A Written Consultant's Report to Risk-Averse Investors (Math Problem Sample)

Strategic Financial Analysis – BUSS 3083
SUPPLEMENTARY ASSESSMENT – SP2 2021
A written consultant’s report to risk-averse investors
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Table of Contents TOC \o "1-3" \h \z \u Executive summary PAGEREF _Toc78972579 \h 31.0: INTRODUCTION PAGEREF _Toc78972580 \h 42.0: FIRM ANALYSIS PAGEREF _Toc78972581 \h 42.1: Firm strategy and competitive advantage PAGEREF _Toc78972582 \h 42.2: Corporate culture PAGEREF _Toc78972583 \h 52.3: Financial ratio analysis PAGEREF _Toc78972584 \h 52.4: Share price valuation PAGEREF _Toc78972585 \h 72.5: Forecasting PAGEREF _Toc78972586 \h 83.0: CONCLUSION AND RECOMMENDATION PAGEREF _Toc78972587 \h 84.0: REFERENCES PAGEREF _Toc78972588 \h 105.0: APPENDICES PAGEREF _Toc78972589 \h 115.1: Appendix 1: financial ratios PAGEREF _Toc78972590 \h 115.2: Appendix 2: industry averages PAGEREF _Toc78972591 \h 125.3: Appendix 3: share price trend PAGEREF _Toc78972592 \h 125.4: Appendix 4: short-run price forecast PAGEREF _Toc78972593 \h 135.5: Appendix 5: long-run price forecast PAGEREF _Toc78972594 \h 13
Executive summary
Research has shown that investment needs to be research driven. The rule of thumb is to invest in a firm that offer a high return on investment. This can be evaluated from its business strategy, its financial performance and forecast. As thus this report assess performance of Harvey Norman Holdings Limited to advise investors.
The report revealed that the firm makes use of a franchise model and competitive pricing to ensure it reaps a competitive advantage. In addition, the firm has a good corporate culture with a strong brand image. As such it has been able to maintain good customer relations. It has also been able to market itself in the local and international market which has improved its customer base. Besides looking at its past performance, the firm has not been straggling to pay off its debts, it has efficient use of resources, and is making profits. It has low debt levels, and has high market value. Through its projections, its share price is likely to rise in the future and thus likely to retain its stability.
Thus, the analyst concluded that HVN is performing well and is a profitable business now and in the future. It has a good business model and is likely to remain competitive. Thus, recommended that since the firm is not a high risk investment and offer a high return to investment, the investors should hold more shares of the firm.
1.0: INTRODUCTION
Research has shown that investment needs to be empirically supported. This has been useful in an attempt to ensuring that an investor has an appropriate portfolio. Thus, one needs to evaluate a firm's performance in the past, current and in the future to be able to make a wise investment decision. In addition, it is important to make investment decisions based on the riskiness of the business. Research has shown that risky businesses have higher returns (Mahmood and Ahmad, 2020). However, an investor makes their investments based on their risk tolerance. Risk averse investors have low tolerance and will prefer to make their investment in firms that have not shown any insolvency signals (D'Amato, 2009). This can be evaluated from a firm business strategy, ratios, and competitive balance. The current report will thus analyse HVN business strategy, competitive advantage, and their financial performance.
Harvey Norman Holdings Limited with ASX 200 ticker (HVN) is a multinational in the retail industry. It is well known for trading in furniture, electronics and consumer electrical products. It is a listed company well known for its brand quality. It has been operating competitively both domestically and internationally with good share price and financial digits. The firm is based in Australia and was founded in 1982 (HVN annual report, 2020).
2.0: FIRM ANALYSIS
2.1: Firm strategy and competitive advantage
The business model of HVN is franchising (HNV annual report, 2019). The firm has been able to open about 220 franchise stores in 8 countries across the globe. Through the model, the firm has its own stores, and others that they have allowed other people to bring up using their name. Own stores are 175 and the rest are rented out. They have, maintained a uniform organisational culture in all outlets, and standardisation that has made the firm to track its growth. This has been developed as a strong tool of expansion both in the domestic market and international market.
Its brand image sells it thus one of the most important competitive advantage tools. HNV brands are well known for their quality. Besides, the firm has maintained customer relations by acting on their feedback, and taking tailor made customer orders. Also, they have ensured that their employees offer best services to the customers. Application of business to customer (b2c) has been a tool for achieving customers’ loyalty, and good service that has propelled the firm brand. The business to customer model alleges that the firm gives priority to customers, as their bases for survival (Carlin and Finch, 2008). Being a specialist in furnishes, electronics, and appliances, it has over the years been able to win customers loyalty (HNV annual report, 2019) For example, HVN’s online marketing and prompt customer feedback has been used effectively in maintaining customer’s relations and its corporate image (HNV annual report, 2019). Therefore, one of its strengths is maintaining its networking with its customers. It has also maintained good relations owing to their fair competitive prices, which are as a result of the firm low cost approach. Maintaining quality, the firm has ensured that they make use of minimum cost in production, to ensure affordable customer prices. Most of the firm competitors like Depop have not embraced franchise model which have limited their growth. Use of technology based marketing has also been a key element for growth of the firm. Some of the online based marketing platforms have been use of emails, social media handles like twitter and Facebook. The major competitors of HVN are Kogan, Appliances Online, Kmart Australia, BF Jade E-Services Philippines, and Depop (Carlin and Finch, 2008).
2.2: Corporate culture
The firm ownership and management structure has helped the firm grow. The firm has maintained a in attempt of fuelling employees management relation. Team leadership has been key to strengthening the relationship. Positive corporate culture has been adopted where employees to employers, as well as to management has been to work as a team. Thus, motivating each other and increasing productivity. Employee’s welfare has also been key to the firm to ensure all employees are fit. Language has been standard, with embracement of employment of people suit for the region. The firm has thus mainly employed locals in their overseas stores to ensure proper functioning. Besides, the firm has maintained good relations with its stakeholders with support internally and externally which has helped the firm to stand out (Carlin and Finch, 2008).
2.3: Financial ratio analysis
There are different ratios that can be used to gauge the performance of a firm. These ratios include liquidity, leverage, efficiency, profitability and market ratios. There are industry indicators for the different ratios which the company should compare to in order to be sustainable.
Liquidity ratios will show the ability of a firm to be able to settle its short-term and long-term obligations. The current ratios will show ability to settle short-term debts (Breuer et.al, 2012). The retail industry current ratio was 1.32 in 2020 and 1.14 in 2019 (IFRS, 2020). As shown on table I (appendix 1), the current ratio of the firm in 2019 was 1.62, and 1.65 in 2020 (HVN annual report, 2020). This is an indication that HVN has been operating above the industry average. Furthermore, this shows that the firm is not struggling to settle its obligations as they fall due. Similarly, the industry average quick ratio was 0.45 in 2019 and 0.6 in 2020. The firm quick ratio was 1.18 in 2019 and 1.15 in 2020. It means that the firm has sufficient cash to operate normally and the assets are easily converted to cash. Thus, it can be used to settle its obligations. The investors do not need to worry about the cash flow of HVN. By the conclusion, we can see that HVN is a good investment at the moment.
HVN Ratio

Sub


June 2020

June 2019

Liquidity ratios

Current ratio

Current assets/Current liabilities

1,298,331/785,444 =1.65

1,456,340/899,108 = 1.62


Quick ration

(Current assets-inventory)/current liabilities

(1,298,331-391,984)/785,444 =1.15

(1,456,340-395,965)/899,108 =1.18

Leverage ratios are used to determine the relative level of debt load that a business has incurred. Can be determined using ratios like debt ratio which compares assets to debt, and is calculated as total debt divided by total assets. Leverage ratios indicate the level of debt a firm holds (Fahmi and Saputra, 2013). The debt ratio will show the asset level in a firm that is financed through debt. The industry average was 0.73 in both 2019 and 2020. A lower ratio is assumed to be better as it improves firm control and ownership. The firm debt ratio was 0.33 in 2019, and 0.4 in 2020. This is an indication that the level of debt in the firm is lower than the industry average which reduced...