Adairs Limited Analysis Assignment Sample

Subject Name : General Accounting and Finance

Cash Flow Statement Analysis - Part A

Cash Flow Analysis

(LOTH, 2020) says that cash flow statement explains how the cash is utilized by the company and from the where the cash comes i.e cash inflow and how and where it is utilized i.e. cash outflow. In case off Adairs Ltd, following is the Cash flow for last three years:-

Cash analysis

Particulars	2019	% change	2018	%Change	2017	% Change	2016

CASH FLOWS FROM OPERATING ACTIVITIES
Cash Revenue	379236	109%	347195	118%	2,93,022	106%	2,77,047
Payment to Supplier	-330437	112%	-295312	119%	-248550	106%	-235447
Interest received	77	175%	44	80%	55	68%	81
Income tax paid	-12666	111%	-11449	76%	-15152	175%	-8659
Interest paid	-1193	86%	-1387	80%	-1731	89%	-1936
IPO transaction costs paid							-7229
Net cash flows from operating activities	35017	90%	39091	141%	27644	116%	23857
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant, equipment and intangibles	-6959	98%	-7095	63%	-11330	110%	-10324
Net cash flows used in investing activities	-6959	98%	-7095	63%	-11330	110%	-10324
CASH FLOWS FROM FINANCING ACTIVITIES
Drawings of borrowings	19000
Repayment of borrowings	-19000	112%	-17000
Payment of borrowing costs	-50			0%	-89
Dividends paid	-24052	145%	-16587	100%	-16588	200%	-8294
Net cash flows used in financing activities	-24102	72%	-33587	202%	-16588	200%	-8294
Net increase in cash and cash equivalents	3956	-249%	-1591	438%	-363	-7%	5239
Cash and cash equivalents at beginning of the period	12718	89%	14313	98%	14676	156%	9437
CASH AND CASH EQUIVALENTS AT END OF PERIOD	16708	131%	12718	89%	14313	98%	14676

It can be seen that company is growing in term so sales growth and it is also reflected in its cash flow statement, cash inflow from operations are also growing i.e. from 347,195 in 2018 to 379,236.But Net cash flow from operation has also decreased, i.e. 39,091in 2018 to 35,017 to 2019. From the table above it can be seen that income tax outflow payment has increased by 11% from 2018 to 2019 but has reduced from year 2017and major fall can be seen in Net Cash flow from operation i.e 90% in 2019 , where as it was 141% in 2018 from 2017. No major change has come in Asset cash inflow , Cash dividend were paid in 2019 which is higher by 45% more cash outflow than in 2018.

Which shows from cash outflow of payments are made are on higher side. It can be represented as shown in the graph

The main components of cash flow is cash from operation, cash flow from financing and cash from investing activities. Accounting methods of accounting is also cash and accrual accounting. (https://www.fundera.com/, 2020) suggest that If a company is in a highly volatile industry or suffering cash issues, they should do cash flow analysis more often otherwise it can be done by whatever time period a company may choose generally four weeks or one month is a reasonable time period .

Cash Flow Statement Analysis - Part B

Calculation of Ratios:-

Ratios	Formulae	Unit	2019	2018	2017	2016
Return on equity	=Profit After Tax/ Equity	in %	25%	26%	21%	27%
Operating Profit Margin	=Operating Profit/ Sales	in %	9%	10%	8%	10%
Inventories turnover period	=COGS/Average inventory	No days	4	4	4
Current ratio	=Current Assets/ Current Liabilities	Times	1.48	1.59	1.62	1.66
Debt to assets ratio	=Debt/ Asset	Times	0.12	0.13	0.22	0.23
Interest cover ratio	=EBIT / Interest	Times	35.12	30.40	15.83	19.56

Data used to calculate above ratios as taken from the annual reports 2017, 2019:-

Particulars			2019	2018	2017	2016
Sales		in $	344430	314769	264964	253182
EBITA		in $	43446	45261	30812	39231
PAT		in $	29643	30561	21017	26143
Inventory		in $	42,782	33,568	32,992	26,272
Average Inventory	(Opening + Closing) /2	in $	38,175	33,280	29,632
Debt		in $	24,999	24,999	41,955	41,921
Shareholder's Equity		in $	1,18,317	1,16,180	1,00,312	95,590
Assets		in $	2,10,274	1,94,993	1,92,681	1,83,678
Current Assets		in $	68,708	54,451	51,793	47,547
Current liabilities		in $	46,567	34,140	32,022	28,575
Interest		in $	1237	1489	1946	2006
COGS		in $	1,47,306	1,25,119	1,08,163	98,863

Source of Formulae: https://www.edupristine.com/blog/ratio-analysis-ratios-formulae

(ratio-analysis-ratios-formulae , n.d.)

Cash Flow Statement Analysis - Part C

Working Capital Management Analysis

(Trisha, n.d.) Describes the working capital is the difference between current assets

and current liabilities. Where Current assets includes cash, accounts receivable, inventory etc. And Current liabilities are account payable and other minor liabilities if any.

Following is the data for working capital Calculation of 3 years

Cash conversion Cycle = DIO (Days inventory outstanding) + DSO (Days sales outstanding) – DPO (Days payable outstanding)

		2019	2018	2017	2016
Current Assets	in $	68,708	54,451	51,793	47,547
Current liabilities	in $	46,567	34,140	32,022	28,575
Working Capital		22,141	20,311	19,771	18,972
CCC		-37	-42	-37
DSO		0	0	0
DIO		4	4	4
DIP		41	46	41

Current ratio

=Current Assets/ Current Liabilities

Times

1.48

1.59

1.62

1.66

Working capital management is the practice and technique to control all item of current assets and liabilities to keep the working capital requirement to a minimum level so that the cost of capital can also be reduced, but it should be too low also which might create a liquidity deficiency situation so there has to be ideal situation which generally is Current Ratio or working capital ratio 2:1

From the above calculation it can be seen CCC in this case is – negative , Adair is a retail company So the debtors or trade receivable is almost negligible and companies supplier are get paid just like in any other industry . So the company is cash rich company and there is no issue of working capital, though the trend is that is increasing from year to year i.e. 18972 in 2016 to 22141 in 2019.

Current ratio is 1.66 in 2016 and has come down to 1.48 time again the trend is that it is following, so it shows that there is some issue as far as the management of cash is concerned though the company has very less inventory only for 4 days and Debtors for 0 days. But still company has not achieved the ideal ratio of 2:1. But again it is also important to see that 90% of the current Assets are quick liquid assets, so if company calculated Quick ratio it will surely be more than 1:1. That makes the company safe in terms of liquidity.

Cash Flow Statement Analysis - Part D

Ratio Analysis

Ratio analysis is the popular technique used by business analyst to measure the financial health or performance of the company. Various business financial ratios of the company is indicator of that how well the company is performing in terms of different variables against its previous years of industry standards or may be peer or competitors companies.

The ratio are of different and categorised four categories:-

Profitability Ratio- Profitability ratio helps in measuring the its ability to earn profit and here in this case Return on Equity, operating profit ratio are the profitability ratio calculated for the last 4 years , and it is observed that Return on Equity is ranging between 21% to 27% and in current year it is 25% shows that company has ability to give returns to its shareholders, and from investors perspective it is profitable. Same way Operating Profit margin is also 8% to 10% which is again a positive sign and treated as good % and no major descripency is observed in these four year from 2016-2019 So there is consistency.

Solvency Ratio – it shows that how much solvent a company is in terms of liquidity and if there is a situation to payback their liability how quickly the creditors can expect their payment. To measure this the Current Ratio is calculated and is shown that it is somewhere between 1.5 on an average for these years and again consistency is maintained. For retail company like this it is ok to have this ratio between this ranges.

Leverage/Gearing Ratio – Debt to Asset Ratio and interest coverage ratio are ratio considered in the category of gearing ratio, this is again to see long term repayment capability of the company, that whether the company is able to earn the profit to cover its financial expense i.e. cost of capital. And Debt to Asset ratio is to see that assets of companies are enough to recover its debt, in case it is no even 20% and again ranging 12% to 13% for last two years again a healthy sign.

Efficiency Ratio – Efficiency ratio show that how the company’s turnover is in terms of debtors, inventory, assets etc. Inventory Turnover is 4 days which is quite efficient number to show working capital blockage in inventory is very less.

(Annual Report, n.d.) Data is taken from the balance sheet, income statement and cash flow to calculate various ratios, other than above ratios there are few more has been the part of Annual report to show the financial performance of the Adair Ltd.,

year	2019	2018	2017	2016	2015
Sales ($'000)	344430	314769	264964	253182	210878
EBIT ($000)	43446	45261	30812	39231	33137
Net profit before tax	42286	43816	28921	38823	31409
Net profit After tax	29643	30561	21017	26143	21986
Share price at the end of year(in $)	1.42	2.23	0.86	2.49	2.78
Dividend paid per share	14.50%	13.50%	8%	11.5%	0
Earnings per share	18%	18%	13%	16%	15%

PAT /Sales = Return on sales	9%	10%	8%	10%	10%

If above table is analysed further for dividend and capital structure of the company in recent times than as per report itself, there is no major changes in structure in FY 2019. The overall debt facility remains at $50 mn in aggregate which represents a $48.75 mn revolving cash advance (term facility) drawn to $25 mn by year end. The Adair Ltd.,‘s debt equity ratio , fixed coverage ratio and leverage ratio are three important covenants of the debt facility.

Dividends – As declared in the annual report 2019, an interim dividend of 6.5 cents /share was paid to the holders of fully paid ordinary shares on April 2019 and the directors also have declared a final dividend of 8.0 cents/share. It can also be seen from the table above that company is paying its shareholder regularly and it is growing year on year except in 2018.

Operating and Financial Review 2019 - The profit after income tax amounted to $29.6 million (2018: $30.6 million). The EBIT of the Company for FY2019 was $43.4 million (2018: EBIT $45.3 million).

2017	2018	2019
Market price per share (financial year end)	$0.86	$2.23	$1.42
Average settlement period for debtors (days)	0.00	0.00	0.00
EPS	$0.127	$0.184	$0.179
Acid-test ratio (times)	0.48	0.48	0.46
Dividends per share (interim + final)	$0.080	$0.135	$0.145
Gross profit margin	59.18%	60.25%	57.23%
P/E ratio (times)	6.77	12.12	7.93
Sales revenue to capital employed (times)	1.68	1.96	2.12
Return on capital employed	19.55%	28.18%	26.82%
Average settlement period for creditors (days)	41.77	46.31	41.72

References for Adairs Limited Analysis

(2020). Retrieved from https://www.fundera.com/: https://www.fundera.com/blog/the-ultimate-guide-to-cash-flow-analysis#:~:text=Cash%20flow%20analysis%20is%20a,have%20at%20any%20given%20time

Annual Report. (n.d.). Retrieved from https://www.adairs.com.au/: https://www.adairs.com.au/

LOTH, I. (2020, August). articles/stocks/07/easycashflow.asp. Retrieved from https://www.investopedia.com: https://www.investopedia.com/articles/stocks/07/easycashflow.asp

ratio-analysis-ratios-formulae . (n.d.). Retrieved from https://www.edupristine.com/blog/ratio-analysis-ratios-formulae : https://www.edupristine.com/blog/ratio-analysis-ratios-formulae

Trisha. (n.d.). 4-main-components-of-working-capital-explained. Retrieved from https://www.yourarticlelibrary.com: https://www.yourarticlelibrary.com/financial-management/working-capital/4-main-components-of-working-capital-explained/44117

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