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AFA Presentation (Finalized)

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AFA Presentation - Financial Analysis

AFA Presentation - Financial Analysis

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  • Note:Wide range of products includes clothing, shoes, electronics, computers, furniture, appliances and hardware
  • Note1. John Little and Marks & Spencer are under the Robinsons holding.
  • Note:1. Discretionary bonuses rewarded tied to company and individual performance
  • Note:In accordance to the points above, the category of factors is as follows;LegalEconomy – For Asia as a whole, example, Japan, Thailand and MalaysiaPoliticalTechnologyPolitical
  • Note:In accordance to the points above, the category of factors is as follows;EconomySocialIndustry – Specific factorEconomySocial
  • In the face of the tough operating environment,we expect many retailers to resort to bargain salesto alleviate the effects of decreased consumerspending. While bargain sales may boost turnover, itwill also add pressure on profit margins.Despite the tough conditions experienced in financial year 2008, the Group has managed toregister growth in its sales turnover. This was achieved through a combination of actions likesecuring exclusive brands and promotions, and more importantly, catering to what customersreally want. For the products and events that we have introduced and which have had verygood response, we try to make it even better. We also leverage on technology to analyzeour customers buying patterns and adjust our merchandising and marketing programmesaccordingly.
  • government has forecastedthe Singapore economy to grow between -5.0% and-2.0% in 2009. Already, we have seen retrenchmentsand other cost–cutting measures being put in placeby businesses to deal with the current difficulties. Allthis will quickly translate into consumers being morecautious, as well as changes in their consumptionpattern.Sub-Urban ReachOur venture into the sub-urban area started with our Katong Store in Parkway Parade in1983. The store, which has enjoyed the patronage of our customers for many years, led us toopen another store in Tampines Mall, in 1995. The Tampines store was given a total revampin 2007 and has since been very well received by our customers.We are constantly faced with new challenges such as our competitors introducing newfashion brands, as well as new upcoming malls in the Orchard shopping belt and in thesuburban area. Part of our strategy is to continue with our efforts to give our customers apleasant and visually pleasing shopping experience. Our Men’s level at Isetan Scotts has hada major remodeling and is now positioned as a style and sports haven for the new age men.Besides housing exclusive brands, we have also enhanced our sales service by training ourstaff in shirt measurement and shoe fitting. Like the product advisor service introduced atour Babies Department recently, these are part of our on-going efforts to render more valueaddedservices to our customers.We continue to grow our pool of loyal customers through our Isetan Privilege Card (IPC) andIsetan Credit Card (ICC). The IPC, which is a point accumulation card, continue to enjoy goodresponses in its recruitment drives. Recently, we have enhanced the benefit of this card byawarding points for entitled purchases made at our supermarket.
  • We also have four“Accessorize” specialty shops inSingapore under our retail portfolio.Going forward, we will lookat strategies to continuallyrefresh our merchandise mixby introducing new brands.We will also look at adopting newmarketing platforms, improvingstore layout and incorporatingmore lifestyle concepts in ourstores to create a more excitingretail experience for our customers.
  • Retail industry and not capital-intensive one so it is not as highly leveraged. Moreover, it is not really expanding too much at the moment in year 2008. Isetan has only announced its expansion plans to establish its new oulet at Nex Mall in Serangoon in Year 2009. This amount will only, definitely have an impact on its ratio only in Year 2009. (opportunities)
  • Retail industry and not capital-intensive one so it is not as highly leveraged. Moreover, it is not really expanding too The decrease was accounted for since Isetan had an increase in its retained earnings which was a result of its dividends being paid out. The dividends paid out were 2 cents per share. Even though Isetan has only paid out dividends of 2 cents per share, its directors have maintained that the final dividend of 7.5 cents share as before like year 2007, will be paid out to them but it will only affect it next year’s financial statements. (Page 66 and 67 of Isetan)  there has not been much of a change in its shareholdings
  • For debt financing, companies are exposed to risks such as forex from their borrowings.However, the usage of debt financing could be advantageous to Isetan for they can use it since it is possible for them to use these finances to generate more earnings. Moreover, debt financing is advantageous as it is tax deductible.
  • For debt financing, companies are exposed to risks such as forex from their borrowings.However, the usage of debt financing could be advantageous to Isetan for they can use it since it is possible for them to use these finances to generate more earnings. Moreover, debt financing is advantageous as it is tax deductible.
  • For debt financing, companies are exposed to risks such as forex from their borrowings.However, the usage of debt financing could be advantageous to Isetan for they can use it since it is possible for them to use these finances to generate more earnings. Moreover, debt financing is advantageous as it is tax deductible.
  • The debt-equity ratio has increased from 0.39 to 0.40 (Percentage change: 2.56%). As the ratio is less than 1, it implies that Metro has sufficient assets to cover its long-term obligations. Unlike Isetan, Metro has adopted a strategy of having a mixture of debt financing with equity financing. The increase in its debt-equity ratio is due to the increase in its long-term liabilities which is being held by its jointly controlled entities in China.  Page 88 of Metro, part (c)
  • The debt-equity ratio has increased from 0.39 to 0.40 (Percentage change: 2.56%). As the ratio is less than 1, it implies that Metro has sufficient assets to cover its long-term obligations. Unlike Isetan, Metro has adopted a strategy of having a mixture of debt financing with equity financing. The increase in its debt-equity ratio is due to the increase in its long-term liabilities which is being held by its jointly controlled entities in China.  Page 88 of Metro, part (c)

AFA Presentation (Finalized) AFA Presentation (Finalized) Presentation Transcript

  • Advanced Financial Accounting
    Interpretation of Financial Statements (1)
  • Content
    Client’s requirements
    Industry background
    Company background
    Main Competitors
    SWOT Analysis
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Client’s Profile
    Name: Ms. Wanna Lui
    Amt. of Investment: S$100,000
    Investment timeframe: 5 years
    Expected investment return: 5% p.a.
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    About the Industry
    Selling commodities directly to consumers
    Wide range of products and services
    Singapore’s retail industries generated S$35 billion in sales
    Provided many job opportunities for locals
    Competency is correlated to wide selection of products provided
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    About the Industry
    With increased competitions, department store needs to consider on both breath and depth of their products
    New shopping malls
    • Tampines 1, 313 @ Somerset, ION, Orchard Central & Iluma
    Q1 2010 Forecast
    • Total retail sales will grow from an estimated US$28.19 billion (Year 2009) to US$40.40 billion by Year 2014
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Company Background
    Opened its first store; the 1st Japanese dept. store to be opened in Singapore
    1972
    1970
    1981
    Conversion from Isetan Emporium (Singapore) Pte Ltd to Isetan (Singapore) Ltd; offered shares to the public
    Incorporated and headquartered in Singapore
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Company Background
    Trade in general merchandise
    Engaged in the business of operating department stores, supermarket and trading in general merchandise
    Offers corporate gifts, bulk buying and prizes & trophies for sports events
    Provides floral bouquets delivery & courier services
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Company Background
    • Business Segment
    • Stores Operating in…
    • Standalone Mango Boutique
    • Intl’ fashion designer lines, cosmetics and family-oriented merchandise
    • Catering to both local and tourist markets
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Competitors
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Main Competitor
    Rank in accordance to Share Capital
    Metro – S$630,776,676
    C K Tang Ltd – S$236,984,226
    Robinsons – S$85,937,494
    • Compared to Isetan (S$41,250,000), the main competitor is…
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Main Competitor
    Rank in accordance to No. of Outlets
    Metro – 4
    C K Tang Ltd – 1
    Robinsons – 3
    • Compared to Isetan (4), the main competitor is still…
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    SWOT Analysis
    Strengths
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Product Quality
    ISETAN
    METRO
    • Secured exclusive brands & promotions
    • Wide range of international collection
    • Technology used to analyze customers buying patterns
    • Will be refreshing merchandise mix by improving new brands and new layouts
    • Will be incorporating more lifestyle concepts in stores
    Strengths of Isetan: Improve customers’ satisfaction, thereby, able to retain and concurrently, attracting more consumers.
    Sourcing & Merchandizing
    ISETAN
    METRO
    • Personalized shopping experience
    • Enhanced customer benefits
    • Places importance on listening to customers and serving their needs and wants
    • No personalized shopping experience
    Strengths of Isetan: Being a step ahead of Metro, Isetan will be able to attract more consumers to the exclusive brands they have.
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Distribution of Products
    ISETAN
    METRO
    • A 7-storey high warehouse located in the area of Macpherson
    • Presence of a supermarket
    • A single-storey warehouse & 3-storey office annex located along Pasir Panjang Rd
    • No supermarket
    Strengths of Isetan: Having a bigger storage space will enable Isetan to maintain adequate goods to meet consumers’ needs. In addition, the risk of experiencing out-of-stock problem will be lower as compared to Metro’s. With the supermarket, Isetan has a wider range of products which in turn increases market share.
    Financing
    ISETAN
    METRO
    • Equity financing
    • Debt financing
    • Large amount of bank borrowings
    Strengths of Isetan: Equity financing is less costly in the long run and bears lesser risk as compared to debt financing. For debt financing, companies are exposed to risks such as forex from their borrowings.
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Awards & Recognition
    ISETAN
    METRO
    • 2006 – Received more than double the no. of Gold & Silver excellence awards as compared to 2005
    • 2009 – Improved Corporate Governance (Band 5 in 2008 to Band 2 in 2009)
    • People Developer Standard certifications
    • Singapore Service Class certifications
    • 1979 – Most Courteous Store Award by STB
    • 1981 – 1st dept. store to receive award from Skills Development Fund for training in Japan
    • 1986 – Isetan Orchard was awarded outstanding planning & design in an intl’ competition
    • 1987 – Sponsored Singapore’s 25th National Day Book to share its commitment in the pursuit of excellence
    • 1997 – NTUC awarded plaque of commendation for good labor union relations; Member’s Choice Award by Diners Club
    • 2009 – Improved Corporate Governance (Band 3 in 2008 to Band 2 in 2009)
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Strengths - Isetan
    • Directors are equipped with relevant industry experience
    • Executives posses relevant qualification and work experience
    • Employees retained despite of poor economy
    • In-house and external training
    • Bonuses rewarded = performance
    Human Resources
    • Vigilantly monitoring of changes to consumers’ needs
    • Target customers includes both men and women
    • Innovative merchandising and marketing strategies
    Marketing & Promotional Strategies
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    SWOT Analysis
    Weakness
    Strengths
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Weakness - Isetan
    ISETAN
    METRO
    • Accounts for the major portion of income
    • Risk ≠ Well-diversified (into other possible sectors)
    • Diversified aspects of generating revenue
    • Risks are well-diversified into both retail and properties
    Dependency on Retail Segment
    Weakness of Isetan: Investing in properties yields a higher return and since Isetan’s focus is not on investment properties, then it may have a lower net income as compared to Metro.
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Weakness - Isetan
    Poor cash flow management
    • Positive cash flow from operating activities; Net decrease in cash & cash equivalents
    • Due to huge amt. of acquisition of financial assets (HTM)
    Position is not well-maintained in the industry
    • Decreasing ROI for the past 5 FY
    • 6.0% (FY 2004) to -0.6% (FY 2008)
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    SWOT Analysis
    Weakness
    Opportunities
    Strengths
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Opportunities
    • Merger with Mitsukoshi Ltd (Jap. Dept. Store)
    • Robust economic growth (Overseas Expansion)
    Integrate wealthier clientele base = Boosts retail presence
    In a better position to cope with intense competition
    • Jobs credit scheme (Relating to Year 2009)
    ≈ 5.5% (Year 2009) & 6.9% (Year 2010)
    Immense opportunities to diversify its operations in established nations
    • Development in e-shopping interface
    Cope effectively with economic downturn
    Retains existing talents without affecting business
    • Promotion of tourism industry by Govt.
    A convenient platform to purchase goods
    Attracts more consumers to patronize with a diverse selection of products
    Policies are adopted by Singapore Govt. to attract more tourists into Singapore
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    SWOT Analysis
    Opportunities
    Threats
    Weakness
    Strengths
  • Introduction
    Abt. Industry
    Co.’s Profile
    Competitors
    SWOT
    Threats
    Economic slowdown = More cautious in spending
    Businesses lose confidence
    Changes in consumers’ fashion taste
    Deter people
    from patronizing
    Held back for the fear of both terrorist attacks & pandemic
    Despite increasing revenue for 5 FYs
    Amt. increased is decreasing drastically
    14.91% (Yr 2004) to 3.26% (Yr 2008)
    Introduction of new fashion brands
    A surge in competitors in both town & suburban areas (313 @ Somerset, ION, Orchard Central…)
    Economic conditions affecting retail industry
    Effects of inflation, global economic crisis
    Fluctuating oil & commodities prices
    Deterioration of business confidence
    Change in consumer trends
    Competitors within industry
    Poor revenue growth
    Terrorism & Pandemic
  • ~The End of IFS Part 1~
    Q&A Session
  • Advanced Financial Accounting
    Interpretation of Financial Statements (2)
  • Financial Year End
    Isetan
    1 January 2008
    31 December 2008
    COMMON PERIOD (9 months)
    1 April 2008
    31 March 2009
    Metro
  • Are the profits of the company adequate and sustainable?
  • Sales Ratio
  • Sales Ratio
    339,360
    328,637
    Isetan
    +3.26
  • Sales Ratio Analysis - Isetan
    • From year 2007 to 2008, Isetan’s Sales had increased by 3.26%.
    Despite tough operating environment, Isetan managed to register growth in Sales turnover.
    Achieved through combination of actions:
    • Securing exclusive brands and promotions
    • Improve on products and events which had good response
    • Leverage on technology to analyze customer buying pattern
    • Optimized merchandising and marketing programmes
  • Sales Ratio Analysis - Isetan
    • From year 2007 to 2008, Isetan’s Sales had increased by 3.26%.
    Aspects to be considered for Isetan’s sustainability of its sales
    • Broad-based slowdown in Singapore economy
    • Competitors introducing new fashion brands
    • New upcoming malls in Orchard shopping belt and suburban area
    • Isetan Scotts’ men’s level underwent major remodeling
    • Enhance sales service through in-house/external staff training
    • Introduced product advisor service for babies department
  • Sales Ratio
    224,409
    200,285
    Metro
    -10.75
  • Sales Ratio Analysis - Metro
    • From year 2008 to 2009, Metro’s Sales had decreased by 10.75%.
    In face of slowdown consumption and tourism, Metro’s sales were affected.
    Factors attributable the generating and sustaining of sales:
    • Four “Accessorize” specialty shops opened in Singapore
    • Strategies to continually refresh merchandise mix
    • Adopting new marketing platforms
    • Improving store layout/Incorporate more lifestyle concepts
    • Slowdown of Singapore economy
    • Metro City Square due to open in 3QFY2010
  • Gross Profit Margin
  • Gross Profit (2007) = 328,637 – (1,836+237,735) = 89,066
    Gross Profit (2008) = 339,360 – (89 + 247,794) = 91, 477
  • Gross Profit Margin Ratio
    91,477/ 339,360
    = 26.96%
    89,066/ 328,637 = 27.10%
    -0.14
    Gross Profit Margin Ratio =
    Gross Profit
    Sales
  • Gross Profit Margin Analysis - Isetan
    • From year 2007 to 2008, Isetan’s GPM had decreased by 0.14%.
    There is a minor fluctuation of Gross Profit Margin Ratio between two years.
    There is an increase in purchases of inventories and related cost
    of $10,059.
    However, there is a substantial decrease in changes in inventories of finished goods of $1,747.
  • Gross Profit Margin Analysis - Isetan
    • From year 2007 to 2008, Isetan’s GPM had decreased by 0.14%.
    Hence, from the above analysisit can be deduced that Isetan’s still generally efficient in managing its COGS.
    However, the downward trend in gross margin suggest that cost of goods sold is increasing which can affect future gross profit.
    • Cost of goods have risen due to change in commodity price
    • Isetan’s may have weak pricing power (bargain sales)
    • Unsold items forced to sell it at lower price
    • Goods are price elastic, Isetan’s sales may be affected.
  • Gross Profit Margin Ratio
    47,410/ 224,409 = 21.27%
    45,211/ 200,285
    = 22.57%
    +1.30
    Gross Profit Margin Ratio =
    Gross Profit
    Sales
  • Gross Profit Margin Analysis - Metro
    • From year 2008 to 2009, Isetan’s GPM had increased by 1.30%.
    This indicates that Metro is efficient in managing its cost of sales and are more liquid with more cash flow.
    There is a decrease in sales of $24,124 and cost of sales of $21,925.
    The increase in GPM could mean that Metro has a favorable pricing power in midst of rising cost of sales.
  • Net Profit Margin
  • Exceptional Items
  • Net Profit Margin Ratio
    (14,787-1,621)/ 339,360
    = 3.88%
    14,849/ 328,637 = 4.52%
    -0.64
    Net Profit Margin Ratio =
    Net Profit
    Sales
  • Net Profit Margin Analysis - Isetan
    • From year 2007 to 2008, Isetan’s NPM had decreased by 0.64%.
    This indicates that company is generating 0.64 cents less in profit for every dollar in sales compared to previous year.
    Contributing factors:
    • Higher expenses like depreciation and rent
    • Exceptional items accounted for (Gain on dilution of share)
  • Net Profit Margin Ratio
    66,283/ 224,409 = 29.54%
    39,623/ 200,285
    = 19.78%
    -9.76
    Net Profit Margin Ratio =
    Net Profit
    Sales
  • Net Profit Margin Analysis - Metro
    • From year 2008 to 2009, Metro’s NPM had decreased by 9.76%.
    This indicates that company is generating 9.76 cents less in profit for every dollar in sales compared to previous year.
    Contributing factor:
    • Fair value of adjustment on investment properties resulted huge deficit
    • Efforts by authorities to stabilize
  • Are the profits adequate and sustainable?
    Sales ↑ 3.26% which achieved through sales strategy
    Gross Profit Margin ↓0.14% due to increase in cost of goods sold and decrease in changes of inventories of finished goods
    Net Profit↓0.64% due to higher expenses like depreciation and rent
    Profits are adequate, Isetan managed to register growth in Sales turnover and able to pay dividends to its shareholders despite economic downturn.
    Profits are sustainable because
    • Isetan Scotts’ men’s level underwent major remodeling
    • Enhance sales service through in-house/external staff training
    • Technology used to analyze customers buying patterns
  • Is the co. investing enough to safeguard future profitability?
  • Fixed Asset Turnover Ratio
    339,360/ 88,216
    = 3.85
    328,637/ 86,548 = 3.80
    +1.32
    FA Turnover Ratio =
    Sales
    Net Fixed Asset
  • Fixed Asset Turnover Ratio Analysis - Isetan
    • From year 2007 to 2008, Isetan’s FA ratio had increased from 3.80 to 3.85.
    This indicates an increased efficiency utilization of FA (property, plant & equipment) to generate sales.
    As there are more additions of office & shop equipment, the amt. of FA bal. increases as well, from $86,548 to $88,216 (% of 1.92)
    As Isetan launched its personalized shopping experience & improved its customer satisfaction, it was able to retain & attract more customers.
  • Fixed Asset Turnover Ratio Analysis - Isetan
    • From year 2007 to 2008, Isetan’s FA ratio had increased from 3.80 to 3.85.
    Hence, from the above analysis, it can be deduced that the increase in the FA turnover ratio is mainly due to the increase in sales.
    The increases in FA is matched by a corresponding increase in sales, from $328,637 to $339,360 (% of 3.27)
    Thereby, leading to an overall increase of FA turnover.
  • Fixed Asset Turnover Ratio
    224,409/ 11,874 = 18.90
    200,285/ 11,965
    = 16.74
    -11.43
    FA Turnover Ratio =
    Sales
    Net Fixed Asset
  • Fixed Asset Turnover Ratio Analysis - Metro
    • From year 2008 to 2009, Metro’s FA ratio had decreased from 18.90 to 16.74.
    This indicates there may be a declined efficiency in the utilization of FA (property, plant & equipment) to generate sales.
    The main contributing factor that resulted in an increase of net FA balance was the revaluation surplus of freehold land.
    However, the amt. was partially net off against the amt. of leasehold land & building reclassified as investment properties.
  • Fixed Asset Turnover Ratio Analysis - Metro
    • From year 2008 to 2009, Metro’s FA ratio had decreased from 18.90 to 16.74.
    As Metro is considered to be a step slower than Isetan in revitalizing their merchandise, for instance, securing exclusive brands, they tend to lose customers.
    Its warehouse is not as big as Isetan’s, therefore, it is possible that Metro faced out-of-stock situations, hence, unable to cater to customers’ demands.
    The resulting increase of FA is from $11,874 to $11,965 (% of 0.77)
  • Fixed Asset Turnover Ratio Analysis - Metro
    • From year 2007 to 2008, Metro’s FA ratio had decreased from 18.90 to 16.74.
    As a result, sales figures declined from $224,409 to $200,285 (% of 10.75).
    Thereby, leading to an overall decrease of FA turnover.
    Hence, from the above analysis, it can be deduced that the decrease in the FA turnover ratio is mainly due to the decrease in sales.
  • Is Isetan investing sufficient?
    • Based on the above ratios calculate, Isetan’s FA turnover ratio is lower than Metro’s.
    • Which is supported by the reports of Isetan acquiring additional shop equipment
    This indicates that Isetan is more active in acquiring FA to generate future income.
    • So as to cater to its newly launched product strategy of enhanced customer benefits
  • Are the finances of the company sensibly and effectively structured?
  • Debt-Equity Ratio
    69,706 / 171,986
    ≈ 0.41
    68,112 / 158,796 ≈ 0.43
    -4.65
    Debt-Equity Ratio =
    Total Liabilities
    Total Shareholder’s Equity
  • Debt-Equity Ratio Analysis - Isetan
    • From year 2007 to 2008, Isetan’s debt-equity ratio has decreased from 0.43 to 0.41
    As the ratio is less than 1, it implies that Isetan has sufficient assets to cover its long-term obligations.
    Low risk of insolvency by adopting a conservative financing strategy of relying entirely on equity rather than debt  Not as “highly leveraged”
    • Retail industry and not capital-intensive
    • Not expanding too much in year 2008
    • Announcement of expansion plans in Nex Mall in Year 2009
    • Will only have a definite impact on its ratio only in FY 2009
  • Debt-Equity Ratio Analysis - Isetan
    • From year 2007 to 2008, Isetan’s debt-equity ratio has decreased from 0.43 to 0.41
    The decrease was due to an increase in its retained earnings which was a result of its dividends being paid out. The dividends paid out were 2 cents per share.
    • However, its directors have maintained that the final dividend of 7.5 cents share will be paid out as usual like FY 2007
    • This will only affect it FY 2009 accounts
  • Debt-Equity Ratio Analysis - Isetan
    • From year 2007 to 2008, Isetan’s debt-equity ratio had decreased from 0.43 to 0.41
    • Solely depends on equity financing.
    • Advantage: Low insolvency risk, less costly in the long run & bears lesser risk as compared to debt financing
    • Downside: Pressures by Isetan to ensure that they retain its shareholders and its share price
    • If Isetan uses debt financing, it will be exposed to risks such as forex from their borrowings
    • However, it is advantageous since it is possible for them to use these finances to generate more earnings & is tax deductible
  • There is NO Interest Expense!!
  • Overall Analysis for Isetan
    Isetan’s financial leverage is relatively good since it has a low debt-equity ratio and does not have to worry about interest expenses that come with borrowing.
  • Times Interest Earned Ratio
    18,264 / 0
    ≈ N.A.
    18,632 / 0≈ N.A.
    N.A.
    Times Interest Earned Ratio
    EBIT
    =
    Interest Expense
  • Times Interest Earned Analysis - Isetan
    • From year 2007 to 2008, Isetan has negligible change in its TIE Ratio
    Retail Industry and has an elastic demand for its goods  dependent on consumers sentiments
    Isetan has adopted the conservative strategy of equity financing alone for its operations
    Does not have to worry about the obligations that comes with debt borrowing. Due to this, it has negligible times interest earned.
  • Debt-Equity Ratio
    376,870 / 936,572
    ≈ 0.40
    345,705 / 888,219 ≈ 0.39
    +2.56
    Debt-Equity Ratio =
    Total Liabilities
    Total Shareholder’s Equity
  • Debt-Equity Ratio Analysis - Metro
    • From year 2008 to 200, Metro’s debt-equity ratio have increased from 0.39 to 0.40
    As the ratio is less than 1, it implies that Metro has sufficient assets to cover its long-term obligations.
    Unlike Isetan, Metro has adopted a strategy of having a mixture of debt financing with equity financing.
    The increase in its debt-equity ratio is due to the increase in its long-term liabilities which is being held by its jointly controlled entities in China.
  • Debt-Equity Ratio Analysis - Metro
    • From year 2008 to 200, Metro’s debt-equity ratio have increased from 0.39 to 0.40
    Its equity reserveshave increased is not due to any issue of shares to its shareholders but is mainly due to its foreign currency translation reserve as well as its revenue reserves
    By using debt financing, Metro may be able to use it to finance its operations and generate earnings as reflected in cash flow statements  increase in its cash generated from operations
  • Debt-Equity Ratio Analysis - Metro
    • From year 2008 to 2009, Metro’s debt-equity ratio have increased from 0.39 to 0.40
    • Advantages of Debt financing
    • Gain tax benefits
    • Obligations are limited only to the loan repayment period.
    • Less expensive for Metro in the long-term
    • Disadvantages of Debt Financing
    • Might cause Metro too much to handle and finance its investments in China subsidiaries and its business activities
  • Times Interest Earned Ratio
    38,947 / 10,283
    ≈ 3.79
    86,482 / 11,232≈ 7.70
    -50.78
    Times Interest Earned Ratio
    EBIT
    =
    Interest Expense
  • Times Interest Earned Analysis - Metro
    • From year 2008 to 2009, Metro’s TIE ratio has decreased from 7.70 to 3.79
    This shows that Metro may have a higher debt burden and a greater possibility of insolvency.
    • Retail industry which is very volatile
    • Heavily dependent on consumers spending power and their preferences, demand is very elastic.
    • Very important for Metro to maintain a high interest coverage ratio.
  • Times Interest Earned Analysis - Metro
    • From year 2008 to 2009, Metro’s TIE ratio has decreased from 7.70 to 3.79
    Metro’s TIE ratio of 3.79 might not give investors the confidence that they will be able to pay its interest obligations when it falls due.
    However, its debt-equity ratio of 0.40 shows otherwise.
    Its debt-equity ratio establishes that Metro
    • Maintains a relatively low risk of facing insolvency issues since it has a balanced strategy of using both debt and equity financing.
  • Is Isetan’s finances effectively structured?
    • Based on the above ratios calculate, Isetan’s Debt-Equity Ratio is comparative with Metro
    • Due to Isetan’s conservative policy of maintaining equity financing
    This indicates that Isetan has good financial leveraging, low risk of insolvency. However, there is room for improvements
    • Could improve its finances through debt financing to improve revenue
  • ~The End of IFS Part 2~
    Q&A Session