Background description of JATCORP Ltd.
Ratio Analysis and Going Concern Assumption.
Background information about JAT.
Jatenergy Limited is a public listed company on ASX. JAT energy limited is a fast growing FMCG company. It helps Australian companies to trade with and build their brands in China and other Asian markets.
The revenue stream of the company has been staggering and has risen from $1 million in 2010 to around $ 30 million in 2018( (Jatenergy Limited, 2020).
The company deals in dairy products such as infant formula, vitamins and household products including canola oil.
The company also provides export services. The export services provided by the company are fast, cost effective and serve as a one stop solution for Australian companies seeking to operate in China. The company’s comprehensive logistic services include shipping, warehousing, and showroom support. The company also deals in Chinese Inspection, Quarantine clearances, B2C and B2B platforms.
The company follows Australian Accounting Standards and since it is operating in China also, it is subject to China’s regulations also.
While examining financial statements of the company for the year ended 30th June 2019 and 30th June 2018, following figures are observed:
Part A Table 1: Ratios
Ratio 2019 2018
Gross Margin Ratio 0.10 0.036
Net Profit Ratio -0.30 -0.53
Asset Turnover 1.74 0.151
Return on Assets -0.44 -0.04
Current Ratio 1.76 3.28
Quick Ratio 1.40 3.28
Inventory Turnover 20.32 Not determinable as Inventory figures are Nil
Debts Turnover 17.17 0.39
Debt/Equity 0.73 0.30
Equity Ratio 0.39 0.47
The following can be inferred from the above ratios
Gross Margin Ratio has increased significantly from 2018 in 2019
Net Profit Ratio is negative in 2018 as well as 2019 and it has increased in 2019 from 2018.
Return on Assets indicates the percentage of how profitable a company’s assets are in generating revenue. It shows how much earnings a business can derive from each dollar of asset it possesses. It can be observed that Return on Assets has decreased significantly from 2018 in 2019. (From -4% in 2018 to -44% in 2019). A falling return on assets ratio indicates that company has over invested in assets or company’s net income has decreased.
Current Ratio indicates as to how well a company can pay its short-term obligations. The formula for calculating current ratio is “Current Assets/Current Liabilities”. This ratio is also called “Working capital ratio”. Current Ratio for 2019 is 1.76, which implies that business has AUD 1.76 of current assets for every AUD 1 of current liabilities. Current Ratio has reduced in 2019 from 2018 (From 3.28 in 2018 to 1.76 in 2019). Decline in current ratio implies increase in short term obligations or reduction in amount of current assets or both. It can be observed that current ratio is decreased from 3.28 in 2018 to 1.76 in 2019.
Quick ratio indicates company’s short-term position and reflects that how well it can meet its short-term liabilities with its liquid assets. This ratio is also called acid test ratio since this ratio indicates the company’s ability to use its most liquid assets to pay its short-term obligations. This ratio is calculated by dividing current liabilities by Liquid assets. Liquid assets are calculated by excluding stock and prepaid expenses from Current Assets. It can be observed has reduced from 2018 in 2019(From 3.28 in 2018 to 1.4 in 2019) which indicates that company has taken more debt and its slow to collect its accounts receivables.
Activity Ratio s
Asset turnover ratio in 2019 is 1.74 which implies additional AUD 1.74 is generated by every 1 AUD of sales. Higher the Asset turnover ratio, better it is. The higher Asset turnover ratio implies that company is generating revenue from its assets more efficiently. A low asset turnover ratio implies company is not efficiently employing its assets to generate the sales. It can be observed that Asset turnover ratio has increased significantly in 2019 from 2018(from 0.15 in 2018 to 1.74 in 2019). Hence it can be said that the company is becoming more efficient.
Debt/Equity ratio is calculated as “ Total Liabilities/Shareholder’s Equity”. This ratio computes company’s financial leverage. This ratio indicates how well company shareholders’ equity can cover all outstanding debts. The lower the Debt/Equity ratio, the better it is as it implies lower risk to shareholders. Debt/Equity ratio has increased in 2019 from 2018 (From 0.3 to 0.73). It implies that company is being financed by debts rather than from its own financial ratio, which is a dangerous trend.
How the above ratio analysis affects the Audit engagement
Ratio analysis and comparison amongst them are especially useful for auditors to have better understanding of the business. The financial ratios of any company have significant relation with the auditor’s opinion. Auditors can use ratio analysis in their audit to compare ratios for the current year with the ratios of prior year. Ratio Analysis also helps the auditors to perform analytical procedures.
Identification of account(s) which might be misstated based on results of ratio analysis
Inventory turnover ratio for 2018 is indeterminate because value of Inventory is nil in 2018. Hence it appears that Inventory ledger may be misstated for 2018.
Going Concern Basis of Accounting
Under the going concern basis of accounting, the financials are prepared assuming that the company is a going concern and its operations will continue in the certain future. Under the assumption of going concern, assets and liabilities are recorded assuming that the company will be able to convert its assets into cash and pay off its liabilities in the ordinary course of business (Auditing & Assurance Standards Board, 2020).
Financial factors to be considered while assessing whether JAT will continue its operation as a going concern
Revenue or profitability indicators
Funding and liquidity indicators
Non-Financial factors to be considered while assessing whether JAT will continue its operation as a going concern
How big and complex the business of company is
The type and state of the business
JATCORP Ltd. is a listed company in the energy sector. It has 4 subsidiaries. The company has a big network in China which offers substantial opportunities for Australian brand owners.
The company has invested around AUD 1.1 billion and has established a large data centre and online platform with Alibaba in China (Jatenergy Limited, 2020).
The company supplies Australian products to department stores, supermarkets and pharmacies in many regions across China
The company also operates stores for Major Australian and international brands on on various online platforms.
The following information is gathered from the Audit reports of the company as at 30th June’2019 and as at 30th June, 2018
Table 2: Audit report information
Number of Subsidiaries
Financial year end date
Audit firm’s name
LNP Audit + Assurance
Audit Partner’ Name
Type of Audit Opinion
Audit report date
27th August 2019
Total annual audit fee
Total Non-Audit fee
Audit opinion with reference to the Australian Accounting Standards indicate that financials of Jatenergy Limited and its subsidiaries are in accordance with the Corporation Act,2001 and complies with Australian Accounting Standards.
The above indicate that financial report of Jatenergy limited and its subsidiaries give a true and fair view of the Group’s financial position and comply with requirements of Australian Accounting Standards.
It implies that it is unqualified opinion
With reference to Australian Assurance and Auditing Standards , auditor states that sufficient audit evidence has been obtained to form an opinion on financial statements of Jatenergy limited.
Auditing & Assurance Standards Board. (2020, September 8). www.auasb.gov.au. Retrieved from www.auasb.gov.au: https://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf
Jatenergy Limited. (2020, September 9). www.jatenergy.com. Retrieved from www.jatenergy.com: https://jatenergy.com/
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