Financial Analysis of Seafarms Group Limited: A Comprehensive Evaluation

This report provides a comprehensive financial analysis of Seafarms Group Limited, an Australian agricultural company specializing in prawn farming. The analysis covers key financial ratios, share price movements, significant announcements, weighted average cost of capital, debt ratio, and dividend policy. The report aims to evaluate the company's financial health, identify potential investment opportunities, and assess its future prospects.

Finance for business
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Table of Contents
Introduction:..................................................................................................................................3
1. Prepare a brief description of the company............................................................................4
2. Specify ownership-governance structure of the company.....................................................5
3. Calculate the following Fundamental ratios for your selected company for the past 2
years................................................................................................................................................7
4. Prepare a graph/chart for movements in the monthly share price over the last two years
.......................................................................................................................................................10
5. Significant announcements which may have influenced the share price of your company.
.......................................................................................................................................................12
6. Financial data of company:.....................................................................................................14
7. Weighted average cost of capital............................................................................................15
8. The debt ratio of the company................................................................................................17
9. Dividend Policy........................................................................................................................18
10. Letter of recommendation....................................................................................................19
Conclusion....................................................................................................................................20
References:...................................................................................................................................21
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Introduction:
The report is prepared for analyzing and evaluating the financial position of the company
“Business”. It is an Australian agricultural company which started its operations in 1988. The
annual report for the company for 2017 has been used to make judgments. The aim of the project
is to analyse the financial position by using financial ratios, effect of Australian Securities
Exchange (ASX) announcements on the share price to predict future of the share value,
calculation of beta values and Capital Asset Pricing Model (CAPM), debt ratios and dividend
policy of the firm have been analysed to predict the future performance of the firm. Then this
information will be used to decide whether the company is worth investing or not.
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1. Prepare a brief description of the company.
Business is one of the leading companies in its industry which started its operation in 1988. It’s
one of the major activities include producing prawn which is used by both Australian and
international customers. It sells them under the brand Crystal Bay Prawns®. The company has
seen a whopping 43 % compounded annual growth over the last 4 years, which makes the
company largest prawn farmer in Australia. Along with this CO2 Australia, another subsidiary of
the company is one of the leading environmental services company (Seafarms Group Limited,
2017).
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2. Specify ownership-governance structure of the company.
Substantial shareholders of the company:
These are the shareholders who own a significant number of shares in the company. This
ownership helps them to have a say in company’s decision-making process. Seafarms Group
Limited substantial shareholders are listed below -
With higher than 20% of shareholdings –
With reference to the information provided by the company for the year ended 2017, the
Business only has one substantial shareholder who holds more than 20 % of the share capital –
Gabor Holding Pty Ltd and associates with holdings worth 453,391,227 (32.30%) shares.
As no individual family has a substantial shareholding in the Seafarms Group Limited it can be
said that it is a non-family company. So, the company is an independent company.
With higher than 5% of shareholdings – There are no shareholders holding more than 5 %
shares and there is only one substantial shareholder, mentioned above
Main people of corporate governance:
 The Chairman = Mr. Ian Norman Trahar
 Board members = The details regarding the Board of directors of the
Business is mentioned below
Name Position
Mr. Harley Ronald Whitcombe Chief Financial Officer, Company
Secretary, Executive Director
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Mr. Ian Norman Trahar Executive Chairman, Executive Director
Dr, Christopher David Mitchell Executive Director
Mr. Paul John Favretto Non-Executive Director
 CEO = There is no position of CEO
No, none of these people have the same surname as any of the substantial shareholder, who is
holding more than 20 % shares in the company. No, there is no individual with more than 5 %
shares involved in the governance of the firm.
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3. Calculate the following Fundamental ratios for your selected company for the past 2
years.
The following financial are required to be calculated –
Short-term solvency (Liquidity ratios)
Current ratio – Total Current Assets / Total Current Liabilities
This ratio is calculated by dividing current assets by current liabilities. At a minimum, this ratio
should be greater than one. It is used to find out short-term solvency of the firm that is whether
the firm will be able to pay its current liabilities by selling off its current assets or not. The
current ratio of the company is positive and has increased which is good thing for the investors.
Quick ratio – Total Current Assets – Inventory / Total Current Liabilities
Quick ratio or acid test ratio is calculated by dividing the difference between current assets and
inventory with current liabilities. The ratio is considered to be appropriate if it is one. This ratio
is used to know whether the firm will be able to pay its current liabilities very short span of time
or immediate notice. The Quick ratio is high above the ideal ratio which states that company is
able to repay the short term liability if any.
Long-term solvency (Financial Leverage ratios)
Debt to equity ratio – Total Liabilities / Shareholder’s Equity
Debt to equity ratio is calculated by dividing total liabilities with shareholder’s equity. This is
used to measure a company’s financial leverage. It is used to know how much debt company has
borrowed from outside to finance its assets. It is also called gearing ratio. The company debt
ratio has declined during the year and since the company is earning losses it will help to decrease
the cost involved.
Total Debt to Total assets ratio
Total debt to Total Assets – Short Term Debt + Long Term Debt / Total Assets
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This ratio is calculated by dividing total debt that is short-term debt and long-term debt of the
firm with its total assets. This ratio is used to know the long-term health of the firm.
Profitability ratios
Return on equity – Net income / Shareholder’s Equity
This ratio is calculated to know the firm’s profit-making capacity when compared with firm’s
equity. This gives the information of the return on shareholders’ equity. The company is not able
to earn profits during the year which is not a satisfactory position and need to be taken care by
the company.
Market value ratios
Earnings per share – (Net income – Preferred share dividends) / number of common shares
outstanding
This ratio shows the earning per share for the equity shareholders of the firm. This ratio helps the
equity shareholder to calculate returns and risk of their investments.
The calculation of various ratios has been carried out by using the financial statements of
the company for different years are as under:
Figures in millions
Calculation of Ratios
Sr.
No.
Particular Year 2017
($ 000)
Year 2016
($ 000)
1 Total Asset 51000.070 49689.823
2 Total Liability 18281.447 19687.215
3 Ordinary Equity 32718.620 30002.608
4 Net profit After Tax (NPAT) -19775.463 -18735.523
5 Current Asset 27643.368 21069.281
6 Current Liability 9756.093 10668.635
7 Inventory 7708.673 6366.517
8 Quick Asset 19934.695 14702.764
9 Debt 8223.763 8821.666
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10 Net Sales 35739.152 23529.286
11 Fixed Asset 23356.699 28620.542
12 EPS (Cents) -0.020 -2.040
Current Ratio = Current Asset/
Current Liability
2.83 1.97
Quick Ratio = Quick Asset/ Current
Liability
2.04 1.38
Debt Equity ratio = Debt/ Equity 0.25 0.29
Fixed Asset Turnover Ratio =
sales / Fixed assets
1.53 0.82
Net Profit Margin Ratio = Net
profit / Sales
-1.43 -2.11
ROA = Net Income / Total Asset -0.39 -0.38
Earnings per share -0.02 -2.04
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4. Prepare a graph/chart for movements in the monthly share price over the last two years
The share price of the company has been fluctuating over the last two years and the same can be
seen in the graph below –
(Figure – Share price comparison of Company with All Ords Index)
(Source – Market index, 2018)
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(Figure – Share price comparison of Company with All Ords Index)
(Source – Market index, 2018)
Introduction:
This report has been prepared for making a comparison of the share price of Business. After
observing the chart following observations were made.
Content:
The share price of the Business is continuously fluctuation over the past two years. From its high
of 0.12 it has fallen below 0.06 this is a significant decline. The value of the share crashed almost
to half. This show highly volatile nature of the share. The price of the share after falling to its
lowest point in the past two years started rising and now it is around 0.08. By the time report was
being prepared the value of share recorded around 8 % upside. The share is most likely to draw
more investors in future. Compared with the ordinary index the value of the share is at times high
but at other times low.
Conclusion:
From the above report, it can be concluded that share price is volatile and there is some degree of
correlation between the company’s share price and the ordinary index.
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5. Significant announcements which may have influenced the share price of your company.
Announcements related to the company can have a significant impact on the profitability of the
company. The effect depends on the nature of the investments. There are a number of internal
and external factors that can either prove profitable or disastrous, thus effectively analyzing the
announcements is the key to making a profitable investment.
The announcements made with respect to Business are that have affected its share price –
 On 23rd of May 2018, there was an announcement that the Japanese seafood giant, Nissui,
will invest in the project sea dragon of the company. This investment was A$24.99
million equity investment with some other agreements (George, 2018). This investment
will help the firm to expand its project and to carry it out with higher efficiency. This will
raise the investor hopes and they will invest n the shares and the shares prices of the
company will rise.
 On 23rd of May 2018, there was an announcement regarding a change in the interest of
the directors of the company. This was the conversion of performance rights to fully paid
shares. This change will expand the equity of the firm (Investsmart, 2018). This
expansion of share capital will encourage other investors to invest in the firm and share
price will rise.
 On 11th December 2017, there was an announcement that the agriculture license has been
granted for project sea dragon Core Breeding Centre and Bloodstock Maturation Centre.
This license will expand the company’s business operations and help them to undertake
an operation in the field (Investsmart, 2018). This will motivate other investors to invest
in the form and more shares will be purchased and the shares price will rise.
 On 6th of November 2017, the company announced that a non – pastoral use permit has
been issued to the company. This permit will help the company to expand its operation
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and this expansion will increase its profit-making capacity (Investsmart, 2018). Thus,
more investors will be inclined to invest in the shares and the share price will rise.
 On 18th September 2017, the company announced that it has completed an agreement
with HSBC to provide the company with banking facilities. It includes working capital
funding and for Queensland operations (Investsmart, 2018). This will help the company
to expand its operations and more investors will be investing in the shares of the firm and
this will increase the share price.
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6. Financial data of company:
i)
The beta of the company =
The beta of the company is an extent of the volatility in the risk of the company when compared
with the industry. The beta of the company shows that the company is less volatile that is it is at
low risk.
The beta of the company is 0.04. (Reuters, 2018)
ii)
Required rate of return = Rf + B (Rm – Rf)
= 4% +0.04*6%
= 4% + 0.24
= 4.24%
iii)
The required rate of return shows that the company is a conservative investment as the rate of
return of the company is very less. It is just slightly above the risk free rate that is prevailing in
the market. It can be stated that the risk involved is minimal with respect to the rate of return rate
that is being provided by the company (Kennon, 2017). There is less chances of any volatility in
the share price thus making it a conservative investment.
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7. Weighted average cost of capital
i)
The formula for calculation of the weighted average cost of capital is mentioned below,
WACC = E / (E + D) * Cost of Equity + D /
(E + D) * Cost of Debt * (1 - Tax Rate)
The above weighted average cost of capital shows that the company is at
Equity = 32718.620
Debt = 8223.763
Equity + Debt = 40942.383
Cost of equity = 4.24%
Cost of Debt =
1- tax rate = 0.70
WACC = 32718.620 x 0.0424 + 8223.763 x (1010.193/8223.763) (1 – 0.30)
40942.383 40942.383
WACC = 0.03389 + 0.0172
WACC = 0.05109
WACC = 5.109%
ii)
It is important for the company to maintain the WACC cost of the company as increase in the
same increases the risk as well as pressure on the management. The higher WACC may result in
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rejection of any project which might be beneficial in the long run and provide profit to the
company. The WACC cost is the cost which needs to be recovered by the organisation to satisfy
the stakeholders of the company and if they are not able to do so there can be distrust and can
also affect the company in monetary terms. The decisions are affected by the WACC as if the
company is having strong liquidity position and low WACC then the project that might be not
beneficial for short run can be accepted if there are long term benefits (Finance Management,
2018).
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8. The debt ratio of the company
Debt ratio – 17.00
i)
The debt ratio is calculated by dividing total debt of the company by total assets. The purpose of
the calculation of debt ratio is to find out the fraction of assets that are financed by debt of the
company. It is calculated in percentage or decimal. This gives the estimates, regarding the
payback capacity of the company. Companies look for a ratio which is between 0.3 and 0.6.
ii)
Company’s debt ratio is 17 which are extremely high. To achieve balanced debt Ratio Company
must reduce its debt. It can be done by paying off debts or by increasing its assets. The other way
is to issue shares that are by replacing outside debt with inside debt that is equity. This will
increase owner’s debt that is shareholders’ funds but will reduce the outside liabilities (KPMG,
2015). The management of the firm has recently got a new investment in equity from a Japanese
firm which will improve its debt ratio.
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9. Dividend Policy
The dividend is the amount paid to the shareholders of the company from the profits of the year.
This amount can vary every year. The policy of the company to decide how much of its earnings
it will be giving to its shareholder is dividend policy. Dividend payment by the company has a
positive effect on the price of the share. As investors choose it as an investment option.
There are a number of dividend policies from which a company can choose. These are regular
dividend policy, stable dividend policy, irregular dividend policy and no dividend policy. There
are a number of factors that play role in determining the company’s dividend policy (Amirya, et.
al., 2014). These include stable earnings, stable industry in which the company is functioning,
regular profits, types of products produced, etc.
Dividend Declaration by Business
The company made no declaration of dividend for the past few years. This shows that company
is following no dividend policy. This policy is useful if the company needs a regular supply of
money for its operations. This is called plowing back of profits or retained earnings, this is
particularly used to meet expansion demands for the company. This provides company supply of
finance without any cost that is money on which interest is not to be paid (Aruomoaghe & Agbo,
2013). As the company is using the money for expansion shareholders will get their returns in
the form of a rise in the price of the share. This policy though beneficial for the firm but it stops
the investors who need regular earnings to invest in the firm. But this also makes company
suitable for long-term investment.
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10. Letter of recommendation
Letter of Recommendation
To,
The Client,
This letter is in reference to the inquiry made by your firm for investing in Business. After
making all the analysis of the firm the company has reached the following conclusion. For more
information, go through the report given above.
The financial analysis of the Business points out that the company is a safe investment. This
analysis has been made by evaluating the following factors. Careful calculation of fundamental
ratios, the impact of significant announcements on the firm's share price, beta calculation, CAPM
model, weighted average cost of capital, debt ratio and dividend policy of the company reveals
that the firm is a worth investing your money. The details of the calculation are available in the
report. Though the company is not paying dividends the returns will be available in the price of
the share. The value of the shares is likely to increase in the near future and the company can be
considered as a long-term investment opportunity. The current market price (CMP) of the shares
is best to make an investment.
The suggestion of the investment advisor is to purchase the shares at the current market price and
include it in your portfolio.
Thanks
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Conclusion
After the report, it can be concluded that the company is a suitable for long-term investment.
Seeing the recent announcements by the company it an e said that its projects are going to be
profitable in future. However, the company has been in losses for the past few years but with the
new project, Sea Dragon will help the firm to earn profits. The Business has a profitable future
and as the company’s period of losses is over, now the company will be able to earn profits and
give higher returns in future.
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References:
 Seafarms Group Limited, (2017). 2017 Annual Report. Seafarms Group Limited.
[Online]. Available at https://seafarms.com.au/wp-content/uploads/2015/02/FY17-
Financial-Statements-Split.pdf. [Accessed on 24 May 2018]
 Aruomoaghe, J., & Agbo, S., 2013. Application of Variance Analysis for Performance
Evaluation: A Cost/Benefit Approach. Research Journal of Finance and Accounting.
 Basu, C., (2018). Four Basic Types of Financial Ratios Used to Measure a Company's
Performance. Chron. [Online]. Also available at http://smallbusiness.chron.com/four-
basic-types-financial-ratios-used-measure-companys-performance-25299.html.
[Accessed on 24 May 2018]
 Finance Management, (2018). Importance and Use of Weighted Average Cost of Capital
(WACC). Finance Management. [Online]. Available at
https://efinancemanagement.com/investment-decisions/importance-and-use-of-weighted-
average-cost-of-capital-wacc. [Accessed on 24 May 2018]
 Hossan, F., (2010). Performance evaluation and ratio analysis of Pharmaceutical
Company in Bangladesh. West. [Online]. Also available at
http://hv.diva-portal.org/smash/get/diva2:323754/FULLTEXT01.pdf. [Accessed on 24-
05-2018].
 Kennon, J., (2017). What Is a Good Return on Your Investments?. The balance. [Online].
Available at https://www.investsmart.com.au/shares/asx-wow/woolworths-group-
limited/announcements?page=2. [Accessed on 24 May 2018]
 KPMG, (2015). Cost of Capital Study 2015. KPMG. [Online]. Also Available
https://assets.kpmg.com/content/dam/kpmg/pdf/2016/01/kpmg-cost-of-capital-study-
2015.pdf. [Accessed on 24 May 2018]
 Market Index, (2018). Seafarms Group Ltd. Market Index. [Online]. Available at
https://www.marketindex.com.au/asx/sfgs. [Accessed on 24 May 2018]
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 Reuters, (2018). Seafarms Group Ltd (SFG.AX). Reuters. [Online]. Available at
https://www.reuters.com/finance/stocks/overview/SFG.AX. [Accessed on 24 May 2018]
 George, T., 2018. Seafarms Group secures $24.99 million equity funding from Japanese
seafood giant. Proactive investors. [Online]. Also available at
http://www.proactiveinvestors.com.au/companies/news/197501/seafarms-group-secures-
2499-million-equity-funding-from-japanese-seafood-giant-197501.html. [Accessed on
24-05-2018]
 Investsmart, (2018). Seafarms Group Ltd. Investsmart. [Online]. Available at
https://www.investsmart.com.au/shares/asx-sfg/seafarms-group-limited. [Accessed on 24
May 2018].
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