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SCHOOL OF

GROUP ASSIGNMENT COVER SHEET STUDENT DETAILS Student name: Owen Ma Student name: Naimisha Ibhat Student name: Niphada Phengmeuang Student name: Ka Chon Cheong Student name: Edgard Hakim

Student ID number: Student ID number: Student ID number: Student ID number: Student ID number:

19829018 20145981 19478988 19571111 19306911

UNIT AND TUTORIAL DETAILS Unit name: Financing Enterprise Tutorial/Lecture : Tutorial Lecturer or Tutor name:

Unit number: 200910 Class day and time: Monday 1-3 PM

Dr Mustapha Bangura

ASSIGNMENT DETAILS Title:

Analysis of Financial Performance Due Date Length: 1552 date: 25/9/2020 submitted: Home campus (where you are enrolled): Sydney City Campus

24/9/2020

DECLARATION I hold a copy of this assignment if the original is lost or damaged. I hereby certify that no part of this assignment or product has been copied from any other student’s work or from any other source except where due acknowledgement is made in the assignment. I hereby certify that no part of this assignment or product has been submitted by me in another (previous or current) assessment, except where appropriately referenced, and with prior permission from the Lecturer / Tutor / Unit Coordinator for this unit. No part of the assignment/product has been written/produced for me by any other person except where collaboration has been authorised by the Lecturer / Tutor /Unit Coordinator concerned. I am aware that this work will be reproduced and submitted to plagiarism detection software programs for the purpose of detecting possible plagiarism (which may retain a copy on its database for future plagiarism checking).

Student’s signature: Student’s signature: Student’s signature: Student’s signature: Student’s signature:

Owen Ma Naimisha Ibhat Niphada Phengmeuang Ka Chon Cheong Edgard Hakim

Note: An examiner or lecturer / tutor has the right to not mark this assignment if the above declaration has not been signed.

Table of Contents Analysis of Financial Performance................................................................................................................................1 Question 1:................................................................................................................................................................ 1 Question 2:................................................................................................................................................................ 1 Question 3:................................................................................................................................................................ 2 Question 4:................................................................................................................................................................ 2 Question 5:................................................................................................................................................................ 3 Reference:......................................................................................................................................................................4 Appendix........................................................................................................................................................................5 Calculate current ratio and quick ratio for measuring the overall liquidity of CSS......................................................5 Calculate current ratio and quick ratio for measuring the overall liquidity of AVG.....................................................5 Calculate the two companies net working capital......................................................................................................5 Question 2 Calculations:................................................................................................................................................6 Question 3 Calculations:................................................................................................................................................6 Question 4 Calculations:................................................................................................................................................7

Analysis of Financial Performance Question 1: Clean Seas Seafood Limited (CSS) liquidity is positioned in 2018 is strong because the ratio is more than 1. Moreover, in 2019 that ratio has drastically risen in current liability as well as the level of inventories and the company will be able to meet its short-term liability payments knowing that the company can pay what is owed by inventory, so the company would not be in debts due in a year. Australia Vintage Ltd (AVG) liquidity is positioned in 2018 is weak as the company quick ratio is less than 1, and it has not been radically changed during one-year period. In 2019, the ratio has practically remained the same. As a result, the company could not encounter the short-term liabilities payments. Considering that, the reason that the liquidity ratios are below average is the increase in current liabilities from 62,638,000 to 66,175,000 as well as the inventory levels meaning that they cannot pay what is owed by inventory. (Bakry, 2016). For 2019, according to the calculation above CSS has a positive Net Working Capital (NWC) which was 57,046,000 compared to 53,973,000 in 2018 means that its NWC position, hence its liquidity has improved from 2018 to 2019. On the other hand, though the Net Working Capital of AVG has increased from 132,502,000 in 2018 to 147,642,000 in 2019, the liquidity position has barely changed. In comparison, CSS and AVG have improved their liquidity position from 2018 to 2019, as implied by all three metrics both enhanced NWC positions. While CSS was severely dropped in the ratios yet the quick ratio still greater than 1. AVG has not changed much in current ratio, the quick ratio which already below average displays slightly decreased that AVG could not sell inventory to meet its current debts obligation.

Question 2: Clean Seas Seafood Limited (CSS) main source of finance can be seen in their equity which stands at $71,769.00, however their alternate source of finance is evidently seen through a variety of external and internal funds. In 2018, the debt ratio was at 12.1% compared to the debt ratio of 21.7% in 2019. This shows that during the year, the debt ratio has increased within the company. The company may have been focused on specific expenditures which has caused their short term and long term debt to significantly increase. This is the reason for the change in their debt ratio. Clean Seas Seafood was also unable to get many business investments in 2019, however this may have been due to the company's EBIT visibly decreasing in 2019. Once again the Australian Vintage Limited (AVG) main source of finance can also be seen as their own equity which stands at $292.89, however they also use a variety of internal and external funds as an alternate source of finance. In 2018, the debt ratio was at 32.1% compared to the debt ratio of 31% in 2019. Therefore, the company's debt ratio has decreased during this time period. Australian Vintage Limited is lacking the sufficient funds in order to expand within their company as they have a duty to pay off the debt they owe. The company's EBIT in 2018 was 16.18, before increasing by 0.1, resulting in 16.28 in 2019, therefore, the company's equity is their main source of finance.

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Question 3: Clean Sea Seafood Limited (CSS) profitability of invested capital in 2018 is better than 2019. From the return on asset is 4.24% in 2018, however the return on asset change to the 0.6% in 2019. When the total asset is more than last year. Even Australian Vintage Ltd (AVG) 3.7% return on assets is not as good as CSS in 2018 and 2019, but every dollar that AVG has invested in assets generates 3.7 cents of net income. AVG is better at converting its investment into profits, compared with CSS. The main reason for the change in the profitability for each company over 2 years is the earnings before interest taxes (EBIT) decreased, CSS as well as the firm controlled its costs relative to each dollar of firm sales in the 2018. Between CSS and AVG, AVG measures net profit margins so that the company's profit margin relative to sales is higher than that of its competitors. This is usually more effective, more flexible and able to seize new opportunities. (Bakry, 2016) AVG's operating margins in 2018 and 2019 are more stable than CSS, and there is a fixed profit income. However, the interest cost of CSS is lower than that of AVG, and the operating cost-plus various expenses are higher than CSS. Therefore, the net profit margin of the two companies is only within 0.1% of the difference between 2018 and 2019.

Question 4: Shareholders’ profitability is an extremely important aspect of finance that Provenance Investment Fund must analyse in order to determine which firm is better to invest in and become shareholders. (Bakry, 2016) With the DuPont Method, the shareholders’ profitability of Clean Seas Seafood Limited (CSS) and Australian Vintage Ltd (AVG) in 2019 and 2018 can be compared and analysed to explain their changes in profitability to themselves and each other. In the DuPont Method, shareholders’ profitability is represented by the return on equity ratio (ROE). Calculations utilizing the DuPont Method reveal that CSS had a ROE of 4.8% in 2018, and 0.4% in 2019, while AVG had a ROE of 2.6% in 2018, and 2.7% in 2019. An average or good ROE is usually between 15% and 20%, meaning neither firm has a very good ROE. One reason for the low ROE is that neither company had preference shares to grant, giving them higher ordinary equity. CSS had the highest overall between the two, with 4.8% in 2018, however when compared to 2019, their ROE decreased significantly to only 0.4%. This is very low and close to a negative ROE which is resulted by financial loss, meaning the business loses more money than it gains, although CSS is not quite there yet. The reasons for this heavy reduction can be analysed through the spreadsheet and DuPont Method. Compared to 2018, CSS in 2019 had higher sales, total assets, and ordinary equity, seemingly doing better than 2018, however, net profit was lower by 3,151,000 dollars from 3,450,000 dollars to 299,000 dollars. Despite having 4,449,000 dollars more in sales in 2019 from 41,650,000 dollars to 46,149,000 dollars, CSS’s net profit was negatively affected from 2018 to 2019 by increased operating expenses of 66,127,000 dollars from 53,919,000 dollars, depreciation of 3,079,000 dollars from 2,539,000 dollars, and net interest expense of 256,000 dollars from 11,000 dollars, thus contributing to the reason that CSS has decreased in shareholders’ profitability. Conversely, AVG’s ROE has slightly risen, from 2.6% in 2018, to 2.7% in 2019. This was due to increases in net profit of 7,694,000 dollars to 8,123,000 dollars, sales of 264,613,000 dollars to 269,166,000 dollars, total assets of 440,776,000 dollars to 446,012,000 dollars, and ordinary equity of 292,893,000 dollars to 298,831,000 dollars from 2018 to 2019. The increase in ROE was also aided by decreases of amortisation from 308,000 dollars to 169,000 dollars, and interest expense from 5,015,000 dollars to 4,059,000 dollars from 2018 to 2019. Thus, AVG had increased in shareholders’ profitability.

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Question 5: To sum all this up, we have found that the basic financial structures of the two companies are very different with one being a very stable company while the other is very risky. Clean Seas Seafood Limited (CSS) liquidity ratio is better, as (CSS) accounts receivable collection quickly has short aging, strong asset liquidity, and short-term debt repayment. Strong force, less bad debt losses (Bakry, 2016). Clean Seas Seafood Limited (CSS) overall liquidity and profitability are higher than Australia Vintage Ltd (AVG), but the risk is also high. (AVG) has strong sales capabilities and high asset utilization efficiency in the current period and is more stable as not much of a change happened from 2018 to 2019. The net profit margin of the two companies is only within 0.1% of the difference between 2018 and 2019. For the ROE (CSS) has over 4.8% in 2018 alone which is 2.1% higher than (AVG) ROE in 2018. However, (CSS) is a volatile and unstable company to invest in as seen with their dramatic decrease in ROE to as low as 0.4% in 2019 and they are coming close to financial losses if their expenses, depreciation, and interest expenses continue to rise without outstanding increases in sales. On the other hand, while having a lower ROE in both years than CSS in 2018, AVG has a higher ROE of 2.7% compared to CSS’s 0.4% in 2019. AVG is stable and safe as their ROE is consistent and steadily increasing due to their higher sales, total assets, and ordinary equity. Their amortisation and interest expenses have also decreased while CSS’s have not. Therefore, AVG has greater shareholders’ equity than CSS. In Conclusion, while it would have been the best option for Provenance Investment Fund to invest in CSS in 2018, due to their 4.8% ROE, it is not anymore as when looking at its major decrease in their ROE to 0.4% it is not recommended for a long-term investment. Overall, it is best for the Provenance Investment Fund to invest in (AVG) is relatively stable from 2018 to 2019 and less risky than (CSS) who is doing very well throughout 2018 but is not looking very good in 2019. (Wallid Bakry and Pearson Australia, 2016).

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Reference:

Wallid Bakry, 2016, Financing enterprises, 200910, Understanding Financial Statements and Cash Flows, Viewed, 20 September 2020, Western Sydney University, Pearson Sydney, Australia. Chapter 2 pp.22-52 Wallid Bakry, 2016, Financing enterprises 200910, Financial Analysis, Viewed, 20 September 2020, Western Sydney University, Pearson Sydney, Australia. Chapter 7, pp.153-193

Morningstar DatAnalysis Premium, 2020, Clean Seas Seafood Limited (CSS) Financial Data 20 September 2020, [online] Available at: https://datanalysis-morningstar-comau.ezproxy.uws.edu.au/af/company/corpdetails?ASXCode=CSS&xtm-licensee=datpremium. Morningstar DatAnalysis Premium, 2020, Australian Vintage Ltd (AVG) Financial Data, Viewed, 20 September 2020, [online] Available at: https://datanalysis-morningstar-comau.ezproxy.uws.edu.au/af/company/corpdetails?ASXCode=AVG&xtm-licensee=datpremium

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Appendix 1. Calculation the value for two liquidity ratios:

Calculate current ratio and quick ratio for measuring the overall liquidity of CSS CSS

2018

2019

Current Asset

61,961,000.00

73,865,000.00

Current liabilities

7,988,000.00

16,819,000.00

Inventories

5,484,000.00

9,465,000.00

Current ratio = current assets / current liabilities

7.7567

4.3917

Quick ratio = (current assets – inventories) / currents liabilities

56,477,000.00 / 7,988,000.00 = 7.0702

64,400,000.00 / 16,819,000.00 = 3.8290

Calculate current ratio and quick ratio for measuring the overall liquidity of AVG AVG

2018

2019

Current assets

195,140,000.00

213,817,000.00

Current liabilities

62,638,000.00

66,175,000.00

Inventories

139,882,000.00

156,346,000.00

3.1153

3.2310

55,258,000.00 / 62,638,000.00 = 0.8821

57,471,000.00 / 66,175,000.00 = 0.8684

Current ratio = current assets / current liabilities Quick ratio = (current assets – inventories) / currents liabilities

Calculate the two companies net working capital CSS: Net

2018

2019

61,961,000.00 -

73,865,000.00 -

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Working Capital = Current Assets Current Liabilities

7,988,000.00 = 53,973,000.00

16,819,000.00 = 57,046,000.00

AVG: Net Working Capital = Current Assets – Current Liabilities

195,140,000.00 - 62,638,000.00 = 132,502,000.00

213,817,000.00 - 66,175,000.00 = 14,642,000.00

Question 2 Calculations: CSS

2018

2019

debt ratio - total liabilities / total assets

9,893.00/81,662.00 = 0.1211457 = 12.1%

20,393.00/93,935.00 = 0.21709693 = 21.7%

interest coverage ratio operatingEBIT / interest expense

3,461.00/75.00 = 46.1466667 = 46.1 times

555.00/262.00 = 2.11832061 = 2.1 times

AVG

2018

2019

debt ratio - total liabilities / total assets

62.64/195.15 = 0.32098386 = 32.1%

66.18/213.82 = 0.30951267 = 31%

interest coverage ratio operatingEBIT / interest expense

16.18/5.03 = 3.2166998 = 3.2 times

16.28/4.06 = 4.00985222 = 4 times

Question 3 Calculations: Calculate the profitability of invested capital (assets) for each of the two companies in 2019 as compared to 2018. CSS

EBIT Total Asset Return on Asset =EBIT / Total Asset

AVG 2018

2019

2018

2019

3,461,000

555,000

16,180,000

16,281,000

81,662,000

93,935,000

440,776,000 446,012,000

0.042382014 0.005908341

0.036707988 0.036503502

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Revenue

59,919,000

69,761,000

265,866,000 270,098,000

-41,146,000 -50,883,000

-192,877,000 -194,735,000

Gross Profit Margin = (Revenue - COGS) / Revenue 1.686693703 1.729390347

1.725466965 1.720979052

COGS

Tax Expenses Interest Expense

-75,000

-262,000

-3,471,000

-4,124,000

-5,031,000

-4,059,000

Operating Expense

-53,919,000 -66,127,000

-242,190,000 -245,903,000

Net Income = R - COGS - OE - O - I - T

155,059,000 187,033,000

709,435,000 718,919,000

Net profit Margin=NI / Revenue

2.58781021 2.681053884

2.6683931 2.661696866

Gross Profit = Revenue - COGS

101,065,000 120,644,000

458,743,000 464,833,000

Operating Profit = Gross Profit - Operating Expense

154,984,000 186,771,000

700,933,000 710,736,000

Operating Profit Margin = Operating Profit / Revenue 2.586558521 2.677298204

2.636414585 2.631400455

Question 4 Calculations: Using the DuPont Method, calculate the shareholders’ profitability (Return on Equity Ratio) of the two companies in 2019 compared to 2018. CSS

2018

2019

Net Profit

3,450,000

299,000

Sales

41,650,000

46,149,000

Total Assets

81,662,000

93,935,000

Ordinary Equity

71,769,000

73,542,000

Net Profit/Sales (Net Profit Margin)

3,450,000/41,650,000

299,000/46,149,000

Sales/Total Assets (Total Asset Turnover)

41,650,000/81,662,000

46,149,000/93,935,000

Total Assets/Ordinary Equity (Equity Multiplier)

81,662,000/71,769,000

93,935,000/73,542,000

Net Profit/Ordinary Equity (Return on Equity Ratio) (Net Profit Margin x Total Asset Turnover x Equity Multiplier)

3,450,000/71,769,000 = 3,450,000/41,650,000 x 41,650,000/81,662,000 x 81,...