ACCT13017 – Financial Statement Analysis



ACCT13017 – Financial Statement Analysis Assignment Stage 2 (ASS#2): Key Drivers & Valuation My Profile: Link to Profile My Blog: Link to my Blog My company website: Southern Cross Austereo Links to Financial Statements: HYPERLINK "" 2019 Annual Report2018 Annual Report HYPERLINK "" 2017 Annual Report STEP THREE: Ratio CommentaryMy Blog: Step 3 Blog Post I believe there could be quite a few areas of concern within Southern Cross Austereo ratios. As their overall financial position was decreasing in strength especially in the 2019 financial year and I am sure the calculated ratios will display this. The first ratios I will be analysing is the profitability ratios (see figure 1). The four years analysed for SCA show varied results. The first three years 2016 to 2018 show positive percentage whereas, 2019 shows as a negative. This is a result of SCA making a loss in the 2019 financial year. The profitability ratios are used to evaluate the ability of a company to generate profit for a specific time. Therefore, a higher percentage is received in this area shows the company is preforming well. The best year in both ratios for SCA was 2017. The return on assets ratio measures the profitability of the firms in relation to their total assets. The 2017 financial year saw a large profit of $108.563M and total assets wasn’t the highest of all four years but was significantly higher than 2018 and 2019. 2017 is the year that SCA started a new business partnership with PodcastOne and QIC. Profitability Ratios 2016201720182019Net Profit Margin12.1%15.8%0.2%-13.8%Return on Assets 4.6%6.8%0.1%-7.5%Figure 1: Profitability RatiosNext, we will look at the efficiency ratios (see figure 2). From here we can see that the current asset turnover ratio is a lot higher than the total asset turnover ratio. This is simply due to SCA holding a higher value of total assets versus currents assets. In the 2019 year the total current assets were $184.887M whereas, total assets for the same period were well over 1 billion. Efficiency Ratios 2016201720182019Total Asset Turnover Ratio0.380.430.440.54Current Asset Turnover Ratio 2.703.323.393.57Figure 2: Efficiency Ratios Now we are going to investigate the liquidity ratios (see figure 3). The definition for liquidity ratio is to measure a company’s ability to pay back both short and long term obligations. The current ratio calculates the ability to pay off current liabilities with current assets. SCA current ratios are considered positive for each year as they are all greater than 1. SCA have quite a range in the current ratio with it increasing each year. Which is interesting to learn as even though the company’s profitability ratio was negative in 2019 the company is in an even stronger position than previous years to pay back their debts. Quick Ratio 1 remains positive for all four years. However, in quick ratio 2 they are no longer considered positive. For quick ratio 1 it means that even once all the borrowings are paid SCA is still in a strong position to pay the remainder of their debts. However, in Quick ratio 2 once the borrowings and receivables are removed the company doesn’t remain in such a strong position to payback their debts. In quick ratio 2 in all four years the ratio remains around the 0.50. Liquidity Ratios 2016201720182019Current Ratio 1.441.792.012.06Quick Ratio 1 1.361.681.921.96Quick Ratio 20.580.420.580.54Figure 3: Liquidity Ratios The financial structure ratios are next to investigate further (see figure 4). The debt to equity ratio can reflects the company’s capital structure meaning it shows us how much of the company’s capital funding’s are from lenders rather than shareholders. From first look at the debt to equity ratio for SCA we can see they are very high. This ratio was at its highest at 181.3% in 2016 and gets to its lowest in the following year 2017 of 145.8%. Therefore, SCA rely heavily on funding from lenders. This mean a couple of different things for the couple. Firstly, it can be very risky to have such a high debt level with the business experience a downturn as it could make it difficult for the company to meant the financial commitments. As we seen in 2019 SCA had a significant loss in comparison to previous years which if it continues could be a concern for the company. A company with high debt can also mean that they are making the most of opportunity and expansion. As it is difficult to take the opportunity to grow and expand without increasing of debt. Another, ratio that is concerning for SCA is the times interest earned ratio. For the four years analysed all of them are negative. With 2019 being the highest of negative 2.08. This ratio measure the SCA ability to make interest and debt repayments. It shows how many times a company could pay the interest with its before tax income. Financial Structure Ratios2016201720182019Debt/ Equity Ratio 181.3%145.8%148.5%180.3%Equity Ratio 35.6%40.7%40.2%35.7%Times Interest Earned (0.17)(0.23)(0.92)(2.06)Figure 4: Financial Structure Ratios Onto the market share ratio which can determine the share price of the company’s stock (see figure 5). The price earnings ratio for SCA is particularly interesting has it largely variance cross the four years. In 2019, it is negative $117.00 where as it was positive $7,519.66 in 2018. Which is a massive jump from $92.14 in 2017. This ratio gives a sense of the value of the company as it looks at the relationship between SCA stock price and the earnings per share. I don’t understand why there is such a large variance between 2017 and 2018. Market price per a share slightly increased from 7.25 to 7.75 is this what caused the increase? Market Ratio 2016201720182019Earnings per Share 0.0560.0790.001-0.066Dividend per Share0.030.040.040.04Dividend Yield Ratio 0.000.010.010.01Price Earnings Ratio 129.5092.14 7,519.66 (117.00)Net Asset Banking Per Share Ratio 0.430.470.430.31Market / Book Ratio 16.7715.3617.9824.61Figure 5: Market Ratio Finally, we look at the rations calculated from the restated financial statements. These ratios are important determining the overall performance of SCA. We will examine SCA return on equity (ROE), return on net operating assets (RNOA) and profit margin (PM) (see figure 6). There is a couple of large variances across the board and others stay rather similar throughout. ROE calculates how much profit each dollars of shareholder equity generates. Which is very poor especially in 2019 where it is negative 0.22 this isn’t encouraging for investors. RNOA shows the higher the return on net asset the better the profit generating for SCA will be. All amounts are positive however, they are significantly low. Profit margin measures what percentage of sales makes up the net income. The PM for SCA is also very concerning and doesn’t improve over the four years. None of these ratios based on the restated financial statements would be considered attractive for potential investors. Ratios Based on Restated Financial Statements 2016201720182019Return on Equity (ROE) 0.130.170.00(0.22)Return on Net Operating Assets (RNOA)0.100.120.100.10Profit Margin (PM)0.150.180.130.12Figure 6: Ratios Based on Restated Financial Statements Accounting Drivers Commentary Southern Cross Austereo is in the broadcast radio and television network industry. This is a highly competitive industry which is constantly changing. In 2017, SCA joined partnership with PodcastOne as society was changing the way they were listening to entertainment. This boosted revenue and profits for the year which we can see in figure 7. With 2017 being the year the highest economic profit was achieved. However, 2018 ratios were affected by the disposal of former northern NSW TV operation. Due to the high competition SCA also had a greater decline in 3 aggregated regional television advertising markets than expected. Which the effect can be seen in the economic profit decreased from 2017 to 13,579 in 2018 (See Figure 7). 2019, was effected by the choice to sell Broadcast Australia and to outsource broadcast transmission functions. In this same years SCA took the opportunity to expand in smart audio consumed through internet enabled devices such as smartphone and smart speakers. From, the ratios calculated we are yet unable to see if this will benefit the company as predict in the future. Even though PM for 2019 was negative the economic profit is still slightly increased from 2018 (See Figure 7). ?2016201720182019Free Cash Flow - 123,008 162,266 241,075 Economic Profit 14,949 43,749 13,579 17,505 Figure 7: Free Cash Flow & Economic Profit SCA ratios show various fluctuations in the amounts however, they all remain positive for the whole 4 years. The free cash flow has continued to increase significantly each year. At this stage I am unsure as to why it has increased so significantly in 2019. I will need to investigate this further as I can see that the operating for the year had increased from 2018 however, net operating assets had significantly decreased. What does this mean for SCA? SCA constantly try and change and adopt to changing demand of the broadcast radio and television network to meet the needs of their consumers. Comments with other students HYPERLINK "" \l "comment-9" Comment on Melanie Watt post HYPERLINK "" \l "p1295187" Comment on Rebekiah Frahm post STEP FOUR:Economic and Business Drivers SCA financial position overall has been decreasing over the past two years. The firm had an improvement in 2017 and has been decreasing since. Profit margins have also been decreasing over the last two years. While return on net operating assets has remained similar over the past four years. Sales growth has fluctuated significantly in the last three years. In 2019, we saw an improve from 2018 however, overall is a very poor. In figure 8 it shows the inconsistency in the interest rate of SCA. Figure 8: Share price of SCA over last 5 years () Sale growth, PM and NOA have many factors that are impacting their movements. There are all important components of SCA financial statement that have all been decreasing over recent times. SCA are made up mainly of two different sections being radio broadcast and television networks. Both sections have different economic and business realities that are effecting the firm’s financial position. The radio broadcast industry is highly competitive and over recent years it has been getting even more competition. With increased ways of listening to entertainment such as Spotify and podcast. Over, the last five years’ music streaming services have surged in popularity. Therefore, everyone is competing for listeners and revenue which effects the firm’s financial statement and ratios and will continue to in years to come. The increase in technology is another factor as availability of portable devices, combined with increasing internet accessibility enables consumers to personalise their listening experience and listen to content whenever and where they want. SCA are trying to adopt by implementing promotional strategies and narrowing the demographic. They do this by ensuring each radio station is targeting different consumer markets. With consumers shifting to online listening services it is becoming even more important for radio broadcasters to consistently deliver strong ratings to remain competitive. The local community interests are having a major impact on SCA. The television networks sections of SCA is also extremely competitive. Again, over recent times there has been an increase of new ways to watch entertainments such as through Netflix, YouTube and Stan etc. The demand has been in what consumer wants to see has been changing. The increase of technology is also having its effects on the television networks as the availability to watch things is at your figure tips. Other aspect is advertising which has it challenges due to the increase of social networking and video internet websites etc. which gives advertiser alternative avenues for reaching consumers. Like radio broadcasting consumer interest that are constantly changing have a major effect on the firm’s business drivers. I have found it challenging to get a full understanding of SCA economic and business drivers. From, my research I believe that the main influence effecting SCA business drivers is competition. Which will continue to be a factor for the firm in the future. I find that the ratios for SCA are all over the place some seem to be very poor results whereas, other don’t seem quite as bad which I find it difficult to draw a conclusion. Which means I possibly need to dig further to get a better understanding about the company. However, I must say I don’t think I would find SCA an attractive choice to invest in. A lot of other student steps I have come across have found this a challenging task. Mainly having concerns about not having enough knowledge of the company and their business and economic drivers. I would agree with this 100% I don’t believe my understanding is deep enough which makes me really nervous ad concerned. STEP FIVE: Forecasting and Valuation CommentaryI have by far found this the most challenging part of the assessment task. I much prefer when things are either right or wrong. I struggle with the guessing part of the analysis. Which I assume will be something over time with practice I will become more confident in. Sales Growth % The sale percentage of Southern Cross Austereo has been a little up and down the last four years. I predict it will continue to be uncertain in the future, the main reason for is the changes in consumer interest, competition and technology. I am very conscious of the current situation in the world with Covid-19 and I predict this will have a major impact on SCA. The reason for my major decrease in sales growth for 2020 is due to the impacts from Covid-19. I assume that these impacts will affect SCA going into 2021. I expect the company will then slowly begin to recover and build on their sales growth. As the SCA is known to continue to develop and make the most of any opportunities if they can manage to survive these challenging economic times of uncertainty. There is a degree of uncertainty of how long the effects of Covid-19 may last as the situation evolves. The reason I predict a major decrease for 2020 is because we are currently in a slump caused by the weak economy from Covid-19. Covid-19 is causing significant interruption across the advertising markets. The rest of SCA business is staying reasonably sound. Profit Margin %I found the PM a little difficult to predict due to the current uncertainty in the economy. I am going to assume that the current financial and economic situation will play a part in 2020 and 2021. With the major effect seen in 2020. My prediction is based on the fact that income is going to significantly decrease and will the company will try to decrease cost as much as possible they will still remain reasonably high therefore, causing PM to decrease. However, I hopeful that we will then see the PM to continue to slowly rise as it was in the previous four years. Asset TurnoverI believe the asset turnover will decrease in 2020 due to sales growth significantly decreasing and I predict due to the current economic struggles the company’s net operating assets will also decrease. However, after that I believe that the asset turnover for SCA will continue to slowly rise of the next four years. RecommendationI am not extremely confident in my ability to analyse SCA, I would say my confidence in my ability level would be just over 50%. I feel that my confidence in my ability would be a bit higher if the world wasn’t currently dealing with the unknown involved with Covid-19. I believe that SCA will continue to have variance in their key accounting drivers as the main economic and business driver that effect SCA will continue to develop a change a lot. I would not be recommending equity investors to purchase shares in SCA. They aren’t in a stable enough position to be investing in especially in the current economic situation. I would advise shareholders to hold onto their shares in SCA. The next two years aren’t looking the best for the company but I am hopeful that they will continue to improve still in the next 5 years. Reflection Overall, I have enjoyed this unit and the structure of the way it is taught. My favorite thing about this unit is that you get to explore and learn about your known company. Which I believe make it easy to understand and learn that topics being taught during the unit. There is a lot of things I didn’t know before competing this subject from how to calculate some of the ratios such as the free cash flow or implicit interest after tax to understanding term such as the WACC (weighted average cost of capital). Which I have now learnt that WACC tell us the return that stakeholder can expect. Most importantly I have learnt what factors need to be considered when predicting the future of a company and how these economic and business drivers effect the key accounting drivers. What topic would I chose to teach? What was the most important sill I learned?My advice for future student who are going to study this unit is too jump in with both feet first, interact with students and ask questions along the way if you don’t understand. I feel like communicating with students is a big one as it can be very beneficial for your own development in the unit. Lastly, I would recommend keeping on top of the work load and by that, I mean start your assessments early a take it in little steps at a time. ................
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