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Introduction to FINACC LLP Financial Analysis

This report has been prepared on behalf of FINACC LLP for one of its large client Big Spenders Inc. that is planning to expand its portfolio of investments. Big Spenders Inc. is seeking investments opportunities in the Canadian equity market. Since, the Canadian government is going to liberal the laws related to cultivation and legal use of cannabis products (popularly known as marijuana); hence FINACC LLP has selected the Canadian Cannabis Industry which has great potential for heavy growth in the near future period and thus becomes ideal for investing. The report will briefly discuss the Canadian Cannabis industry.

The report has selected one of the top Canadian Marijuana Stock named Aurora Cannabis (NYSE: ACB) and is of the opinion that it can be a great potential investment opportunity for Big Spenders Inc. The report will make a financial analysis of Aurora Cannabis to determine the profitability and financial health of the company, also the analysis will not be made in isolation but a comparative study will be conducted by comparing the financial of Aurora with another top Canadian Marijuana Stock named Aphria Inc (APHA).

At last the report will provide valid recommendations and justification on the basis of financial analysis (both qualitative and quantitative) for suggesting Aurora Cannabis to Big Spenders Inc. for making potential investments in Canadian Cannabis Space.

The Canadian Medical and Recreational Cannabis Industry

Cannabis (aka marijuana) is a psychoactive drug manufactured from the plant of Cannabis and is primarily and legally used for recreational and medical purposes. Tetrahydrocannabinol is the main cannabis’s psychoactive part of the cannabis plant.

The Cannabis Industry includes legal producers, cultivators, independent industries, consumers, researchers and regulators concerning cannabis. The cannabis industry is highly regulated and large levels of restrictions are imposed considering most periods of the history, but recently this sector has rapidly emerged because governments are legalizing the use of cannabis for medical and adult use. Canada following the path of Uruguay has become the 2nd country (after Uruguay) that legalized the medicinal and recreational use of marijuana through laws. Also, Canada has become the 1st country that legalized the private selling of recreational marijuana under law by passing the Bill C-45 in 2018. Recently, Coca-Cola also shown its interests in manufacturing of cannabis infused beverages.

Market value:

The cannabis industry can be considered a multibillion dollar component of a larger pharmaceutical industry. The exact value of cannabis sales worldwide remains unknown as the vast majority of the market remains illicit. With movement around legalization of Cannabis, it is attracting more investments from alcohol and drug companies.

Overview of FINACC LLP

Aurora Cannabis Inc.

Aurora Cannabis Inc. is engaged in the business of legally producing and distributing medicinal cannabis. The Company is horizontally diversified and vertically integrated across every primary segment of the supply chain ranging from design, and facility engineering to genetics research and cannabis breeding, hemp and cannabis production, home cultivation, and derivatives. The company has around 5 sales licenses, 8 licensed manufacturing facilities, and operations in approx 25 countries. The company has a capacity to produce more than 625,000 kgs of cannabis per year. Aurora is the world’s 2nd largest company in cannabis business by market cap, following Canopy Growth Corporation.

Stock Ticker

Company

Industry

Market Cap

CMP

Key people

ACB

Aurora Cannabis Inc.

Biotech & Pharma

 $1.792 B

 $17.80

Michael Singer (interim CEO)

Aphria Inc

Aphria Inc is another company that is engaged in the business of producing cannabis medicinal products. The Company conducts all its production and distribution activities through its Aphria One facility. It mainly produces cannabis derived extracts and adult-use cannabis as per the guidelines of the Canadian Cannabis Act. One of its subsidiaries named Broken Coast Cannabis Ltd enables the company to operate an indoor legal production facility.

Stock Ticker

Company

Industry

Market Cap

CMP

Key people

APHA

Aphria Inc.

Biotech & Pharma

 $1.662 B

 $5.90

Simon D Irwin (interim CEO)

Financial Statement Analysis

Vertical Analysis

ACB Income Statement

APHA Income Statement

Period Ending:

2016

2017

2018

2019

2016

2017

2018

2019

 

30/06

30/06

30/06

30/06

30/06

30/06

30/06

30/06

                 

Revenue

100%

100%

100%

100%

100%

100%

100%

100%

Cost of Revenue, Total

156%

52%

67%

74%

29%

22%

52%

85%

Gross Profit

-56%

48%

33%

26%

71%

78%

48%

15%

 

0%

0%

0%

0%

0%

0%

0%

0%

Total Operating Expenses

419%

162%

273%

259%

113%

107%

62%

137%

Operating Income

-319%

-62%

-173%

-159%

-13%

-7%

38%

-37%

             

Interest Income (Expense), Net Non-Operating

-32%

-4%

345%

28%

3%

25%

53%

32%

Other, Net

-57%

-29%

-31%

-1%

0%

2%

3%

-2%

Net Income Before Taxes

-408%

-96%

140%

-132%

-9%

21%

97%

-7%

             

Provision for Income Taxes

-10%

-24%

15%

-12%

-14%

1%

17%

0%

Net Income After Taxes

-397%

-72%

125%

-120%

5%

21%

80%

-7%

             

Minority Interest

0%

0%

5%

3%

0%

0%

0%

0%

Net Income

-397%

-72%

130%

-117%

5%

21%

80%

-7%

             

Diluted Weighted Average Shares

8958%

1544%

854%

410%

693%

545%

449%

102%

EPS

-4%

0%

0%

0%

0%

0%

0%

0%

Horizontal Analysis

ACB Income Statement

APHA Income Statement

Period Ending:

2016

2017

2018

2019

2016

2017

2018

2019

30/06

30/06

30/06

30/06

30/06

30/06

30/06

30/06

                 

Revenue

1.44

18.07

55.2

247.94

8.43

20.44

36.92

237.11

YOY (% change)

 

1155%

205%

349%

 

142%

81%

542%

                 

Cost of Revenue, Total

2.24

9.48

37.23

184.66

2.45

4.58

19.33

202.3

YOY (% change)

 

323%

293%

396%

 

87%

322%

947%

                 

Gross Profit

-0.8

8.59

17.97

63.28

5.98

15.85

17.59

34.81

YOY (% change)

 

-1174%

109%

252%

 

165%

11%

98%

                 

Total Operating Expenses

6.03

29.26

150.97

642.18

9.52

21.83

23

324.91

YOY (% change)

 

385%

416%

325%

 

129%

5%

1313%

                 

Operating Income

-4.59

-11.19

-95.77

-394.24

-1.09

-1.39

13.92

-87.8

YOY (% change)

 

144%

756%

312%

 

28%

-1101%

-731%

                 

Financial Expense

-1.28

-6.07

173.1

66.01

0.28

5.71

20.82

71.77

YOY (% change)

 

374%

-2952%

-62%

 

1939%

265%

245%

                 

Net Income Before Taxes

-5.87

-17.26

77.33

-328.23

-0.8

4.33

35.86

-15.64

YOY (% change)

 

194%

-548%

-524%

 

-641%

728%

-144%

                 

Provision for Income Taxes

-0.15

-4.3

8.1

-30.31

-1.2

0.13

6.41

0.85

YOY (% change)

 

2767%

-288%

-474%

 

-111%

4831%

-87%

                 

Net Income

-5.72

-12.97

71.94

-290.84

0.4

4.2

29.45

-16.5

YOY (% change)

 

127%

-655%

-504%

 

950%

601%

-156%

                 

EPS

-0.06

-0.06

0.13

-0.29

0.01

0.06

0

-0.11

YOY (% change)

 

0%

-317%

-323%

 

500%

-100%

0%

 

Ratio Name

Formula

2016

2017

2018

2019

2016

2017

2018

2019

Liquidity Ratios

Current Ratio

Current Assets / Current Liabilities

0.66

8.25

2.92

1.52

17.24

17.38

4.44

5.64

Quick Ratio

Cash Equivalents + ST Invest + Accounts Receivables / Current Liabilities

0.09

1.75

0.52

0.45

15.04

4.14

1.10

0.91

       

Profitability Ratios

Net Profit Margin

NP / Net sales

-397.2%

-71.8%

130.3%

-117.3%

4.7%

20.5%

79.8%

-7.0%

Gross Profit Margin

GP / Net sales

-55.6%

47.5%

32.6%

25.5%

70.9%

77.5%

47.6%

14.7%

Operating profit margin

Operating Profit/ Net sales

-318.8%

-61.9%

-173.5%

-159.0%

-12.9%

-6.8%

37.7%

-37.0%

Return on Assets

Net income/ Total Assets

-31.09%

-4.02%

3.81%

-5.29%

1.10%

1.33%

2.24%

-0.68%

Return on Equity

Net income/ Shareholder's Equity

-95.97%

-5.92%

4.65%

-6.63%

1.14%

1.53%

2.53%

-0.97%

Shareholder’s Equity

Total Assets - Total Liabilities

5.97

218.93

1548.36

4385.64

35.01

273.87

1164.01

1704.74

       

Efficiency Ratios

Asset Turnover Ratio

Net Sales / Total Assets

24.161%

8.254%

3.565%

5.653%

24.079%

7.463%

3.172%

13.909%

Inventory Turnover

COGS / Total Inventory

0.54

0.80

0.86

1.12

0.88

0.87

0.66

1.83

       

Capital Structure Analysis Ratios

Debt to Equity

Total Debt / Total Equity

0.74

0.29

0.13

0.09

-

0.12

0.02

-

Recommendation on FINACC LLP Financial Analysis

Aurora Cannabis Inc. seems to be an attractive investment avenue for investors keen on benefiting from the dynamics of the highly growing multibillion cannabis market. However the company made losses in the FY 2019 despite of increase in revenue YOY by 350% (approx) because the COGS and operating expenses simultaneously increase by a whooping rate of 350% and 325% respectively. But the company has intelligently invested in growing its asset base and spending in R&D that are going to the company in boosting its operations as soon as the Health Canada issues required licenses.

By analyzing the ratios of the company, it has been found that the current ratio of the company for FY 2019 (1.52) is a little low than the ideal ratio of 2:1; also it decreased from levels of 3:1 from previous financial year. It indicates that either the current asset pool has been decreased or liabilities have been increased, however considering a satisfactory current ratio of 1.52:1, the company will not face any liquidity issue in the near future.

It is also worth noting that the profitability and efficiency of Aurora Cannabis Inc. is on an increasing trend while the debt to equity ratio is on a decreasing trend YOY.

Therefore Aurora Cannabis Inc. stock price is expected to raise high in the early future period and has the potential to deliver multi-bagging returns if the company executes its cannabis business operations according to the planning of the management and improved efficiency.

Reference for FINACC LLP Financial Analysis

Aphria Inc. (2020). Annual Report 2019. http://www.annualreports.com/Company/aphria

Aurora. (2020). Annual Report 2019. https://assets.ctfassets.net/rhxhcf3cql1g/3d8H3svPrIddwiwp4z4PK1/3da954fa9387251e7c6cb011a992d4ba/2019-Annual_Report.pdf

Campbell, J. L., D'Adduzio, J., Downes, J., & Utke, S. (2019). Do Investors Adjust Financial Statement Ratios when Financial Statements Fail to Reflect Economic Substance? Evidence from Cash Flow Hedges. Evidence from Cash Flow Hedges (April 2019).

Cucchiella, F., D’Adamo, I., & Gastaldi, M. (2015). Financial analysis for investment and policy decisions in the renewable energy sector. Clean Technologies and Environmental Policy, 17(4), 887-904.

Gabric, D. (2018). Determination of Accounting Manipulations in the Financial Statements Using Accrual Based Investment Ratios. Economic Review: Journal of Economics and Business, 16(1), 71-81.

Gürel, E., & Tat, M. (2017). SWOT analysis: a theoretical review. Journal of International Social Research, 10(51).

Jalbert, T. (2017). A Model for Forecasting Small Business Financial Statements and Firm Performance. Business Education & Accreditation, 9(2), 61-84.

Pierson, K., Hand, M. L., & Thompson, F. (2015). The government finance database: A common resource for quantitative research in public financial analysis. PloS one, 10(6).

Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial accounting theory and analysis: text and cases. New Jersey: John Wiley & Sons.

The Motley Fool. (2020). The 10 Largest Canadian Marijuana Stocks. https://www.fool.com/investing/2020/01/25/the-10-largest-canadian-marijuana-stocks.aspx

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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