Introduction
A.P Eagers ltd is a retail group trading in automotives and her main operations are based in South- East Queensland, Adelaide, Darwin, Melbourne, Sydney and the Hunter Valley in Newcastle. The business operations are centered on the ownership and operation of motor vehicle dealerships. These dealerships are concerned with a range of services that include sale of new and pre owned vehicles, service, spare parts, and customer financing facilitation.
This paper seeks to conduct an objective financial analysis (trend and ratio analyses) based on the audited financial reports of the entity for the four year period between 2011 and 2014. The analysis seeks to evaluate the company’s performance over the period. In this regard, it will focus on financial metrics that assess the profitability, asset efficiency, liquidity, and capital structure and market performance.
Trend analysis
Trend analysis is a metric that evaluates the financial information of an entity over a specified period of time. Its main objective is to calculate and give an analysis of the amount and percentage change from one period to the next. In the case of A.P Eagers, the trend analysis for the income statement shows a significant increase of the revenues generated by the business gradually from 2011- $ 2,398,695,000, 2012- $ 2,642,535,000, 2013- $ 2,672,813,000 and 2014 $ 2,858,113,000. These growths in revenue amount to 10% ($ 243,840,000), 11% ($ 274,118,000), and 19% ($459,418,000) positive changes in the company revenues for the years 201, 2013 and 2014 respectively. ("A.P. Eagers Annual Report | A.P. Eagers Group Ltd | Australia", 2016)
The analysis also reveals a relative increase in the cost of goods sold over the years. The cost of goods sold increases from $ 1,979,115,000 in 2011 to $ 2,180,551,000 in 2012, an increase by $ 201,436,000 (10%). In 2013 relative to 2011, the costs increase by $ 211,216,000 (11%) and in 2014 they increase by $ 337,751,000 (17%). The gradual growth in the sales and the corresponding related increase in cost of goods sold resulted in increased pre- tax profits for the company. The company’s profits before and after tax grow gradually over the four years. The after tax profits for instance grow from $ 40,829,000 in 2011 to $ 55,551,000 in 2012, a 38% growth. In 2013, the same profits increase by $ 23,673,000(59%) and $ 36,401,000 (90%) in 2014. The slight increases in other expenses are outdone by the huge growth in revenues to sustain a relative growth in net profits for the business. ("A.P. Eagers Annual Report | A.P. Eagers Group Ltd | Australia", 2016)
A trend analysis of the balance sheet shows a drop in the cash and cash equivalents in 2012 by $ 4,563,000(34%) and slightly by $1,173,000(9%) in 2013 and a recommendable growth of $ 10,948,000(79%) in 2014. The inventories and receivables for the business reflect an increasing trend over the four years. Inventories increase by 21%, 21% and 39% in 2012, 2013 and 2014 respectively. Trade receivables increase by 4%, 2% and 13% in 2012, 2013 and 2014 respectively. These increases in inventories and receivables as well as cash ensure a steady increase in the total current assets for the company (the current assets increase by 15%, 16% and 35% in 2012, 2013, and 2014 respectively. ("A.P. Eagers Annual Report | A.P. Eagers Group Ltd | Australia", 2016)
The available for sale investments have massively increased from 2011 to 2014, 6,833% in 2012, 8,224% in 2013 and 9,895% in 2014. This is good for the business since it counters the decline in property, plant and equipment which increases by 4% in 2012, 2% in 2013 and falls by 13% in 2014. The net effect is a gradual increase in the total noncurrent assets by $ 173,754,000 (38%), $ 210,029,000 (46%) and $ 261,697,000 (57%) in 2012, 2013, and 2014 respectively. The total assets also increase by 26%, 31% and 46 % in 2012, 2013 and 2014 respectively. ("A.P. Eagers Annual Report | A.P. Eagers Group Ltd | Australia", 2016)
The total current liabilities for the business keep fluctuating over the four year period. They are however increasing, by, 29% in 2012, 19% in 2013 and 44% in 2014. Noncurrent liabilities display a similar staggering trend but generally increase over the four years by $ 51,243,000 (27%), $ 59,133,000 (32%) and $ 54,926,000 (29%) in 2012, 2013 and 2014 respectively. The contributed equity, retained earnings, reserves and non-controlling interest display a consistent increase over the four years to create the corresponding growth in total equity by $87,921,000 (23%), $ 158,510,000 (42%) and $210,441,000 (55%) in 2012, 2013 and 2014 respectively. ("A.P. Eagers Annual Report | A.P. Eagers Group Ltd | Australia", 2016)
Financial ratio analysis
Financial ratios are expressions for significant relationships between figures shown in a balance sheet and the profit and loss accounts of an entity. The financial ratios can be classified as follows:
Liquidity ratios
Profitability ratios
Turnover ratios
Solvency ratios/ Financial leverage
Liquidity ratios are metrics for short term solvency of an entity. They measure the extent or degree of quick transformation or convertibility of an entity’s assets into money to meet short term obligations for the business. They are therefore indicators of an entity’s ability to meet its current liabilities. They include the following.
Current ratio which shows the relationship between current liabilities and current assets of an entity at any particular time. It shows the ability of a firm to meet its current liabilities using its current assets. The current ratios for AP eargers from range from 1.29, 1.15, 1.26, and 1.21 for 2011, 2012, 2013 and 2014 respectively. These ratios imply that the current asses of the business are sufficient to meet the current liabilities despite the inconsistent trend over the period.
It is calculated as follows, Current Ratio= Current assets/ Current liabilities
Quick Ratio/ Acid test ratio: This is a supplementary test for the entity’s ability to meet its short term obligations. It presents the relationship between quick assets (current assets-inventory) and the current liabilities. I is calculated as follows:
Quick Ratio= (current assets- inventory)/current liabilities
For Eagers, the ratios for the years are 0.36, 0.28, 0.31 and 0.32 for 2011,2012, 2013 and 2014 respectively. All are below the optimum ratio 1:1 an indication that the quick assets of the entity cannot meet the current liabilities. ("A.P. Eagers Annual Report | A.P. Eagers Group Ltd | Australia", 2016)
The cash ratio which is also referred to as the absolute liquid ratio measures the ability of the entity’s absolute liquid assets (cash in hand, cash at bank and marketable securities) to pay for its current liabilities. It is calculated as follows:
Cash ratio = Absolute liquid assets/Current liabilities
In the case of Eagers, the cash ratios are below the optimum 0.50 but show an increasing trend, from 0.04 in 2011, 0.36 in 2012, 0.48 in 2013 and 0.49 in 2014.If the trend persists then the optimum ratio will be surpassed. ("A.P. Eagers Annual Report | A.P. Eagers Group Ltd | Australia", 2016)
Profitability ratios illustrate the general efficiency of the business in converting revenues to profits. They show the amount of income derived from each sale. They include the following.
Gross profit ratio shows the relationship between sales and the gross profit. It shows by how much value the sales exceed the costs of sales. It’s calculated as follows:
G.P margin= Gross profit/ Sales.
The GP margins for the entity over the four year period are all positive and thus favorable.(0.17,0.17, 0.18, 0.19) and they depict an increasing trend.
The net profit margin shows how much of each dollar sales remains after deducting all expenses and is calculated as follows:
N.P margin = Net Income / Sales.
The N.P margins for Eagers also show a gradual growth from 0.02 in 2011 to 0.03 in 2014. They are all positive and so favorable.
The operating ratio relates the total operating expenses to the sales. It indicates the ability of an entity to meet its operating expenses from its revenues. It’s calculated as follows:
O.R = (Operating costs/sales)*100
The OR for Eagers range between 87% to 88% for the four year period an indication that the business can meet its operating expenses with the revenues generated from sales.
Operating profit ratio compares the entity’s operating profit with the total sales. It’s calculated as follows:
O.P.R = (Operating profit/Sales.)*100
The ratio for the company is growing from 2% to 4% over the period an indication of increased efficiency in terms of converting sales into profits.
Return on capital employed is a representation for the relationship between the net income and the gross capital employed in a business. Calculated as follows:
ROCE = net profit after taxes before interest/ gross capital employed.
The ratio increases from 4% to 6% over the period an indication of the increasing efficiency on the part of net income in relation to C.E. ("A.P. Eagers Annual Report | A.P. Eagers Group Ltd | Australia", 2016)
Return on equity measures the amount of profit generated by each dollar of equity.
ROE = Net income/ Equity
The return is all positive for the four years (4%, 5%, 5% and 6% ) and show an increasing trend, an indication of increasing profitability in relation to the shareholders equity.
Turnover ratios show how efficiently the entity’s assets are utilized. They include:
Inventory turnover- It is a representative of the proportion of the cost of goods sold to the inventory of the entity. It’s calculated as follows:
Inventory turnover= Cost of goods sold/Inventory
The analysis shows a positive turnover for the company.(5.85, 5.31,5.35,4.94)
The total asset turnover shows the extent to which the management of the entity is efficient in generating revenue from the total assets.
Total asset turnover =Sales/Total assets
The turnover is positive however declining over the four years from 2.57 to 2.10.
Fixed asset turnover shows the ability and effectiveness of the management to put the fixed assets into use to generate revenues.
Fixed asset turnover = Sales/ Total fixed assets
The turnover on fixed assets is also positive over the period but declining from 5.2 to 3.95.
Leverage or solvency ratios show the degree of the business’ dependence of debt financing. They are basically comparisons of the entity’s debt with other financial elements such as capital or assets. They include:
Total debt to assets ratio shows the amount of assets held by the business that are deemed to be debt financed. It shows the ability of the business to meet its debt from its assets.
Total debt to assets ratio = Total debt/ Total assets
The ratio for Eagers indicates that the business can easily meet its debt using the assets available. The ratio is 0.18, 0.18, 0.17, and 0.16 over the four years 2011, 2012, 2013 and 2014 respectively.
Total debt to equity ratio shows the proportion of debt financing in the total equity for the business.
Total debt to equity ratio= Total debt/Total shareholders’ equity
The ratio declines from 1.01 in 2011 to 0.89 in 2014. It implies that the amount of debt financing is significantly falling. ("A.P. Eagers Annual Report | A.P. Eagers Group Ltd | Australia", 2016)
References
A.P. Eagers Annual Report | A.P. Eagers Group Ltd | Australia. (2016). AP Eagers. Retrieved 6 May 2016, from http://www.apeagers.com.au/shareholders/ap-eagers-annual-reports/
Drake, P. (2015). Financial Ratio Analysis. Retrieved from http://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf
