ABC Golf Mart Limited IPO Report

This report analyzes the financial health of ABC Golf Mart Limited, a potential client seeking audit assurance for its Initial Public Offering (IPO). The analysis utilizes ratio analysis (liquidity, asset turnover, financial leverage, profitability), horizontal/trend analysis, and cash flow statement analysis. Key findings reveal concerning liquidity ratios (current and quick ratios below ideal levels), high debt-to-equity ratio, and a low fixed charge coverage ratio. Trend analysis shows increasing current assets and liabilities, but the increase in liabilities is a concern. The cash flow statement highlights significant cash outflow from financing activities. A comparison of the forecasted statements with the analysis reveals significant discrepancies, suggesting over-optimism. The report concludes that while ABC Golf Mart has expansion potential, its current financial position and overly optimistic forecasts pose significant risks to the IPO. Recommendations include adopting a green shoe option for a phased share release and revising the forecasted statements to be more realistic.

Background:
Alan Clarke is the owner of the ABC Golf Mart Limited, who is the potential client of M&M,
requiring their assistance to provide audit assurance as part of ABC’S IPO.
ABC have 15 retail outlets throughout the lower North Island and have gone into the expansion
of business via franchising license and have already sold license for 5new stores and have
received applications for 10 more.
The main objective for ABC is to expand into New Zealand’s largest retail market i.e. Auckland,
by opening ABC outlets in same and through the process of licensing.
Therefore, in order to finance the upcoming projects and new ventures, the company’s banks
has already informed them of their limits nearing the 80% and have to rule out a new way to
finance, and thus have settles to take ABC public.
Having been into the market for around 15 years, ABC finally deems fit to opt for initial public
offering through which they would present the stock of the company to the public for the very
first time, though the decision is pressed forward on the fact that the company is nearing the limit
of 80% debt to total assets, it is a considerable move to ask for public financing.
It is also important, to understand the implications and repercussions, going public would attract
towards the company, involving public would stroll great deal of compliances, disclosures and
strict eye of FMA and other securities regulation agencies, as the interest of the public would be
at the stake. Therefore, any certification or statement issued in professional manner should be
cautiously put forward, after taking all the scenarios in consideration as huge aftermaths would
be meet, if the same is neglected.
As, IPO aims as disbursing the stock of the company to the general public, it becomes very
imperative to have an understanding as to what expectations and vision does the investors holds,
as ultimately, it’s their money on the line.
Company should be well aware of the fact that investors going for IPO’s have well versed
knowledge, on a exception of few, as it’s companies first time, but not theirs, therefore, every
requirement, formality, presentation of the financial facts should be precise, clear cut and should
be an end to investor’s requirement.
The financial information obtained from ABC Golf Mart Limited have been thoroughly spent
and is made understood by adopting the following means of analysis tools.

a. Ratio Analysis, comprising of liquidity ratios, asset turnover ratio, financial leverage ratio and
profitability ratio, so that all plausible elements ranging from short –term liquidity to future
solvency is studied properly and proper conclusions can be drawn from the same.
b. Horizontal/ Trend Analysis, included percentage increase or decrease in the elements of the
income statement or the balance sheet over the period od time to have an idea as to what trend is
on display by the company, so that accurate forecast can be made and adjudged.
c. Cash Flow Statements, have been drawn out of the provided information, to estimate the
availability of cash on accrual basis and profitability on accrual grounds, as it showcases the
financial position of the company in a better manner.
Liquidity ratio, displays the ability of the company to meet it’s short term financial obligations.
Under liquidity ratio, two basic and important ratios have been calculated, first being,
The current ratio that is basically current assets to current liabilities, and from the information, it
is made clear that ABC’s current ratio for both the years doesn’t give good signs, it is way below
that than the ideal ratio of 2:1, moreover, it simply indicates to the fact that company’s liabilities
are greater than the assets, and will not be able to pay off it’s debt when the time is due.
Second is, Quick Ratio, which indicates availability of quick cash in the company to meet
immediate requirements, the calculations done infer that ABC doesn’t posses a good quick ratio,
and is made to draw that it doesn't have enough readily available cash, the ideal ratio stands at
1:1, and company in both the years , fail to meet its mark,
And both these ratios, thus raise concerns, as these ratios are critical for Initial Public Offer’s
audit assurance.
Asset turnover ratio explains the value of company’s sales or revenue generated relative to the
value of its assets, even though ABC company have a moderate asset base, the ratio is low for an
ideal liking, it depicts that the sales earned cannot cover the value of fixed assets, moreover
company's bank has already raised flags on closing on the limits of the Debt to total assets,
which indicates that company doesn’t have enough asset to pay off its debt, and hence, is not a
good sign.

Financial leverage ratio highlights the long term solvency of the company, in order to prosper
and grow, it is inevitable for the company to remain solvent in its succeeding years, the ratios
calculated under financial leverage are,
Debt to equity ratio, which basically explains how much equity does the company have for each
component of debt and in any scenario, should not exceed 2:1, but from the calculations drawn
above, it is clearly drawn that in both the previous years, ABC have high Debt to equity ratio,
which brings a big question mark on the solvency of the firm, and also indicates that, there
would be close to non banks exceeding any sort of loan or guarantee to the bank because of the
high ratio.
Fixed charge coverage ratio should be on a higher side in order to emit positive signs for future
growth, but this is not the case for ABC, as for both the years they have a fairly low fixed charge
coverage ratio.
Profitability ratio indicates, now much the company generates from the sale of goods or services
and the ratio covered are Net profit ratio and return on equity.
Net profit ratio reveals the reaming profit after all cost of production, administration, and
financing have been deducted from sales, and income tax is recognized. ABC shows a decrease
in the net profit from 2014, which would be unsettling for the investors, also the net profit rate is
not that high to coerce the buyers into investing.
Return on equity is a measure of profitability that calculates how many dollars of profit a
company generates with each dollar of shareholder’s equity, calculating return on equity for
ABC, gives an inside as to what the investor can expect as their rate of return in future from the
company, though the return rate is not ideally high, it does showcase potential for future growth
and high investment, even though it has reduced slightly from 2014.
A trend analysis is a method of analysis that allows the traders to predict what will happen with a
stock in the future, on the basis of information gathered from historical data and try and manage
to identify some sort of pattern.
The objective behind doing a trend analysis for ABC limit, is to see exactly in which direction
the stock and other elements of the financial statements are moving, to identify any sort of
pattern and most importantly to validate the forecasted statement provided by the ABC Golf
Mart Limited.

From the above analysis, it cab be observed that the revenue and cost of sale have increased
minutely over the period which has a direct implication on the gross profit, which shows the
positive implications as well.
The expenses for ABC is also on an increase which shows that the company is constantly paying
off charges, debt and other expenses and will need a steady flow of liquid cash for its daily
operations, but the provisions provided for and bonus received showcase eminent decline which
contributed to the fact that company is unable to hold cash for operations other than paying off.
Trend analysis of the balance sheet of ABC , highlights the facts that the current assets as well as
the current liabilities are on an increasing trend, but the increase in current assets is not that
greater from the current liabilities, which is area of concern, as it makes the users believe, that
company can stand at a point where there current liabilities could not be paid off with the current
assets and this can be off putting for an potential investors.
Decline in cash also indicates critical position of the company and in sheer inability to have a
balance and steady flow of cash in its operations, increase in inventory also indicates the
availability of ideal stocks remaining in the company which is not considered as a good sign.
Cash flow statement is a financial statement that shows how changes in balance sheet accounts
and income affect cash and cash equivalents, and breaks the analysis down to operating,
investing and financing activities.
Operating activities measures the cash inflows and outflows caused by core business operations,
the operations reflects how much cash is generated from a company’s products or services on
accrual basis, from the above it can easily be inferred, that there is significant amount of cash
inflow from the operating activities and is an indicator to the fact that company is deficient with
its operating business.

Investing activities comprises of changes in equipment, assets or investments, ABC shows
purchase of fixed asset, which is good as it depicts that the company utilizes the available cash
that is generated in the business and doesn’t leave it ideal.
Financing activities comprises of changes in debt, loans or dividends, and ABC displays a
significant amount of cash flowing out of the company through financing activities, which is an
indication that company had liabilities that needs immediate and regular payments.
The forecasted statement provided by ABC when compared to the information drawn from trend
analysis, shows a large and significant amount of disparity, even though there are around 15 new
licensed stores and one main store in the pipeline for the ABC, the forecasted statement seems to
be very exaggerated.
The revenue is forecasted at an increase of 54% as compared to 3.77% from the previous year to
the current fiscal year, the gross profit follows the same route and is at 101% increase, and net
forecasted income is accumulated at an increase of 97.26% as compared to (8.16)% from the last
fiscal year which becomes difficult to comprehend.
The only close forecast has been made with the expenses incurred which should realms of
reality, but keeping expenses at such minimum , raises suspicions of high level window dressing.
On the other hand, with the objective of expansion in mind and several stores in the pipeline, the
profits realistically might increase a certain amount, but in no scenario, they can reach to a level
as provided in the forecasted statements. It is not wrong to conclude that ABC is highly
optimistic of its future performance and may deliver the same, but from an investor’s point of
view, it might be a too much of a risk to take.
From the careful analysis and dissection of the financial statements and forecasted information ,
following conclusions can be drawn.
Company displays a lower current ration from past two years which indicates the probability of
not paying its debt when the time is due, even though the ration doesn’t direct or indicates
insolvency, but raises serious questions as to whether, the company would be capable to provide
a return or encompass the IPO, if received, and this slight doubt would not settle well with the
investors.
Debt to Equity ratio further adds on the concerns regarding the financial position of the
company, the higher rate is alarming and will surely wouldn’t settle well with any financial

banks, and thus taking loans for the company can seem endangered, which won’t go unnoticed
by the potential investors, who might losses their interest in the same.
Company’s current and future profiling do promise profits and increase in its rate, but is
considerable on lower side and is not that attractive, which can convince the investor that easily,
the company does seem to be on path to significant growth, but the current position of the
statements might prove skeptic for the investors.
Financial leverage drawn and information understood from the cash flow , is enough to raise
notion of low liquidity in the company, which directly impacts its solvency proficiency in the
future years, there is no denying the facts drawn that company can foster a situation where there
is no readily available can for daily operations.
The forecasted statements presented by the company, seems highly optimistic and the grounds
for such boost seems to wavered and whimsical, as explained in the previous slides.
Therefore, it can be summarized that ABC Global Mart Limited, have prospect in future for
expansion with new upcoming stores, the financial position doesn’t correlate with same
ideologies, and can defer the sentiments of investors, moreover the forecasted statements seems
to be highly inflated and thus providing audit assurance can be to big of a risk to counter.
Green shoe option is a special provision in an IPO prospectus, which allows underwriters to sell
investors more shares than originally planned by the issuer, the option should be adopted by
ABC, as this would allow them to initial release limited amount of shares to play safe and then
after obtaining a positive reaction can expand the same.
It is suggested for ABC to have a revised forecasted statement that would be more realistic with
an positive approach that can promise significant profits in the future and be more promising and
honest in front of the investors.
It is very important for any company to no lose faith by its head banks and bankers, therefore,
gaining banks confidence should be first and foremost, and only after gaining their support, the
company can confidently put its foot forward for IPO, and this would also make company’s
profile more investor friendly and would ultimately attract investors.