Abstract
Performing the analysis for this milestone within the purview of profitability and cash management efficiency using the traditional financial ratios and horizontal analysis, we have gathered a useful insight into the financial position of the company that confirms bullish run in the company.
We initiated the analysis with the calculation of profitability ratios and found that owing to increased revenue figures and most importantly,controlled cost structure for cost of goods sold and operating expenses, the company was able to generate higher operating and net profitability compared to the previous year. Moreover, during 2015, the company was also able to generate higher return on invested capital for debt and equity investors, thus signaling strong profitability position of the company.
On the other hand, we meticulously analyzed the cash flow position using cash flow ratios. Here also, we found that that the company is generating strong operating cash flow, which is enough o pay around 65% of the total current liabilities of the company is more than what company needs to invest in capital assets. Moreover, during 2015, a higher percentage of the company’s sales was generated in cash terms, thus strengthening the liquidity position of the company.
Paper Outline
The paper targets the financial analysis of cash flow statement and profitability position of AMC Entertainment Holdings. The attempt to the analysis will be made using suitable ratios to access profitability position and cash management efficiency of the company. However, in order to dig deep into the financial situation of the company, we will rely on the traditional tool such as vertical and horizontal analysis of the financial statements for the latest two fiscal years, and the same will be used to support the explanation of the trends in the financial ratios. The paper will be culminated with a conclusion that will bring out whether the company is going through a rough financial patch or is earning steady profits and is performing efficiently.
Profitability Analysis
The ability of a firm in the management of assets is reflected by the profitability ratios. In this regard, profitability would mean the revenue proportions which are remained after incurring all expenses. Therefore, these ratios indicate the overall profitability situation of the company and assist in understanding more about the trends in the financial performance over the years. Highlighted below are some of the profitability ratios used to access the trends for AMC Entertainment:
a) Operating Margin: Operating Profit/ Revenue
2014: 175072/2695390
= 6.50%
2015: 237057/2946900
= 8.04%
b) Net Profit Margin: Net Profit/ Revenue
2014: 64080/2695390
= 2.37%
2015: 103856/2946900
= 3.52%
c) Return on Invested Capital: (Net Income)/ (Total Debt+ Total Equity)
2014: (64080)/(1775132+1512732)
= 1.67%
2015: (103856)/(1924366+1538703)
= 2.99%
As revealed by our calculations, during 2015, the operating margin of the company has increased from 6.50% to 8.04%, while the net margins have increased from 2.37 to 3.52%. However, it was through the outcome of the vertical and horizontal analysis that we got to know the real insight related to the trends that resulted in the increase in operating and net profitability of the company.
Referring to the horizontal income statement, we found that while during 2015, the revenue figures increased by 9.35%, the company churned the real gains through a prudent control on the cost structure. As for costs of goods sold, in percentage to the sales figures, the multiple declined from 82.93% to 81.91%, thus giving the real push to the gross margins of the company. Additionally, the proportion of operating expenses to the revenue figures also got decreased from 10.61% to 10.04%., thus resulting in the increased operating income during the year.
As for net profit margin, while the controlled cost structure did assist in higher net margin, lower interest expense, which decreased from $121million to $106 million, was also one of the factors that fuelled bottom line margins of the company.
Culminating the profitability analysis, we calculated the return on invested capital to learn more about the profit generation ability of the company for both equity and debt holders. Important to note, ROCI multiple is used to access how efficiently the company is allocating the capital raised to profitable avenues and thus gives a sense of how well the company is using the external funds to generate additional returns.
Our calculations confirmed a bullish profitability run for the company with the return on invested capital(ROIC) increasing from 1.67% to 2.99%. This reveals strong profitability position of the company.
Horizontal Income Statement
Cash Flow Management
Even though the income statement of the company reveals the financial position during the year, however, since it is made using accrual accounting, we should be meticulous and should combine our analysis with the cash flow statement, which is made entirely on cash basis. Therefore, combining the outcome of profitability analysis with cash management ratios, we will be able to learn about the financial situation of the company in a better way. Highlighted below are some of the cash flow related ratios of the company:
a) CFO to Revenue: Operating Cash Flow/ Revenue
2014: 297302/2695390
= 11.03%
2015: 467557/2946900
= 15.86%
b) CFO to Current Liabilities: Operating Cash Flow/ Current Liabilities
2014: 297302/636377
= 46.71%
2015: 467557/712154
= 65.65%
c) CFO to Capital Spending: Operating Cash Flow/ Capital Spending
2014: 297302/270734
= 1.09
2015: 467557/333423
=1.40
As noted from the above figures, it is clearly evident that the company has been efficiently managing its cash reserves and is strengthening its cash power every year. To begin, the proportion of operating cash flow to revenue figures has increased from 11.03% to 15.86%. This indicates that during 2015, a higher proportion of the sales were generated on a cash basis and thus solidified the liquidity position further, a direct sign of efficient cash management.
On the other hand, the ratio of operating cash flow to current liabilities has increased significantly from 46.71% to 65.65%. This indicates that the company is capable to honor significant amount of its current liabilities using its operating cash flow, a strong sign of efficient cash management and generation.
Lastly, we calculated the proportion of operating cash flow to the capital expenditure to access the ability of the company to bear capital expenditure with the available amount of operating cash flow. Our calculation revealed that the amount of operating cash flow of the company is more than the annual capital expenditure. In fact, during 2015, the proportion of CFO to capital expenditure has increased from 1.09 to 1.40, thus indicating towards a strong cash position of the company to meet its capital requirements.
Conclusion
At the end of this analysis, we found that the company is performing tremendously well and is making prudent utilization of the available resources at its disposal. Strong profitability, high amount of operating cash flow and most importantly, a controlled cost structure is what works in the favor of the company.
Overall, our analysis confirms that AMC Entertainment has witnessed a bullish financial year and with control over operational cost and high operating cash generation, the company is poised for growth for the years to come.
References
AMC Entertainment. (2015). Annual Report 2015. Retrieved July 9, 2016, from Investor Relations: http://investor.amctheatres.com/Cache/c33288121.html
Income Statement: AMC Entertainment Holdings Inc . (n.d.). Retrieved July 9, 2016, from Morningstar: http://financials.morningstar.com/income-statement/is.html?t=AMC®ion=USA&culture=en_US
Return On Invested Capital - ROIC. (n.d.). Retrieved July 9, 2016, from Investopedia: http://www.investopedia.com/terms/r/returnoninvestmentcapital.asp
