Comprehensive Financial Statement Analysis: Afterpay Touch Group

This report presents a financial analysis of Afterpay Touch Group Limited for the years 2016, 2017, and 2018. It employs ratio analysis to evaluate the company's profitability, efficiency, liquidity, and solvency. The analysis reveals that Afterpay's net profit ratio was negative during the period, though it improved from -257% to -8% in 2018. Gross profit margin declined due to increasing cost of sales. ROE was also negative but showed improvement. DuPont analysis indicates an increasing asset turnover ratio. Additional efficiency ratios, such as debtor and creditor turnover, improved, impacting the cash conversion cycle. Long-term solvency is assessed through debt-to-equity and other ratios, indicating the company's ability to meet long-term liabilities. Overall, the report provides a comprehensive view of Afterpay's financial health based on its historical financial statements.

RUNNING HEAD: FINANCIAL STATEMENT ANALYSIS
Financial statement analysis

Financial statement analysis 2
Contents
Introduction.................................................................................................................................................3
Ratio analysis..............................................................................................................................................4
Long term solvency.....................................................................................................................................9
Liquidity position......................................................................................................................................11
Quality of financial statements..................................................................................................................13
Conclusion and Recommendation.............................................................................................................13
References.................................................................................................................................................14

Financial statement analysis 3
Introduction
Financial statement analysis deals with the critical examination of company’s final accounts
prepared at the end of each year. It is a process of properly reviewing the statements in order to
make correct and suitable economic decisions. The financial statements of the company include
balance sheet. Income and cash flow statement and statement of changes in equity. The analysis
reflects the overall financial health of the company covering all the quantitative and qualitative
aspects. The outcomes of the examination are very much useful for individuals like investors,
shareholders, managers and other interested users (Fridson and Alvarez, 2011). There are many
techniques and methods used for analysing financial statements of a particular company. It
includes horizontal, vertical analysis and ratio analysis. The methods allow the companies to
identify the trend in their performance by properly interpreting the results. The most common
method used is ratio analysis as it deals with the measurement of firm’s profitability, efficiency,
liquidity and solvency. It provides all the data in a nutshell and presents reliable information
(Rao, 2011).
The report is all about financial analysis of Afterpay Touch Group Limited conducted for the
past three years that are 2016, 2017 and 2018. It explains the interpretation of several ratios
calculated on the basis of company’s data presented in its annual report. Afterpay is an Australia
based payment company that offers various services which facilitates trading between retail
merchants and their customers. It provides a customer centric, omni channel retail service that
allows the merchants to make their customers able for buying products on ‘buy now, receive
now, pay later’ basis. Apart from that, the company also deals in offering Touch System which
facilitates in-store purchases for customers that can be done through their mobile phones,

Financial statement analysis 4
websites and several other methods. It also provides ATG System platform to bring more
convenience to its clients and consumers. Initially the company was known as Afterpay Holdings
Limited but the name got changed in June 2017. It is listed on Australia Securities Exchange and
is traded with the ticker APT.AX. Currently, it has market capitalization of $3.403 billion with
the share price at $15.00 per share (Bloomberg. 2018).
Ratio analysis
It is one of the techniques used for evaluating and examining the financial statements of the
company. It analyse the data presented in the statements from all the aspects such as profitability,
solvency and others. The ratios summarize the overall performance and position of the enterprise
and compare the same with past trends and movements. It includes the calculation of several
categories of ratios named as liquidity, profitability, solvency and turnover ratio (Bragg, 2012).
Each category reflects the financial health of the company in its own way by interpreting the
historical data of the entity. Generally, ratio analysis is the most used technique by the analyst
and investors as it provide all the necessary information at one place and in a nutshell.
Shareholders and management of the company look at the data reflected by company’s key ratios
and compare the same with industry averages or from past year’s performance (Bragg, 2012).
Despite having many advantages, the technique also has some limitations that it only takes into
account the quantitative data and only relies on the past years’ information. The historical data
available may prove to be wrong and unreliable which can mislead the analysis and as a result
investors can make wrong and inappropriate interpretations. Overall, ratio analysis helps in
taking important decisions regarding the concerned entity and allows the investors and other
interested parties to make correct decisions regarding their investments (Gibson, 2011).

Financial statement analysis 5
Year End (3years)
Ratios and Other Analysis Measures 2016 2017 2018
ROE and DuPont Ratios
ROE (NI/OEavg) -19% -10% -5%
Profitability(NI/Sales) -257% -42% -8%
Efficiency(Turnover =Sales/Assetsavg)
0.0
6
0.
16
0.3
6
Leverage(Leverage=Assetsavg /OEavg) 1.12 1.41 1.84
Additional Profitability Ratios
Gross Profit Margin%[(netRev-COGS) /netRevenue] 81.32% 77.02% 75.23%
Selling General &Administration%(SG&A
expense/netRevenue) 177.53% 110.59% 41.82%
Important Expense Percentage*(Important
Expense/netRevenue) (Income tax expense) -9.96% -20.97% 1.22%
Additional Efficiency Ratios
AR Turnover(Sales/ARavg)
0.3
3
0.
43
0.6
8
Days Receivables Outstanding(DRO)
[ARavg/(Sales/365)]
1,10
1
8
46
54
1
Inventory Turnover(COGS /Inventoryavg) 0 0 0
Days Inventory (DI) [Inventoryavg/(COGS/365)] 0 0 0
AP Turnover(Purchases/APavg)
0.1
2
0.
45
0.8
6
Days Payables Outstanding(DPO)[365 /(Purchases/Accts
Payableavg)]
3,00
5
8
15
42
5
CASH CONVERSION CYCLE (DI-DPO +DRO) - 1,904 30
11
5
PPE Turnover(Sales/NetPPEavg)
49.0
6
10.
21
26.9
0
Additional Leverage Ratios
Debt-to-Equity(total Liabilities /total OE)
0.0
2
0.
50
1.1
4
Times Interest Earned(Earnings before Interest Expense
and Taxes /Interest Exp)
4.9
6
15.
98 - 2.50
Return on Financial Leverage(ROE-ROA) -2.0% -2.8% -2.4%

Financial statement analysis 6
LT Debt-to-Assets(LT Debt, including current
portion/total Assets) 0% 19.5% 41.2%
Cash Liquidity and Cash Sources &Uses
Working Capital(CA-CL) 26592.856 117195 258993
Current Ratio(CA/CL)
29.6
4
4.
71
6.5
6
Quick Ratio [(Cash + ST Securities +AR)/CL)]
29.6
4
4.
71
6.5
6
OCFCL (Operating CF / CL) - 8.95 - 2.49 - 2.26
OCFCX (Operating CF/Capital Expenditures)
254.3
0
1,011.
12
97.3
5
Free Cash Flow (Cash from Ops –NetCap. Expend.) -8275.095 -78789 -104250
(Source: Yahoo Finance. 2018).
The above table shows the overall financial statement analysis of Afterpay Group for the past
three years. All the relevant ratios are been calculated in the above table which make it easy for
assessing company’s performance over the years.
Talking about profitability ratios, they include return on equity, gross profit margin, Selling,
General and Administration percentage of revenue and income tax expense percentage. These
ratios help in knowing about the overall profit situation of the company and its ability in
generating more returns to its shareholders (Godwin and Alderman, 2012). They are a class of
financial metrics that assess the capability of enterprise in respect of generating earnings to the
business. Generally, investor seeks to invest in those corporations which have high profitability
ratios as compare to its competitor and industry average. High margins give an indication that the
company have improved its performance and position as compare to previous years. The mostly
looked ratios are ROA, ROE and net profit margin (Higgins, 2012).

Financial statement analysis 7
In case of Afterpay Touch, it can be observed that the net profit ratio of company was always in
negative in the past three years because of the losses made by the company in the past. However,
the percentage of ratio has increased from -257% to -8% in 2018 as compare to 2016. This
increase shows that the loss has reduced over the years. In 2016, it was -$3552.2 which reduced
to -$8976. Along with this, the revenue of Afterpay has also shown an upsurge from $22906
million to $113899 million. Despite having increased net margin, Afterpay’s gross profit margin
reduces constantly over the three years. In 2016, it was 81.32% which further declined to 77.02%
in 2017 and then falls to 75.23% in the recent year. This was because of the continuously
increasing cost of sales of the entity.
Apart from these two ratios, ROE of the company was also negative for the last three years.
Although the amount of shareholders’ equity increased every year but the losses made by
Afterpay makes its ROE negative. This shows that company was not able to pay high and
positive returns to its investors. However when observed, it can be interpreted that the firm’s
return on equity was -19% in 2016 which anyway improved to -5% in 2018. This indicates that
company is focused on improving its profitability position and is paying more emphasis on
providing reasonable returns to its shareholders. In the above table, the ROE has been shown
with the DuPont analysis under which, the ratio is divided into its components. The elements are
net income, revenue, average assets and average owner’s equity. The efficiency ratio named as
asset turnover is calculated under DuPont analysis in which the amount of sales made by the
company is measured against its average total assets (Jenter and Lewellen, 2015). The ratio
represents an increasing trend in past three years as it rose from 0.06 to 0.36 in 2018. This was
due to the overall upsurge in Afterpay’s net sales and average assets. In addition, a leverage ratio
has also been calculated that compares the assets of the company with its owner’s equity. The

Financial statement analysis 8
result shows that the ratio increased from 1.12 to 1.84 in 2018 due to the hike in its average
shareholder’s equity as well as total assets.
Additional efficiency ratios are calculated which basically determines the capability of the
company in utilizing its assets efficiently and effectively for the purpose of generating revenue.
In other words, it measures the amount of revenue that is generated from the assets such as
receivables, inventory, fixed assets and others. The average receivable turnover shows how
quickly a company can collect cash from its debtor and contributes to its revenue portion (Vogel,
2014). In case of Afterpay, the DTR of the company increased from 0.33 times to 0.68 times in
the past three years. Although the amount of trade debtors has increased constantly over the
years but the proportionate change in company’s revenue was more than the change in AR. This
ultimately boosted up the ratio in recent year. The inventory turnover ratio of the company is
zero has it does not have any sort of stock in the past three years. The creditor turnover ratio
shows the rate at which company make payments to its suppliers and creditors. Higher the ratio
more favourable it is for the entity. It is calculated by dividing cost of goods sold with average
trade creditors. A high ratio indicates that company make timely payments to its lenders and
creditors (Krantz and Johnson, 2014). From the above table, it can be interpreted that the CTR of
Afterpay has increased from 0.12 times to 0.86 times. The ratio has shown a hike because the
increase in average creditors was more than the upsurge in company’s cost of sales.
Along with the increase in Afterpay’s receivable and payable turnover ratio, the debtor days and
creditor days reduces respectively. This indicates that the company’s efficiency has increased as
a whole. Its day’s receivables outstanding were 1101 days in 2016 which significantly reduced to
541days. This shows that the company is efficient enough to collect its debtors on time. Further,
its day’s payable outstanding also reduced from 3005 days to 425 days. This could prove to be

Financial statement analysis 9
expensive for the company as they have less time to pay to their borrowers. The overall net
impact on company’s cash conversion cycle was that it in 2016 it was -1904 which turns positive
in 2017 at 30 days. It further increased to 115 days. This was due to debtor days were more than
creditor days.
Talking about the growth perspective, the revenue has grown at low rate as compare to the rate at
which it increased in 2016. The growth in net income was at 89.39 in 2016 which further
reduced to -0.07 in 2018.
Long term solvency
It is another category of ratio which measures the capital structure of the firm by critically
evaluating and examining its debt and equity component. It basically shows the competency of
the form in meeting its long term liabilities and the debt by using its equity and assets. A high
solvency ratios are considered to be more favourable as they indicates that company has
sufficient cash flows to meet its short and long term liabilities (Kimmel, Weygandt and Kieso,
2010). Following ratios are been calculated in the above table:
 Debt to Equity: It is one of the capital structure ratios that compare the debt and equity
element of the firm against each other. It shows the portion of company’s assets financed
through debt and those funded by shareholder’s equity. A high D/E ratio indicates that
the firm is aggressive in financing its growth by debt. On the other hand, creditors prefer
low debt equity ratio (Lee, Lee and Lee, 2009).
In case of Afterpay, its D/E ratio increases from 2.4% to 113.7%. This indicates that company
relies more on external financing rather than going for internal sources. However, such hike can

Financial statement analysis 10
be observed from the significant increase in Afterpay’s total liabilities from $931 million to
$208670 million as compare to the upsurge in its owner’s equity.
 Interest coverage ratio: It determines the number of times a company can make its
interest payments out of its earnings before interest and taxes. It is also a solvency ratio
which measures the capability of the firm to meet its debt obligations. Generally, a high
ITR is considered desirable as it indicates that company can pay off its interest expense
easily from its annual earnings (Nikolai, Bazley and Jones, 2009).
Afterpay’s ITR was -4.96 times in 2016 which further change to -15.98%. However, the ratio
turns positive to 2.50 times in 2018. The negative figures showed that in those years, the
company was not able to make its interest payments as it had reported negative earnings during
those years. In 2018, the trend git reverse and positive EBIT at $16560 is reported by the
company. In the same year, its interest expense is $6617 times which make the ratio positive.
 Long term debt to assets: It compares the long term financial obligations of the firm with
its total assets. The ratio determines ability of the entity in paying off its non-current debt
by using its assets and available resources (Penman, Reggiani, Richardson and Tuna,
2017).
In 2016, the ratio was zero as in that Year Company did not report any kind of long term
liabilities. In 2017, the ratio was 19.5% which further increased to 41.2%. This was due to the
significant increase in the amount of long term liabilities as compare to the upsurge in its total
assets. This shows that Afterpay does not sufficient assets to meet its financial obligations.
In addition, its return on financial leverage was also negative in the past three years due to the
negative return on equity and return on assets of the company. The ratio is just a simple

Financial statement analysis 11
accounting difference between ROA and ROE. In 2016, it was -2.0% which further reported at -
2.4% in 2018.
Liquidity position
The ratios which reflect liquidity position of the company generally takes into account the
evaluation of cash and cash equivalents of the company and cash flow statement of the
enterprise. The liquidity ratios mainly include current and quick ratio which determines the
overall financial health of the company. The cash flow ratios show the comparison of operating
cash flows against the short term obligations of the company. The OCF is also measured against
the capital expenditure incurred by the firm during its accounting year.
The above table shows the calculation of certain ratios that determines the situation of liquidity
in case of Afterpay Touch Group.
 Current ratio: It is the most widely used liquidity ratio which compares the CA of the
firm with its CL. In other words, it determines the capability of the entity in setting off its
current liabilities with its current assets. The ideal ratio is 2:1 which means the company
should have its CAs double of its CLs so that they can pay them easily and on time
(Saleem and Rehman, 2011).
In the above table, it can be observed that the CR of Afterpay has reduced to a great extent in the
past three years. In 2016, it was 29.64 which further reduced to 4.71 in 2017. However, the same
has been increased to 6.56 in 2018 with a significant upsurge in company’s current assets as
compare to liabilities. The reason for the decline in 2017 was the sudden increase in current
liabilities of Afterpay as compare to its assets. Despite having a reduction, the ratio is still more
than the ideal benchmark.

Financial statement analysis 12
 Quick ratio: It is another metrics that gives the same results as CR. The only difference is
that it takes into account the most liquid assets of the firm which excludes the amount of
inventory and prepaid expenses. The ideal ratio is 1:1 (Tracy, 2012).
As Afterpay had no inventories in last three years therefore its quick ratio is same as current
ratio.
 Operating cash flow to Current liabilities (OCFCL): The ratio shows how well the CL of
an entity is covered by the cash flow generated from its operations. A high ratio indicates
that more cash is generated from business operating activities and the current obligations
can be paid easily.
The OCFCL of Afterpay has been negative during the past three years. In 2016, it was -8.95
which further increased to -2.49 and then rise to -2.26 in the recent year. The ratio was negative
because of the net cash used in operating activities tends to increase. This indicates that the OCF
was not enough to meet CL of the entity.
 Operating cash flow to Capital expenditure (OCFCX): it determines the company’s
ability to acquire long term assets with the help of its operating cash flow. A high ratio
indicates that the firm has sufficient cash flow to fund its capex.
Afterpay’s OCFCX shows a fluctuating trend as it was 254.30 in 2016 which increased to
1011.12 in 2017. It again reduced to 97.35 in 2018. This huge increase in 2017 was due to the
sudden decline in the capital expenditure of the company in that year. Overall, its free cash flow
reduces reflecting poor performance of the firm in respect of maintain the cash position.

Financial statement analysis 13
Quality of financial statements
The qualitative characteristics of financial statements include understand ability, reliability,
comparability and relevance. The data presented in the statement should be easily understandable
to its users and clearly presented with supporting materials and notes. Along with this, the
statements should be reliable and free from material errors. The information reflected in them
should not mislead the investors, managers and other users of the report.
Comparability is another quality which states that the information presented in the final accounts
should be easily comparable over several accounting periods, thus making decision making more
appropriate. In addition, it should be relevant and must be as per the need of users which
ultimately assist them in taking better decisions.
Conclusion and Recommendation
The overall analysis of Afterpay Touch Group Limited suggest that it is better not to invest in
company as of now as it has been facing losses from the past three years. Though it has
improved liquidity and efficiency position but it lacks in marinating cash in the business and
relies more on external debt. This increases the degree of financial risk taken by the company
and also it has provided negative returns to its investors in the past. However, one thing is also
observed that now the company is focused on improving its position and performance with
respect to solvency and profitability. Yet, it will be advisable not to invest because of the
deteriorating financial position as whole.

Financial statement analysis 14
References
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Finance, 70(6), pp.2813-2852.
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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.

Financial statement analysis 15
Nikolai, L. A., Bazley, J. D., and Jones, J. P. (2009). Intermediate Accounting. USA: Cengage
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Penman, S.H., Reggiani, F., Richardson, S.A. and Tuna, A. (2017). A Framework for Identifying
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Yahoo Finance. (2018). Afterpay Touch Group Limited (APT.AX). [Online]. Available at:
https://finance.yahoo.com/quote/APT.AX/financials?p=APT.AX