Financial Statement Analysis
Introduction
The Australian Pharmaceuticals Industries Ltd operates in the pharmaceuticals sector. There were several oversight given into the company. The study of the report is outlined in our assignment. Macro-Economic Analysis was carried for determining the conditions and factors under which the company operates. There are certain government rules and regulations, demographic trend and level of disposable income factors which are discussed in the macroeconomic section.
Through this detailed study of the macro-economic conditions we get to know that the company may face hurdles in the upcoming five year of horizon time period due to strict rules and regulations of the government. The company may be able to deliver superior returns in contrast to its superiors if the company increase the operational and efficiency level of the operations of the company. The company’s industry and business strategy analysis was performed to analyse the operations of the company. As part of the Industry Analysis and Business strategy the position of the company’s product and portfolio analysis was performed (Cook 2016).
The report also shows the conducted accounting analysis and ratio analysis performed where the financials and operations of the company shows stable and less volatility.
Discussion
Macro-Economic Policy
Macro-Economic Policy, Industry and Business Factors influence the working conditions of a company. These factors directly and indirectly impacts the company’s operations, it is essential to know the factors as these are reflected rough the fundamentals and financials of the company. The Australian Pharmaceuticals Ltd is having the largest market share in wholesale distribution of pharmaceuticals and other health care products (Borio 2014). The financial report for the company of 2017 shows the revenue segment analysis where the company has majority of its revenue earning around 95% from Australia and other from New Zealand. The Australian Government policy changes could influence significantly company’s operations. Certain regulatory reforms, policy and procedures have severally impacted the company operation from the year 2015, the demand for branded products was affected by the introduction of Pharmaceutical Benefit scheme (P.B.S) where customers prefer switching to generic products. The demographic trend for the company are useful as the elderly population of Australia is growing. The Australian elderly population is APL biggest market. The future income growth for the company depend on the disposable income and the consumer spending. Increase in household disposable income and gross earnings will have a positive impact and influence on the company (Mankiw 2014).
Business and Industry Analysis
The company has an improved focus on one of the brand which is the Priceline brand for making it a market leader in the beauty, healthcare and well-being retailer. The company strong network growth and market share has appositive influence on the operations of the company. The Industry analysis of the company was performed by using porter’s five force model where we found that the company was in a cut throat competition with its competitors and its influence on the price or dominance was quite low. Porter five force analysis gives a brief idea about the industry analysis (Dobbsv 2014).
Porter’s Five Force Analysis
Ratio Analysis
Ratio Analysis provides a trend analysis of the company’s financial operations and it’s also provides investors with important details of company’s financials. The return on equity is the ratio, which has been emphasized a lot because it indicates the performance of the company. The ratio is calculated as a percentage of net income in contrast to the shareholders equity of a company. The ratio analysis was done on the basis of five year trend analysis and the implications of each ratio on the financials and workings of the company.
Liquidity Ratio
The ratio measure a company ability for meeting up and paying of the short term obligations of the company. The liquidity ratio for the company has remained stable this shows that the company is efficiently utilising the current assets of the company (Law 2018).
Current Ratio: Current Assets/Current Liabilities.
The ratio reflects the company’s current assets available with the company for covering up its liabilities (Tosi and Paidar 2015).
The Current Ratio for the company is 1.32 times in the year 2017, which has significantly rise from the year 2013 when it was 1.39 times. This shows that the company is not significantly increasing its current asset as compared to the current liabilities of the company. The liquidity of the company is seen to be worsening.
Figure 1: Current Ratio
Source: Appendix 1
Quick Ratio: (Cash+ Accounts Receivables)/Current Liabilities.
The quick ratio or the pure liquidity ratio shows the most efficient or liquid assets in terms of obtaining and conversion of assets cycle into cash. The Quick ratio for the company is around 0.85 times in the year 2017, which has significantly reduced and remained static to the level of 0.88 in the year 2013. The company should focus on improving the quick ratio so that the operating or working capital of the company (Demerjian, Donovan and Larson 2016).
Figure 2: Quick Ratio
Source: Appendix 1
Solvency Ratio
(Net after-tax income + Non-cash expenses) ÷ (Short-term liabilities + Long-term liabilities). The solvency ratio shows the efficiency in the company’s management in paying up its long-term liabilities and obligations of the company (Dam and Pai 2017).
Figure 3: Solvency Ratio
Source: Appendix 1
The solvency ratio for the company in the year 2013 was 0.06 times and the ratio has shown some volatility in the five-year trend but the ratio for the year 2017 was 0.08 times a slight improvement in the company’s ability in paying of paying of its long term liabilities.
Activity Ratio
The Activity ratio for the company represents the company’s ability of conversion of company financial component into revenue.
Asset Turnover Ratio: Sales/ Total Assets
The ratio shows the revenue generated by using company’s total assets. The higher the ratio the higher is the efficiency in the utilization of assets (Weygandt, Kimmel and Kieso 2015). The asset turnover ratio for the company in the year 2017 was 2.80 times and it has shown significantly improvement from the year 2013 when the ratio was 2.31 times. This shows the efficiency in utilization of company’s assets, and delivering better returns on the assets employed (Chen,Shroff and Zhang 2017).
Figure 4: Asset Turnover Ratio
Source: Appendix 1
Financial Leverage Ratio or the Equity Multiplier Ratio: Total Assets/Total Equity
The ratio shows the percentage of assets owned by the equity holders of a company. It also shows the percentage of assets financed by the equity shareholders of the company.
The ratio for the company in the year 2017 was around 2.62 times which has further increased from the year 2013 where it was 2.36 times. However, the volatility in the ratio was quite low.
Figure 5: Financial Leverage Ratio
Source: Appendix 1
Interest Coverage Ratio: Earnings before Interest and Taxes/Interest
The ratio was at 2.50 times in the year 2013 while the ratio has consistently seen a increase to 10.25 times in the year 2017.
Figure 7: Interest Coverage Ratio
Source: Appendix 2
Net Borrowing Cost: Total Interest Expense Paid/ Total Interest Bearing Liabilities. The net borrowing costs for the company has significantly been volatile throughout the five year rend analysis.
Figure 7.1: Net Borrowing cost
Source: Appendix 1
Profitability Ratio:
Return on Equity: Pre-tax Income/Total Equity
The ratio shows the return generated for the equity shareholders of the company. The return on equity for the company in the year 2017 was around 14% in the year 2017 which has shown a significant increase from the year 2013 when the same was 5.93% in the year 2013. The ratio for the company has remained volatile in the five-year trend (Karim, Al-Mamun and Miah 2017).
Figure 8: Return on Equity
Source: Appendix 1
Return on Net Operating Assets: Net Income/ Assets used to create revenue.
The ratio calculates the return generated on the assets employed by the company. The ratio is also helpful in calculating and comparison different companies’ performance among the sector in assessing and efficiently utilizing the assets. The ratio for the company in the year 2017 was around 15.76% which has shown variability in the five-year trend where the company’s return has shown negative to positive returns. The ratio for the company in the year 2013 was around 5.21% and was having negative -25.41% return in the year 2014. This variability in the company trend analysis has shown that from the year 2015 a consistency in this ratio is observed (Papanastasopoulos and Thomakos 2017).
Figure 9: Return on Net Operating Assets
Source: Appendix 1
Profit Margin Ratio: Gross profit/ Sales
The profit margin ratio shows the operating profit of the company by the revenue it earns. The ratio shows the amount of profit generated by the company by selling every extra unit of goods and services. The ratio taken into account with the compatibility of revenue and gross income earned from the same. The operating income of the company if greater determines the growth of the company in the long term.The ratio for the company is around 12.68% in the year 2013, which has remained constant in the five-year trend analysis while the ratio or the percentage for the year 2017 was around 11.87% (Grant 2016).
Figure 10: Profit Margin
Source: Appendix 1
Analysis of Profit Margin
The three significant items which have caused major changes in the profit margin are selling and general expense are the most important and constituent form of income statement and influences the profit margin by almost 80%. The company’s net profit gets affected due to expenses warehousing and distributing expenses, marketing and sales expense and other general expenses. The other is the financial expenses which the company spends on the debt borrowing it has. The company should try to reduce these expenses by financing with equity method which will help save interest or borrowing costs for the company. The income tax expenses for the company depends on the statutory tax rate, which is not always the same as the effective tax rate. It occurs due to the creation of deferred tax assets and liabilities created in the books of the companies. The income tax rate and the effective tax rate for the company has been in the range of approximately 27% with a slight volatility of around 5% (Appendix 2). The company should focus on tax saving benefits like introduction of debt financing when the company is in high tax bracket, when the company is having a minimal or no risk in debt financing (Heikal, Khaddafi and Ummah 2014).
Analysis of Assets and Liabilities
Three major assets and liabilities whose turnover ratio have contributed to the overall change in the assets efficiency is the fixed assets of the company i.e., plant and machinery which have reduced by around 5% from 2016-2017 but the increase in the revenue was at the same time observed to be around 5.26%. This shows that the company has shown efficiency in production and revenue generation (Appendix 3). The trade and other receivable which has reduced by 1.12% from the year shows the management has started focusing on the efficiency of this particular asset. While if we see at the liability side from the year 2013-2017 the company has reduced the loans and borrowing and long term debt of the company significantly which has let the company reduce financial risks and reduce interest expense a significant component of income statement (Panigrahi and Sharma 2016).
Cash Flow Analysis
The cash flow from operating activities for the company has increased from the year 2013 to 2017 to around 7.56%. This increase was due to increasing revenue and operating income for the company. The operations from cash flow has shown a tremendous growth in the period. While the Cash flow from investing did not see any massive changes except the company has reduced its property plant and equipment by around 15% from the year 2013-2017 (Cao 2015). The financing activities did see a major changes in the borrowings and debts of companies which they have repaid and consistently reduced their debt (Appendix 4).
Figure 11: Net Operating Cash Flow
Source: Appendix 4
The free cash flow analysis was performed with the formula FCF= NOPAT – change in NOA + OCI. The trend showed an upward or rising scenario for the company (Appendix 6).
Figure 12: Free Cash Flow
Source: Appendix 6
Conclusion
American Pharmaceuticals Industries has used different business strategy and analysis by differentiating the products and delivering unique products and services. The macro economic analysis performed stated that the current and ongoing regulations are not favourable for the company. The ratio analysis performed that the company is having a sound positive financial trend. The company has significantly increased the operating revenue of the company and had reduced a consolidated debt in the five year time. Overall the company financial position is stable but it should think of diversifying and reducing operating expenses of the company.
References
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