Financial Statement Analysis: Ratio Analysis, Solvency Ratios, and Cash Flow Analysis

This analysis covers the financial statement analysis of Desklib, including ratio analysis, solvency ratios, and cash flow analysis. It includes ROE, RNOA, FLEV, NBC, ATO, and PM. The analysis also covers the breaking down of asset turnover ratio and profit margin. The solvency ratios include current ratio, quick ratio, cash ratio, and OCF ratio.

RUNNING HEAD: FINANCIAL STATEMENT ANALYSIS
atio anal iR ys s

Financial statement analysis 2
Contents
Ratio Analysis.............................................................................................................................................3
Return on Equity (ROE)..........................................................................................................................3
Return on Net Operating Assets (RNOA)................................................................................................4
Financial Leverage (FLEV).....................................................................................................................5
Net Borrowing Cost (NBC).....................................................................................................................6
Asset Turnover ratio (ATO)....................................................................................................................7
Breaking Down of Asset Turnover Ratio.............................................................................................8
Profit Margin...........................................................................................................................................8
Breaking Down of Profit Margin.........................................................................................................9
Cash Flow Analysis...................................................................................................................................10
Solvency Ratios.........................................................................................................................................10
Financial Stability......................................................................................................................................11
Dividend Payout Ratio..............................................................................................................................12
References.................................................................................................................................................13
Appendix...................................................................................................................................................14

Financial statement analysis 3
Ratio Analysis
Return on Equity (ROE)
It represents the overall return provided by the company to its shareholders from its net income.
Initially, the ROE of Metcash was 10.6% in 2014 and the same became negative in 2015 and
reached at -27.8%. Later on, the ratio increased to 17.3% in 2016 and after that continues to fall
for the rest two years. Recently, it is -9.7% reflecting the reduced profitability of the Metcash
Limited. The fluctuation is the ROE was due to the variations in the profits reported by the
company over the past five years. It can be observed that in 2014, the net income was $170.7
million which turned into a loss of $382.8 million in 2015. This was due to the disappointing
performance of the company in the fiscal year. Its core Food and Grocery business was highly
impacted by the market variations, prevailing competition and increasing costs of transformation
activities (Metcash Limited. 2015)
However, the trend got reversed in 2016 where company earned a profit of $218.2 million which
further reduced to $173.7 million in 2017. The upsurge was due to the sustainable growth in
company’s Food and Grocery business by undertaking some initiatives like Network investment,
competitive pricing and Core ranging. This also boosted up the ROE in the same year. Yet, the
fall in the net income in 2017 was contributed by the immense competition and difficult external
conditions for the supermarkets (Metcash Limited. 2017). In 2018, the company reported a loss
of $146.7 million due to the impairment of goodwill and others in F&G pillar. All such events
reduces the overall profitability of the company.

Financial statement analysis 4
2014 2015 2016 2017 2018
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
10.6%
-27.8%
17.3%
11.6%
-9.7%
ROE
P A era eROE = CS / v g CSE
earY s
%
Return on Net Operating Assets (RNOA)
This ratio shows the amount of return or profit generated by the average net operating assets of
the company for the past five years. It is also a measure of company’s profitability and financial
health. The RNOA of Metcash has also shown the same fluctuating trend as its ROE does over
the past five years. In 2014, the ratio was 8.9% which fall down to -15.4% in 2015. It again move
upwards and was reported at 13.55 in 2016 and then at 11% in 2017. The ratio became negative
in 2018 at -7.15% (Metcash Limited. 2018). The reason for such variation was the net operating
profit after tax and was the constant decrease in its average operating assets. In 2015 and 2018,
the company reported losses which ultimately make the ratio negative. The fluctuation in
company’s after tax net profit has been the significant factor in the movement of RNOA.

Financial statement analysis 5
2014 2015 2016 2017 2018
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
8.9%
-15.4%
13.5% 11.0%
-7.5%
ARNO
A PAT A ARNO = NO / vg NO
earY s
%
Financial Leverage (FLEV)
The financial leverage as per reformatted method shows an overall decline in the past five years.
In 2014, it was 51.6% which increased to 60.1% in 2015. However, after that the ratio reduced
constantly and reached to 10.6% in 2018. This continuous decline was due to the constant
reduction in Metcash’s average financial obligations. Its financial liabilities were $805.3 million
in 2015 which fall to $330 million in 2016 and further reduced to $193.9 million and $127.2
million in 2017 and 2018 respectively. On the other side the average equity of Metcash increased
in relation to its debt. In 2017 and 2018, the net debt reduced due to the strong cash performance
and operating cash flows generated during that year (Metcash Limited. 2017). All this reduced
the financial risk of Metcash and make it capable of paying its financial obligations as and when
they are due. Overall, Metcash is now focused on relying more on equity rather than outside
borrowings.

Financial statement analysis 6
2014 2015 2016 2017 2018
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
51.6%
60.1%
44.9%
17.4%
10.6%
FLEV
A era e A era eFLEV = v g NFO / v g
CSE
earY s
%
Net Borrowing Cost (NBC)
It can be defined as the finance cost incurred by the company in respect to its borrowings. It is a
cost incurred while taking out loan expenses such as interest payments and others. NBC is
calculated by dividing Metcash’s finance cost with its average financial obligations. The graph
shows that the NBC has reflected an upward trend. It remains almost same from 2014 to 2016
that was 5.5%, 5.4% and 5.1% respectively. However, after that the cost increased to 7.8% and
13.5% in 2017 and 2018. Although the financial obligations of Metcash have reduced but its
NBC rises due to the upsurge in the prevailing market interest rates because of expansion in the
economy. The reduction in NFO and finance cost boosted up the cost as a whole (Metcash
Limited. 2017).

Financial statement analysis 7
2014 2015 2016 2017 2018
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
5.5% 5.4% 5.1%
7.8%
13.5%
NBC
at A era eNBC = NFE / v g NFO
earY s
%
Asset Turnover ratio (ATO)
It shows how efficiently a company utilizes its assets to generate more revenue. The graph shows
that the ATO of Metcash has shown an upward trend in the past five years. In 2014, the ratio was
549.1% which rose to 619% in 2015 and shows a constant increase later on. In 2018, it was
reported at 864.3%. The factors that contributed to the upsurge in ATO are discussed below.
2014 2015 2016 2017 2018
0.0%
100.0%
200.0%
300.0%
400.0%
500.0%
600.0%
700.0%
800.0%
900.0%
1000.0%
549.1% 619.0%
739.8% 800.0% 864.3%
ATO
AT ale e en e A era eO = S s R v u / v g
ANO
earY s
%

Financial statement analysis 8
Breaking Down of Asset Turnover Ratio
Trade Receivables and Loans
The debtors accounted for 7.7% of sales in 2014 which then reduced to 7.2% in 2016. However,
the portion again increased to 8% and 10.2% in 2017 and 2018. The trade receivable turnover
was 12.90 in 2014 which increased to 13.80 times in 2016 but it fall later in 2017 and 2018 at
12.42 times and 9.79 times respectively. The company efficiently collected its receivables which
led to the strong cash generation in the business. It has also impacted the revenue of the year.
Property, Plant and Equipment
The PPE was 2.3% of sales in 2014 which fall to 1.6% of sales in 2018. The turnover increased
from 43.43 times to 61.11 times reflecting that high turnover is generated from Metcash’s PPE.
The disposal of PPE has contributed to the sales of company. In 2014, the amount was $308.4
million which reduced to $236.7 million in 2018.
Intangible Assets and Goodwill
They also cover a major part of company’s operating assets. Intangibles were 13.2% of sales in
2014 and they fall to 5.7% of the same in 2018. The turnover ratio increased from 7.58 times to
17.67 times in the past five years. Due to the increasing competitive trading environment in Food
and Grocery business, the company has to reduce the value of intangibles and goodwill which
resulted in the huge impairment of the assets. This has also contributed in the increased turnover.
Profit Margin
Metcash’s profit margin was 1.6% in 2014 which reduced to -2.5% in 2015. A significant
increase was noticed in Metcash’s administration expenses which affected company’s net
income and its profit margin. However after that the PM rise to 1.8% in 2016 and again fall to

Financial statement analysis 9
1.4% and -0.9% in the last two years. This was due to the fluctuations in company’s profit after
tax.
2014 2015 2016 2017 2018
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
1.6%
-2.5%
1.8%
1.4%
-0.9%
PM
PM PAT ale e en e= NO / S s R v u
earY s
%
Breaking Down of Profit Margin
Cost of sales
The cost of sales comprises of 90.7% of the sales which further increased to 91.1% in 2018. The
amount of cost of sales has contributed majorly in the fluctuations of profit margin. The upsurge
in this has significantly impacted the net profit of the company (refer excel).
Administrative cost
Metcash’s admin costs increased from $516 million to $567 million over the past five years.
Moreover they comprise of almost 4% of the sales and have contributed in bringing variations in
the profit margin. They comprises of the amortization of customer contracts for over 5 to 25
years. Also it reflected the cost incurred on acquisitions done by Metcash in the past five years.
Significant Items

Financial statement analysis 10
The value was highest at $638.8 million in 2015 and later it reached to $380 million in 2018. The
items enclosed the impairment and written down of goodwill and other intangible assets. The
upsurge in the value of significant items has brought down the margin in both the years that is
2015 and 2018 (refer excel).
Cash Flow Analysis
Solvency Ratios
These ratios show the overall liquidity position of the company. It can be interpreted from the
graph that the current ratio of Metcash has shown an upward trend whereas the quick ratio
declines later in 2018. In 2015, the CR was 1.19 which reduced to 1.14 in 2016. It again
increased to 1.21 in 2017 and further reduced to 1.19 in 2018. On the other hand, the QR was
0.69 in 2014 which later on rose to 0.80 in 2018. This was due to the constant increase in current
assets and liabilities of Metcash. The cash ratio and OCF ratio has been fluctuating since past
five years. In starting cash ratio was 0.05 in 2015 which reduced to 0.02 in 2016 and again
increased to 0.08 in the recent year. The same goes with OCF ratio as it was 0.14 in 2015 that
reduced to 0.11 in 2016 which further changed to 0.18 and 0.14 in 2017 and 2018. Overall the
solvency of Metcash has increased during the past years (Metcash Limited. 2016). Fluctuating
cash and cash equivalents has created many variations in cash ratio.

Financial statement analysis 11
2014 2015 2016 2017 2018
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
ol enc ratioS v y s
rrent ratio ACu = C /CL
ic ratio AQu k = Q / CL
a ratio caC sh = sh
e i alentqu v s /CL
peratin ca lo ratioO g sh f w
rom operation= CF f s/CL
earY s
al eV u s
Financial Stability
The below graph depicts that the net financial liability of the company reduces in the past five
years. The ICR (earnings basis) of Metcash was negative in 2015 and 2018 due to the operating
loss reported by the company whereas the ICR (cash basis) remain positive during the years and
has increased in 2017 and 2018. This was due to the significant reduction in company’s interest
expense. The NFL of the company reduced from 0.53 to 0.59 in the past five years. The
reduction in Metcash’s financial liabilities contributed to the fall in the ratio. The total years
service of the company has also declined in the period.
2014 2015 2016 2017 2018
-10.00
-5.00
-
5.00
10.00
15.00
20.00
25.00
inancial ta ilitF s b y
ntere t co era eI s v g
earnin a i( gs b s s)
ntere t o era e caI s C v g ( sh
a ib s s)
Total ear er iceY s S v
NFL
eary s
al eV u s

Financial statement analysis 12
Dividend Payout Ratio
The below graph depicts the amount of dividends paid out by the company out of its earnings.
Metcash has not paid any dividends in 2016 which brings the ratio to 0%. In 2014, its DPR was
74.9% which fall to 34.0% later. In 2017, it was 22.2% which increased to 58.8%. Metcash was
focused on increasing its earnings in 2018 in order to maintain a DPR of 60%. The increase in
the EPS boosted up the ratio in the current year. Metcash did not declare any sort of dividends in
2016 due to insufficient earnings (Metcash Limited. 2016).
2014 2015 2016 2017 2018
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
i idend pa o t ratioD v y u
i idend pa o t ratioD v y u
earY s
%

Financial statement analysis 13
References
Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.
Metcash Limited (2018). Annual Report. [Online]. Available at: https://mars-metcdn-
com.global.ssl.fastly.net/content/uploads/sites/101/2018/07/24145704/Metcash-Annual-Report-
2018.pdf#page=7 [Accessed 26 September 2018].
Metcash Limited (2015). Annual Report. [Online]. Available at: http://metcashreports.com/wp-
content/uploads/2015/07/metcash-limited-annual-report-2015.pdf [Accessed 26 September
2018].
Metcash Limited (2016). Annual Report. [Online]. Available at:
https://metcashannualreport.com/images/pdf/2016_Metcash_AnnualReport.pdf [Accessed 26
September 2018].
Metcash Limited (2017). Annual Report. [Online]. Available at: https://mars-metcdn-
com.global.ssl.fastly.net/content/uploads/sites/101/2017/07/28082756/metcash-annual-report-
2017.pdf [Accessed 26 September 2018].

Financial statement analysis 14
Appendix
Metcash
Reformatted Income Statement
2013
$’m
2014
$’m
2015
$’m
2016
$’m
2017
$’m
2018
$’m
Operating Activities
Operating revenue
Sales Revenue
12976
.6
13392
.7
13626
.2
13541
.3
14121
.9
14463
.7
Other income 121.1 140.7 132.5 138.4 106.7 101.2
Share of profit of equity-accounted
investments 3.4 4.8 3.1 7.1 9.7 0.6
Net profit/(loss) after tax from
discontinued operations -59.9 -10.5 - 38.2 - -
Total operating revenue
13041
.2
13527
.7
13761
.8
13725
.0
14238
.3
14565
.5
Operating expense
Cost of sales
-
11758
.7
-
12144
.5
-
12364
.7
-
12412
.3
-
12885
.6
-
13175
.6
Distribution costs -430.9 -479.5 -516.9 -475.2 -485.3 -486.5
Administrative costs -456.0 -516.0 -546.6 -509.8 -566.9 -566.1
Significant items -1.1 -56.1 -638.8 - -32.7 -380.1
Total operating expense
-
12646
.7
-
13196
.1
-
14067
.0
-
13397
.3
-
13970
.5
-
14608
.3
Net operating profits before tax 394.5 331.6 -305.2 327.7 267.8 -42.8
Income tax expense -116.1 -95.8 -14.0 -68.4 -64.8 -72.9
Tax Shelter (30%) 20.8 19.5 19.1 12.3 8.8 9.3
Net operating profit after tax
(NOPAT) 257.6 216.3 -338.3 247.0 194.2 -125.0
Financing Activities
Finance revenue 0.0 0.0 0.0
Finance costs -69.3 -65.1 -63.6 -41.1 -29.3 -31.0
Net finance costs -69.3 -65.1 -63.6 -41.1 -29.3 -31.0
Tax shelter (30%) 20.8 19.5 19.1 12.3 8.8 9.3
Net Financing Expanse (NFEat) -48.5 -45.6 -44.5 -28.8 -20.5 -21.7
Net Income (CSP) 209.1 170.7 -382.8 218.2 173.7 -146.7
Other comprehensive income, net of
tax 3.0 4.4 -3.4 - 1.2 0.9
Total comprehensive income 212.1 175.1 -386.2 218.2 174.9 -145.8

Financial statement analysis 15
Metcash
Reformatted Balance Sheet
2013
$’m
2014
$’m
2015
$’m
2016
$’m
2017
$’m
2018
$’m
Operating assets
Current assets
Cash and cash equivalents 50.3 24.7 83.3 26.4 96.5 161.2
Trade Receivables and Loans
1012.
9
1037.
8
1014.
5 981.4
1136.
6
1477.
7
Inventories 753.8 743.8 712.5 673.6 759.2 784.4
Disposal Groups and Assets Held for
Sale 47.6 41.1 - - - -
Income Tax Receivable 24.4 - - - - -
Prepayment and Other Assets 5.7 13.9 13.5 10.8 13.4 -
Assets Held for Sale - - 26.1 32.1 18.8 11.8
Total current asset
1894.
7
1861.
3
1849.
9
1724.
3
2024.
5
2435.
1
Non-current assets
Trade Receivables and Loans 60.4 50.3 25.6 15.9 16.4 20.1
Equity-accounted Investments 91.3 99.2 101.7 102.9 103.3 88.3
Property, Plant and Equipment 278.5 308.4 276.0 251.9 242.1 236.7
Net Deferred Tax Assets 61.8 70.4 124.4 113.5 103.8 109.7
Intangible Assets and Goodwill
1708.
0
1765.
7
1284.
5
1127.
5
1152.
7 818.4
Total non-current assets
2200.
0
2294.
0
1812.
2
1611.
7
1618.
3
1273.
2
Total operating assets
4094.
7
4155.
3
3662.
1
3336.
0
3642.
8
3708.
3
Operating Liabilities
Current liabilities
Trade and Other Payables
1335.
6
1457.
1
1419.
1
1356.
9
1524.
3
1629.
6
Provisions 137.8 127.2 127.6 140.4 139.7 126.4
Income Tax Payable 18.1 23.9 9.1 15.8 6.1 24.9
Customer Charge Cards Agreement - - - - - 274.0
Total current liabilities
1491.
5
1608.
2
1555.
8
1513.
1
1670.
1
2054.
9

Financial statement analysis 16
Non-current liabilities
Provisions 166.6 106.0 144.4 123.8 141.4 137.6
Total non-current liabilities 166.6 106.0 144.4 123.8 141.4 137.6
Total operating liabilities
1658.
1
1714.
2
1700.
2
1636.
9
1811.
5
2192.
5
Net operating assets (NOA)
2436.
6
2441.
1
1961.
9
1699.
1
1831.
3
1515.
8
Financial
Current liabilities
Interest Bearing Loans and Borrowings 57.5 15.3 63.2 15.7 3.0 1.9
Derivative Financial Instruments 0.5 1.6 0.8 1.8 0.8 0.1
Other Financial Liabilities 1.7 13.0 22.3 13.6 10.0 7.3
Total current liabilities 59.7 29.9 86.3 31.1 13.8 9.3
Non-current liabilities
Interest Bearing Loans and
Borrowings 751.4 824.9 794.8 299.4 187.1 127.1
Derivative Financial Instruments 2.7 0.1 6.3 3.9 2.3 0.9
Other Financial Liabilities 37.2 40.6 22.7 7.7 3.7 0.6
Total Non-current liabilities 791.3 865.6 823.8 311.0 193.1 128.6
Total Liabilities (Financial) 851.0 895.5 910.1 342.1 206.9 137.9
Current assets
Derivative Financial Instruments 0.6 1.8 0.2 - 0.3 0.6
Total current assets 0.6 1.8 0.2 - 0.3 0.6
Non-current assets
Derivative Financial Instruments 37.7 46.3 104.2 12.1 12.7 10.1
Other financial assets 0.3 0.3 0.4 - - -
Total non-current assets 38.0 46.6 104.6 12.1 12.7 10.1
Total assets (Financial) 38.6 48.4 104.8 12.1 13.0 10.7
Net financial obligation (NFO) 812.4 847.1 805.3 330.0 193.9 127.2
Closing equity (CSE)
1624.
2
1594.
0
1156.
6
1369.
1
1637.
4
1388.
6
Equity
Contributed Equity
2284.
9
2308.
1
2391.
9
1626.
0
1719.
3 600.0
Other Equity -765.9 -765.9 -765.9 - - -
Other Reserves -6.8 -2.9 -1.3 -5.6 -3.0 -0.7
Retained Earnings 106.7 47.1 -475.8 -259.6 -87.7 780.6

Financial statement analysis 17
Non-controlling Interests 5.3 7.6 7.7 8.3 8.8 8.7
Total equity
1624.
2
1594.
0
1156.
6
1369.
1
1637.
4
1388.
6
Data
2013 2014 2015 2016 2017 2018
Net Income (CSP)
209.
1 170.7 -382.8 218.2 173.7 -146.7
Net operating assets (NOA)
2436
.6 2441.1 1961.9 1699.1 1831.3 1515.8
Net financial obligation (NFO)
812.
4 847.1 805.3 330 193.9 127.2
Closing equity (CSE)
1624
.2 1594 1156.6 1369.1 1637.4 1388.6
Opening equity (CSE)
1335
.1 1624.2 1594 1156.6 1369.1 1637.4
Average (CSE)
1609.1
0 1375.30
1262.8
5
1503.2
5
1513.0
0
Sales revenue
1297
6.6
13392.
7 13626.2
13541.
3
14121.
9
14463.
7
NOPAT
257.
61 216.27 -338.28 246.97 194.21 -125
Net Financing Expanse (NFEat) 48.5 45.6 44.5 28.8 20.5 21.7
Net profit after tax
209.
1 170.7 -382.8 218.2 173.7 -146.7
CFO 388.7 231.7 165.8 304.6 288.6
Dividend paid (cents) 0 18.5 6.5 - 4.5 13.0
Earnings per share 30.4 24.7 19.1 19.2 20.3 22.1
Ratios 2014 2015 2016 2017 2018
ROE = CSP /Average CSE 10.6% -27.8% 17.3% 11.6% -9.7%
RNOA = NOPAT / Avg NOA 8.9% -15.4% 13.5% 11.0% -7.5%
PM = NOPAT/ Sales Revenue 1.6% -2.5% 1.8% 1.4% -0.9%
ATO = Sales Revenue / Average NOA
549.1
% 619.0% 739.8%
800.0
%
864.3
%
FLEV = Average NFO / Average CSE 51.6% 60.1% 44.9% 17.4% 10.6%
RNOA = PM*ATO 8.9% -15.4% 13.5% 11.0% -7.5%
NBC = NFEat/ Average NFO 5.5% 5.4% 5.1% 7.8% 13.5%
FLEV*(RNOA-NBC) 1.7% -12.5% 3.8% 0.6% -2.2%
ROE = RNOA + (FLEV*SPREAD) 10.6% -27.8% 17.3% 11.6% -9.7%

Financial statement analysis 18
Solvency ratios (short term) 2014 2015 2016 2017 2018
Current ratio = CA/CL 1.16 1.19 1.14 1.21 1.19
Quick ratio = QA/ CL 0.69 0.73 0.69 0.76 0.80
Cash ratio = cash equivalents /CL 0.02 0.05 0.02 0.06 0.08
Operating cash flow ratio = CF from
operations/CL 0.24 0.14 0.11 0.18 0.14
Financial stability (short term) 2014 2015 2016 2017 2018
Interest coverage (earnings basis) =
(net income + interest expense + tax
expense)/ interest expense
6.84
-
7.29 10.95 12.63
-
2.40
Interest coverage (cash basis) = (cf
from operations + interest expense +
tax paid)/ interest expense
11.63 6.52 9.13 19.02 17.66
Financial stability (Long term) 2014 2015 2016 2017 2018
Total Years Service = NFOTotal / CF
from operations 2.18 3.48 1.99 0.64 0.44
NFL = NFO/OE 0.53 0.59 0.26 0.13 0.08
Dividend payout ratio 2014 2015 2016 2017 2018
Dividend Payout Ratio (DPO) =
Dividends per share / EPS 74.9% 34.0% 0.0% 22.2% 58.8%