Accounting for Managers (Research Paper Sample)

ACC00724 (Accounting for Managers) S2, 2020
Assessment 2: Allocated Company Analysis
Chosen Company: Nick Scali Limited
Student Name & ID:
Date:
Table of Contents TOC \o "1-3" \h \z \u Over View of Nick Scali Limited PAGEREF _Toc49249827 \h 3A.Cash flow Analysis PAGEREF _Toc49249828 \h 4B.Calculation of Ratios PAGEREF _Toc49249829 \h 5Return on Equity. PAGEREF _Toc49249830 \h 5Operating Profit Margin PAGEREF _Toc49249831 \h 6Inventories turnover period PAGEREF _Toc49249832 \h 6Current Ratio PAGEREF _Toc49249833 \h 7Debt to assets ratio PAGEREF _Toc49249834 \h 8Interest cover ratio PAGEREF _Toc49249835 \h 8C.Working Capital Management Analysis PAGEREF _Toc49249836 \h 9D.Further Company Analysis PAGEREF _Toc49249837 \h 10Profitability PAGEREF _Toc49249838 \h 10Efficiency. PAGEREF _Toc49249839 \h 10Liquidity. PAGEREF _Toc49249840 \h 11Financial gearing PAGEREF _Toc49249841 \h 11Investment performance. PAGEREF _Toc49249842 \h 11Conclusion PAGEREF _Toc49249843 \h 11References PAGEREF _Toc49249844 \h 13
Over View of Nick Scali Limited
Nick Scali is an Australian based furniture retailing company and a publicly listed firm in ASX trading as NCK. The company was founded in 1962 and is headquartered in North Ryde, New South Wales in Australia and has extended its operations in New Zealand, (Bloomberg, 2020). The key people in the company include John Ingram who is the non-executive chairman and Anthony Scali, the managing director, (Nick Scali Limited, 2020). Currently, the company engages in sourcing of household furniture with two main brands which are Nick Scali brand with over 40 stores and Sofas2Go with about five stores. The company also operates an online boutique store which is used to sell designer furniture and other products, (Reuters, 2020). According to the company’s latest annual report 2019, it has had an increasing sales revenue, currently at $268 million with average net income being $41 million. The asset base of the company is currently at $172 million with an equity base of $85 million, (NCK Annual report, 2019).
The report present an analysis of the performance and financial position of Nick Scali Limited, focusing on the past three years of operation.
* Cash flow Analysis
Cash flow analysis helps in evaluation of the sources of the company’s income and the areas where the company is using its cash in. This is usually important because a company can be very profitable as presented in the statement of comprehensive income but on the other end lacks adequate finances to settle its obligations, (Fawzi, Kamaluddin, & Sanusi 2015). Therefore, the important areas that will be analysed from Nick Scali’s 3-year annual reports will be its cash flow from operating activities, cash flow from investing activities and cash flow from investing activities as well as its net cash and cash equivalent after its financial year. The table below summarises the inflows and outflows during the past three years of operation;

2017
$Thousand

2018
$Thousand

2019
$Thousand

Net cash from operating activities

42,913

43,050

45,363

Net cash used in investing activities

(14,278)

(28,821)

(4,921)

Net cash used in financing activities

(25,729)

(17,588)

(40,743)

Net increase/decrease in cash and cash equivalents

2,906

(3,359)

(301)

Source: Annual reports, Nick Scali limited
From the company’s latest annual report 2019, the main operating activities of the company include receipt of payment from customers for its supply of goods and services which in the current year amounted to an inflow of $295.8 million, an increase from $274.1 million from the previous year 2018. The main outflow also is also constituted from the payment of suppliers and organisation employees, which amounted to $232.4 million, an increase from $214.5 million from the previous year 2018. This resulted to an overall net cash inflow from operating activities of $45.4 million which is an increase from the previous years at $43.1 million and $42.9 million in year 2018 and 2017 respectively. Generally, an already established firm that has been running for the past 50 years like this one is expected to have inflows from operating activities compared to new establishments that may have an outflow at the beginning. Therefore, this shows a good financial position for Nick Scali Limited.
The investing activities of the company mainly consist of purchase of PPEs which had a general outflow of $4.9 million, a decrease from $28.8 million in the previous year. For such a company, it is expected to be making investments to foster its growth, thus expected to have a general cash outflow from investing activities as it has been the case here. The financing activities for the year had a general outflow of $40.7 million compared to the previous year $17.6 million. The main outflow under this came from the payment of dividends and interest payment while the previous year had an inflow from borrowings. For such a company, it may have an inflow or outflow in this section depending on the financing engagements during the financial year.
The net cash and cash equivalent balance for the year was -$0.3 million, an improvement from the previous year -$3.3 million, which was a decrease from the previous year 2017 $2.9 million. The company’s cash position has however improved but the management need to maintain positive balances in cash and cash equivalent to finance the next year activities of the company. Comparing this with positive net income balances in this years, there are differences which result from accrual accounting basis of the company and also the matching principle of expenses with the revenues earned.
* Calculation of Ratios
Return on Equity.
The return on equity ratio shows how much of the company’s profit is attributed to the investors of the company expressed as a percentage of the year’s net income, (Robinson 2020). The formula of calculating the return on equity is as shown below;
ROSF = [Profit after taxation and any preference dividend/Average ordinary share capital] × 100
Source: Study Guide
For the three financial years, the return on equity is as shown below,

2017 $thousand

2018 $thousand

2019 $thousand

Profit after tax

37,556

40,979

42,116

Share capital

70,384

83,663

85,183

ROSF

53.36%

48.98%

49.44%

The company had better returns in 2017 at 53.36%, which has dropped by 3.92% in 2019 which is the second best and lastly 2018 at 48.98%. However, the performance is better since the shareholders are entitled to almost 50% of the company’s net income thus showing the management efficiency in using shareholders’ funds to generate profits.
Operating Profit Margin
The operating profit margin shows the percentage of profit that the company has made after deducting all the expenses and costs to sell, (Williams & Dobelman 2017). The margin is calculated as
Operating Profit Margin = EBIT / Sales
Source: Study Guide
From the last three years of operation, the company’s operating profit margin is as shown below.

2017 $thousand

2018 $thousand

2019 $thousand

Sales revenue

232,908

250,768

268,025

EBIT

53,199

58,858

59,650

Margin

22.84%

23.47%

22.26%

The operating profit the three years almost remained at the same position (22% of the annual sales revenue. However, year 2018 had the highest margin at 23.47% followed by year 2017 at 22.84% with a slight decline in the current year 2019 at 22.26%. On average, the company performs better but should improve the profit margin by increasing its sales revenue and decreasing the operating expenses.
Inventories turnover period
The turnover period shows the number of days the company takes to sell all its inventory and replace it again, (Robinson 2020). It is calculated as
Days inventory ratio or Inventory turnover period = [Inventory / COGs] × 365
Source: Study Guide
For the three year period, the inventory turnover is as follows,

2017 $thousand

2018 $thousand

2019 $thousand

Cost of goods sold

87,346

93,562

99,385

Inventories

29,045

36,175

37,597

Turnover period (Days)

121.37