Financial Ratio Analysis Example

This assignment presents a solved example of financial ratio analysis for a company over three years (2014-2016). It calculates various key financial ratios, including liquidity ratios (current ratio, quick ratio), profitability ratios (gross profit margin, net profit margin, return on equity), solvency ratios (debt-equity ratio, interest coverage ratio), efficiency ratios (inventory turnover ratio, debtor turnover ratio, creditor turnover ratio), and investment ratios (dividend yield ratio). The data provided includes dividend per share, earnings per share, price per share, and other relevant financial figures.

Running Head: Financial analysis 1
Financial analysis

Financial analysis 2
Table of Contents
Part-A..........................................................................................................................................................2
After Tax Cash Flows................................................................................................................................2
Worst case...............................................................................................................................................5
Best case..................................................................................................................................................8
Payback Periods....................................................................................................................................11
Discounted Payback Periods..................................................................................................................14
Net Present Value..................................................................................................................................17
Profitability Index..................................................................................................................................20
Other Capital Budgeting Technique.......................................................................................................21
Decision on Acceptance of Project........................................................................................................21
Part-B.........................................................................................................................................................22
Executive summary...................................................................................................................................22
Introduction...............................................................................................................................................23
Comparing Firm’s Capital Structure.......................................................................................................23
Analysis of Financial Ratios of AMC Outdoor Company.........................................................................26
Significant Changes in the Capital Structure in Past Three Years...........................................................26
Wealth Maximization in Past Three Years.............................................................................................27
Importance of Minimization of the Cost of Capital................................................................................28
Recommendations for Lowering the Cost of Capital.............................................................................28
Conclusion.................................................................................................................................................29
References.................................................................................................................................................30

Financial analysis 3
Part-B
Executive summary
This report reflects the financial analysis of APN Outdoor Company and its business
performance in the market. There are several financial tools which could be used by investors to
evaluate the three years business performance of APN Outdoor Company. In this report, it is
shown that company has shown high amount of growth and effective business functioning
throughout the time. Capital structure analysis and ratio analysis of company will reflect the risk
and return provided by company.

Financial analysis 4
Introduction
This report reflects the key understanding on the financial performance of APN Outdoor
Company in the market. There are several financial tools such as capital structure analysis and
ratio analysis and other tools which are used to evaluate the financial performance of APN
Outdoor Company. This company has been running its business in Australia and providing
advertisement business. In this report, capital structure and financial performance of APN
Outdoor Company has been evaluated to determine the viability of business functioning of
company throughout the time.
Comparing Firm’s Capital Structure
Capital structure is accompanied with equity, debt and reserve of company which is used
by company to raise finance from the market. If company wants to increase the efficiency of
business then management department needs to establish optimum capital structure. Ideal capital
structure of company should be 30 % debt and 70% equity (Finance. Yahoo, 2017). If company
is having more than 30% debt funding in its capital then it will increase the overall financial risk
of company. APN Outdoor Company has to maintain its debt funding below 30% to reduce the
overall financial leverage. The computation of WACC of company has been computed as below
(Gitman, Juchau, & Flanagan, 2015).
Cost of Equity
CAPM Model

Financial analysis 5
Risk free rate of
return 2.40%
Beta 1.3
Market Rate of
Return 7%
Cost of Equity 8.38%
Cost of debt
Interest after tax 2956100
Debt 103000000
Cost of debt 2.87%
Weights

Financial analysis 6
Debts (Loan) 103000000
Equity 222334000
Total 325334000
Weighted Average Cost of Capital (WACC)
Weight
Cost
(%) Weighted Cost
Debt 0.32 2.87% 0.91%
Equity 0.68 8.38% 5.73%
Cost of Capital (WACC) 6.64%
After evaluating these data, it is determined that company has maintained total cost of
capital 6.64%. In addition to this, capital structure of company is also 32% debt funding and 68%
equity funding. This has shown that company has high financial leverage and reduced its overall
cost of capital. Furthermore, QMS Media Company is the rival company which has maintained
debt to equity ratio of 22:78. It provides that company has maintained 22% debt funding and rest

Financial analysis 7
of the capital has been raised from the equity financing. However, the overall cost of capital is
7.87% which is comparatively high. APN Outdoor Company has low level of cost of capital due
to its debt funding but at the same time, simultaneously company has increased its financial
leverage (Finance. Yahoo, 2017).
Analysis of Financial Ratios of AMC Outdoor Company
APN Outdoor Company has shown high amount of growth since last three years. After
evaluating the annual report, it could be inferred that APN Outdoor Company has maintained
effective liquidity ratio. Current ratio of company is 2.14 in 2014 which has gone down by .65 in
2017. Quick ratio of company is also reduced by .55 in 2017 comparatively. This level of
reduction is made by company with a view to reduce the overall cost of capital. The gross profit
margin has gone up by 2% in 2016 since last three years. The net profit of company was 6.04%
in 2015 which has effectively converted into profit of 20% in 2016. Return on equity of company
was -7.4% in 2015 which increased positively to 25% in 2016. Company has reduced its interest
expenses by paying off its entire debts fund. Efficiency ratio of company reflects that inventory
turnover of company is stable since last three years. On the other hand, creditor’s turnover rialto
has been increased to 40% in 2016 to reduce the amount blockage (Brigham & Gerhardt, 2013).
Significant Changes in the Capital Structure in Past Three Years
APN Outdoor Company has maintained its equity capital on the increasing side and
resulted to $58.15, $63.74, and $59.64 million in 2014, 2015 and 2016. The long term debts of
company have also increased by 5% (Finance. 2017).
Particulars 2014 2015 2016
Fiscal year ends in June AUD$ '000
AUD$
'000
AUD$
'000

Financial analysis 8
AUD in Million except per share
data
Long term loans 125 97 133
Wealth Maximization in Past Three Years
The stock price of AMC Outdoor Company has increased by 200% as compared to last
three year data. It has shown that company has created value for the investors on their investment
by having efficient business functioning. This increase in stock price of AMC Outdoor Company
is based on the efficiency of business market share and effective business functioning.
Importance of Minimization of the Cost of Capital
The cost of capital is overall amount which is paid by company to investor to lender or
investors. AMC Outdoor Company could reduce its overall cost of capital by injecting more debt

Financial analysis 9
funding and reducing equity share financing. This debt financing will save tax payment and
reduce the cost of funding in determine manner (Finance. Yahoo. 2017)
Recommendations for Lowering the Cost of Capital
It is evaluated that AMC Outdoor Company has increase its business efficiency and
increased its brand image. The main problem is related to its debt to capital structure. Company
needs to have optimum level of debt to equity ratio. This will not only increase the business
functioning but also increased the overall return on capital employed (Vernimmen, et al. 2014).

Financial analysis 10
Conclusion
After evaluating all the computed figures and details of company, it could be inferred that
AMC Outdoor Company has high growth in advertisement and media business. However, high
debt funding may result to increased financial leverage of company. In addition to this, company
should also inject more money in its assets with a view to create value in its investment.

Financial analysis 11
References

Financial analysis 12
Bodie, Z. (2013). Investments. McGraw-Hill.
Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage
Learning.
Finance. Yahoo. (2017). APN Outdoor Group Limited (APO.AX). Retrieved September 16, 2017 from,
https://finance.yahoo.com/quote/APO.AX/financials?p=APO.AX
Finance. Yahoo. (2017). QMS Media Limited (QMS.AX). Retrieved September 16, 2017 from,
https://finance.yahoo.com/quote/QMS.AX/balance-sheet?p=QMS.AX
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher
Education AU.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., & Salvi, A. (2014). Corporate finance: theory
and practice. John Wiley & Sons.

Financial analysis 13
Appendix
Financial analysis of DWC company
Particulars 2014 2015 2016
Fiscal year ends in June AUD$ '000
AUD$
'000
AUD$
'000
AUD in Million except per share
data
Total Revenue 250 300 330
COGS 80 80 80
Operating Profit/(Loss) 242 292 324
Other expenses 228 230 252
Finance cost 30 4 3
Net profit -16 58 69
Current Assets 76 85 94
Inventory 1 1 1
Average Inventory 1 1 1
Trade receivables/Debtors 58 63 69
Average Debtors 37 39 42
Total Assets 372 389 451
Dividend Paid 9 39 32
Current Liabilities 31 45 50
Trade Payables/Creditors 6 2 2
Average Payables 3 4 2
Total Liabilities 156 141 182
Capital Employed 341.0 344.0 401.0
Long term loans 125 97 133
Shareholders' Equity 216 248 269
Dividend per Share (DPS)
0.0416666
7
0.157258
1
0.11895
9
Earnings per Share (EPS) -0.7 0.25 0.29
Price per Share 10 10 10
Computation of ratio analysis
Liquidity ratio 2014 2015 2016
Current ratio 2.4516129 1.8888889 1.88
Quick ratio 2.41935484 1.8666667 1.86

Financial analysis 14
Profitability ratio 2014 2015 2016
Gross Profit Margin 0.968
0.973333
3
0.98181
8
Net Profit Margin -0.064
0.193333
3
0.20909
1
Return on Capital Employed
-
0.0469208
2
0.168604
7 0.17207
Return on Equity
-
0.0740740
7 0.233871
0.25650
6
Solvency Ratios 2014 2015 2016
Debt-Equity Ratio
0.7222222
2
0.572580
6
0.68029
7
Interest coverage Ratio
0.1239669
4
0.013698
6
0.00925
9
Efficiency Ratios 2014 2015 2016
Inventory turnover ratio
0.0074390
9
0.007439
1
0.00743
9
Debtor turnover ratio
6.8493150
7
7.692307
7
7.85714
3
Creditor turnover ratio
26.666666
7 20 40
Investment Ratios 2014 2015 2016
Dividend Yield Ratio 0.036 0.13 0.09697