FIN600 Financial Management Case Study Sample
Context
The purpose of the assignment is to provide you with the opportunity to apply the knowledge and skills acquired in FIN600 Financial Management, to a practical task, involving the use of ‘real?world’ accounting information. This is intended to consolidate your accounting knowledge and skills.
Instructions
The basic requirement is to undertake a general financial analysis, comparing financial position and performance over the two most recent financial years, of an ASX listed company. Your Learning Facilitator will provide the details of the ASX listed company. The annual report for the chosen company should be available on the company website and/or will be provided by your Learning Facilitator.
Note: Assessment 2 submissions based on the incorrect company or a company not chosen by the Facilitator will be regarded as a Non-Submission and no grade will be allocated.
Non-Submissions of Assessment 2 will prohibit a Supplementary assessment for the student.
The analysis should consider each of the following financial ratios:
- profitability and market performance
- efficiency,
- liquidity,
- capital structure
Note: Please use the ‘consolidated’ data in conducting your analysis.
You are only required to look at the most recent financial report. For those ratios which involve averages, you will calculate an average for the most recent year only, the prior year ratio calculation will NOT consider average calculations.
This assignment will contain two elements:
1. Schedule(s) of relevant ratios and other useful calculations
- The detailed calculation of relevant ratios and other useful calculations should be included, as one appendix, prepared using Excel. An example template is provided under the assessment 2 information, FIN600 Assessment 2 Appendix template.xls.
- You will be advised by your facilitator as to which ratios to calculate.
- You are advised to show the formulae used in determining particular ratios and other figures.
2. A written report
The written report is the main element of this assessment. A sample template is provided under the assessment 2 information, FIN600 Assessment 2 report template.doc.
The written report should:
- Explain what is revealed by the ratios and other calculations, in the context of the company’s profitability, asset efficiency, liquidity, capital structure, and market performance.
- In particular, any important changes over the two financial years should be identified, discussed and, where possible, explained.
- Provide an overall assessment of whether the company, over the recent financial year, has been better than the previous financial year, in the perspective of existing equity investors (shareholders).
In preparing this report, students should:
- analyse the financial statements of the business;
- identify key ratios and apply ratio analysis;
- argue the case of why the organization may or may not succeed in the future and what the business should be doing to help it succeed;
- consider the impact of the political and competitive environment on the business;
- include external factors that need to be taken into consideration and the likelihood of a merger or acquisition;
- provide a recommendation, that is, would you invest in this company after your own analysis or under what circumstances would you buy/save the business?
Points to consider
i. You are encouraged to seek and use additional public information about the company from sources, other than the annual report (for example, the internet, journal articles, newspapers, and business magazines).
ii. However, it is NOT envisaged that you will be engaged in extensive research of this nature and it is expected that the annual report will be the primary resource relied upon, in completing the assignment.
iii. You are asked NOT to try and make direct personal contact with the company or its officers (for example by telephone, fax, letter or email), in an attempt to gather further information.
iv. It is important to note that you must NOT reproduce company promotional material from the annual report or company website and represent it as critical analysis.
v. You will be provided relevant share price data for the company by your facilitator so that investment ratios (such as a price earnings ratio) can be calculated.
vi. You may find it useful to consult accounting references, in addition to the prescribed text, which deals with the analysis and interpretation of company financial reports.
vii. As this is a Masters-level subject, students are expected to engage with high quality credible resources (eg. academic journal articles) to support and develop arguments and position statements, using the Torrens University.
Library: http://library.laureate.net.au. References to ‘Wikipedia’ or similar unsubstantiated sources will not be accepted.
viii. It is essential that you use the appropriate APA 6th referencing style, for citing and referencing research. The assignment is to include in-text citations and a reference list following the appropriate APA 6th referencing style. Please see more information on referencing here: https://library.torrens.edu.au/academicskills/apa/tool
Solution
1 Introduction
1.1 Background and Business
Discussion
Financial analysis can be stated as a tool that enables one to understand financial power and weakness (Pandey & Jaiswal 2011). It further enables taking decisions regarding the investment. In this report, After pay, a pay later business providing a digital platform, is considered for the study. The study will evaluate the performance of the company through ratio analysis and discussion of the annual report. University Assignment Help, The focus will be on profitability, liquidity, efficiency and solvency. The finding will ascertain whether the business is profitable and viable to be invested in.
Description of Afterpay
Afterpay is a pay later business that provides a digital payment platform for retail merchants to provide to the customers. It helps the customers to procure goods and pay for the goods purchased in instalments. The company was established in 2014 in Sydney and had a massive customer base of more than 10 million customers and more than 55,000 merchants (Afterpay 2021). The customer uses the platform globally that spans the UK, US, Australia and New Zealand. The global team comprises more than 650 people that provides relentless services to the customers at large. It generates more than $836046million in sales (Afterpay 2021). Currently, the company comprises 15 companies in the corporate family.
Different business segments
The company's main relates to payment that is driven by technology and aids the customers in the process of payment. Further, the other segment is the Afterpay service in the Asia Pacific, North America’s Afterpay, pay now and finally the Clearpay. The model of business is constructed in a manner that provides free services to its customers and enables the people to spend without any charges or interest.
2 Company Analysis
2.1 Current Financial performance, Key financial highlights, Economic outlook
Financial highlights/events of 2021
The company's total income stands at $924.7 million in 2021, which was 78% more than the previous year that was highlighted by growth in the sales (underlying) and the increment in the merchant margin. The net transaction margin for Afterpay stood at $434.1 million that witnessed an increment of 74% on the previous year (Afterpay 2020). This was majorly aligned with the underlying sales due to the enhanced merchant margin and stability in the variable cost margin. Further, the group attained an EBIDTA of $38.7 million in 2021, an a decline from the level of 2020 ($44.4 million). The underlying sales enhanced during the impacted months of COVID-19. The total income stood at $924.7 million in 2021, an increment of 78% compared to 2020. The total assets and liabilities stood at $3,116.2 million and $1812.3 million, respectively (Afterpay 2021). The total liabilities stood at $1812.3 million, where increment was noted at $1150.1 million owing to the growth in borrowings and interest-bearing loans.
Economic Outlook
· The financial technology of Australia matured rapidly throughout the COVID-19 with record investor capital raised and enhancement in the startups.
· The growth in the Fintech innovation was prominent in pandemic, thereby creating fresh opportunities and strong generation of revenue.
Government incentives, collaboration and talent acquisition, is critical to the sustenance to the overall growth
· Australian people are tech-savvy, and hence two-third use Fintech products. This led to an increment in customer-centric products, services and solutions.
3 Ratio Analysis
3.1 Profitability and Market ratios
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(Refer Appendix)
Suggested Discussion
Profitability ratios can be defined as measurements that help determine the business ability to generate earnings. The ratios are favourable when it is better as compared to the competitors.
Overall the profitability ratios indicate a weak trend because the business has a negative net margin, and other supporting ratios are negative (Gill, Biger, & Mathur, 2011). The business incurred losses in 2021 and 2020, that is -194214 million and -26782 million, respectively. With high operating expenses followed by the pandemic scenario, the business of Afterpay failed to deliver a promising result.
Ratio like net profit margin, ROE and ROA need specific discussion because the shareholder, before investing their money, looks into the prospect of the business through these ratios. Net profit margin indicates the profit made by the business, while ROE and ROA indicate the ability of the business to utilize the assets and equity.
The raios are not stable. The ratios changed in 2021 as compared to 2020. The ROA is negative and worsened from -2.21% to -8.22% in 2021 while ROE has changed from -3.36% in 2020 to -17.27% in 2021. The NPM had further plunged from -5.95% in 2020 to –23.23% in 2021. Hence, stability is a concern.
Considering the overall scenario, it can be commented that the ratios are weak and projecting a negative trend. Afterpay has been incurring losses in the past two years and hence unable to project positive numbers. The sales have increased but are offset by the higher expenses. Even the operating expenses surged, thereby projecting an unfavourable ratio
The negative profit margin, ROE and ROA project failed to deliver performance and incurred losses in 2020 and 2021. The positive indication was the increase in sales, but the company failed to deliver the performance due to the higher expenses. The company failed to utilize the assets and equity, thereby signaling potential weakness.
3.3 Efficiency ratios
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(Refer Appendix)
Suggested Discussion
The efficiency ratio is a tool that helps evaluate the functioning of the company to put into use the resources like the capital and assets that leads to income. The ratio serve as an expenses comparison made to the generation of revenues that projects the return in revenue or profit that a company makes from the amount spent (Panda 2012).
Overall the efficiency ratio is weak because the asset turnover is weak in 2021 and 2020. The day's debtor of the company is high 488 days and 500 days in 2021 and 2020, respectively. In both the years, the time's inventory turnover and receivable is weak as in both the years the ratio is below 1.
The day's debtor is high, indicating that the company takes a longer time frame to collect the money from the investors. The cash collection time frame is 488 days, and thereby the company will face a time crunch.
The ratios indicate a negative trend and are unfavourable because the company is receiving collection from the debtors after a longer time frame. The lower times inventory turnover indicates a deficiency in the product line (Carlon 2019).
3.3 Liquidity ratios
(Refer Appendix)
Suggested Discussion
Liquidity is a vital component for the business as it helps the business to perform smoothly. Liquidity can be stated as the company’s ability to arrange the funds when needed (Karadag 2015). This helps in understanding whether the business needs a budget or should invest the money to gain returns.
The overall liquidity indicates that the company has adequate liquid funds and hence would be easier for Afterpay to discharge the obligations. The liquidity ratio changed positively in 2021 as compared to the year 2020. The change is due to a better current asset position in comparison to the current liabilities. The current and quick ratio is 8.16 times indicating the business has $8.16 of current assets for single $1 of current liabilities.
The current and quick ratio needs adequate attention as the company is higher ratios. This means that the company has adequate funds which are idle. The same can be invested by the company elsewhere, and gains can be reaped. Hence, the management should invest the funds elsewhere.
The ratios indicate stability because the ratios increased positively in both years. The current and quick ratio indicates a better liquidity position, while the cash flow ratio indicates the company has sufficient cash flow to meet obligations (Karadag 2020).
On an overall basis, it can be commented that the company has adequate liquid funds that will help in meeting the short term obligations. All the liquidity ratios is strong which means the business can easily honor the obligations. However, the management should come up with a prudent policy and invest the surplus funds elsewhere for better returns (Blackwood 2015).
3.4 Gearing ratios
(Refer Appendix)
Suggested Discussion
Gearing ratio projects the capacity of the company on the long term skills to remain in the business and to honor the debts of their creditors (Fernandes et al 2014).
The gearing ratios have increased in the year 2021. It is due to the fact that the total liabilities increased by $1150.1 million as compared to the year 2020. This was due to the growth in the loans and borrowings which was up by $824.8 million (Afterpay 2020).
The debt to equity and debt ratio stood at 138.99% and 58.16% in 2021. This indicates Afterpay is keeping sufficient balance between equity and debt. The debt coverage of the company is above 1 meaning the company is generating sufficient operating income to cover the annual debts.
Overall the ratio has increased in the year 2021 because of the increment in the loans and borrowings. The debt and interest coverage ratio is even acceptable indicating consistent revenue for the company to meet the obligations (Afterpay 2020).
The solvency ratio is favorable and projects the business is not riskier in terms of debt. The company has acceptable debts and contains the desired debt coverage ratio to honor the obligations. This means the business of Afterpay is not reliable entirely on debt.
Recommendations and overall assessment
Discussion
Has the reporting year been better than the prior reporting year for the company?
The ratios of After pay in 2021 and 2020 has changed. From the table, it is visible that the company's profitability is weak and negative in 2021 and 2020. However, the net loss in 2021 has increased, and the sales have increased. This factor depicts a better performance in comparison to the year 2021. The similar, instance was observed in the case of ROA and ROE. The ROA of the company posted -8.22% in 2021 as compared to -2.21% in 2020. The company did not declare any dividend
As per the efficiency ratio, the performance of 2021 was similar to the 2020 scenario. This means the company failed to utilize the assets and the debtor's collection period is 488 days indicating a slight lesser number of days needed for the collection.
The liquidity and solvency both have shown stability in 2021. The current and quick ratio indicates improvement, which stands at 8.16 times. From the solvency point of view, the debt to equity and debt ratio stands at 138.99% and 58.16%, respectively. From the expansion point of view, the company has undertaken debt which denotes a better ratio position.
Will the company succeed in the future?
The company is currently struggling with profitability and efficiency ratios. The company faced a problem amidst the decline in profit of the company. Similarly, the company faced problems concerning asset turnover and the debtor's collection period. Both these areas are vital for the smooth functioning of the company, and hence the management needs to look into these ratios. As for now, the company is having high liquidity followed by a good debt management which would keep the company afloat and help to succeed the company in the long run.
Which ratios show if Afterpay Company will or will not succeed in the future?
At present the liquidity and solvency ratio indicates that the company can be a forerunner in the long run. As indicated that the company has better the performance in 2021 as compared to 2020, it is poised for better performance further. The liquidity of the company is strong with a current ratio of 7.26 times indicating high liquidity. The company can easily pay off the obligations and even invest the surplus elsewhere.
Similarly, the company is using the debt in a prudent manner which is a strong combination of equity and debt. Hence, the company can easily pay off the debt and even function without any crunch. With better control of expenses and profitability scenario the company can make better progress in the future.
The likelihood of a merger or acquisition of the company?
Going by the performance especially the profitability it can be commented that the company is worth an acquisition. Afterpay Limited (ASX: APT) and Square, Inc. (NYSE: SQ) have announced the signing of a Scheme Implementation Deed. The acquisition is estimated to be worth around US$29 billion (A$39 billion). The deal is supposed to be paid in all share and has an indicated value of about US$29 billion (A$39 billion) forecasted on current share price of Square common stock in 2020 (Buckley 2021). The procurement will allow a company to deliver more captivating financial products and services to more customers, and helps in generating more revenue for vendors of all dimensions (Jessica 2021). The deal is expected to be completed in the year 2022.
Suggest what should the company be doing help it succeed?
Afterpay can be successful with a stellar performance aided by better sales accompanied by lower expenses. The expenses need to be curbed for better performance. On the other hand, the company needs to utilize the assets and equity for generating better returns to the shareholders. At present the ROE of -17.27% and ROA of -8.22% is hurting the company's performance. Hence, an improvement is needed in the profitability ratios. Apart from it, the company has faced trouble in the asset turnover and days receivable. The ATO and days receivable of 0.35 and 488 days indicates the company is taking higher number of days to collect the payment. Hence, management must draft a strict payment policy to get back the funds quickly.
Which ratios require improvement? What should Afterpay Company be doing to improve these?
The profitability and efficiency ratio is under immense pressure because the business is providing negative returns. Afterpay should utilize the assets and equity for better ROA and ROE respectively. Moreover, the company should cut down additional cost for increasing its net profit margin and bringing it to the positive zone.
Secondly, the company needs to restructure the efficiency ratio where the collection from the customers is 500 days. To ensure better utilization it needs to restructure the credit period that will help the company to procure funds quickly.
External Impacts That Need To Be Taken Into Consideration
The impact of government on the business
Government allocation of resources and time scale - Australia's new government policies have the power to enhance financial industry investment sentiment. Given the public's endorsement of the proposed measures, it's safe to predict that they'll take longer to implement than the current Australian government's statutory term.
Governance System - Australia's current governance model has maintained its function for a long time, and I don't expect much to change in the system, even if it may produce leaders who may make political choices that differ from the historical average. To foresee trends, Afterpay Touch must keep a keen watch on industry-wide policy measures.
Brining new administration – Riding on present indicators, it appears likely Australia will have a government turnover during the next elections. Afterpay Touch must arrange for the same because it will lead to the development of goals in the governance of financial sector's
Non-government organisations, protest and political groups all play important roles in legislation in Australia. Afterpay Touch should work closely with these organisations so that it can make a greater contribution to both community and company objectives.
Armed Conflict - Australia faces no immediate dangers from disruptions in the business environment caused by military policies, terrorist threats, or other political unrest. Afterpay Touch has handled operations in a range of difficult situations.
The Australian government is facing increased pressure to comply with WTO restrictions on the Consumer Financial Services business, as well as global efforts to comply with UN trade regulations.
Financial market efficiency in Australia - Afterpay Touch can tap on Australia's vibrant capital sector and simple liquidity accessibility in the stock market to expand internationally.
Core infrastructure accessibility in Australia - The Australian government has expanded its investment in creating core network throughout the years in facilitating and enhance business climate. Afterpay Touch can take advantage of existing systems to help the financial sector in Australia flourish.
Australia's Economic Performance – I anticipate Australia's economic performance will stay constant in the next 5-10 years due to spending of the government, stability in the demand due to cash disposable, and enhanced investment happening in new industries.
Would you invest in this company?
Currently going by the ratio analysis and the parameters it is not a worth to invest in the company. The profitability of the company is weak followed by the weak efficiency ratio. This means the earning potential of the company is not strong and hence can face trouble in the upcoming days. Moreover, the company is keeping idle funds which is indicted by the high current ratio of 8.16:1 and this is devoid the company of the additional returns it can generate. Hence, the overall scenario can be concluded by the fact that the company Afterpay at present is not a fruitful investment and should be kept in the radar till it revives itself.
5 References/Bibliography
Afterpay. (2021). Afterpay 2021 annual report & accounts, https://afterpay-corporate.yourcreative.com.au/wp-content/uploads/2021/08/APT-FY21-Annual-Report.pdf
Afterpay. (2020). Afterpay 2020 annual report & accounts, https://www.annualreports.com/HostedData/AnnualReportArchive/a/ASX_APT_2020.pdf
Blackwood, B. Diane. (2015). likview for Finance : Deliver Dynamic Business Intelligence Dashboards for Financial Analysis with Qlikview. Birmingham, UK: Packt Publishing, https://lesa..onworldcat.org/v2/oclc/926046002
Buckley, J (2021). Square shareholders have given the thumbs up to the $US39 billion merger with Afterpay, https://www.businessinsider.com.au/square-afterpay-shareholders-merger
Carlon, S. (2021). Financial Accounting : Reporting, Analysis and Decision Making. Seventh ed. Milton, Qld.: John Wiley & Sons Australia., https://lesa.on.worldcat.org/v2/oclc/1268515926
Fernandes, D., John G. L., & Richard G. N. (2014). Financial Literacy, Financial Education, and Downstream Financial Behaviors. Management Science 60(8), 1861–83, https://lesa.on.worldcat.org/v2/oclc/5582120062
Gill,A., Nahum B., & Mathur, N. (2011). The Effect of Capital Structure on Profitability: Evidence from the United States.” International Journal of Management 28(4), 3–15, https://lesa.on.worldcat.org/v2/oclc/5399067251
Hande, K. (2016). Financial Management Challenges in Small and Medium-Sized Enterprises: A Strategic Management Approach. Emerging Markets Journal 1, 26–40, https://lesa.on.worldcat.org/v2/oclc/8773443266
Jessica, A. (2021). Biggest takeover in Australian history, https://www.belldirect.com.au/smarter/insights/videos/biggest-takeover-in-australian-history-afterpay-asxapt-reporting-results
Panda, A. (2012). The Status of Working Capital and Its Relationship with Sales. International Journal of Commerce and Management 22(1), 36–52, https://lesa.on.worldcat.org/v2/oclc/7058306358
Paul, D., & Jaand,C. (2020). Business Analysis. Fourth ed. Swindon, UK: BCS, The Chartered Institute for IT, https://lesa.on.worldcat.org/v2/oclc/1176564910
Sherman, E. H. (2015). A Manager's Guide to Financial Analysis : Powerful Tools for Analyzing the Numbers and Making the Best Decisions for Your Business. Sixth ed. Place of publication not identified: AMA, American Management Association, https://lesa.on.worldcat.org/v2/oclc/924210109
Shishir, S., & Jaiswal, K. (2011). Effectiveness on Profitability: Working Capital Management. Scms Journal of Indian Management 8(1), 73–80, https://lesa.on.worldcat.org/v2/oclc/5291592949
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