Comprehensive Financial Analysis Report: Nick Scali Limited

This report presents a comprehensive financial analysis of Nick Scali Limited, a public limited company operating in the furniture retail and import sector. The analysis is divided into two parts: Part A focuses on ratio analysis, including profitability, asset turnover, liquidity, and solvency ratios, examin...Read More

FINANCIAL STATEMENT ANALYSIS
NICK SCALI LIMITED
2/9/2020
Student’s Name:

FINANCIAL ANALYSIS- NICK SCALI LIMITED
1
Contents
Introduction...........................................................................................................................................2
Organisation background and the Outlook............................................................................................2
Ratio Analysis.......................................................................................................................................3
Profitability Ratios.............................................................................................................................3
Asset turnover....................................................................................................................................7
Cash Flow Position................................................................................................................................8
Liquidity Ratios:................................................................................................................................8
Solvency ratio....................................................................................................................................9
Cash debt coverage ratio..................................................................................................................11
Cash flow return on asset.................................................................................................................11
Forecasting..........................................................................................................................................12
Valuation.............................................................................................................................................16
Recommendations...............................................................................................................................19
References...........................................................................................................................................20
Appendix.............................................................................................................................................22

FINANCIAL ANALYSIS- NICK SCALI LIMITED
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Introduction
The enhanced globalisation has made the business activities more complex, and a need of
more detailed and efficient presentation of the financial statements to the varied stakeholders.
The process of reviewing the financial statements of an organisation to guide the internal and
external stakeholders is called as the Financial Analysis. The relevancy of the financial
analysis to the external stakeholders is that the same aids in the evaluation of the business
value and value of the investments. In contrast to this, the internal stakeholders use the
financial statement as a monitoring tool, to efficiently manage the varied resources of an
entity. It is imperative to understand the financial figures present in the financial statements
in conjunction with the happenings in the business environment, such as changes in the
political, economic, technological and legal environment and others. Further, the data of
multiple years needs to be analysed to understand the overall trend of the financial
performances. Often the trends are analysed in comparison to the industry benchmarks or the
competitor data.
The following report is prepared with an aim to present a comprehensive financial analysis of
the company Nick Scali Limited. The analysis would be divided into two parts namely the
Part A and the Part B. The Part A would touch the various aspects of the business, and would
be guided by the various financial techniques. In addition to the above, a set of reformatted
financial statements would be provided to guide the detailed analysis of varied items of the
financial statements. The ratio analysis would shed light on the liquidity, solvency,
profitability and overall efficiency of the conduct of the business operations of the entity.
Apart from the above listed; the Part B of the report is inclusive of the evaluation of the
future performances of the entity. This part would include the determination of the forecasted
financial values with the aid of different models such as dividend discount model. An overall
conclusion along with a set of recommendations would be provided at the end to summarise
the key findings and address the issues if any.
Organisation background and the Outlook
The organisation Nick Scali Limited is a public limited company that has been listed on the
Australian Stock Exchange, and the foundation of which was laid down 50 years ago. The
organisation’s chief business is the retailing and the importing of the quality furniture

FINANCIAL ANALYSIS- NICK SCALI LIMITED
3
products, to provide the household furniture and the associated accessories (Nick Scali
Limited, 2020). The headquarters of the company is located at Lidcombe, New South Wales,
and the listing of the company shares is done on ASX under the symbol “NCK.” Some of the
chief products of the company include lounges, dining tables, cabinets, rugs, mirrors and
others. The organisation operates under the two brands namely the Sofas2Go and the Nick
Scali Furniture. Over the years, the company has earned the status of a respected and trusted
brand of furniture in terms of the finest quality and the low prices.
PART A
Ratio Analysis
There are various ways to analyse a set of financial statement comprehensively, such as the
trend analysis, vertical analysis and ratio analysis. The technique used in the presented report
is that of the ratio analysis. Computation of ratios is one of most fundamental financial
analysis techniques in which the various ratios give insights about the various aspects of the
financial health. The following report involves the computation of the various ratios for the
period of five financial years, descending from the most recent that is the year 2019. The
analysis of the key ratios is presented as follows.
Profitability Ratios
Determination of the profitability ratios is an important exercise not only for the external
stakeholders such as the regulators and the investors of the company for the decision making
process, but for the internal stakeholders to review the business processes. There are varied
kinds of profitability ratios as computed on the various stages of profitability. The said
earnings are examined against the different elements of the financial statements such as the
assets, revenue, equity and others, and useful insights are gained by comparing and
evaluating the trends (Edmonds, 2013).
Thus, the chief objective of the computation of the said group of ratios is to adjudge the
efficiency of the results of the business operations as against the different items of statement
of financial position and the income statement. The table below is representative of the
various profitability ratios of the organisation Nick Scali Limited.
Financial Ratio Analysis - Nick Scali Limited
Profitabi
lity
Formul
a
2015 2016 2017 2018 2019

FINANCIAL ANALYSIS- NICK SCALI LIMITED
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Ratios
Return
on
Equity
Profit /
Averag
e equity
17077/
(46226+4013
0)/2
26150/
(57794+462
26)/2
37236/
(70384+577
94)/2
40979/
(83663+7038
4)/2
42116/
(85183+836
63)/2
=0.09887558
5
=0.1256969
81
=0.1452511
35
=0.13300810
8
=0.1247171
98
9.89% 12.57% 14.53% 13.30% 12.47%
Return
on Net
Operatin
g Assets
Net
profit /
Net
Operati
ng
Assets 17077/60772
26150/8108
7 37236/93746
40979/10264
3
42116/11141
0
=0.28100111
9
=0.3224931
25
=0.3972009
47
=0.39923813
6
=0.3780271
07
28.10% 32.25% 39.72% 40% 38%
Net
Profit
Margin
Net
profit /
Sales or
revenue
17077/15719
5
26150/2044
73
37236/23448
2
40979/25271
6
42116/27021
0
0.108635771 0.127889746 0.158801102 0.162154355 0.155863958
10.86% 12.79% 15.88% 16% 16%
The following segment is descriptive of the analysis of the varied profitability ratios as
computed in the above parts.
Net Profit Margin: It can be observed that there is an increasing trend in the net profit
margin of the company. The said increasing trend can be attributed to the increment in the
sales of the company which has increased from $ 157 million in year 2015 to $ 207 million in
the year 2019. This increment accounts for around 72 per cent. Though the operating
expenses have also increased consistently over the period of five years, yet the revenues have
increases at a higher pace and hence the results of increasing trends. It can be stated there are
positive conditions for the core business of the entity.
Return on Equity: The said ratio is a measure of the efficiency of the company to generate
the returns against the overall equity or the investments. The investors of the company are of
the prime interest in the said ratio. As stated in the ratio table above the highest ROE was in
the year 2017, to the tune of 14.53 per cent. Since then, the ROE is on a slight declining
trend. The reason for the said decline is while the average equity has increased at a higher
pace because of the increased retained profits, the return per year have not increased

FINANCIAL ANALYSIS- NICK SCALI LIMITED
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proportionately to the retained profits. The consistent retained profits and the increment in the
equity are a positive sign for the entity and highlight a possible expansion in the future.
Return on Net Operating Assets: The said financial metric is a good indicator of how
efficiently the operating assets of an organisation are used in the generation of the revenues.
It is vital to note that the return on the net operating assets has improved considerably over
the last five years period. While the return in the net operating assets was 28.10 % in the year
2015, the same had increased to 40 % in the year 2018. However, the ratio has reduced
slightly in the year 2018, because of the considerable increase in the net current assets of the
company. The three items that have improvised in the year 2019 as against the year 2018
which led to the increment in the operating assets are the reduction in the short term
borrowings, increment in the prepayments, and the slight improvement in the inventories of
the company. The following graph highlights are overall movement of the said returns over
the period of five years.
2015
2016
2017
2018
2019
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
Net Profit Margin
Net Profit Margin
2015
2016
2017
2018
2019
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
Return on Equity
Return on Equity

FINANCIAL ANALYSIS- NICK SCALI LIMITED
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Financial Leverage: The debt equity ratio is one of the ratios that is helpful to compare debt
of company relative to different financial metrics that cover total equity. It is related to the
debt to equity ratio that is known to be a strong indicator of the financial structuring within an
entity (Alexander, 2011). It is known as gearing ratio. In this way, it is found that the debt
equity ratio of company was 1.08 in 2015. It was increased to 1.10 in 2016. Further, it was
decreased to .98 in 2017. In 2018, it was increased to 1.05. Moreover, it was 1.03 in 2019.
In 2017, it represents that a company was depended on the investors to raise funds. However,
the funds have been raised through the outside sources in the form of the bank and other
financial institutions as well other than issuing of shares in 2018 and 2019. It is good
situation, as the company is playing strong and steady on the financial leverage.
Asset turnover ratio: The efficiency ratios is known as activity ratios. They assess how the
company can use assets to get more profits. The analyst to assess performance of short-term
performance or current performance uses these ratios. The efficiency ratio represents the
expenditure as the proportion of revenue by having certain variations. It is significant to
know that how much the entity or person spends to make the dollar. It can say that the
companies are supposed to attempt diminishing efficiency ratio. It can see that this ratio is
mainly utilised to assess how well the entity utilises the assets as well as liabilities internally.
Moreover, the efficiency ratio can calculate the turnover of receivable, quantity, and use of
equity, repayment of liability as well as normal utilisation of inventories along with
machineries. All these ratios use numbers in current asset or current liabilities of entity,
quantifying certain function of the business of entity (Trivedi, et. al, 2016).
Further, the efficiency ratio evaluates the ability of company to utilise the asset to generate
earning. For instance, the efficiency ratio often looks at different facets of an entity, like the
2015 2016 2017 2018 2019
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
Return on Net Operating
Assets
Return on Net
Operating Assets

FINANCIAL ANALYSIS- NICK SCALI LIMITED
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time to take cash from customer or the amount of time to change inventory into cash. In this
way, it creates the efficiency ratios significant. The main reason is that the improvement in
efficiency ratio generally transforms to developed profitability (West, 2018). In this way, the
efficiency ratios are best to be used to know how to reduce expenses as well as increase
earnings. It can that the efficiency of company can be assessed from different ratios. These
efficiency ratios are accounts receivable turnover, sale to inventory, asset turnover, accounts
payable to sales, sales to net working capital, cash flow return on asset, stock turnover ratio
as well as asset turnover ratios. The asset turnover ratio as well as cash flow return on asset
are significant to measure company’s efficiency (Williams and Dobelman, 2017). These two
ratios are discussed below -
Asset turnover
The asset turnover ratio is helpful in measuring the value of sales or revenue of company
relative to value of company’s assets. The asset turnover ratio is assessed annually. The
company uses this ratio as the indicator of the efficiency with which the entity is utilising
the assets to get income. The higher the asset turnover ratio, the more efficient a company. It
can say that high asset turnover ratio states that company is doing well. The high ratios states
that the company is making revenue per dollar of the asset. On the other hand, if the entity
has lower asset turnover ratio, it means that company is not using assets effectively to
generate revenue. It is assessed that the asset turnover ratio was 1.78 in 2015. It was slightly
increased to 1.88 in 2016. Further, it was slightly decreased to 1.83 in 2017 and 1.63 in 2018.
It was 1.57 in 2019. It means company is not doing well. In this way, the entity can improve
the low asset turnover ratio by constantly utilising assets restraining purchase of inventories,
as well as make sales without buying new assets (Satryo, Rokhmania and Diptyana, 2017).

FINANCIAL ANALYSIS- NICK SCALI LIMITED
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Cash Flow Position
Liquidity Ratios:
The liquidity ratios of the company highlight the efficiency of the short term assets or the
current assets to cover the current obligations. Thus, the efficiency of the management in
running the day to day business operations is highlighted by the said group of ratios. The two
popular liquidity ratios that have been computed for the analysis of the liquidity position are
the current ration and the quick ratio. The following table shows the two renowned working
capital ratios.
Liquidit
y Ratios Formula 2015 2016 2017 2018 2019
Current
Ratio
Total
current
assets /
Total
current
liabilities
58865/3556
5
63269/4038
4 69786/45370
77055/6867
8
77537/6116
9
=1.6551384
7
=1.5666848
2
=1.53815296
5 =1.1219750
=1.2675865
2
1.66 1.57 1.54 1.12 1.27
Cash
Ratio
(Cash +
Marketabl
e
Securities)
/ Total
current
liabilities
33680/3556
5
37038/4038
4 39944/45370
36585/6867
8
36284/6116
9
=0.9469984
5
=0.9171454
0
=0.88040555
4 =0.5327033
=0.5931762
8
0.95 0.92 0.88 0.53 0.59
Current Ratio: The current ratio is the most renowned liquidity ratio and indicates the
quality of the current assets in the servicing of the current liabilities. The ideal measure of the
current ratio is known to be the twice amount of the current assets for the given level of the
current liabilities. A higher current ratio indicates huge current assets for the servicing of the
current liabilities of the company. However, the same can also be indicative of the fact that
the organisation has idle cash or unused current assets. In contrast to this, a lower current
ratio is indicative of an aggressive approach of the organisation and can be risky at times.

FINANCIAL ANALYSIS- NICK SCALI LIMITED
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FINANCIAL ANALYSIS- NICK SCALI LIMITED
10
It has been analysed from the current ratio of the company Nick Scali Limited for the period
of five years is that there is an overall slight declining trend in the working capital and thus
the current ratios of the company. While the current assets of the company increased from $
58.86 million to $ 77.54 million over the period of five years, the current liabilities increased
from $ 35.56 million to $ 61.17 million. Thus, while there is a slight increase in the current
assets, the current liabilities nearly doubled. Thus, the unequal pace of increment between the
current assets and current liabilities is evident clearly in the working capital trends as well.
Another major reason for the said decline as assessed is the decline in the cash and short term
marketable securities of the company.
Cash Ratio: Cash Ratio is the measure of efficiency of the company in the payment of the
current debts, with the use of the cash and the short term securities. The cash ratio of above 1
is considered as good, and indicates that even after the payment of the current debts, the
company would be left with certain amount of cash in hand. It has been assessed from the
cash ratio of the company that the company is on the lines to follow an aggressive approach
towards cash reserves as the same ratio is on a consistent fall. It has been recommended to the
entity to improve the cash and cash equivalent balances, or the same may prove risky for the
short term financial health.
Solvency ratio
The solvency ratio is best ratio to determine whether the entity can remain solvent.
The solvency ratio is considered as key metric utilised to assess the capability of entity to
2015 2016 2017 2018 2019
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Current Ratio
Current Ratio

FINANCIAL ANALYSIS- NICK SCALI LIMITED
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fulfil the obligation related to debts. This ratio is helpful in measuring the extent to which
asset covers commitment for the payment in upcoming period. Solvency ratio of the entity is
considered as size of the capital relative to risk taken by it. It can say that the future business
lender uses this ratio. It is indicated by the solvency ratio that whether the cash flow of
company is sufficient to fulfil the short-term liabilities as well as long-term liabilities. It is
evident that the lower solvency ratio of company leads the great possibility that this would
default on the debts obligation (Salawau, 2017).
Further, the solvency ratio is considered as wide-ranging measure of solvency. The main
reason is that it is helpful in assessing the actual cash flow of company in place of net income
by including depreciation again and non-cash expenditure to measure the ability of company
to stay afloat. It is evident that the solvency ratio assesses the cash flow ability regarding the
liabilities in place of only short-term debts. Therefore, one can use the solvency ratio to
assess long-term health of company by assessing the capability of repayment for the long-
term debts as well as interest on long-term debt. In general, the solvency ratio more than
twenty per cent is considered fiscally sound. However, this ratio can differ from industry to
industry. In this way, the entity is capable to close out the long-term debt obligation when
they become due utilising operating revenue. Henceforth, the lenders will usually use the
solvency ratio as a factor for soundness by assessing the financial statement of company. The
solvency ratio examines a company's ability to meet its long-term obligations. This ratio is
utilised by potential lenders at the time of assessing creditworthiness of company. A higher
ratio percentage result indicates a company's increased ability to cover its liabilities over the
long term. There are different solvency ratios to assess the solvency of company. These are
debt to equity as well as equity ratio. These are discussed as below-
The equity ratio is solvency ratio. It is helpful in measuring the amount of asset that is funded
by owners' investment by making comparison with total equity in organisation to total assets.
This ratio puts focus on the two significant financial concepts of solvent operations of
company. The low equity ratio shows that the company has used more debt to pay for the
assets. This ratio also states that how much shareholder will get at the time of liquidation
(Singh, 2017). The ratio states the dependency of company on debt. It also shows stability of
company. The equity ratio of company was 0.48 in 2015 and 2016. It was increased to .51 in
2017. Further, it was decreased to .49 in 2018 and 2019. It means company is doing well. The

FINANCIAL ANALYSIS- NICK SCALI LIMITED
12
reason is that lower equity ratio is good for stockholder as long as the entity gets rate of
return on assets, which is more than rate of interest paid to creditor (Moolman, 2017).
Cash debt coverage ratio
The cash debt coverage ratio states how much of total liabilities of company can be paid with
net cash from operating activity. The Cash Debt Coverage Ratio is also known as cash flow
to debt ratio. It can say that this ratio develops the relationship between the
operating cash flow of a company to the total liabilities (Laskina, 2017). Therefore, it also
signifies what the actual capability of company to pay back debts from the operations. The
Cash debt coverage ratio should be 1 or higher because it is reasonably best indicator of the
financial stability of company. From the ratio analysis, it is found that the cash debt coverage
ratio was .38 in 2015. It was increased to .50 in 2016 and .62 in 2017. Further, it was again
decreased to .49 in 2018. It was .52 in 2019. This is not good situation for company. The
company should increase Cash Debt Coverage ratio with the help of better cash management
(Vogel, 2014).
Cash flow return on asset
The cash flow return on asset ratio is utilised to make comparison between the performance
of company and performance of members of industry. This efficiency ratio rates the real cash
flow to the assets of company without being influenced by income measurement or
recognition of income (Bramvilla, et. al, 2018). In this way, this ratio is utilised internally by
analyst and existing as well as prospective investors. It can say that the high cash flow return
on asset ratio is regarded as favourable investment. It is assessed that the cash flow return on
asset ratio was 0.21 in 2015. It was increased to .29 in 2016, and .33 in 2017. It was
decreased to .28 in 2018. Further, it was reduced to 0.26. It means company is not utilising
assets effectively. The company should improve the efficiency of use of assets.

FINANCIAL ANALYSIS- NICK SCALI LIMITED
13
PART B: PROSPECTIVE ANALYSIS AND APPLICATION
The following segment of the report would shed light on the prospective performance and
analysis of the company. The prospective financial statements present the projected results of
an enterprise taking into consideration the information that is best available in the hands of
the expert, considering the key events in the external business environment of an entity. The
following segment of the report would guide the decision makers in making the estimates of
the business and financial performance of the entity that is Nick Scali Limited, together with
the values of the shares as computed through varied valuation models. The following segment
would shed light on the information and assumptions used in the preparation of the
Forecasted Financial Statements.
Forecasting
The basis of a financial forecast is the set of assumptions of a responsible party. It must be
noted that the said assumptions must be capable of reflecting the conditions that are expected
to exist in the future and strategies expected to be taken by a business. A financial forecast
may be expressed in terms of a specific monetary amount in the form of an estimate at a
single point of the forecasted operations or in the form of a range. When the forecasts are
expressed in the form of a range, key assumptions are selected by the responsible party which
are reasonably expected to occur. These events must be within the best of the knowledge and
belief of the responsible party and the assumptions used must have a correlation with the
actual environment.
Sales: One of the prime elements of the construction of the forecasted financial statements is
the determination of the revenue growth rate. In terms of the external factors affecting the
revenue of the enterprise Nick Scali, it must be noted that the retail industries are exposed to
the negative impacts of the political and economic events like that of Brexit and the US China
trade war. As the country Australia is economically integrated with China and other Asian
countries, the Australian economy is likely to bear the negative impact of the trade war, in
context of the slowdown of the Chinese economy and its trickling effect in Australia (Kehoe
and Housego, 2019). In addition to this, it is to be noted that the sales growth of the company
is on declining trend. For instance, while the revenues increased from $ 155 million in 2015
to $ 203 million in the year 2016 that is nearly 30 per cent increase, the sales in the year 2019
increased to only 7 per cent as compared to the year 2018. One of the reasons for the same is

FINANCIAL ANALYSIS- NICK SCALI LIMITED
14
rising number of competitors in the market. It is additionally vital to note that currently China
is suffering from the demographic issue of coronavirus outbreak, and the region is one of the
significant component of the supply chain of the company. The result of which is that the
orders are getting delayed upto two weeks, and the overall revenues are impeded as stated by
the company (Greenblat, 2020). Thus, the above factors would affect the sale prices for the
company Nick Scali.
2019 (Actual)
2020 (Forecast)
2021 (Forecast)
2022 (Forecast)
2023 (Forecast)
2024 (Forecast)
0%
2%
4%
6%
8%
10%
12%
Revenue- Growth Rate
Revenue- Growth Rate
In terms of the quantity of the sales, the prime factor that would impede the sales growth of
the entity is in the form of the housing slump. It must be noted that slowing house market is a
consistent issue for the company and there is a fall in the same store sales of the company as
characterised by the RBA cuts and the federal elections, and the same is expected to continue
in the near future as well (Blake, 2019). This is because the country Australia is currently
experiencing the fall in the value of homes by the virtue of the negative wealth effect,
inflation rates, and the slow GDP rates as well. The GDP of the country is expected to slow
down as forecasted by the IMF, depicted below.

FINANCIAL ANALYSIS- NICK SCALI LIMITED
15
(Source: Knoema, 2020)
Thus, all the above mentioned factors contribute towards the slowing down of the sales
growth of the company in the coming year. It has been further estimated that while the
company can bounce back on the sales next year, the growth would be still sluggish because
of the considerable number of new players in the market. Nevertheless in the long run, the
sales would grow at a steady pace, with the aid of the strong asset and equity base, which can
be utilised in the form of expansion in new countries or business segments.
Asset Turnover Ratio: It has been assessed from the asset turnover ratio of the company
Nick Scali, that the same is on a declining trend, the reason being the consistent expansion of
the company in the asset base, both the current and the fixed assets. It is to be noted that as
the company is known for its stable earnings, and the retaining of the same in the company
itself, the company would continue maintaining the same trend. This is also because, in the
event of the sluggish growth of the retail sales market, instead of increasing the volumes of
the sales, the company would rather concentrate on the provision of incentives to the
customers for buying the company products, as stated by the senior company executives itself
(Blake, 2019). The incentives to customer would only be possible with a strong asset and
equity base.
2019 2020 2021 2022 2023 2024
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Asset turnover
Asset turnover
Profit Margin: The company is known for maintain a consistent profit margin, and getting
past the industry benchmarks. On the lines of the profit margin, it has been forecasted that
though the company would intend to do the same in the future as well, but the slow sales
growth and the external unfavourable political and economic conditions, may lead to the rise

FINANCIAL ANALYSIS- NICK SCALI LIMITED
16
in the cost of goods sold of the company. This would mostly be in the form of the rise in the
cost of the supply chain because of the US China Trade War, rise of the corporate and
customer discounts, and others. However, with the passing year, the net profit margins of the
company would improve further because of the long standing goodwill of the company and
the steady growth strategies.
2019 2020 2021 2022 2023 2024
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
Profit Margin
Profit Margin
Dividend payout ratio: As described in the graph below, it has been forecasted that the
company Nick Scali would maintain its business strategy of distributing the earnings in the
form of the dividends to the investors. Over the years, the company has been paying a
consistent range of dividend, as depicted in the table below, and this is one of the chief
reasons for the stability in the share prices even when retail industry is going through the
tough times.
Descripti
on 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Asset
turnover
1.78 1.88 1.8 1.63 1.57 1.48 1.45 1.45 1.4 1.25
Profit
Margin 11% 13%
15.88
%
16.22
%
15.59
%
14.8
%
15.75
%
16.85
%
17.30
%
18.20
%
Net
Dividend
Payout
Ratio
71.09
%
71.21
%
73.91
%
79.05
%
86.54
%
90.5
%
91.50
%
88.50
%
88.75
%
88.75
%

FINANCIAL ANALYSIS- NICK SCALI LIMITED
17
2019 2020 2021 2022 2023 2024
84.00%
85.00%
86.00%
87.00%
88.00%
89.00%
90.00%
91.00%
92.00%
Net Dividend Payout Ratio
Net Dividend Payout Ratio
Valuation
Dividend Discount Model
One of the most fundamental valuation models for a stock of a company is that of the
dividend discount model. The model involves various steps, in which the present values of
the future dividends are calculated, and accordingly the gain or loss on the value of the stock
is assessed. One of the most important components of the model is the determination of the
cost of capital, and the same has been assessed to be 6.70% for Nick Scali Limited as per the
market data available (Yahoo Finance, 2020). In addition to the present cost of capital, it is
vital to give effects of the inflation and the inflation rates for Australia has been used for the
model (Statista, 2020). The method was a suitable one in the case of the Nick Scali because
the company distributes majority of its earnings in the form of dividends. The working out of
the valuation is presented in the table below.

FINANCIAL ANALYSIS- NICK SCALI LIMITED
18
Description
2019
(Actual)
2020
(Forecast)
2021
(Forecast)
2022
(Forecast)
2023
(Forecast)
2024
(Forecast)
Forecast Dividend 40060 38023.19 44237.54 48959.33 55463.85 64722.57
Estimated cost of equity
(6.7%) 1.067 1.086 1.108 1.134 1.162 1.191
Forecasted dividend growth
patterns 7.49% 3.96% 1.00% -3.00% 0.25% 0.28%
TV Pattern: Perpetuity with
growth of 0.25%
23115205.2
5
Present Value of furure
dividends
$
35,012.14
$
36,033.92
$
33,573.47
$
30,421.84
$
27,008.28
Discounted TV
$
96,86,412.2
2
Total Equity Value
$
98,48,461.
88
Shares Outstanding 810000
Value per share
$
12.16
Market value per share $ 8.30
Difference
$
3.86
Note: Source of estimated cost of equity:
(Yahoo Finance, 2020)
Residual Income Model
The residual income model is not a popular model and is focussed on the abnormal earnings
of a company, where there is a situation of company earning more returns than the cost of
capital of the firm. The table below presents the valuation based on this model, however it is
to state that this model is not suitable for Nick Scali as the company hardly had any other
income, and thus the value addition derived at the end of the model was in negative terms.

FINANCIAL ANALYSIS- NICK SCALI LIMITED
19
Residual Income Model
Description
2019
(Actual)
2020
(Forecast
)
2021
(Forecast)
2022
(Forecast)
2023
(Forecast)
2024
(Forecast)
Forecast Net Income 42116 40834.36 46976.68 53853.62 61042.71 71278.60
Forecast Owner equity 85183 87994.17 90733.31 95627.60 101206.46 107762.48
Calculation of residual
income 43067 47159.81 43756.63 41773.98 40163.74 36483.88
Forecasted growth patterns 10% -7% -5% -4% -9%
TV Pattern: Perpetuity
with 2 %, PV OF TV
1824194.0
61
Present Value of residual
incomes
$
37,122.14
$
41,031.25
$
46,520.78
$
52,179.57
$
46,326.20
Discounted TV
$
16,52,228.
76
Total Equity Value
$
18,75,40
8.71
Shares Outstanding 810000
Value per share
$
2.32
Market value per share $ 8.30
Difference
$
-5.98
Free Cash Flow Model
Description
2019
(Actual)
2020
(Forecast)
2021
(Forecast)
2022
(Forecast)
2023
(Forecast)
2024
(Forecast)
Forecast Free Cash
Flows 33866
-
38387.75808 28459.13233 40596.56885 30891.00912 10397.7083
Estimated cost of
equity (6.7%) 1.067 1.086 1.108 1.134 1.162 1.191
Forecasted growth
patterns -213% -174% 43% -24% -66%
Calculate TV 155189.6761
Present Value of FCF
$ -
35,347.84
$
23,181.53
$
27,838.78
$
16,943.67
$
4,338.89
Discounted TV
$
1,33,867.98
Total Value OF firm
$
1,70,823.01
Less NFO 26227
Total Equity Value
$
1,44,596.01
Shares Outstanding 810000
Value per share
$
0.18
Market value per share $ 8.30
Difference
$ -
8.12

FINANCIAL ANALYSIS- NICK SCALI LIMITED
20
Recommendations
As per the analysis conducted in the previous parts, it has been assessed that the company
Nick Scali has a strong set of financials, as evaluated from the ratio analysis technique, as
well as the forecasted financial statements. Currently the share is doing quite well and is
placed at a high, and is a costly buy as of now. However, the gloomy business environment in
the form of the economic, political, social and demographic changes in the global business
environment in the form of the US China Trade War, housing slump and others; might bring
the share prices down in future. The strong set of financials, the constant dividend
distribution makes the share a good buy, and must be bought when the prices are down in
future.

FINANCIAL ANALYSIS- NICK SCALI LIMITED
21
References
Alexander, C. (2011) Market models: A guide to financial data analysis. USA: John Wiley &
Sons.
Blake, D. (2019) Election, housing slump slow growth at Nick Scali [online] Available from:
https://insideretail.com.au/news/election-housing-slump-slow-growth-at-nick-scali-201908
[Accessed on: 10 February 2020].
Brambilla, A., Bonvin, J., Flourentzou, F. and Jusselme, T., (2018) Life cycle efficiency
ratio: A new performance indicator for a life cycle driven approach to evaluate the potential
of ventilative cooling and thermal inertia. Energy and Buildings, 163, pp.22-33.
Greenblat, E. (2020) Coronavirus forces Nick Scali delays, amid warnings over sales [online]
Available from: https://www.theaustralian.com.au/business/companies/nick-scali-warns-of-
impact-of-coronavirus-on-retail-sector/news-story/374d5e4d65797d69d619fe606382b557
[Accessed on: 09 February 2020].
Keyhoe, J. and Housego, L. (2019) Australia to 'pay the price' for US-China trade war
[online] Available from: https://www.afr.com/policy/economy/australia-to-pay-the-price-for-
us-china-trade-war-20190806-p52ea5 [Accessed on: 09 February 2020].
Knoema (2020) Australia GDP Growth Forecast 2019-2024 and upto 2060, Data and Charts
[online] Available from: https://knoema.com/mzpmmfd/australia-gdp-growth-forecast-2019-
2024-and-up-to-2060-data-and-charts [Accessed on: 10 February 2020].
Laskina, L.Y., (2017) Enhancing the analytical potential of cash flow-based solvency ratio
analysis. Ekonomicheskii analiz: teoriya i praktika= Economic Analysis: Theory and
Practice, 16(11), pp.2145-2162.
Moolman, A.M. (2017) The Usefulness Of Analytical Procedures, Other Than Ratio And
Trend Analysis, For Auditor Decisions. The International Business & Economics Research
Journal (Online), 16(3), p.171.
Nick Scali Limited (2020) Investor Information [online] Available from:
https://www.nickscali.com.au/investor-information [Accessed on: 09 February 2020].

FINANCIAL ANALYSIS- NICK SCALI LIMITED
22
Salawu, M.K. (2017) Trend analysis of earnings quality among listed companies in
Nigeria. Journal of Emerging Trends in Economics and Management Sciences, 8(1), pp.62-
74.
Satryo, A.G., Rokhmania, N.A. and Diptyana, P., (2017) The influence of profitability ratio,
market ratio, and solvency ratio on the share prices of companies listed on LQ 45 Index. The
Indonesian Accounting Review, 6(1), pp.55-66.
Singh, S., (2017) Ratio Analysis in Manufacturing Sector-A Study. International Journal of
Innovative Research in Engineering and Management, 4.
Statista (2020) Australia: Inflation rate from 1984 to 2024* [online] Available from:
https://www.statista.com/statistics/271845/inflation-rate-in-australia/ [Accessed on: 10th
February 2020].
Trivedi, M., Branton, A., Trivedi, D., Nayak, G., Sethi, K.K. and Jana, S., (2016) Gas
chromatography-mass spectrometry based isotopic abundance ratio analysis of biofield
energy treated methyl-2-napthylether (Nerolin). American Journal of Physical
Chemistry, 4(5), pp.80-86.
Vogel, H. L. (2014) Entertainment industry economics: A guide for financial analysis.
Cambridge: Cambridge University Press.
West, M.K. (2018) Optimizing energy efficiency ratio feedback control for direct expansion
air-conditioners and heat pumps. U.S. Patent 9,958,190.
Williams, E. E., and Dobelman, J. A. (2017) Financial statement analysis. World Scientific
Book Chapters, pp. 109-169.
Yahoo Finance (2020) A Look At The Fair Value Of Nick Scali Limited (ASX:NCK) [online]
Available from: https://finance.yahoo.com/news/look-fair-value-nick-scali-022859764.html
[Accessed on: 10th February 2020].

FINANCIAL ANALYSIS- NICK SCALI LIMITED
23
Appendix
Part A
Reformatted Financial Statements- Nick Scali Limited (Amount in '000)
Description 2015 2016 2017 2018 2019
Revenue- Function
Sales 155743 203045 232908 250768 268025
Other Income 1452 1428 1574 1948 2185
Total Revenue 157195 204473 234482 252716 270210
Expenses 132347 166598 180664 192930 209507
Net Operating Profit from Ordinary
Activities 24848 37875 53818 59786 60703
Net Operating Porfit before Tax (NOPBT) 24848 37875 53818 59786 60703
Tax on Operating Profits 7345 11302 15963 17879 17534
Net Operating Profit After Tax (NOPAT) 17503 26573 37855 41907 43169
Net Financial Expenses 426 423 619 928 1053
Net Profit After Tax (NPAT)/Net Income 17077 26150 37236 40979 42116
Comprehensive Income 17408 25242 37556 42382 41580
Net Current Assets 23300 22885 24416 8377 16368
Net Non Current Assets 37472 58202 69330 94266 95042
Net Operating Assets 60772 81087 93746 102643 111410
Net Financial Obligations 14546 23293 23362 18980 26227
Equity
Issued Capital 3364 3364 3364 3364 3364
Reserves 324 -488 -24 1436 530
Retained Prfoits 42538 54918 67044 78863 81289
Minority Interests 0 0 0 0 0
46226 57794 70384 83663 85183
Opening CSE 40130 46226 57794 70384 83663
Comprehensive Income 17408 25242 37556 42382 41580
Net Dividends 11312 13674 24966 29103 40060
Calculated Closing CSE 46226 57794 70384 83663 85183
Double Check Closing CSE 0 0 0 0 0
Difference
FCF = NOPAT- Changes in NOA+OCI 5350 25516 34413 33866
FCF = NFEat- Changes in NFO+ d-
Changes in OI 5350 25516 34413 33866

FINANCIAL ANALYSIS- NICK SCALI LIMITED
24
Part B
Forecasting table
Descrip
tion 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Asset
turnove
r
1.78 1.88 1.8 1.63 1.57 1.48 1.45 1.45 1.4 1.25
Profit
Margin 11% 13%
15.88
%
16.22
%
15.59
% 14.8% 15.75% 16.85% 17.30% 18.20%
Net
Dividen
d
Payout
Ratio
71.09
%
71.21
%
73.91
%
79.05
%
86.54
% 90.5% 91.50% 88.50% 88.75% 88.75%
Net
paymen
t to
debt
holders -8324 550 5310 -6194
-
35576.
6
31198.2
7
45490.8
6
36469.8
7
16953.7
3
Net
borrwoi
ng cost 3% 2% 3% 5% 4% 4.5% 5.0% 5.1% 4.80% 5.2%

FINANCIAL ANALYSIS- NICK SCALI LIMITED
25
Description
2019
(Actual)
2020
(Forecast)
2021
(Forecast
)
2022
(Forecast)
2023
(Forecast)
2024
(Forecast)
Revenue- Growth Rate 7% 5% 8% 7% 10% 11%
Sales 268025 281426.25 303940.35 325216.17 357737.79 397088.95
Other Income 2185 2456 3025 3100 3502 3608
Total Revenue 270210 283882.25 306965.35 328316.1745 361239.792 400696.949
Net Operating Profit After Tax (NOPAT) 43169 42014.57 48347.04 55321.28 62494.48 72926.84
Net Financial Expenses 1053 1180.22 1370.36 1467.66 1451.77 1648.24
Net Profit After Tax (NPAT)/Net Income 42116 40834.36 46976.68 53853.62 61042.71 71278.60
Comprehensive Income 41580 40834.36 46976.68 53853.62 61042.71 71278.60
Net Operating Assets 111410 191812.33 211700.24 226424.95 258028.42 320557.56
Net Financial Obligations 26227 27407.22 28777.58 30245.23 31697.00 33345.25
Equity
85183 87994.17 90733.31 95627.60 101206.46 107762.48
Net Dividends 40060 38023.19 44237.54 48959.33 55463.85 64722.57
FORECASTED FINANCIAL STATEMENTS