This report evaluates the financial performance of Kathmandu Holding Limited using ratio analysis technique. Liquidity, profitability, operating efficiency and solvency positions are analyzed. Findings suggest that the company's liquidity and profitability positions have weakened in the last five years.
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RunningeadathmanduoldingimitedH: KHL RATIO ANALYSIS
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athmanduoldingimitedKHL1 Introduction: Kathmandu holding Limited is a company that is listed on New Zealand Stock Exchange however it operates its business from three major segments: New Zealand, Australia and United Kingdoms. The company was established in the year 1987 and is located in Christchurch, New Zealand. The business in which Kathmandu group is engaged is of designing, marketing as well as retailing the wide range of clothing and equipment that are required for the tour and travel purpose. The product range of the company covers variety of apparels such as waterproof jackets, fleece jackets, thermals, merino thermals and jackets. It also manufactures shoes and shocks for the travelling purposes. The travelling and touring equipment includes bag-backs, sleeping bags, tents and various other travelling accessories that are used for camping and trekking. In all Kathmandu Group has around, 160 stores out of which 110 stores are located in Australia, over 46 stores are located in New Zealand and around 4 stores are operated in United Kingdom. The subsidiaries of the company are Milford Group Holdings Limited, Kathmandu Limited, Kathmandu Pty Limited and Kathmandu (U.K.) Limited. The purpose of this report is to carry out the evaluation of financial performance of Kathmandu Holding Limited in last 5 years. To evaluate the company’s performance, the use of Ratio analysis technique is made which is the key technique of financial management. As a part of ratio analysis, various ratios in regards to various important components of the financial statements of the company has been taken into account and their impact on the overall financial position and performance of the business of Kathmandu Ltd. has been analysed. Application of Ratio Analysis
athmanduoldingimitedKHL2 In order to identify the overall financial health of the business, ratio analysis has been carried in four major aspects of financial position i.e. the liquidity position, profitability position, operating efficiency position and solvency position of the business. The use of different sorts of ratio will allow the managers of the company to pay more attention to the areas where the financial ratios are indicating irregularity or any sort of risk on the company (Gibson, 2011). All the financial results of preceding 5 financial years have been represented through graphs to allow the managers or users of this information, to understand each result in the convenient and clear manner. Along with the analysis of results of each individual year, a comparative study has been made to understand the changes in the financial performance of the business so that any required changes or recommendations for the subsequent periods could be made for the purpose of achieving better results (Godwin and Alderman, 2012). Liquidity Position: First of all, liquidity position of the business has been analysed using the two key liquidity ratios i.e. the current ratio and the liquid ratio. Generally, in regards of current ratio, a ratio of 2:1 is considered as ideal. In the present case of Kathmandu Holdings, it has been identified that the current ratio of the company in 2013, 2014 and 2015 was satisfactory as it has already achieved the ideal standards in these standards (Kathmandu, 2014). Therefore, it can be said that the company had sufficient amount of current assets to meet the short term liabilities that were supposed to be due in next 12 months from the date on which such liabilities were entered into. The results of current ratio of shows that the company had sound liquidity position till the end of 2015. After, 2015, both the current and quick ratios of the company started declining and the declining liquidity ratios of the company clearly indicates that the liquidity position of the company has worsened in last two reporting years. The declining liquidity position of the business is faced when the company is not able to efficiently manage and utilise its current assets to pay off its current liabilities. Thus to meet
athmanduoldingimitedKHL3 the current liabilities, Kathmandu Ltd would have required the disposal of its fixed assets that were not held in the business for the sale purpose. Looking at graph below, it can be observed that the liquidity position of the company was strongest among all the five years and it was weakest in year 2017. 20172016201520142013 Current ratio1.471.792.902.642.42 Quick ratio0.150.200.420.250.36 20172016201520142013 0.00 0.50 1.00 1.50 2.00 2.50 3.00 Current and quick ratio Current ratio uick ratioQ Profitability Position After analysing the liquidity position of the company, the profitability position of the business has been analysed using various ratios such as net profit margin, gross profit margin, return on assets, return on equity, earning per share and asset turnover ratio. 20172016201520142013
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athmanduoldingimitedKHL4 Return on Equity11.63%10.84%6.52%13.95%15.02% Return on Assets12.98%12.31%7.71%15.74%16.85% Net profit Ratio12.80%11.96%8.10%16.35%16.51% Gross profit Ratio62.02%62.59%61.53%63.15%63.03% Asset Turnover1.381.411.381.361.33 Although, the liquidity position of the business in 2015 was strongest, but the profitability position of the business in 2015 is lowest among all the 5 years under analysis. The return on equity ratio of the company was highest in 2013 and it was lowest in 2015 (Kathmandu, 2015). Since 2013 to 2015, the ROE has declined significantly and this shows that company was not able to utilise its shareholders’ investment funds in generating the profits for the owners. However, after 2015, an increasing trend has been followed by the company in regards to ROE and this shows that the company has efficiently utilised the funds that are invested by the shareholders and by utilising such funds, the company has become successful in earning the profits of the company. However, the company could not earn as much returns for its shareholders as it had earned in 2013. The ratio of return on assets of the company is also showing that the level of profits earned by business is declined since 2013 and it had become lowest in 2015 (Kimmel, Weygandt & Kieso, 2010). This shows that the company is not efficiently managing its total assets to earn returns for its owners. The net profit ratio of the company shows the quantum of earnings remained after meeting the cost of operating the business. Net profit ratio of the company is declining since 2013 and this shows that company’s profitability position has been weakening since last 5 years. Though all the profitability ratios of Kathmandu are showing declining trend over the last 5 years, but in 2016 and 2015 all the ratios are increasing as compared to those ratios of 2015 and this
athmanduoldingimitedKHL5 increase in the trend shows that the company is striving to achieve the desirable ratios by effectively managing its total assets and funds of the shareholders in such a way that revenues from sales have increased. 20172016201520142013 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% ROE & ROA Return onquityE Return on Assets 20172016201520142013 0% 10% 20% 30% 40% 50% 60% 70% Net Profit and Gross Profit et profit RatioN ross profit RatioG Operating efficiency: 20172016201520142013 inventory turnover ratio4.994.463.613.794.80
athmanduoldingimitedKHL6 Receivables turnover Ratio78.7297.03108.88105.52107.09 Payables turnover Ratio8.268.9510.0411.1412.32 20172016201520142013 0.00 20.00 40.00 60.00 80.00 100.00 120.00 Inventory and Receivable Turnover inventory turnover ratio Receivables turnover Ratio ayables turnover RatioP The operating efficiency ratios are used to determine the company’s ability to manage efficiently its current assets and current liabilities in such a way that a smooth operating and cash conversion cycle of the business can be maintained. In the present case, the inventory turnover ratio of the firm tells how often the company converts its inventory into the sales of the business (Baker, Jabbouri & Dyaz, 2017).Therefore, a higher inventory turnover ratio is generally desirable. In the present case, the inventory turnover of the company has improved since 2014 and this shows that company is efficient enough to convert its inventory into the sales whether cash or credit. The receivable turnover of the company of the company has been declining since 2013 and this shows that though the company is able to generate high revenues from the sale in the years after 2013 by frequently converting its inventory into
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athmanduoldingimitedKHL7 sales but is it not able to collect sufficient cash from the sales made in the particular year because of its lose trade credit policies. The declining receivable turnover ratio of the company is a clear indicator of company’s inefficiency towards collecting the amount receivables for the credit sales made in the year because company is not making required efforts to convert its credit sales into cash. Due to this, the operating cash cycle of the company is not maintained effectively and efficiently and leading to weak working capital management of the company (Kathmandu, 2016). The payable turnover ratio of the company gauges the speed with which a firm pays offs the amount that is due to its accounts payables i.e. the suppliers and creditors of the business. In the present case, the accounts payable ratio is continuously declining since 2013 till 2017 and this shows that the company is not paying off its trade creditors on timely basis, all the amount due to them for the credit purchases made from them (Kathmandu, 2017). The declining accounts payable ratio is an indication of weakening financial position of the business. One of the major reason due to which the company is unable to meet its trade credit obligations is the unavailability of sufficient amount of funds with the company as a result of excessive blockage of funds in the trade credits allowed to the customers of the business. Solvency position (Gearing Ratios) 20172016201520142013 Leverage Ratio25.50%25.20%27.21%26.00%21.80% Debt To Equity34.23%33.68%37.39%35.13%27.88% Debt To Total Asset Ratio25.50%25.20%27.21%26.00%21.80% Interest Coverage Ratio28.0814.3112.0913.9914.38 Cash Flow From Operations To Total Liabilities60%66%25%29%56%
athmanduoldingimitedKHL8 20172016201520142013 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 Debt toquityE debt to total asset ratio The solvency position of the business is achieved when the firm is able to repay all its debt obligations as and when they are required to be settled down both in terms of principle and interest due on such debts. The solvency position of the company primarily depends on the capital structure of the company. Capital structure comprises of two major components: Debt and Equity. The portion of debt represents the quantum of funds that are raised from the external sources i.e. the creditors of the company. However, the portion of equity reflects the quantum of funds that are internally generated i.e. from the funds of the investors of the company (Accounting tools. 2018). A firm which carries higher proportion of debt faces more financial risk i.e. the risk of insolvency than the firm that generates maximum of its finances from the internal sources such as equity financing, retained earnings etc. In the present case, the debt equity ratio of each year is satisfactory as the company has not financed its assets from the significant utilisation of the external sources and hence it does not have to face financial risk. The solvency ratios of the company show that it is under low leverage position and hence there are low chances of insolvency of the company. The company’s cash flow from operations to total debt ratio in 2017 and 2016 has significantly improved because company is able to generate higher revenue from the sales of its products. This shows the company will be easily pay off the maximum portion of its debt obligations using the funds
athmanduoldingimitedKHL9 that have been generated from the operating activities of the company. The results of this ratio show that the firm is able to generate more of the returns in 2017 and 2016 as compared to the previously reported three financial years. The interest coverage ratio of the company shows the portion of earnings that will be required to pay off the borrowing expenses i.e. the interest cost of the debt funds. In 2017, the interest expense ratio is increased due to increased proportion of debt in the entire capital structure of the company and this casts higher risk of insolvency on the company. Market Valuation 20172016201520142013 Price Earnings Ratio12.1310.4515.0514.4910.84 Earnings Per share $ 0.19$0.17 $ 0.10$0.21$0.22 Earnings Yield Ratio10.9%9.6%6.6%6.9%9.2% Dividend Yield Ratio5.24%3.96%6.64%3.41%3.77% 20172016201520142013 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 Market Price Per Share
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athmanduoldingimitedKHL10 20172016201520142013 0.00 0.05 0.10 0.15 0.20 0.25 Earnings Per Share Due to decrease in the profitability of the company the market worth of the company has declined and this has resulted in decline in the market price of the share. The lowest level of profitability in 2015, the company’s market worth in 2015 was also lowest. The price earnings ratio increases with the increase in the market worth of the company and higher PE ratio indicates the chances of positive future growth of the business and hence higher PE ratio is generally preferred by the investors of the company. In the present case of Kathmandu Ltd. the price earnings ratio of the company is quite fluctuating and hence it is difficult to predict the future economic performance of the business (Saleem & Rehman, 2011). .
athmanduoldingimitedKHL11 Conclusion and Recommendations: From the above analysis, it can be said that ratio analysis helps significantly in measuring the overall financial performance of the business from different possible parameters. Ratio analysis covers almost every important aspect of the business on which the financial performance of business depends and helps the company to identify the areas where significant deficiencies are found. In the present case of Kathmandu Ltd, the company’s liquidity position has worsened with each passing years subsequent to 2015. The company must make efforts to manage its current assets in such a way that they are sufficiently available to meet the short term debt obligations of the business as and when they become due so as to promote its working capital management. If adequate amount of current account balance is not available with the business, the company will have to face severe cash crises in the subsequent years. So, in order to improve the liquidity position of the business, Kathmandu Ltd. will have to ensure that its trade credit policy is stringent enough to collect cash from all the trade debtors of the company so that timely payment of trade creditors i.e. the supplier of the business can be made and also to avoid incurrence of high interest costs on the credit purchases which amounts to considerable outflow of cash from the business. Further, the profitability position of the company can be improved further to reach the desired profitability level (Lee, Lee & Lee, 2009). In order to improve the overall profitability of the business, the company must focus on the ways that could increase its revenue from sales and also to those ways that could lead to ultimate cost cutting of the business. The company must make use of its funds of the shareholders in the most efficient way that allows it to generate more sales from the business. Further, the company must reduce further the level of its debt obligations so as to cut down the interest cost which negatively affects the earnings capacity of the business. The major reason of decline in the market worth of the company is its declining earnings per share which is resulted from the low profitability position of the
athmanduoldingimitedKHL12 business. Hence, it is highly recommended to the company to maintain its profitability position in the market at such level that it can easily pay desirable returns to its investors in order to keep them intact with the company. High return potential of the company will attract more potential investors of the company and this will ultimately provide the competitive edge to the business of Kathmandu Holdings.
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athmanduoldingimitedKHL13 Refernces: Accounting explained. 2013.Financial Ratio Analysis. Retrieved from https://accountingexplained.com/financial/ratios/Accessed on 04.09.2018 Accounting tools. 2018. Ratio Analysis. Retrieved from https://www.accountingtools.com/articles/ratio-analysis.htmlAccessed on 04.09.2018 Baker,H.K.,Jabbouri,I.andDyaz,C.(2017).Corporatefinancepracticesin Morocco.Managerial Finance,43(8), 865-880. Bragg, S. M. (2012).Business ratios and formulas: a comprehensive guide(Vol. 577). New Jersy: John Wiley and Sons. Gibson, C. H. (2011).Financial reporting and analysis. USA: South-Western Cengage Learning. Godwin, N., and Alderman, C. (2012).Financial ACCT2. USA: Cengage Learning. Higgins, R. C. (2012).Analysis for financial management. New York: McGraw-Hill/Irwin. Kathmandu, 2014. Annual Report. http://www.annualreports.com/HostedData/AnnualReportArchive/K/ASX_KMD_2014.pdf Kathmandu, 2016. Annual Report. https://www.kathmanduholdings.com/wp-content/uploads/2012/08/Kathmandu-AR-2016- online.pdfAccessed on 04.09.2018
athmanduoldingimitedKHL14 Kimmel, P. D., Weygandt, J. J., and Kieso, D. E. (2010).Financial accounting: tools for business decision making. New Jersy: John Wiley and Sons. Lee, A. C., Lee, J. C., and Lee, C. F. (2009).Financial analysis, planning and forecasting: Theory and application. Singapore: World Scientific Publishing Co Inc. Saleem,Q.andRehman,R.U.(2011).Impactsofliquidityratioson profitability.InterdisciplinaryJournal of Research in Business,1(7), pp.95-98.
athmanduoldingimitedKHL15 Appendix: LiquidityFormulas20172016201520142013 Current ratiocurrent assets99027107358132348 1147 48 9393 1 current liabilities672445982545700 4345 8 3882 0 1.471.792.902.642.42 Quick ratioQuick assets98211192219078 1098 1 1390 0 current liabilities672445982545700 4345 8 3882 0 0.150.200.420.250.36 EfficiencyFormulas20172016201520142013 inventory turnover ratiocost of goods sold445348425593409372 3929 18 3839 83 inventory8920695436113270 1037 67 8003 1 4.994.463.613.794.80 Receivables turnover Rationet sales445348425593409372 3929 18 3839 83 average accounts receivables5657.543863760 3723 .5 3585 .5 78.7297.03108.88 105. 52 107. 09 Payables turnover RatioSales445348425593409372 3929 18 3839 83 average accounts payables53909.547566 40768. 5 3526 0.5 3116 8 8.268.9510.04 11.1 4 12.3 2 ProfitabilityFormulas20172016201520142013 Return on Equity Net Income after income and taxes380393352120419 4215 2 4417 4 Shareholder's Equity32710030913331331430212941
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