Financial assignment analysing the financial statements of Kogan.Com Ltd
Task: You are required to study the annual reports of the designated company over the past three years and present your findings in a financial assignment format. Your business report should evaluate the relative financial performance of the company based on the financial analysis results and propose strategies for future improvements.
The financial assignmentwill be analysing the performance of the company Kogan.com Ltd, which is a multinational company dealing in a variety of retail businesses and services. The financial assignmentwill thoroughly analyse the financial statements of the company for the last three years to conduct Ratio Analysis and DuPont Analysis and then comment upon the existing financial position and strategies of the company. The financial assignmentwill be concluded by providing some strategies as a suggestion to improve the financial position and working of the company.The financial assignmentwill try to depict the trends in ratios and the relative performance of the company by using graphs of some selected ratios. The financial assignmentwill also use past performance as a benchmark to comment upon the current performance of the company.
Financial Statement Analysis conducted in the financial assignment
The financial assignmenthas taken into consideration four years of financial statements to facilitate our calculation and study the trends in data from 2019 to 2022. The company prepares an Income Statement, Balance Sheet, Statement of Changes in Equity and Cash Flow Statement as a part of its annual report (Kogan, 2019). After analysing the statement the key highlights that were identified are:
i) The profits of the company have been declining over the past three years and in the current year 2022, the company suffered a loss of $ 36,266.
ii) The finance cost of the company has increased leading to a decrease in Earnings before tax. iii) The company invested a huge amount in intangible assets in the year 2021 and continued to maintain them in 2022 (Kogan, 2021).
iv) The company has also invested funds in buying property, plant and equipment in the year 2021 Financed by loan borrowings.
v) The company has also entered into lease agreements for using property plants and equipment.
Ratio Analysis in the financial assignment
Ratio Analysis is a comprehensive tool for a business performance evaluation of a company on different parameters like profitability, activity, leverage, and liquidity (Vaidya, 2019). Various line items of balance sheet, comprehensive income statement, cash flow statement and other notes to accounts are linked together to compare and understand the performance efficiency of a company. For Kogan.com Ltd, the financial assignmenthas calculated a variety of ratios for three years so that a thorough studies the trend of performance of various line items and concludes an opinion thereon.
The overall analysis after studying the various ratios is:
Profitability Ratios: These ratios are a measure of the performance of a company and whether they are able to earn and pay off the desired returns expected by the shareholders (Bragg, 2018). After analysing the performance of the last three years it can be said in the financial assignmentthat the company's profit margin has dropped over the years and their returns are also decreasing. The gross profit margin though remained steady but the net profit has decreased due to a large number of indirect expenses.
The administration and selling expenses of the company have increased by many folds during the last four years which is one of the prominent reasons for declining profits. In the year 2022, the net profit margin of the company decreased from 5.39% in 2020 to 0.45% and further declined to negative 4.93% in the year 2022 as the profits remained negative and there was also a foreign exchange currency loss. Thus, it can be saidin the financial assignmentthat the profitability position of the company is risky.
Asset Efficiency Ratios: These ratios are used to understand the asset efficiency of a company, and how well a company is able to make use of its assets to generate higher returns for itself and its shareholders (Monea, 2019). By calculating and analysing the efficiency ratios it can be saidin the financial assignmentthat the company is using its resources in an optimum manner. The company is able to generate good returns and maintain steady asset efficiency ratios within the period of three years as the changes in ratio values were quite low.
Though the inventory, and trade receivable collection period has shown a slight increase in the period of realisation every year it is an alarming situation for the company as it will affect the cash conversion cycle of the company in the long run. The company’s inventory days as per the financial assignmenthave increased from 92 days in 2020 to 108 days in 2021 and 132 Days in 2022 which increases the risk of goods becoming obsolete for the company and also adds to the maintenance cost of stock keeping by the company.
Liquidity Ratios: These ratios are used to analyse the short-term financial position of the company (Durrah et al., 2016). These ratios help the management to understand the short-term solvency and cash position of a company so that plan their cash conversion cycle appropriately and day-to-day operations do not get affected. The liquidity position of the company has declined over the years. It is found in the financial assignmentthat the company is not able to cover its current liabilities with its liquid assets if inventories are excluded in the calculation as they may take time to realise in cash.
The company shall monitor its cash conversion cycle and try to improve its debtors and inventory conversion period, else the chances to become a defaulter in future may increase. The company's acid test ratio declined from 1.34 times in 2020 to 0.62 times in 2021 and further to 0.55 times in 2022. Thus, it can be saidin the financial assignmentthat the liquidity position of the company is quite weak and the company should take immediate measures to improve it. Capital Structure / Leverage Ratios: These ratios are a measure of the financial health of a company in long run (Bader and Aljamaan, 2018). These ratios are used by investors of the company to analyse the risk associated with the investments made in the company. Leverage is used by the company to enjoy tax benefits and reduce profits ethically.It is found in the financial assignmentthat the company has more or less maintained the same Capital structure over the year. The Debt Equity ratio remained around 50% over the past three years – 41.35% in 2020, 59.11% in 2021 and 52.09% in the year 2022. The ratio is almost ideal as most assets of the company are financed by self-generated funds. As other costs are also increasing the interest coverage ratio has declined over the years, it was 51.56% in the year 2020 which declined to 11.44% in 2021 and 15.45% in the year 2022. The company as per the financial assignmentshould take robust measures to cut down costs and increase profits to avoid the risk of becoming a defaulter in future (Babatunde Lawal, 2017). Thus, it can be saidin the financial assignmentthat the company's long-term capital structure is not risky and can apply for further loans or fresh capital raised from the market easily.
Market Performance / Investment Ratios:These ratios are important from a prospective investor’s point of view as they reflect the valuation of the business. The market price of the shares of the company has declined over the years, it was $ 14.72 in the year ending 2020 which decreased to $ 11.52 in the year 2021 and further declined drastically to $ 2.78 in the year 2022.
The company has been steady in paying dividends but in the year 2022 the loss was high, and they restrained from paying any dividends (Kogan, 2022). As per the financial assignmentpaying off large dividends is a good policy to attract more investors but as the company is planning to expand its business operations and incurred loss in the year 2022 hence, it might have intentionally abstained from creating a charge against accumulated funds and paying dividends this year. As the company’s profits and performance are declining its P/E ratio has also dropped from 51.61 times in 2020 to 8.19 times in the year 2022. Hence, the company’s market valuation has also been affected adversely over the years.
Let’s understand some trends with the help of Graphs in thefinancial assignment:
Figure 1: Return on Equity
Figure 2:Net Profit Margin
Figure 3: Asset Turnover ratio
Figure 4: Dividend Payout Ratio
Source: Self-developed for the financial assignment
The above graphs in the financial assignmentdisplay the trends of data for the last three years for Kogan.com Ltd; as it is evident from the graph itself that the net profit margin, return on equity, and dividend payout ratio all have decreased in the year 2022. Therefore it can be concluded from the financial assignmentthat the company's performance is deteriorating. The asset turnover ratio has increased as the sales and amount of total assets possessed by the company both have to reduce d in the year 2022.
DuPont Analysis is a technique that was used by the DuPont Corporation to assess its profitability and the drivers of return of equity (Pinsent, 2022). Return on equity is the rate at which returns are provided to the investors on their funds.The Return on Equity can be calculated by three methods:
i) Return on Equity = (Net Income/Sales)*Sales/Shareholder’s Equity
ii) Return on Equity = (Net Income/Sales)*(Sales/Assets)*(Assets/Shareholder’s Equity)
iii) Return on Equity = Net Profit Margin*Asset Turnover*Equity Multiplier
These ratios help us to understand how these ratios and items are linked together and what impact they can make on the financial status of the company. If the rate of return ratio rises it is a good sign but with the help of the DuPont model, its other effects can also be analysed if the debts increase and equity decrease Return on Equity will increase but it is a more risky position for the company as there is more leverage (CFI Team, 2022).
While it has been analysed in thefinancial assignmentthat the Return on Equity and its different drivers for Kogan.com Ltd, the results were not positive as the sales and net profits have dropped over the period of the three years, the total assets of the company have also decreased in value, the amount of equity capital has also decreased as the amount of loss was high and some repayments were also made in the year 2022. The company served a quite low Return on equity in the year 2022 which was lower than the industry average and most of its competitors. Thus, with the help of DuPont Analysis overall financial assignmentcould understand the position of both assets and profitability of the company and the reasons behind their decrease (CFI Team, 2022). As the situation is quite alarming the company should focus on improving its return on equity else the existing shareholders will be dissatisfied and new investors will not be attracted towards the company.
Segment Analysis in the financial assignment
The company reports two main segments divided geographically – Australia and 2 segments of New Zealand. The two operating divisionsKogan.com and Mighty Ape deal in different products and services.
Figure 5: Annual Report
Source: (Kogan, 2022)
The Parent Company of Kogan.com is less profitable than Mighty Ape. The sale of Kogan.com is much larger in volume than Might Ape its profit margin is low. To know which division is more profitable Operating Profit margin for both divisions can be calculated in the financial assignment:
Recommendations and Conclusion
After performing both the analysis mentioned above it can be concluded that the financial position of the Company Kogan.com Ltd is not strong as its profits and sales are declining. It is found in thefinancial assignmentthat the company is adapting robust techniques and measures to boost its sales by increasing selling and distribution expenses, it is also trying to build its internal management strong by spending more on administration activities so that with a strong team it could grab better opportunities and expand its business operations. The company is also trying to reduce its fixed finance costs by paying off almost 50% of its loan liabilities in the year 2022. This will help the company to increase profits.
The company as per thefinancial assignmentshall immediately monitor its current assets position as they are quite low; if the mechanism to collect debtors and convert inventories into cash sales will not be improved the company shall become a defaulter soon and be unable to meet its fixed expense through working capital.
It can be concludedfrom the financial assignmentthat the company is trying to expand its operations by investing in fixed assets but as the amount of loans has increased the finance cost have also increased. The company is not able to maintain its working capital efficiently so, it should try to enhance its current assets and profit margin to satisfy its shareholders.
Babatunde Lawal (2017). Effect of Cost Control and Cost Reduction Techniques in Organizational Performance. [online] ResearchGate. Available at: https://www.researchgate.net/publication/341314249_Effect_of_Cost_Control_and_Cost_Reduction_Techniques _in_Organizational_Performance [Accessed 18 Nov. 2022].
Bader, E. and Aljamaan (2018). _Published by European Centre for Research Training and Development UK (www.eajournals.org). European Journal of Accounting, Auditing and Finance Research, [online] 6(2), pp.2053–4094. Available at: https://www.eajournals.org/wp-content/uploads/Capital-Structure-Definitions-Determinants-Theories-and-Link-with-Performance-Literature-Review-1.pdf [Accessed 18 Nov. 2022].
Bragg, S. (2018). AccountingTools. [online] AccountingTools. Available at: https://www.accountingtools.com/articles/profitability-ratios.html [Accessed 18 Nov. 2022].
CFI Team (2022). DuPont Analysis. [online] Corporate Finance Institute. Available at:
https://corporatefinanceinstitute.com/resources/accounting/dupont-analysis/ [Accessed 18 Nov. 2022]. Durrah, O., Aziz, A., Rahman, A., Jamil, S. and Ghafeer, A. (2016). International Journal of Economics and Financial Issues Exploring the Relationship between Liquidity Ratios and Indicators of Financial Performance: An Analytical Study on Food Industrial Companies Listed in Amman Bursa. International Journal of Economics and Financial Issues |, [online] 6(2), pp.435–441. Available at: https://dergipark.org.tr/tr/download/article-file/363363 [Accessed 18 Nov. 2022].
Kogan (2019). ANNUAL REPORT. [online] Available at: https://www.kogancorporate.com/resources/pdf/library/1.%20KOG0008%20Kogan%20AR19_ASX.pdf [Accessed 18 Nov. 2022].
Kogan (2021). Annual Report. [online] Available at: https://www.kogancorporate.com/resources/pdf/library/2021%20Annual%20Report.pdf [Accessed 18 Nov. 2022].
Kogan (2022). Annual Report. [online] Available at: https://www.kogancorporate.com/resources/pdf/library/2022%20Annual%20Report.pdf [Accessed 18 Nov. 2022].
Monea, M. (2019). Asset Management Ratios Mirela Monea. [online] Available at: https://www.upet.ro/annals/economics/pdf/2019/p2/Monea.pdf [Accessed 18 Nov. 2022].
Pinsent, W. (2022). Decoding DuPont Analysis. [online] Investopedia. Available at: https://www.investopedia.com/articles/fundamental-analysis/08/dupont-analysis.asp#:~:text=DuPont%20analysis%20is%20a%20framework [Accessed 18 Nov. 2022].
Vaidya, D. (2019). Dheeraj Vaidya. [online] Learn Investment Banking: Financial Modeling Training Courses Online. Available at: https://www.wallstreetmojo.com/ratio-analysis/ [Accessed 18 Nov. 2022].