauge the best company for the investment.
Lastly were the analysis of corporate taxes and their classification, the difference between cash
tax and book tax and their treatment in the financial statement reporting.
Note, as mentioned, there are different methods of doing financial analysis, some which may not
be independent but gives an overview of the company and others which requires professional
analysis, consultation and evaluation depending to the business line of operation.

References
Atwood, T.J., Drake, M.S. and Myers, L.A., 2010. Book-tax conformity, earnings persistence
and the association between earnings and future cash flows. Journal of Accounting and
Economics, 50(1), pp.111-125.
Balakrishnan, K., Watts, R. and Zuo, L., 2016. The effect of accounting conservatism on
corporate investment during the global financial crisis. Journal of Business Finance &
Accounting, 43(5-6),pp.513-542.
Black, D.E., 2016. Other comprehensive income: a review and directions for future
research. Accounting & Finance, 56(1), pp.9-45.
Blaylock, B., Shevlin, T. and Wilson, R.J., 2011. Tax avoidance, large positive temporary book-
tax differences, and earnings persistence. The Accounting Review, 87(1), pp.91-120.
Blouin, J., Core, J.E. and Guay, W., 2010. Have the tax benefits of debt been
overestimated?. Journal of Financial Economics, 98(2), pp.195-213.
Brown, R., 2012. Analysis of investments & management of portfolios.
Desai, M.A. and Dharmapala, D., 2009. Corporate tax avoidance and firm value. The review of
Economics and Statistics, 91(3), pp.537-546.
Dickinson, V., 2011. Cash flow patterns as a proxy for firm life cycle. The Accounting
Review, 86(6), pp.1969-1994.
Donohoe, M.P. and Robert Knechel, W., 2014. Does corporate tax aggressiveness influence
audit pricing?. Contemporary Accounting Research, 31(1), pp.284-308.
Eaton, T.V., Easterday, K.E. and Rhodes, M.R., 2013. The presentation of other comprehensive
income. The CPA Journal, 83(3), p.32.
Faulkender, et al., 2012. Cash flows and leverage adjustments. Journal of Financial
Economics, 103(3), pp.632-646.
Faulkender, M., Flannery, M.J., Hankins, K.W. and Smith, J.M., 2012. Cash flows and leverage
adjustments. Journal of Financial Economics, 103(3), pp.632-646.
Hall, R.E. and Rabushka, A., 2013. The flat tax. Hoover Press.
Hanlon, M. and Heitzman, S., 2010. A review of tax research. Journal of Accounting and
Economics, 50(2-3), pp.127-178.
Harford, J., Mansi, S.A. and Maxwell, W.F., 2012. Corporate governance and firm cash holdings
in the US. In Corporate governance (pp. 107-138). Springer, Berlin, Heidelberg.
Helfert, E.A. and Helfert, E.A., 2001. Financial analysis: tools and techniques: a guide for
managers (pp. 221-296). New York: McGraw-Hill.

Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy (No.
2nd Eu). McGraw Hill.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy (No.
2nd Eu). McGraw Hill.
Hope, O.K., Ma, M.S. and Thomas, W.B., 2013. Tax avoidance and geographic earnings
disclosure. Journal of Accounting and Economics, 56(2-3), pp.170-189.
Julio, B. and Yook, Y., 2012. Political uncertainty and corporate investment cycles. The Journal
of Finance, 67(1), pp.45-83.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2010. Intermediate accounting: IFRS
edition (Vol. 2). John Wiley & Sons.
Kim, J.B., Li, Y. and Zhang, L., 2011. Corporate tax avoidance and stock price crash risk: Firm-
level analysis. Journal of Financial Economics, 100(3), pp.639-662.
Lev, B., Li, S. and Sougiannis, T., 2010. The usefulness of accounting estimates for predicting
cash flows and earnings. Review of Accounting Studies, 15(4), pp.779-807.
Louis, H., Sun, A.X. and Urcan, O., 2012. Value of cash holdings and accounting
conservatism. Contemporary Accounting Research, 29(4), pp.1249-1271.