Super Cheap Auto is an Australian-based automotive retailer which was formed in 1972, operating as a Mail-Order business. During the past 15 years, Supercheap Auto has experienced more than 25% compound annual income growth. Super Cheap Auto Group Limited contains four major businesses: Supercheap Auto, BCF (Boating Camping and Fishing), Goldcross Cycles and Ray's Outdoors. Since its commence in 1972 by Reg and Hazel Rowe, Super Cheap Auto Group has grown to become one of Australia and New Zealand's largest retailers with about 400 stores across Australia and New Zealand and with a average fiscal year of sales in excess of $1 Billion. Possessing more than 5,000 team members, Super Cheap Auto Group's success is leaded by a successive focus on maintaining and enhancing its culture, products and systems. Founded in 1976, ARB is involved in the development, manufacture and distribution of 4WD accessories, including bull bars, differentials, shock absorbers and air compressors. ARB distributes its own products as well as other brands. ARB's main production facility is at Kilsyth, Victoria. ARP also possesses facility in Rayong, Thailand, US and export network that covers 100 nations. There are 33 ARB branded stores in Australia. ARP occupies the 4WD segment of the automotive market. Via operations in this filed, ARP is deemed to benefit from the continuing strong demand for 4WD vehicles. Steadily established on the traditional 4WD-enthusiast customer base, ARP also provides products to original equipment manufacturers in Australia.
The financial analysis mainly concerns about three aspects; profitability, liquidity and stability. The firm's profitability attracts most external investors' focus. It focuses on the payment capacity of retaining enough profit for shareholders. Operating efficiency verifies the maintenance ability and managerial effectiveness for the reason that operational performances directly impact the stock prices, potential expansion capacity and future movement. Stability, commonly measured by solvency ability, concerns toward the amounts of debt which straightforwardly determines the firm's operating and financing occasions. An enormous amount of external debts facilitate the effect of leverage and also suggest that the firm is not properly operated. Financial data will exhibit low debt paying-back capacity and latent financial risk. (A.J. Kanto. T. Martikainen. 1992) To understand the investment values for discrepant companies, proper financial ratios will be directly used which cover three aspect of analytical objects mentioned above.
Percentage ratio is the typically tool used for analytical process. (Kieso, D. E etc 2007). Gross profit margin, net profit margin and return on asset are three major aspects which measure the firm's profitability. The gross profit margin for ARB and SCA are 40.07% and 41.95% respectively. This result mainly due to the income scale for SCA is greater than that of ARB. The net profit margin for ARB increases from 16.34% to 16.64% from 2008 to 2009 while that for ASC increases from 6.41% to 6.7%. It can be seem that the quality of net profit for ASC is much lower than that of ARB. This can be explained by the greater amount of interim expenses paid by SCA. A corresponding diminution of miscellaneous expenses and expenditures can effectively increase the net profit ratio. The selling and administration expenditures are strictly controlled for the existence of disbursement policy. However, the net profit ratio for both companies keeps a growing trend. Return on assets (ROA) indicates the profit generating ability through the assets utilized. It exhibits how many net incomes are generated through the assets the firms possess. It is especially optimal for contrasting competing firms in similar industry.
ROA
ARB
SCA
2008
24.94%
11.92%
2009
26.63%
12.71%
As indicated in the table, the ROA ratios for ARB are 24.94% and 26.63% in 2008 and 2009 respectively. Both data exceeds those of SCA which are 11.92% in 2008 and 12.71% in 2009. The income yielded by per unit of assets is less for SCA.
Return on equity (ROE) measures the rate of return on the benefit of shareholders or the common stock owners. It measures a firm's efficiency in generating profits from every unit of equity quantity. ROE will be reduced on the premise of too many liabilities since the gross capital costs will raise. (Woolridge & Gary, 2006) High ROE ratio on the other hand may not totally ensure proper and optimal investment. Similar with ROA, ROE is also commonly used to compare firms within the identical industry. (Groppelli, 2000) For both companies, the ROE values are 30.35% and 20.55% in 2009 respectively.
It can be concluded from the ratios calculated for ARB and SCA that ARB possesses a relatively higher than those of SCA. The profitability of both companies endures a enhancement from 2008 to 2009, this may mainly due to decreased expenditures and extended growth ability in income during 2008 to 2009. However, according to the performance, ARB possesses a relatively worthy investment value for a inferior quality of profit generated.
2.2 Efficiency Analysis
Asset turnover qualifies the capability of using assets in generating income. (Bodie, Zane etc 2004) This ratio varies from industries to industries; relatively lower turnover number may suggest inefficiency in utilizing firm's assets.
Asset Turnover
ARB
SCA
2008
1.53
1.86
2009
1.6
1.89
A higher turnover number stresses more efficient utilization of asset since fewer assets are introduced. By comparison, SCA possesses relatively higher value of turnover number. This may be caused for the fewer assets charged during the operations. This result suggests that SCA is more efficient in generating revenue in assets utilization.
Inventory turnover is a measurement of the number of times inventory is sold or used in specific accounting period such as a season or a year. The equation for inventory turnover value equals the cost of goods sold divided by the average inventory amount.
Inventory turnover(Days)
ARB
SCA
2008
133
166
2009
133
169
The efficiency for ARB does not change since 2008 while that of SCA increases for 3 days. A low turnover rate or a high turnover period may suggest overstocking, obsolescence, and deficiencies in the manufacturing line or marketing effort. So for SCA, the efficiency in inventory turnover decreases very slightly.
Creditors turnover measures the times needed to refresh one firm's recent liabilities. The value for ARB and SCA are 46 days and 70 days in 2009. Combining with debtor's turnover ratio which shows how long one firm normally occupies to collect account receivables. If a firm's debtor's turnover ratio is higher than the time needed for the firm repay its credit, then the firm is doing a poor job of collecting receivables. According to the data exhibited, the debtor's turnover for SCA is dramatically lower than that of ARB which means SCA collects receivables much faster than ARB. ARB's debtor's turnover exceeds that of creditor's turnover value. This also indicates that ARB is not properly manipulated its credits and other liabilities. This may render ARB under the financial pressure of timely paying back debts.
Totally speaking, ARB's efficiency is not so guaranteed when comparing with SCA in accordance with the data listed above.
2.3 Stability Analysis
The stability is also conducted through few ratios which measure the debts payment ability within the coming fiscal periods. Generally introduced ratios are current ratio which measures the value between current assets and current liabilities, Quick ratio, also known as liquid ratio, measures the ability of a company to use its cash or cash equivalent to immediately extinguish or retire its current liabilities. A company with a Quick Ratio of less than 1, it means that the company cannot currently pay back current liabilities. Other measurements including Debt to Assets ratio which is used to assess Company's solvency and cash flow ratio and Times Interests Earned which indicates the extent of earnings that are available to meet interest payments. A lower times interest earned ratio means less earnings are available to meet interest fees and that the business is more vulnerable to increases in interest rates.
The current ratio is a guide of market liquidity and corresponding capacity to meet creditors' demand. It is usually used to testify short-term financial stability. Too high the value may indicate that the company's current assets are not efficiently used.
Current ratio
ARB
SCA
2008
1.78
1.39
2009
2.42
1.55
Quick ratio for ARB and SCA are 0.84 and 0.175 in 2008 and 1.13 and 0.251 in 2009 respectively. SCA endures more financial pressure in paying back interest fees.
Debt to asset ratio also measures the solvency capacity. Most creditors and investors stress the ratio since it represents how much debt one firm tends to maintain instead of equity. (Erwan Morellec, 2001) (Anton Miglo, 2007)
Debt to asset
ARB
SCA
2008
31.91%
64.75%
2009
23.38%
64.28%
It can be seen that ARB holds fewer debts than SCA dose. So SCA is more vulnerable to external financial pressure.
Regard to TIE ratios, ARB's retained earnings are less than the interests expenditures and hence endures more financial risks in meeting current expenditures demand.
To sum up, the SCA holds more liabilities and utilizes the effect of leverage in enhancing income level. Its interest fees are also well covered by the earnings generated. By contrast, ARB adopts a more conservative manner in handling its debts and equity. This is largely because of ARB manipulates its operations in one more prudent way. SCA on the other hand, though represented not very outstanding in the profitability capacity, adopts an aggressive manner in dealing with firm's financial status.
3.0 Limitations, conclusions and recommendations.
Financial analysis primarily concerns toward the calculation and comparison of diverse financial indices and relative commercial performances. A number of financial metrics are used to assess a firm's ability in generating incomes. For most financial indices, a higher value contrasted to competitors or firm itself within a given previous period usually indicates that the financial status is in favorable situation. Common paragons of profitability ratios are profit margin, return on assets and return on equity.
Debt financing is the fund raised via issuing bonds, loan or other relevant form of debts. Based on the type of loan, it can be divided into two categories, long term debt financing and short term debt financing. Long Term Debt Financing commonly applies to fixed assets which support basic business operations, such as PPE. The payment for such loan usually exceeds more than one year. Short Term Debt Financing on the other hand applies to current requirements like inventory purchasing or salaries paid for employees. The financial recognition for such loans is usually less than one year. Short term debt introduction is typically associated with a relative higher risk than long term debt finance because of fluctuating interest rates and other market systematic risks. The major benefit for debt financing is that a full retain of ownership and the interest on business loans is also tax-deductible which increase amount of cash flow. Secured loans are generally granted for some kinds of mortgage to back the loan such as property, equipment or other tangible assets. Debt can also lead problems if too much dependency is emphasized and shortage of income to pay it back. Still, too much debt will reduce the attractiveness of external investment in that a seemly higher risks.
Financial analysis serves to assess specific viability, stability and profitability of business sectors. As a tool mostly used in evaluating financial situations, the process of analysis mainly comprises the utilization of financial information provided by financial statements to calculate pertinent financial ratios. The financial information must be audited and reviewed which ensures authenticity and correlation with following analytical jobs. So the ratios are just statistic results which can be viewed as one possible illustration toward the health status showed during normal operations. It is significant using other related information represented by firm's announcement, future movement and other disclosures. These are some of the limiting factors:
Past financial performance, good or bad, does not necessarily secure a good future performance.
Information that is out-of-date in financial statements is less useful and more fluctuated in predicting future movement.
Without some necessary and potentially important notes attached to the financial statements, it is impossible to get an overall understanding of the financial status considered.
Unless the financial statements are audited, no assurance can be formed when using such unaudited data. As a consequence, the statements information may distort investors' decisions.
It is necessary to review at least recent three years' financial statements for comparison. Trends will not be only become apparent through comparative analysis.
The methods used in financial analysis commonly concentrate upon some mathematic and statistic techniques. (Robert, 2001) It mainly concerns about past performances which cover historical time spans and give hint about proper future movements. The future prediction extrapolates possible investment opportunity. Although forecasting deviation may be incurred, it tends to offer investors latent developing trends. It can be comprehended from the data and analytic results provided that ARB is more conservative than SCA. The investment value for ARB should focuses upon a long-term and steady basis. SCA utilizes more liabilities and controls its asset and managerial process properly. As for profitability, though SCA exhibits less ability in generating profit than ARB, but in the long run, SCA's highly covered expenditures and emphasis upon utilization of debts will further increase its profits. So it is recommended that to invest in SCA and hold ARB's stock for long-term investment.
For financial analysis, the ratios acquired are typically adopted from the balance sheets, income statements and cash flow statements. However, sole financial ratios analysis is only one side of consideration of gross operational status and investing value. Financial ratios face several theoretical and practical challenges such as some ratios are actually meaningless when comes to certain aspect of operations, some ratios ignore the impact of external surroundings and seasonal factors. In truth, financial ratios are no more objective than the accounting methods adopted. Variation of accounting policies may yield drastically different analytic results when compares with original ones. Some exogenous elements such as investor behaviors which are not in accordance with economic hypothesis are not included in the ratio analysis. Albeit financial analysis may be confined for the reason of uncertain manipulation of future events and possible deviation from original expectations, it serves as a tool in implying the prospective. As a matter of fact, in order to obtain a schematic and comprehensive understanding about one company's operational and financial status, relative information toward corporation's governance policies and preparation of projects or other business pertinent movements are also important for outer statement users. Such disclosures in detailed virtually provide some indirect information about company's decisions. Investors can deduct the potential profitability projects and opportunities.
