Abstract
Carrying out the analysis in the multiple directions of liquidity analysis, fixed assets, off-balance sheet items and capital structure has helped us in learning more about the financial situation of the company. Beginning with the liquidity analysis, the company is suffering from liquidity dry-up with current liabilities exceeding the current assets significantly. Most importantly, declining cash reserves are the biggest concern.
On the other hand,with consistent growth in the fixed asset base and a sustainable debt-equity composition do favor the company, however, with deteriorating liquidity position, the company may face issues in committing to its long-term obligations.
Apart from this, the growth in fixed asset base is sustainable and we do not see any concern in this arena. Similarly, the off-balance sheet arrangements in the form of operating leases are clearly discussed and thus promotes transparency and the desire to impart quality information to the stakeholders and other users of the financial statements.
Paper Outline
The objective of this milestone is to perform the financial analysis of the balance sheet items, using raw financial figures, liquidity ratios and capital structure ratios for the two latest fiscal years reported by the company. To gain an in-depth review of the balance sheet, we will also refer to the accompanying notes, as part of which, we will primarily evaluate the contingent liabilities, lease agreements and any off-balance transaction undertaken by the company. The paper will finally be culminated with a succinct conclusion relating to the financial performance of the company within the purview of balance sheet analysis.
Review of current assets and liabilities
For the fiscal year 2015, the current assets of the company were reported at $414.36 million, a 3.12% increase compared to 2014. The increase here was predominantly sourced from other current assets , which recorded a surge of 15.72% during 2015. On the other hand, cash and cash equivalent reserve were down by -3.18%, thus raising concern over the cash liquidity position of the company. On the other hand, current liabilities were reported at $712.15 million, a 11.90% increase compared to the previous year. Most notably, the increase here was attributed surge in the account payable and accrued expenses, which compared to 2014, increased by 19.46% and 16.44%, respectively.
Liquidity Ratios
These ratios will help us in appraising the trend in the liquidity position of the company during the recent past two years. Highlighted below are two liquidity ratios calculated for AMC Entertainment Holdings:
-Current Ratio: Current Assets/ Current Liabilities
2014: 401.80/636.37= 0.63
2015: 414.36/712.15= 0.58
-Cash Ratio: Cash and Cash Equivalent/ Current Liabilities
2014: 218.20/636.36= 0.34
2015: 211.25/712.15= 0.29
As noted from the above figures, over the year time, the company seems to be losing on the grounds of liquidity. To begin with the current ratio, the multiple has plunged from 0.63 to 0.58 following a greater percentage increase in current liabilities in comparison to the current assets. Important to note, during 2015, while the current assets of the company increased by 3.12%, it was the 11.90% increase in the current liabilities that overshadowed the net increase in the current asset base and resulted in the decline in the current ratio.
Overall,our analysis clearly confirms that because the rate of increase in the current liabilities is significantly higher than that of the current assets, AMC Entertainment Holdings is losing its liquidity grounds and this sparks concern over its ability to handle short-term obligations. Moreover, while the cash generation could have saved some grace for the company, but with decline in cash reserves, we are skeptical relating to future working capital position of the company.
Capital Structure
Capital structure of a company is composed of debt and equity capital, and a meticulous analysis of the capital structure reveals the level of risk being borne by the company and other relevant information. Referring to the balance sheet of the company, we found that by the end of 2015, the total corporate borrowings outstanding with the company amounted to $1924.36 million,which was 8.40% higher compared to the previous year. On the other hand, the equity base of the company witnessed an increase of 1.69% courtesy a marginal rise of 0.94% in additional capital while the amount outstanding with Class A common stock declined by 4.34%. Most notably, no change in the treasury stock which by the end of 2015 amounted to $0.68 million, indicates a skeptical vision and low confidence of the management of the company.
Overall, with the $1924.36 million outstanding in debt borrowings, and $1538.703 million in equity base, the debt equity ratio of the company stands at 1.25 indicating that the company is operating under the capital structure containing higher leverage compared to equity financing.
Fixed Assets& Intangible Assets
Fixed Assets or the Capital Assets are the one that provides long term benefits to an entity and assist in generating revenue. As for AMC Entertainment, the fixed assets of the company comprise of plant and by the end of 2015, was reported at $1401.92 million, a 12.34% rise compared to the previous year.
As for intangible assets, by the end of 2015, the company reported intangible assets worth $237.37 million, a 5.33% increase compared to the previous year. Following Note 1, we found that the company acquired intangible assets with the acquisition of Holdings on August, 2012, and these assets are tested for impairment annually.
Off-Balance Sheet Items
In this penultimate section of this report, we will discuss the off balance sheet transactions undertaken by the company such as leases and contingent liabilities. Important to note, off-balance sheet items are the one that are not disclosed on the balance sheet of the company, but are nonetheless assets and liabilities, and hence requires a meticulous analysis. Below we have discussed the lease agreements undertaken by AMC Entertainment as the company has exclusively discussed that only the operating leases of the company are accounted under off-balance sheet items and it has no contingent liability:
-Operating Leases as off-balance sheet item
Referring to the accompanying notes to the financial statements we found that the the majority of the company’s operations are conducted in premises that are occupied under operating lease terms ranging from 12 years to 15 years, of which some of the lease has an option of extension uptil 20 years. As of December 31, 2015, the Company has lease agreements for six theatres with 68 screens which are under construction or development and are expected to open in 2016 and 2017. Highlighted below is the table illustrating the minimum lease payments under existing operating leases of the company:
Conclusion
Apart from this, the company has made a steady investment in fixed assets and the transparency in disclosing off-balance sheet arrangements is commendable and is a sign of high quality of the company’s earnings.
References
Annual Report 2015. (n.d.). Retrieved July 8, 2016, from AMC Entertainment: http://investor.amctheatres.com/doc.aspx?IID=4171292&DID=35669863
Kaplan. (2016). Capital Structure. In Kaplan, Schweser Notes for CFA Exam (pp. 262-281). USA: Kaplan Inc.
Off Balance Sheet . (n.d.). Retrieved July 8, 2016, from Investopedia: http://www.investopedia.com/terms/o/off-balance-sheet-obs.asp
