Financial Analysis of LKH Corporation: A Case Study on Performance

This case study analyzes the financial performance of LKH Corporation, a real estate and development company listed on the SGX. The report assesses the company's stock market performance over different time periods, examining factors like earnings per share, dividend per share, and net asset value. It evaluates the company's growth objectives, contrasting actual and sustainable growth rates, and suggests financial strategies for future success. The study further explores the impact of debt and equity financing on earnings per share and discusses the advantages and disadvantages of borrowing for real estate investments. The analysis covers short, medium, and long-term financial performance, considering profitability, liquidity, and leverage positions. The assignment also includes calculations for earnings per share under debt financing scenarios. The report provides a comprehensive overview of the company's financial health and strategic considerations.

Finance Case Questions

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
QUESTION 1..................................................................................................................................1
a. Assessment of the corporate stock and financial performance over different mediums of
time and discussion about the fundamental performance of the company over same period in
accordance with its share price....................................................................................................1
b. Evaluating the growth objective of the company and suggestions on the financial strategies
that the corporation can adopt......................................................................................................4
QUESTION 2..................................................................................................................................5
QUESTION 3..................................................................................................................................5
a. Calculation of earnings per share in equity and debt financing alternatives...........................5
b. Stating the situation when EPS and EBIT will be same..........................................................5
c. Factors in the debt and equity financing that affects the earning per share and the earning
multiples of the company.............................................................................................................6
QUESTION 4..................................................................................................................................6
Discussion about the advantages and disadvantages of the borrowing for financing the real
estate investment and explaining the factors that lead the investor to avoid or prefer
borrowing.....................................................................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Finance act as the wider term that describes about the study or system of the money,
financial instruments and investments. It relates with the management of the funds and the
process for acquiring the required funds. Finance field is categorized into three segments that are
corporate finance, public finance and personal finance. This study will be focusing on the
corporate finance which is concerned with creating shareholders value through financial
planning for the short and the long term and the execution of the several strategies. All the
decisions regarding the capital budgeting and investment banking comes under the purview of
corporate finance. The present study is based on the LKH Corporation, dealing with the
investment in the real estate and development. This company is listed on the stock exchange of
the SGX. Furthermore, the report explains about the stock market and financial performance of
this corporate on the basis of time period. Contrast between the actual and the sustainable growth
rate is also evaluated in the study. Influence of various funding options on the earning per share
is also stated under the report.
QUESTION 1
a. Assessment of the corporate stock and financial performance over different mediums of time
and discussion about the fundamental performance of the company over same period in
accordance with its share price.
Stock performance- It relates with the measurement of the ability of the stock of the
company to increase and decrease its shareholder's wealth. Stock market performance is typically
assessed by the fluctuation in the prices. Increase in the price of the stock shows the good
performance of the company's shares while decrease in the market price of the stock reflects the
poor performance. Many users such as day traders, investors and the brokers predicts the
performance of the stock for getting higher returns (Brusov and et.al., 2018). It includes the
analysis of the various aspects of the business that are Earning per share, Dividend per share,
share price, net asset value and the price earning ratio.
Financial Performance- It means measuring the performance of the ways in which the
financial activities of the company has been carried on. It is the degree or metric through which
the financial objectives of the enterprise are met. It relates with the measurement of the policies
and the operations of the firm in terms of monetary value. It includes the evaluation of the
profitability and the liquidity performance of the LKH corporation.
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Short- term financial and stock performance- Such analysis is based on the performance
of the corporate for a period of less than one year. In short term, the stock market performance of
this corporation is considered as better because the earning per share ratio is depicting a higher
result which means higher earning. This in turn will show a rising trend of the stock price in the
overall market. The ideal price earning ratio is said to be 20-25 times, so the P/E ratio of this
company is reflecting a better ratio as it equates to 29.739 which is greater than the ideal ratio.
This means the enterprise is moving towards the higher growth in the near future. The dividend
per share ratio of the entity is resulted as 0.035 which depicts that value of the dividend paid
against the outstanding shares of the company. Net asset value per share of the firm computed
for the first year as 2.244 which reflects the value of the asset in context of the outstanding share
price of the LKH corporation. By this it is assessed that in short term the company'' stock market
performance is indicating a good and better position of the company as the ratio generated are
not too low or too high (Cai, Yang and Zhao, 2019). On the other hand the financial performance
of the corporation involves the liquidity, profitability and leverage position.
As liquidity ratio, Current ratio which depicted as a lower ratio in comparison to the ideal
current ratio that is 2:1 which means enterprise has not managed its current assets efficiently and
lack the capability in meeting its current obligations in short term. The cash ratio states the
availability of the cash in the hands of the company in paying off its current liabilities which is
also showing a lower result and by this it is interpreted that LKH corporation need to make more
efforts in creating efficient liquidity position in the coming years (Chang, Chen and Dasgupta,
2019). The profitability position can be analyzed by looking towards the return on the capital and
the equity. The return on equity and capital resulted as 0.0417&0.0365 that reflects the return
generated from the invested capital and on the equity shareholding of the enterprise.
This means in short term the company is generating lower profits as it is a start-up stage.
The leverage position of the entity will be measured by analyzing the debt equity ratio, debt
ratio, debt service ratio and payout ratio. The ideal debt equity ratio is said to 0.5-1 and the ratio
of this corporation is resulted as 1.0071 which means a good ratio as its borrowing are not more
than its own funds. The debt ratio and debt service ratio computed as 0.5149&0.5371 for the year
2011 which also reflects a better ratio towards its financial leverage. The payout ratio equates to
0.4232 depicts the amount of dividend distributed to its shareholders is also good as per the short
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term period. Thus, the overall financial position of the firm is reflecting a sound performance of
the LKH corporation.
Medium-term financial and stock market performance- Medium term refers to the
assessment of company's performance from 1 to 3 years. The stock performance of the enterprise
is reflecting an increasing trend as the Earning per share, Dividend per share and the net asset
value is continuously rising year by year. Though, the share price of the firm is decreasing in the
second year from 2.46 to 1.97 due to lower returns gained and wealth of the shareholders cannot
be met. However, share price in third year again rises with a greater value that shows the
favorable stock performance of the company in the market. The financial performance of the
corporation is varying in term of its different aspects as the profitability position is declining
while the liquidity position is showing greater efficiency from one period to another and the
leverage position is stating a balancing trend (Cole and Sokolyk, 2018). Thus, the overall
financial performance is not reflecting a better or sound position in the medium term.
Long-term Financial and stock market performance- Assessing the long-term
performance involves measurement for the 3 years above results. The stock performance of the
company till is stating the rising trend while in 2017 it is showing a decline in the value of the
earning, dividend and the asset as returns are falling with a greater ratio. In 2018, negative results
are generated in relation to the earnings and the profitability and higher leverage. This analysis
clearly indicating that in the long term the stock performance of the LKH corporation is falling
with negative results which means a huge loss has been incurred in the enterprise and this leads
to the decrease in the value of the firm. Poor financial performance of the entity is been
identified in the long term as the profitability and the liquidity position of the enterprise is
reflecting negative returns and current assets are too low for meeting its current liabilities
(Coleman, Cotei and Farhat, 2016). The leverage position of the corporate is also not stated as
sound because of excess leverages over its owned funds which creates a negative image of the
company in the market and can lead to high bad debts.
Hence, the fundamental performance in relation to the share price of the company can never
show same results over the years because many other factors are also present in the surrounding
that affects or influence the performance of the business such as economic down-drowns,
unfavorable environmental conditions, market crash, instability of the government and changing
lifestyle of the people.
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b. Evaluating the growth objective of the company and suggestions on the financial strategies
that the corporation can adopt.
Sustainable growth rate of the corporation is defines as the maximum growth rate of the sales
achieved by utilizing the financial resources that are internal to the organization. However Actual
growth rate is the real growth rate of the business and the investment made by the corporation. In
the short term the annual growth rate of the company in terms of return on the capital and equity
resulted as 3.65 & 4.17 which means low but positive returns while the sustainable growth in
short term relates with the debt to equity ratio which equates to 1.0071, a good and better growth
ratio. In the medium term the actual growth rate is showing an increasing trend on the return on
equity which means high returns are gained from the shareholding but earnings on capital shows
the negative trend which reflect lower growth on the capital. However, sustainable growth rate in
the medium term of the LKH corporation is consistent and stable with very little changes. In the
long run the actual growth rate is declining and generative negative returns which indicates
failure of strategies while the sustainable growth rate is also decreasing which means high
leveraging and negative growth in the sales or revenue of the enterprise (De Rassenfosse and
Fischer, 2016). For attaining the growing success company should adopt various financial
strategies such as exploring the several business alternatives, balancing the personal and the
business goals, control cost, managing the liquidity, tax management, risk management,
developing safety net, estate planning and business succession planning.
Trend analysis = current year-base year/base year*100
Particula
rs 2011 2012 2013 2014 2015 2016 2017 2018
Return on
equity 3.65% 24.38% 13.00% 9.36% -14.26% 1.87% -23.06% -353.32%
return on
capital 4.17% -2.40% -6.39% 32.02% -12.13% 1.87% -13.58% -119.59%
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QUESTION 2
Particulars
Square
feet
rate
per
square
feet
No of
months Amount
60000 80 12 57600000
Less: Vacancy and
uncollectible rent 5760000
Less: Operating
expenses 60000 384 23040000
Net income 28800000
Given case exhibits that now firm in maintaining capital structure of .30:7. On the other
side, minimum acceptable ratio for the firm accounts for 1.30:1. Referring this, it can be
mentioned that firm should meet monetary requirements via debt sources. Moreover, now debt
level of company is highly lower in comparison to the benchmark. Thus, firm should give
priority to debt sources over equity (Lyon and Owen, 2019).
QUESTION 3
a. Calculation of earnings per share in equity and debt financing alternatives.
1. If the project is financed by debt
Earnings per share under debt financing alternative
Particulars formula Amount Total
Earning before interest and taxes 10500000
Interest 10000000*6/100 600000
Earning after interest 9900000
Less:tax@50% 9900000*50/100 4950000
Earning after tax 4950000
Number of shares 204000
EPS 24.26
2. If project is financed by equity
Earnings per share under equity financing alternative
Particulars formula Amount Total
Earning before interest and taxes 10500000
less: dividend 0
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Earning after interest 10500000
less:tax @50% 10500000*50% 5250000
Earning after tax 5250000
Number of shares 204000
EPS 25.74
b. Stating the situation when EPS and EBIT will be same
On the basis of given case situation, business unit wants to assess when EBIT will be
earnings per share. Besides this, business unit is also planning to planning fulfil funding
requirements for refurbishing project via debt and equity sources (What Is the EBIT-EPS
Approach to Capital Structure?, 2019). In this regard, situation where BBIT and EPS remains
unchanged is known as break-even point. Hence, by determining the level of revenue at different
level Real Estate Company can ensure equal EBIT and EPS. Thus, by making different financial
plans company can assess EBIT-EPS break-even point.
c. Factors in the debt and equity financing that affects the earning per share and the earning
multiples of the company.
For a corporation debt financing acts as an effective source of raising the funds for the purpose
of diversification or expansion in different development sectors. This states that choosing a debt
alternative benefits the firm as funds are easily available without diluting the control over
ownership which leads to increase in the earning per share and the earning multiples of the
enterprise. On the other hand, equity financing involves dilution of the ownership control which
results in declining earning per share as more dividend has to be distributed to the shareholders.
Debt financial alternatives assists the company in enjoying the leverage benefit which also a
major factor that leads to the improvement in the wealth of the shareholders due to increase in
the return on equity (Florou and Kosi, 2015). Debt financing involves the higher amount of
interest cost that need to be bear by the entity which causes decrease in the net earning and thus
the earning per share of the company reduces. Equity financing enables the organization in
maintaining its earning multiples and earning per share as it prevents the burden of the interest
and dividends are to be distributed in accordance with the proportion of the holding and as per
the profits generated. It also provides for reinvestment strategy as the returns ascertained can be
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plough back into the business rather than distributing to holders in the business so that higher
growth can be achieved with greater earnings.
QUESTION 4
Discussion about the advantages and disadvantages of the borrowing for financing the real estate
investment and explaining the factors that lead the investor to avoid or prefer borrowing.
Two advantages of the borrowing-
Tax deductions- Most of the time for making large amount of investment in the
p[articular project, organization choose for borrowing. This benefits the LKH corporation in
enjoying the tax deductions that it will be availed due to the debt financing. Tax advantage in the
sense that the principal and the interest payment on the loan borrowed by the business are treated
as business expenses, therefore, can be deducted from the income of the business (Goh and et.al.,
2017). This also enables the entity in making the government as the partner in their business with
minor stake at the prevailing tax rate of business.
Maintain ownership- Though borrowing creates obligations of the repayment for the
owner of the business but this obligation is limited to only the borrowed amount. After the
repayment, the obligation of the owner comes to an end (Hebous and Ruf, 2017). Thus, they
retain the right of their ownership in their business without any interruption of an outside entity.
Two disadvantages of borrowing-
Impacts credit rating- Debt financing might seems very much attractive for the
corporation to meet its funding needs but each loan taken will affect the credit report of the LKH
corporation which in turn impact its credit rating (Hirsch and Walz, 2019). Higher the
borrowing, higher generation of the risk to lender so higher rate of interest has to paid by the
firm on each of its loan.
High interest rates- The corporation has to bear higher interest rate on the borrowing
even after the deduction in the taxes are made because interest rate varies with the changes in the
macroeconomic conditions and other factors like history of the company in repaying bank loan,
credit rating of the LKH corporation and personal credibility of the owner.
FACTORS THAT LEAD TO PREFER OR AVOID BORROWING-
Leverage- The investors whose leverage position or ratio lies between 0.5-1 is said to be
a good ratio and reflects that for running its operations smoothly it does not require any
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borrowing. Such investors can prefer to go for borrowing so that higher growth can be achieved
by investing it in new projects (Huang, Ritter and Zhang, 2016). On the other hand, the investors
whose leverage ratio is higher than 0.5-1, such investors must avoid more debt financing as
higher ratio indicates aggressive financing through debt.
Taxes- The tax rate lower than the bank interest rate might induces the investors to prefer
the borrowing with the tax deductions while higher rate of tax may call for avoiding the
borrowing by some investors.
Liquidity- If the investors reaches its liquidity position to 2:1 which is an ideal liquid
ratio then those investors can prefer for leverage as it shows that he can manage its current
obligations with efficiency (Lemmon and Zender, 2019). However, those investors whose
liquidity ratio is high or low than the ideal ratio then they should opt for avoiding the borrowing
as possible because it resists the investors in meeting its current obligation.
Inflation- High inflation in the market may lead to higher interest rates on the borrowed
funds so in that case the investors will avoid debt financing (Lewis and Tan, 2016). On the other
side decrease in inflation results in lower rate of interest which will the best situation for the
investors to prefer borrowing.
CONCLUSION
From the above report it is concluded that, finance is an important aspect of every
corporation as it plays essential role in maintaining and improving the financial as well as stock
performance of the company. This leads the LKH corporation in attaining the growing success in
the future by identifying and measuring its position from one period to another. It helps in
achieving the objectives and the goals relating to the consistent growth and success. The goal of
wealth and profit maximization can also be attained with appropriate management and use of
funds. It provides for adopting the suitable financial strategy which enables the corporation in
attaining the higher returns from the investments made by it which in create more and more
opportunities for the firm in the long run. With the greater earning LKH corporation can seek
various sources for generating large amount of funds for investing in the new profitable projects.
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REFERENCES
Books and journals
Brusov, P. and et.al., 2018. Influence of Debt Financing on the Efficiency of Investment
Projects: The Analysis of Efficiency of Investment Projects Within the Perpetuity
(Modigliani–Miller) Approximation. In Modern Corporate Finance, Investments, Taxation
and Ratings (pp. 209-241). Springer, Cham.
Cai, Y., Yang, Z. and Zhao, Z., 2019. Contingent capital with repeated interconversion between
debt‐and equity‐like instruments. European Financial Management. 25(2). pp.358-379.
Chang, X., Chen, Y. and Dasgupta, S., 2019. Macroeconomic conditions, financial constraints,
and firms’ financing decisions. Journal of Banking & Finance. 101. pp.242-255.
Cole, R.A. and Sokolyk, T., 2018. Debt financing, survival, and growth of start-up firms. Journal
of Corporate Finance. 50. pp.609-625.
Coleman, S., Cotei, C. and Farhat, J., 2016. The debt-equity financing decisions of US startup
firms. Journal of Economics and Finance. 40(1). pp.105-126.
De Rassenfosse, G. and Fischer, T., 2016. Venture debt financing: Determinants of the lending
decision. Strategic Entrepreneurship Journal. 10(3). pp.235-256.
Florou, A. and Kosi, U., 2015. Does mandatory IFRS adoption facilitate debt financing?. Review
of Accounting Studies. 20(4). pp.1407-1456.
Goh, B.W. and et.al., 2017. Conditional conservatism and debt versus equity
financing. Contemporary Accounting Research. 34(1). pp.216-251.
Hebous, S. and Ruf, M., 2017. Evaluating the effects of ACE systems on multinational debt
financing and investment. Journal of Public Economics. 156. pp.131-149.
Hirsch, J. and Walz, U., 2019. The financing dynamics of newly founded firms. Journal of
Banking & Finance. 100. pp.261-272.
Huang, R., Ritter, J. R. and Zhang, D., 2016. Private equity firms’ reputational concerns and the
costs of debt financing. Journal of Financial and Quantitative Analysis. 51(1). pp.29-54.
Lemmon, M.L. and Zender, J.F., 2019. Asymmetric information, debt capacity, and capital
structure. Journal of Financial and Quantitative Analysis. 54(1). pp.31-59.
Lewis, C.M. and Tan, Y., 2016. Debt-equity choices, R&D investment and market
timing. Journal of Financial Economics. 119(3). pp.599-610.
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Lyon, F. and Owen, R., 2019. Financing social enterprises and the demand for social
investment. Strategic Change. 28(1). pp.47-57.
Online
What Is the EBIT-EPS Approach to Capital Structure?. 2019. [Online]. Available through: <
https://www.fool.com/knowledge-center/what-is-the-ebit-eps-approach-to-capital-
structure.aspx>
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