Return on Equity
Colorado has provided a reasonably consistent level of return on equity over the four-year period of between 36.54% and a high of 41.49% in 2003. Although this may appear as good news to investors considering long-term investment prospects, it may suggest that Colorado is over leveraged and should consider opportunities of establishing greater balance between ROA and reliance on financing for its capital structure.
Noni-B’s registered a 22.7% gain in ROE in 2004 over 2003, a reflection of increased profit margins, increased asset productivity, reduced reliance on debt financing and 13% increased in net sales.
ii. SPREAD ANALYSIS
Return on Operating Assets:
Applying spread analysis, return on operating assets [See Appendix III] highlights the contribution of operating assets to the organisation’s performance. In this case, Colorado has produced the higher returns of the two entities, including a 22% increase in return between 2002 and 2003, again representative of the organisation’s ability to balance reliance on debt and equity financing for growth, while maintaining some degree of control over its operating costs as it expands.
Noni-B experienced a decrease between 2002 and 2003. An increase in operating costs has not been matched by effective employment of operating assets. This may indicate the organisation has remained static in deploying new methods of asset utilization, or has failed to explore different methods of financing in order to expand.
Cost of Debt
As anticipated, the reliance on debt financing to support an entity’s growth or continuing operations will produce additional costs, and this is reflective of the cost of debt fluctuations experienced by Colorado since 2001. Its willingness to take on debt to finance acquisition has led to higher interest expenses. Unless the organisation launches another takeover bid in the near future or interest rates increase, Colorado’s interest expenses should decline as its accumulation of debt falls.
Noni-B has not been reliant on debt financing for its expansion, and growth. In 2003 Noni-B repaid borrowings and paid out proportionately higher dividends than previous years. This was financed largely by the issuance of new shares.
Spread
The effect of introducing debt into an entity’s capital structure is measured through the calculation of spread, ie. the difference between the rate of return earned on operating assets and the cost of debt for an organisation. From this analysis, Colorado would be described as having ‘positive spread’, with its highest spread recorded in 2001 and 2003 at times when cost of debt was marginally lower, a reflection of the timing of its acquisitions, interest rate hikes and interest expenses incurred from debt financing.
Noni-B seems to be moving away from its dependency on debt financing as long-term interest bearing liabilities have diminished.
Leverage
An alternative calculation of leverage, the degree to which the entity is reliant on debt as a source of capital, indicates Noni-B derived between 38 and 43 per cent of its capital from debt financing. Long term interest bearing liabilities declined to below 5% in 2003 and 2004 from self-financed expansion. This may explain moderate expansion as Noni-B waits for income before embarking on a major expansion and growth strategy.
Colorado’s reliance on debt peaked in 2003 at 15.24%, again a reflection of the increase in debt stemming from the diana ferrari acquisition which, in turn, produced a domino effect of an increase in receivables, inventories, interest-bearing liabilities and net assets.
Return on Financial Leverage
As a result of the use of leverage to support capital structure, shareholders of both firms have witnessed some major peaks and valleys in terms of financial gains. Shareholders of Colorado experienced the greatest gains in 2003, from the diana ferrari acquisition, which boosted revenue, operating assets and allowed the company to improve returns on operating assets. In 2004, the company began to pay down its debt and focus on internal efficiencies.
iii. FINANCIAL PERFORMANCE ANALYSIS (Profitability)
Net Profit Margin
Colorado has performed effectively at extracting net profit from revenue. Net profit margin topped 6.53%, or roughly $0.07 per dollar of revenue, suggesting a long-term strategy for re-investment of earnings and higher margins from overseas product procurement. Both companies have performed well despite high industry competition, shrinking margins and discounting, the latter of which was blamed Colorado’s flat margins across 2001-2002. Noni-B’s strategy of developing its brands for niche markets renders it less affected by discounting however sourcing merchandise within Australia at higher costs may be cause for concern if there is a sudden downturn in the market.
Sales Change
Although Colorado’s net sales have progressively increased over the years, the sales change ratio suggests that sales have plateaued and, in the case of 2004, completely leveled off at 0.38% rate of change. The 5-point differential in sales change between 2001 and 2002 stems from company store and brand expansion. 2002-2003 sales were distorted by the one-off inclusion of the 53rd week and an additional $7.5 million in top line sales. The company’s marginal performance in 2003-2004 was a by-product of competitor discounting, a slow down in consumer spending, poor performance of its JAG and Mathers brands and a warmer-than-usual winter season.
Noni-B sales have steadily increased, averaging 12.3 percent since 2002, bolstered by store expansion and increased market share.
Cash Cover
Colorado is over-positioned with cash cover in 2004. This stems from a sharp increase in the net cash provided by operating activities – a product of a decline in borrowing costs, increase in cash receipts from customers and decrease in cost of goods sold – versus a decline in interest expense. Colorado is less risky to investors as it is better positioned to address interest payments.
Noni-B’s cash cover ratio gradually increased between 2001 and 2003 before rising to a level in 2004 which may be less than ideal. Although the cash cover ratio measures a company’s ability to meet interest payments, Noni-B is holding too much cash at the end of 2004, the result of limited expansion opportunities.
Debt to Equity
It is generally assumed that a higher debt to equity ratio is an indicator of greater financial risk to investors. Both entities have produced fluctuating results, a reflection of their strategies for growth and/or willingness to acquire debt financing. Colorado saw a noticeable increase in debt in 2001 to 2003, fueled in part by sharp increases in payables (up 107%) and interest bearing liabilities (up 104%) while net assets showed slower growth at 37%. By 2004, the ratio stabilized with payables dropping roughly 10% and net assets increasing 35% from the prior year, thus lowering the volatility of the entity.
Noni-B’s debt to equity ratio has decrease by 50% between 2000 and 2004. Payables have fluctuated, but there was an increase in net assets of 41% between 2001 and 2004. In 2004 payables increased by 30% and net assets by 11%. This points to increased volatility, whereby payables increased more than assets.
iv. FINANCIAL PERFORMANCE ANALYSIS (Operational Efficiency)
Current Ratio
Current Ratio analysis suggests the corporate performance of the companies has varied across the period of review, a possible reflection of environmental factors (eg. 9/11, economic growth) and internal operation (eg. collections of accounts receivable, acquisitions). The performance of the companies during the early part of the decade suggests events such as 9/11 and a faltering global economy were factors. For Colorado, one-offs such as the diana ferrari acquisition led to increases in accounts receivables, inventories and the recording of intangible assets, including an increase in goodwill of roughly $7.1 million related to the acquisition. The company’s liquidity improved to 2.26 in 2004, just above the generally accepted range of 2:1.
Noni-B has generally been below the accepted norm of 2:1. There has been no direct effect on trade other than the possible lack of ingenuity when it comes to expansion and growth. Between 2001 and 2004 there has been an increased ability for Noni-B to meet its short-term debts, but in 2002 the current ratio dropped to 1.02 due an increase in current liabilities (interest bearing) from the previous period. This was due to a non-current interest bearing liability becoming current.
Quick Ratio
Use of the quick ratio is particularly relevant in financial analysis of retail companies, which traditionally have significant inventories holdings that cannot be immediately converted to cash. Assessing the ability of companies like Colorado and Noni-B to repay short term debt is critical in determining their liquidity. A comparison of the two companies suggests that Colorado is ‘more liquid’, particularly in 2004 when it produced a 1.53:1 ratio, as opposed to Noni-B’s 0.75:1 ratio. This suggests that Noni-B has hovered dangerously close to a level that, if faced with a crisis, it might not be able to meet its immediate obligations. For stakeholders such as creditors, employees and suppliers, this would be considerable cause for concern. Colorado successfully increased its liquidity in 2004 by reducing its inventories and current liabilities, and is now in a stronger position to meet short-term obligations.
VIII. WORKING CAPITAL / FUNDING GAP ANALYSIS
Accounts Receivable Turnover
Colorado is controlling its receivables, recording a 72% reduction in receivables turnover from 2001 to 2004. Noni-B, on the other hand, has gone the other way, recording a 46% increase in accounts receivable turnover during the same period, and at 114 times in 2004. Noni-B takes almost 2.5 times longer to collect its outstanding receivables balance. This represents additional costs to the organisation. [See Appendix V: Days Receivable Analysis]
Inventory Turnover
Both companies are well below the retail industry benchmark for inventory turnover of 8.5 times. Although Colorado has congratulated itself on reducing its inventory holdings, at 3.95 in 2004 the company is actually holding onto them longer. Noni-B is equally guilty; after showing early promise of faster turnover in 2001, they have slipped to 3.73 in 2004. Current trends suggest that fashion retailers are aiming for higher inventory turnover, with some trying to produce monthly rather than seasonal lines to obtain this goal. [See Appendix V: Days Inventory Analysis]
Days Payable
At 21 days, Colorado Group has had the lower days payable ratio of the two companies. Given their size, product offering and positioning they should have greater leverage over suppliers to seek better terms.
Noni-B has hovered around an average of 71 days over the four years, presenting some concerns about liquidity issues, their relationship with suppliers and the possibility of additional costs because of later payment terms.
Funding Gap
Having constructed the elements of the case, it is now possible to determine the efficiency of the organisations by way of the funding gap. It must be recognized that seasonality issues and timing of end of year reporting will present issues of distortion. Both organisations have been operating with negative funding gaps, with Colorado reporting a more severe scenario of 55 days in 2004 to the 29 days reported by Noni-B. The organisations must ensure they each have a cash ‘cushion’ to meet the terms of payment, which may limit their ability to grow through internal cash sources, hence their excess cash reserves [See Appendix IV: Cash Flow Analysis]. It is assumed that Colorado’s decision to seek debt financing and the multi-option facility for corporate acquisitions may partly stem from this barrier. In Noni-B’s case, it may explain why their growth as an entity has been gradual.
IX. CASH SUFFICIENCY ANALYSIS
Dividend Payout Ratio
Noni-B is more willing to pay out a higher percent of profits to shareholders than Colorado. Its policy carries a degree of risk, as illustrated by the board’s decision to pay out dividends above its operating cash flows in 2001, and similarly high dividends in 2003.
In recent years, Colorado has increased its dividend payout, a reflection of its increased cash flows from operating activities and a cautious approach to future growth through corporate acquisition.
X. CASH FLOW ANALYSIS
Colorado and Noni-B have both reported significant net cash gains in the past five years, stemming from acquisitions, cost-cutting and improvements in operational efficiencies. Despite Colorado’s positive cash holdings, the group is not afraid to borrow to support its acquisitions, reinvesting and operational initiatives. Net cash flow from operations dropped 29% in 2002/2003 from the prior year as a result of additional working capital requirements of $10 million due to the acquisition, $7 million of extra tax payments, and a “one-off” allocation of $6 million of inventory purchased in week 53. The acquisition also added $10 million to inventories. Net cash used in financing activities has fluctuated as a result of significant borrowings and repayments between 2001/2002 and 2003/2004. Dividends paid between 2001 and 2004 also increased 194%, including a 32.9% increase in 2004 over 2003, helping to earn the confidence of shareholders. Overall, recent trends in the organisation’s cash flows suggest it is prosperous but limited in good growth opportunities.
Noni-B has reported similar cash flow activity, with operating cash flow increasing 177.6% in 2003/2004 over the prior financial year. There has been very little change in cash flows from investing activities in the last two years, while net cash used in financing activities decreased 45.6% over the same period, due in part to a 12.6% decrease in dividends paid and 11.9% decrease in proceeds from the issue of shares. Noni-B’s investment in property, plant and equipment was one-quarter (25.5%) the value of its net cash from operating activities in 2003/2004, just slightly ahead of Colorado’s 24.3% across the same ratio. Like Colorado, Noni-B was sitting with considerable cash holdings at the end of the 2004 financial calendar, up a dramatic 226.5% from 2003. It, too, is stymied by the limited acquisition opportunities, and is its sizeable cash holdings leaves it vulnerable to potential takeover.
XI. TREND ANALYSIS
Colorado
Colorado experienced growth in both sales and accounts receivables from 2000 to 2002. In 2003, despite a marginal decline in sales, accounts receivable increased significantly. This may be attributed to longer payment terms to fuel sales however the benefit was not converted into revenue.
One of the contributing factors to a net profit decline in 2001 can be attributed to the weakened Australian dollar as Colorado sources suppliers from overseas. Operating profits have grown from 2001. Interestingly, the inventory level of Colorado showed a pattern in-line with sales.
Noni-B
Sales revenue is trending upward in line with investments in sales and marketing. Noni-B experienced a significant decline in net profits in 2001 due to increased marketing expenditures and the incremental cost of short-term borrowings, which increased by more than 50 percent to 2001 from 2000. Noni-B’s inventory level showed continuous growth from 2001 to 2003, due to the increasing forecast on sales revenue for this period and expansion. The retail industry during this time was booming due to strong economic growth and consumer spending.
XII. HORIZONTAL ANALYSIS
Noni-B had a stable increase in their assets from 2000-2003 and significantly jumped by 18% in 2004, attributable to large cash holdings. Investments made on fixed assets, payments to supplier and lease payments caused the surge in short term liabilities from 2002 to 2004 and was further funded through the issuance of shares.
For Colorado the year 2003 showed a spike in assets due to high levels of inventories, trade receivables and intangible assets held. The company’s expansion through acquisition and continued investments on fixed assets were backed by long term borrowings and equity infusion from investors. Efforts to pay down debts eroded in 2001 but increased from 2002 onwards. The use of retained profits to pay dividends may have contributed in maintaining positive cash flow.
XIII. LIMITATIONS OF ANALYSIS
Differences in reporting periods may result in major distortions of available information and inaccurately reflect seasonality, inventory holdings and relative performance. Colorado’s year end is late January, while Noni-B files at the end of June. For the latter entity, inventory and other working capital balances as at the reporting date are unlikely to be representative of the balance of items at other points in the business cycle.
It is recognised that a large amount of information is not included in a company’s financial statements. These include industry and management changes, government actions and union activities. These external influences are crucial to a company’s successful operation, and information about them must come from careful analysis of financial reports in the media and other sources.
Ratios are also based on historical figures. This can lead to distortions in measuring performance and may not account for anomalies in an entity’s dealings. Additionally, ratios are only as good as the data upon which they are based and are therefore reliant of accurate company financial statements.
There is a general lack of appropriate and reliable apparel industry benchmarks ratios, rendering results open to interpretation.
The adoption of new accounting standards will create further distortions and uneven peer comparison. For year end January 2002, Colorado applied revised standards AASB 1018 Statement of Financial Performance, AASB 1034 Financial Report Presentation and Disclosures and the AASB 1040 Statement of Financial Position. These standards were also applied to the previous financial year ended 27 January 2001 and are reflected in the analysis. The application of new standards discloses revenue and expense items as individually significant and separate line items on the face of the statement of financial position, whereas they were previously disclosed as abnormal items.
The inclusion of a 53rd week in Colorado Ltd’s financial year ended 26 January 2003 resulted in an additional $7.5 million in sales, and $6 million in inventory, which directly influenced the reporting of net profit, current assets, and income tax.
For the year end January 2004, there is a discrepancy between Colorado’s “other” current assets resulting from the inclusion of “deferred foreign currency hedge exchange” which was not noted in the previous financial year. Inclusion of this line item directly affects the stating of current assets, current liabilities through payables, thus providing a potentially misleading effect on the analysis performed. For the purposes of this analysis, the original statements for the year ended 26 January 2003 have been applied.
As this analysis commences in 2001 it assumes GST is fully integrated into the framework.
XIV. RECOMMENDATIONS
Long-Term Investment: Colorado Group Ltd.
From the preceding analysis, Colorado is recommended for medium to long term investment. Colorado’s management focus on deriving better margins from increased internal efficiencies and demonstrated willingness to invest in operations will suit investors well over periods of downturn.
Colorado’s stable of attractive brands, investment in building brand equity and understanding its customers through CRM initiatives, will provide leverage against competitors in the fashion retail industry. Combined with a large sales base and diverse product lines, Colorado is also well positioned for an anticipated decline in consumer spending. From price-to-earnings ratio analysis, Colorado is seen as reasonably priced when compared against the total market PER average of 25.29. In recent years the company has demonstrated its commitment to shareholders by increasing dividend payments.
Potential risks include Colorado’s reliance on overseas sourcing of products, which leaves it vulnerable to currency exchange fluctuations. Thus, careful foreign currency hedging should be deployed by the company. Additionally, increased domestic and imports competition will continue to put pressure on maintaining higher margins. Moreover, Colorado has several struggling brands (JAG, Mathers), an emerging concern with its days payable, high cash holdings and the possibility of being over-leveraged.
Overall, the continued strength of Colorado’s balance sheets and cash flows and its willingness to seek debt financing while maintaining a cash “safety net” may outweigh the risks associated with the company.
Short-Term Investment: Noni-B Ltd.
Noni-B is recommended for short-term investment and would cater to conservative investors seeking low risk. Noni-B’s past performance of delivering consistent returns is a positive indicator of shareholder focus. By maintaining a cash positive position over the past four years, Noni-B has a good opportunity to expand through acquisition as the market consolidates, on the other hand, may attract larger operators.
The main limitations of Noni-B include its niche market strategy and inherent difficulties in growing profitably due to its limited range of products in a softening economy. Noni-B’s reliance on sourcing products within Australia rather than overseas will continue to constrain margins as they have less flexibility in pricing.
Noni-B’s lack of aggressiveness to invest their shareholders equity in fixed and intangible assets, such as technology, more brands and supplier relationship building, may be the limiting factors in sustaining efficient retail management practice and diversification in the long term.
APPENDIX I: SWOT – COLORADO GROUP LTD.
APPENDIX II: SWOT – NONI-B LTD.
APPENDIX III: MACRO-ENVIRONMENTAL ANALYSIS
APPENDIX IV: RATIO ANALYSIS
Relevant apparel industry ratios and accompanying analysis are presented below. Complete calculations for Colorado Group Ltd. and Noni-B Ltd. are located in Appendix VII and Appendix VIII, respectively.
APPENDIX V: OTHER RATIOS
Operating Assets
Applying spread analysis, it is possible to derive additional insight into financial performance and capital structure, and thereby assess risk of a particular entity. On calculation of the operating cost to operating assets ratio, wherein operating assets is equal to total assets less current liabilities, it is apparent that Colorado is growing more efficient as an entity in controlling its operating costs as its operating assets have grown. The ratio between operating costs to operating assets has dropped more than 25% since reaching a high of 430% in 2001.
Between 2001 and 2002 Noni-B’s operating costs to operating assets increased from 277% to 375%. Noni-B has made marginal improvements since, gaining some efficiency in operating assets while operating costs increase.
Days Receivable
Colorado extended its days receivables to roughly eight days in 2004, a 258% increase from 2001. On the surface this may be an alarming trend, but it is a reasonable increase when compared against the industry benchmark of 7, and may stem from the organisation’s desire to stimulate customer sales. Noni-B has moved in the opposite direction, reducing the number its days receivable. Aging analysis of the receivables would identify distortions.
Days Inventory
Seasonality issues and consumer trends confronting the fashion industry may explain the increases in days inventory of both firms. Since 2001, Noni-B has seen their days inventory increase 15 days, while Colorado is up roughly 9 days over 2002 figures, although the latter has recently made significant investment in a Retail Merchandising System (RMS) to handle increased capacity from the diana ferrari and JAG acquisitions. Colorado also relies on wholesale distribution, which may further distort results.
SUSTAINABLE GROWTH RATE ANALYSIS
Sustainable Growth Rate
How much can a company grow without outside capital? The answer lies in the sustainable growth rate, which suggests that Colorado was in a very strong position at the end of the 2004 financial year to grow sales without having to resort to external sources, whereas Noni-B would more likely need some level of outside funding to sustain the level of growth experienced in recent years, although certainly less than what it would have required in 2003.
APPENDIX VI: RATIOS DEFINED
DUPONT SYSTEM ANALYSIS
ASSET TURNOVER
Asset Turnover = Revenues
Average Total Assets
Description: Measures the effectiveness of an entity in using its assets during the period. This ratio provides a general indication of a company's long-term stability. It measures the effectiveness with which all assets have been used by assessing the number of revenue dollars generated for each dollar of average assets used during the period.
PROFIT MARGIN (Before Interest and Tax)
Profit Margin = EBIT
Sales
Description: A measure of a company's profitability, cost structure and efficiency. It is a key driver of business performance and related to the entity’s ability to convert revenue into profit.
RATE OF RETURN ON ASSETS
Rate of Return on Assets = Asset Turnover x Profit Margin
Description: Rate of Return on Assets measures operating profitability, and is decomposed into two elements, profit margin and total asset turnover. The company goal is a product of maximising both elements.
LEVERAGE (Dupont Model)
Leverage = Total Assets
Shareholders’ Equity
Description: Leverage refers to the relative reliance on debt financing versus equity financing. The more an entity relies on debt, the greater the risk.
RETURN ON EQUITY (ROE) RATIO
Return on Equity = ROA x Leverage
Description: Under the Dupont System of analysis, return on equity is a function of return on assets and the degree of leverage employed by the entity in its financing/capital structure. A business that yields a high return on equity is more likely able to generate cash internally. Investors typically seek companies with high and growing return on equity.
SPREAD ANALYSIS
Description: When compared to the Dupont System of anlaysis, spread analysis provides a more explicit quantification of the source of returns to shareholders from operational activities and the entity’s financial structure.
OPERATING ASSETS
Operating Assets = Total Assets – Current Liabilities
REVENUE TO OPERATING ASSETS
Revenue to
Operating Assets = Revenue
Operating Assets
OPERATING COSTS
Operating Costs = Total Assets – Interest Costs
OPERATING COSTS TO OPERATING ASSETS
Operating Costs to
Operating Assets = Operating Costs
Operating Assets
RETURN ON OPERATING ASSETS
Return on Operating Assets = Revenue to Operating Assets – Operating Cost to Operating Assets
Description: Return on Operating Assets show the contribution to overall performance of the entity’s operating assets during the period.
COST OF DEBT
Cost of Debt = Interest Expense
Debt
Description: Provides an estimate of the cost of debt incurred by the entity, with debt representing the total value of its interest bearing liabilities.
SPREAD
Spread = Return on Operating Assets – Cost of Debt
Description: The incremental economic effect of introducing debt into an entity’s capital structure.
LEVERAGE (Alternative)
Leverage = Debt
Equity
Description: The degree to which the entity is reliant on debt as a source of capital.
RETURN ON FINANCIAL LEVERAGE
Return on Financial Leverage = Spread x Leverage
Description: Measures the gains (losses) to shareholders resulting from the use of leverage in the entity’s capital structure.
FINANCIAL PERFORMANCE ANALYSIS
NET PROFIT RATIO
Net Profit Margin Ratio = Net Profit (after tax)
Net Sales
Description: This ratio indicates how much profit a company makes for every $1 it generates in revenue.
SALES CHANGE RATIO
Sales Change = Sales This Period – Sales Last Period
Sales Last Period
Description: Provides a general, yet important, measure of performance of a company based on a year-to-year sales comparison.
CASH COVER RATIO
Cash Cover Ratio = Net Cashflow from Operations + Cash Interest Paid
Interest Expense
Description: A measure of the ability of an entity to service interest payments due on debt, with the numerator providing information about the free operating cashflow available to cover debt financing costs. The denominator represents the amount of interest expense incurred during the period, and may be subject to distortions due to timing.
DEBT TO EQUITY RATIO
Debt to Equity Ratio = Total Liabilities
Shareholders’ Equity
Description: A measure of a company's leverage, calculated by dividing long-term debt by common shareholders' equity, usually using the data from the previous fiscal year. Sometimes, long-term debt plus preferred shareholder's equity is divided by common shareholders' equity, since preferred stock can be viewed as a form of debt. A company with a higher debt/equity ratio can offer greater returns to shareholders but be riskier.
CURRENT RATIO
Current Ratio = Total Current Assets
Total Current Liabilities
Description: Used to indicate the ability of the business entity to meet its short-term financial commitments. It measures a margin of safety to the creditors. A generally acceptable current ratio is 2 to 1. One of the weaknesses of this ratio is that includes all current assets, mixing the most liquid assets such as cash, marketable securities and receivables with less liquid assets as inventories and prepaid expenses.
QUICK RATIO
Quick Ratio = Current Assets - Inventory
Current Liabilities - Overdraft
Description: When considering a company’s short-term liquidity – essentially the ability of the organisation to pay its current liabilities – the Quick Ratio typically provides a better measure than the Current Ratio, in that it excludes all but the most highly liquid current assets from the numerator.
WORKING CAPITAL/FUNDING GAP ANALYSIS
ACCOUNTS RECEIVABLE TURNOVER RATIO
Accounts Receivable Turnover = Net Sales Revenue
Average Receivable Balance
Description: This ratio will suggest how quickly accounts receivable are being collected. It measures how many times the average receivables balance is converted into cash during the year. A higher ratio will suggest a shorter wait between recording a sale and collecting the cash.
DAYS RECEIVABLE
Average Collection Period = 365
Accounts Receivables Turnover
Description: A measure of the average time a company's customers take to pay for purchases.
INVENTORY TURNOVER
Inventory Turnover = Cost of Goods Sold
Average Stock
Description: The number of times during the period that inventory balances were sold or otherwise consumed.
DAYS INVENTORY
Days Inventory = 365
Inventory Turnover
Description: Determines the number of days, on average, taken to either sell of consume inventory in productive processes, depending on when the inventory is acquired. Fewer “days inventory” means the faster inventory is being consumed through the business entity.
DAYS PAYABLE
Days Payable = 365
COGS/Average Accounts Payable
Description: This calculation shows the average length of time an entity’s trade payables are outstanding before they are paid.
FUNDING GAP
Funding Gap = Days Inventory + Days Receivable – Days Payable
Description: Measures the difference between the time taken for an entity to convert its inventory into cash (Operating Cycle) and the time taken to pay suppliers. A negative funding gap suggests the entity has a funding gap problem as it is expected to pay its creditors in advance of actually receiving payment from customers.
CASH SUFFICIENCY ANALYSIS
DIVIDEND PAYOUT
Dividend Yield = Annual Dividend Per Ordinary Share
Market Price Per Ordinary Share
Description: Measures the rate of return to shareholders based on current market price. Percentage yield indicates a rate of return on the dollars invested and permits easier comparison with the returns from alternative investment opportunities.
SUSTAINABLE GROWTH RATE ANALYSIS
SUSTAINABLE GROWTH RATE
Sustainable Growth Rate = ROA x (1-D)
E/A – (ROA)(1-D)
Description: This ratio is commonly used to measure the maximum rate of growth a firm can sustain without increasing financial leverage.
APPENDIX VII: COLORADO GROUP LTD. RATIOS
DUPONT SYSTEM ANALYSIS
SPREAD ANALYSIS
FINANCIAL PERFORMANCE ANALYSIS
*Total Current Assets include deferred foreign currency exchange.
WORKING CAPITAL/FUNDING GAP ANALYSIS
*Note: For the purposes of this analysis, the revaluations of line items and sub-totals enclosed in the 2002 financial statements have been applied.
*Note: For the purposes of this analysis, the revaluations of line items and sub-totals enclosed in the 2002 financial statements have been applied.
CASH SUFFICIENCY ANALYSIS
SUSTAINABLE GROWTH RATE ANALYSIS
APPENDIX VIII: NONI-B LTD. RATIOS
DUPONT SYSTEM ANALYSIS
SPREAD ANALYSIS
FINANCIAL PERFORMANCE ANALYSIS
WORKING CAPITAL/FUNDING GAP ANALYSIS
CASH SUFFICIENCY ANALYSIS
SUSTAINABLE GROWTH RATE ANALYSIS
APPENDIX IX: CASH FLOW ANALYSIS - COMBINED
APPENDIX X: REFERENCES
Journals/Newspapers
Hill, G., 2001. Colorado Ltd., Money Section, Sydney Morning Herald, 21 July, p. 2, [Accessed 7 Oct 2004], Available at www.factiva.com
Ideaworks.com.au, Tales of (Retail) Disaster, The Ideaworks Report, March 2001, p. 2, [Online], [Accessed 8 Oct 2004], Available at www.ideaworks.com.au
James, D., Mead, J. 2004, International Trends and their effect on Australian Business. Business Weekly Review, June
Walsh, L., 2004. Retailers’ cost-cutting impresses, The Courier-Mail, 27 Sept [Online], [Accessed 7 Oct 2004], Available at www.factiva.com
Whyte, J. 2004. Retailers cash in while the spending lasts, The Australian Financial Review, 7 August, p 45. [Online], [Accessed 7 Oct 2004], Available at
Wisenthal, S., 2004. Cash flow as Colorado taps low costs, big demand, The Australian Financial Review, 24 Sept, [Online], [Accessed 7 Oct 2004], Available at www.factiva.com
Wisenthal, S., 2004. Colorado ready for adventure, The Australian Financial Review, 27 Sept, p. 16, [Online], [Accessed 7 Oct 2004], Available at
Books
Glynn, J. et al. 2003. Accounting for Managers, Victoria: Thomson Learning
Ross et al, 2001. Fundamentals of Corporate Finance, 2nd ed Australia
Online Sources
Apparel in Australia (August 2004). Published by International Business Strategies. Available at www.internationalbusinessstrategies.com
Australasian Textiles and Fashion [Online],[Accessed 18 Oct 2004], Available at www.apparelb2bcentral.com
Council of Textile and Fashion Industries of Australia Fashion [Online],[Accessed 18 Oct 2004], Available at www.tfia.com
Debt to Equity Ratio, Investorwords.com, [Online], [Accessed 2 Nov 2004], Available at http://www.investorwords.com/1316/debt_equity_ratio.html
Morgan Stanley: Stephen Roach (New York), Global Economic Forum, Global: Canary in the Coal Mine, [Online] [Accessed on 8 October 2004], Available at http://www.morganstanley.com/GEFdata/digests/latest-digest.
Reserve Bank of Australia: Statement on Monetary Policy [Online]. [Accessed 5 August 2004], Available at http://www.rba.gov.au/PublicationsAndResearch/StatementsOnMonetaryPolicy/statement_on_monetary_0804.html
Return on Equity, BeginnersInvesting, [Online], [Accessed 5 Nov 2004], Available at http://beginnersinvest.about.com/cs/investinglessons/l/blreturnequity.htm
Yahoo! Finance, Colorado Group Ltd Profile, http://au.biz.yahoo.com, [Online]. [Accessed 15 Nov 2004], Accessed http://au.biz.yahoo.com/p/c/cdo.ax.html
Worthington, G., IFR Asia-Pacific Economic Monitor, Week ahead: Oil tops $50, scares G7; wait on US jobs data, [Accessed on 4 October 2004], page 2
Other Sources
Colorado Ltd, 2001-2004 Annual Reports, [Online], [Accessed 18 Oct 2004], Available at www.coloradogroup.com.au
Corporate ScoreCard Pty Ltd., Sydney, Corporate ScoreCard Pty Limited, 1999
MGSM840 Accounting for Management, Topic 7 – Analysis of Financial Statements
Noni-B, 2001-2004 Annual Reports, [Online], [Accessed 18 Oct 2004], Available at www.coloradogroup.com.au
Young, S.D., 1998. Financial Statement Analysis, INSEAD, Fontainebleau: France
APPENDIX XI: ENDNOTES
Prepared for Dr. Suresh Cuganesan Anderson-Buenaventura-Henry-Krnjulac-Pierkarska
Whyte, J.(2004. Retailers cash in while the spending lasts, The Australian Financial Review, 7 August, p 45. [Online], [Accessed 7 Oct 2004], Available at www.factiva.com
Reserve Bank of Australia: Statement on Monetary Policy [Online]. [Accessed 5 August 2004], Available at http://www.rba.gov.au/PublicationsAndResearch/StatementsOnMonetaryPolicy/statement_on_monetary_0804.html
Worthington, G., IFR Asia-Pacific Economic Monitor, Week ahead: Oil tops $50, scares G7; wait on US jobs data, [Accessed on 4 October 2004], page 2
Morgan Stanley: Stephen Roach (New York), Global Economic Forum, Global: Canary in the Coal Mine, [Online] [Accessed on 8 October 2004], Available at http://www.morganstanley.com/GEFdata/digests/latest-digest.
Worthington, G., IFR Asia-Pacific Economic Monitor, Week ahead: Oil tops $50, scares G7; wait on US jobs data, [Accessed on 4 October 2004], page 2
Apparel in Australia (August 2004). Published by International Business Strategies. Available at www.internationalbusinessstrategies.com
Whyte, J. 2004. Retailers cash in while the spending lasts, The Australian Financial Review, 7 August, p 45. [Online], [Accessed 7 Oct 2004], Available at )
Whyte, J.(2004. Retailers cash in while the spending lasts, The Australian Financial Review, 7 August, p 45. [Online], [Accessed 7 Oct 2004], Available at www.factiva.com
Council of Textile and Fashion Industries of Australia Fashion [Online],[Accessed 18 Oct 2004], Available at www.tfia.com
James, D., Mead, J. 2004, International Trends and their effect on Australian Business. Business Weekly Review, June
Ideaworks.com.au, Tales of (Retail) Disaster, The Ideaworks Report, March 2001, p. 2, [Online], [Accessed 8 Oct 2004], Available at www.ideaworks.com.au
Wisenthal, S., 2004. Cash flow as Colorado taps low costs, big demand, The Australian Financial Review, 24 Sept, [Online], [Accessed 7 Oct 2004], Available at www.factiva.com
Hill, G., 2001. Colorado Ltd., Money Section, Sydney Morning Herald, 21 July, p. 2, [Accessed 7 Oct 2004], Available at www.factiva.com
Wisenthal, S., 2004. Colorado ready for adventure, The Australian Financial Review, 27 Sept, p. 16, [Online], [Accessed 7 Oct 2004], Available at
Australasian Textiles and Fashion [Online],[Accessed 18 Oct 2004], Available at www.apparelb2bcentral.com
Aspect Financial, Colorado Group Ltd. and Noni-B Charts and Price – Performance, [Online], [Accessed 15 Nov 2004], Available at www.aspectfinancial.com.au
Yahoo! Finance, Colorado Group Ltd Profile, http://au.biz.yahoo.com, [Online]. [Accessed 15 Nov 2004], Accessed http://au.biz.yahoo.com/p/c/cdo.ax.html
Yahoo! Finance, Noni-B Ltd Profile, http://au.biz.yahoo.com, [Online]. [Accessed 15 Nov 2004], Accessed http://au.biz.yahoo.com/p/n/nbl.ax.html
Glynn, J. et al. 2003. Accounting for Managers, Victoria: Thomson Learning, p. 578
Corporate ScoreCard Pty Ltd., Sydney, Corporate ScoreCard Pty Limited, 1999
MGSM840 Accounting for Management, Topic 7 – Analysis of Financial Statements, p. 12
As noted elsewhere in this report, Colorado revenues for 2003 are influenced by the inclusion of the 53rd week, resulting in an extra $7.5 million in revenues and roughly $4.5 million in inventories.
In this analysis, trade creditors and provision balances are included.
Source: MGSM840 Accounting for Management, Topic 7 – Analysis of Financial Statements, p. 18
Belinda Pasqua, Events Product Manager and Designer, MGSM Advertising and Promotions Presentation, 18 Oct 2004
Colorado MD Rowan Webb has publicly stated that the organisation is continuing to seek acquisition opportunities but at the moment “asset prices are up” thereby preventing any immediate additions to its portfolio. As a result, the organisation is seeking to improve internal efficiencies to produce better margins and to develop its own brand, while waiting for a downturn in the market before pursuing further acquisitions. (Source: Wisenthal, S. 2004. Colorado ready for adventure, Australian Financial Review, 27 Sept., p. 16)
MGSM840 Accounting For Management – Lecture Note, Topic 6, p. 17
MGSM840 Accounting For Management – Lecture Note, Topic 6, p. 19
For the year ended 31 January 2004, Colorado applied Accounting Standard AASB 1044 “Provisions, Contingent Liabilities and Contingent Assets” which “prohibits the recognition of dividends as liabilities where they were not declared or publicly recommended on or before reporting date. Accordingly the consolidated entity has not provided for dividends at 31 January 2004.” (Source: Colorado Ltd, 2004 Annual Report, p. 33, [Online], [Accessed 18 Oct 2004], Available at www.coloradogroup.com.au) The adoption of this accounting standard requirement resulted in a direct increase in opening retained profits and decrease in provision for dividends.
Walsh, L., 2004. Retailers’ cost-cutting impresses, The Courier-Mail, 27 Sept [Online], [Accessed 7 Oct 2004], Available at www.factiva.com
Fin Analysis, Sector Analysis (EPS, P/E, Dividend Yield), www.aspectfinancial.com.au, [Online], [Accessed 15 Nov 2004], Available at www.aspectfinancial.com.au/af/sectoranlaysis?xtm-licensee=finanalysis
Corporate ScoreCard Pty Ltd., Sydney, Corporate ScoreCard Pty Limited, 1999
Young, S.D., 1998. Financial Statement Analysis, INSEAD, Fontainebleau: France, p. 12
MGSM840 Accounting for Management, Topic 7 – Analysis of Financial Statements, p.7
Return on Equity, BeginnersInvesting, [Online], [Accessed 5 Nov 2004], Available at http://beginnersinvest.about.com/cs/investinglessons/l/blreturnequity.htm
MGSM840 Accounting for Management, Topic 7 – Analysis of Financial Statements, p.12
MGSM840 Accounting for Management, Topic 7 – Analysis of Financial Statements, p.11
MGSM840 Accounting for Management, Topic 7 – Analysis of Financial Statements, p.12
MGSM840 Accounting for Management, Topic 7 – Analysis of Financial Statements, p.18
Debt to Equity Ratio, Investorwords.com, [Online], [Accessed 2 Nov 2004], Available at http://www.investorwords.com/1316/debt_equity_ratio.html
Young, S.D., 1998. Financial Statement Analysis, INSEAD, Fontainebleau: France, p. 5
Young, S.D., 1998. Financial Statement Analysis, INSEAD, Fontainebleau: France, p. 5
