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AFA Presentation (Finalized)

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AFA Presentation - Financial Analysis

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AFA Presentation (Finalized)

  1. 1. Advanced Financial Accounting Interpretation of Financial Statements (1)
  2. 2. Content • Client’s requirements • Industry background • Company background • Main Competitors • SWOT Analysis
  3. 3. 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 Client’s Profile
  4. 4. Selling commodities directly to consumers Introduction Abt. Industry Co.’s Profile Competitors SWOT About the Industry 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
  5. 5. With increased competitions, department store needs to consider on both breath and depth of their products Introduction Abt. Industry Co.’s Profile Competitors SWOT About the Industry 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
  6. 6. Conversion from Isetan Emporium (Singapore) Pte Ltd to Isetan (Singapore) Ltd; offered shares to the public Introduction Abt. Industry Co.’s Profile Competitors SWOT Company Background 1970 Incorporated and headquartered in Singapore 1972 Opened its first store; the 1st Japanese dept. store to be opened in Singapore 1981
  7. 7. 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
  8. 8. Introduction Abt. Industry Co.’s Profile Competitors SWOT Company Background • Retailing • Operating Retailing • Leasing of property Others  Business Segment  Stores Operating in… Scotts Orchard Katong Tampines  Standalone Mango Boutique • Intl’ fashion designer lines, cosmetics and family-oriented merchandise • Catering to both local and tourist markets
  9. 9. Introduction Abt. Industry Co.’s Profile Competitors SWOT Competitors
  10. 10. • Rank in accordance to Share Capital 1. Metro – S$630,776,676 2. C K Tang Ltd – S$236,984,226 3. Robinsons – S$85,937,494 • Compared to Isetan (S$41,250,000), the main competitor is… Main Competitor Introduction Abt. Industry Co.’s Profile Competitors SWOT
  11. 11. • Rank in accordance to No. of Outlets 1. Metro – 4 2. C K Tang Ltd – 1 3. Robinsons – 3 • Compared to Isetan (4), the main competitor is still… Main Competitor Introduction Abt. Industry Co.’s Profile Competitors SWOT
  12. 12. Introduction Abt. Industry Co.’s Profile Competitors SWOT SWOT Analysis Strengths
  13. 13. Introduction Abt. Industry Co.’s Profile Competitors SWOT Sourcing & Merchandizing Strengths of Isetan: Being a step ahead of Metro, Isetan will be able to attract more consumers to the exclusive brands they have. ᴥ Secured exclusive brands & promotions ᴥ Wide range of international collection ᴥ Technology used to analyze customers buying patterns ISETAN ᴥ Will be refreshing merchandise mix by improving new brands and new layouts ᴥ Will be incorporating more lifestyle concepts in stores METRO Product Quality Strengths of Isetan: Improve customers’ satisfaction, thereby, able to retain and concurrently, attracting more consumers. ᴥ Personalized shopping experience ᴥ Enhanced customer benefits ᴥ Places importance on listening to customers and serving their needs and wants ISETAN ᴥ No personalized shopping experience METRO
  14. 14. Introduction Abt. Industry Co.’s Profile Competitors SWOT Distribution of Products 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. ᴥ A 7-storey high warehouse located in the area of Macpherson ᴥ Presence of a supermarket ISETAN ᴥ A single-storey warehouse & 3-storey office annex located along Pasir Panjang Rd ᴥ No supermarket METRO Financing 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. ᴥ Equity financing ISETAN ᴥ Debt financing ᴥ Large amount of bank borrowings METRO
  15. 15. Awards & Recognition Introduction Abt. Industry Co.’s Profile Competitors SWOT ISETAN 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) 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 METRO
  16. 16. Human Resources  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 Introduction Abt. Industry Co.’s Profile Competitors SWOT Strengths - Isetan Marketing & Promotional Strategies  Vigilantly monitoring of changes to consumers’ needs  Target customers includes both men and women  Innovative merchandising and marketing strategies
  17. 17. Introduction Abt. Industry Co.’s Profile Competitors SWOT SWOT Analysis WeaknessStrengths
  18. 18. Introduction Abt. Industry Co.’s Profile Competitors SWOT 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. ᴥ Accounts for the major portion of income ᴥ Risk ≠ Well-diversified (into other possible sectors) ISETAN ᴥ Diversified aspects of generating revenue ᴥ Risks are well-diversified into both retail and properties METRO Weakness - Isetan
  19. 19. Poor cash flow management Position is not well-maintained in the industry ᴥ Decreasing ROI for the past 5 FY ᴥ 6.0% (FY 2004) to -0.6% (FY 2008) ᴥ Positive cash flow from operating activities; Net decrease in cash & cash equivalents ᴥ Due to huge amt. of acquisition of financial assets (HTM) Weakness - Isetan Introduction Abt. Industry Co.’s Profile Competitors SWOT
  20. 20. WeaknessOpportunities Strengths Introduction Abt. Industry Co.’s Profile Competitors SWOT SWOT Analysis
  21. 21. $ Merger with Mitsukoshi Ltd (Jap. Dept. Store) Integrate wealthier clientele base = Boosts retail presence In a better position to cope with intense competition $ Robust economic growth (Overseas Expansion) ≈ 5.5% (Year 2009) & 6.9% (Year 2010) Immense opportunities to diversify its operations in established nations $ Jobs credit scheme (Relating to Year 2009) Cope effectively with economic downturn Retains existing talents without affecting business $ Development in e-shopping interface A convenient platform to purchase goods Attracts more consumers to patronize with a diverse selection of products Opportunities Introduction Abt. Industry Co.’s Profile Competitors SWOT $ Promotion of tourism industry by Govt. Policies are adopted by Singapore Govt. to attract more tourists into Singapore
  22. 22. Weakness Opportunities Strengths Introduction Abt. Industry Co.’s Profile Competitors SWOT SWOT Analysis Threats
  23. 23. Terrorism & Pandemic Despite increasing revenue for 5 FYs Amt. increased is decreasing drastically 14.91% (Yr 2004) to 3.26% (Yr 2008) Economic slowdown = More cautious in spending Businesses lose confidence Changes in consumers’ fashion taste Effects of inflation, global economic crisis Fluctuating oil & commodities prices Deterioration of business confidence Introduction of new fashion brands A surge in competitors in both town & suburban areas (313 @ Somerset, ION, Orchard Central…) Deter people from patronizing Held back for the fear of both terrorist attacks & pandemic Economic conditions affecting retail industry Change in consumer trends Competitors within industry Poor revenue growth Threats Introduction Abt. Industry Co.’s Profile Competitors SWOT
  24. 24. ~The End of IFS Part 1~ Q&A Session
  25. 25. Advanced Financial Accounting Interpretation of Financial Statements (2)
  26. 26. Financial Year End 1 April 2008 31 March 2009 Metro 1 January 2008 31 December 2008 Isetan COMMON PERIOD (9 months)
  27. 27. Are the profits of the company adequate and sustainable?
  28. 28. Sales Ratio
  29. 29. Sales Ratio Year 2007 Year 2008 % 328,637 339,360 +3.26Isetan
  30. 30. 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. Sales Ratio Analysis- Isetan 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
  31. 31. From year 2007 to 2008, Isetan’s Sales had increased by 3.26%. Aspects to be considered for Isetan’s sustainability of its sales Sales Ratio Analysis- Isetan • 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
  32. 32. Year 2008 Year 2009 % Sales Ratio 224,409 200,285 -10.75Metro
  33. 33. 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. Sales Ratio Analysis- Metro 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
  34. 34. Gross Profit Margin
  35. 35. Gross Profit (2007) = 328,637 – (1,836+237,735) = 89,066 Gross Profit (2008) = 339,360 – (89 + 247,794) = 91, 477
  36. 36. Gross Profit Margin Ratio Year 2007 Year 2008 % Isetan 89,066/ 328,637 = 27.10% 91,477/ 339,360 = 26.96% Gross Profit Margin Ratio = Gross Profit Sales -0.14
  37. 37. 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. Gross Profit Margin Analysis - Isetan 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.
  38. 38. • 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 Analysis - Isetan However, the downward trend in gross margin suggest that cost of goods sold is increasing which can affect future gross profit. Hence, from the above analysis it can be deduced that Isetan’s still generally efficient in managing its COGS. From year 2007 to 2008, Isetan’s GPM had decreased by 0.14%.
  39. 39. Year 2008 Year 2009 % Metro 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
  40. 40. 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. Gross Profit Margin Analysis - Metro 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.
  41. 41. Net Profit Margin
  42. 42. Exceptional Items
  43. 43. Net Profit Margin Ratio Year 2007 Year 2008 % Isetan 14,849/ 328,637 = 4.52% (14,787-1,621)/ 339,360 = 3.88% Net Profit Margin Ratio = Net Profit Sales -0.64
  44. 44. 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. Net Profit Margin Analysis - Isetan Contributing factors: • Higher expenses like depreciation and rent • Exceptional items accounted for (Gain on dilution of share)
  45. 45. Year 2008 Year 2009 % Metro 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
  46. 46. 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. Net Profit Margin Analysis - Metro Contributing factor: • Fair value of adjustment on investment properties resulted huge deficit • Efforts by authorities to stabilize
  47. 47. 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
  48. 48. Is the co. investing enough to safeguard future profitability?
  49. 49. Fixed Asset Turnover Ratio Year 2007 Year 2008 % Isetan 328,637/ 86,548 = 3.80 339,360/ 88,216 = 3.85 FA Turnover Ratio = Sales Net Fixed Asset +1.32
  50. 50. 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. Fixed Asset Turnover Ratio Analysis - Isetan 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.
  51. 51. Thereby, leading to an overall increase of FA turnover. Fixed Asset Turnover Ratio Analysis - Isetan The increases in FA is matched by a corresponding increase in sales, from $328,637 to $339,360 (% of 3.27) 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. From year 2007 to 2008, Isetan’s FA ratio had increased from 3.80 to 3.85.
  52. 52. Year 2008 Year 2009 % Metro 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
  53. 53. From year 2008 to 2009, Metro’s FA ratio had decreased from 18.90 to 16.74. Fixed Asset Turnover Ratio Analysis - Metro However, the amt. was partially net off against the amt. of leasehold land & building reclassified as investment properties. 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.
  54. 54. 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. Fixed Asset Turnover Ratio Analysis - Metro 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)
  55. 55. From year 2007 to 2008, Metro’s FA ratio had decreased from 18.90 to 16.74. Thereby, leading to an overall decrease of FA turnover. Fixed Asset Turnover Ratio Analysis - Metro 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. As a result, sales figures declined from $224,409 to $200,285 (% of 10.75).
  56. 56. Is Isetan investing sufficient? Based on the above ratios calculate, Isetan’s FA turnover ratio is lower than Metro’s. This indicates that Isetan is more active in acquiring FA to generate future income.  Which is supported by the reports of Isetan acquiring additional shop equipment  So as to cater to its newly launched product strategy of enhanced customer benefits
  57. 57. Are the finances of the company sensibly and effectively structured?
  58. 58. Debt-Equity Ratio Year 2007 Year 2008 % Isetan 68,112 / 158,796 ≈ 0.43 69,706 / 171,986 ≈ 0.41 Debt-Equity Ratio = Total Liabilities Total Shareholder’s Equity -4.65
  59. 59. 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. Debt-Equity Ratio Analysis - Isetan 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
  60. 60. 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. Debt-Equity Ratio Analysis - Isetan • 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
  61. 61. 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 Debt-Equity Ratio Analysis - Isetan • 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
  62. 62. There is NO Interest Expense!!
  63. 63. 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. Overall Analysis for Isetan
  64. 64. Times Interest Earned Ratio Year 2007 Year 2008 % Isetan 18,632 / 0 ≈ N.A. 18,264 / 0 ≈ N.A. Times Interest Earned Ratio EBIT Interest Expense N.A. =
  65. 65. From year 2007 to 2008, Isetan has negligible change in its TIE Ratio Times Interest Earned Analysis - Isetan 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.
  66. 66. Debt-Equity Ratio Year 2008 Year 2009 % Metro 345,705 / 888,219 ≈ 0.39 376,870 / 936,572 ≈ 0.40 Debt-Equity Ratio = Total Liabilities Total Shareholder’s Equity +2.56
  67. 67. 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. Debt-Equity Ratio Analysis - Metro 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.
  68. 68. From year 2008 to 200, Metro’s debt-equity ratio have increased from 0.39 to 0.40 Its equity reserves have 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 Debt-Equity Ratio Analysis - Metro 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
  69. 69. From year 2008 to 2009, Metro’s debt-equity ratio have increased from 0.39 to 0.40 • Advantages of Debt financing o Gain tax benefits o Obligations are limited only to the loan repayment period. o Less expensive for Metro in the long-term Debt-Equity Ratio Analysis - Metro • Disadvantages of Debt Financing o Might cause Metro too much to handle and finance its investments in China subsidiaries and its business activities
  70. 70. Times Interest Earned Ratio Year 2008 Year 2009 % Metro 86,482 / 11,232 ≈ 7.70 38,947 / 10,283 ≈ 3.79 Times Interest Earned Ratio EBIT Interest Expense -50.78 =
  71. 71. From year 2008 to 2009, Metro’s TIE ratio has decreased from 7.70 to 3.79 Times Interest Earned Analysis - Metro 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.
  72. 72. From year 2008 to 2009, Metro’s TIE ratio has decreased from 7.70 to 3.79 Times Interest Earned Analysis - Metro 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.
  73. 73. Is Isetan’s finances effectively structured? Based on the above ratios calculate, Isetan’s Debt-Equity Ratio is comparative with Metro This indicates that Isetan has good financial leveraging, low risk of insolvency. However, there is room for improvements  Due to Isetan’s conservative policy of maintaining equity financing  Could improve its finances through debt financing to improve revenue
  74. 74. ~The End of IFS Part 2~ Q&A Session

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