AFA1105: Accounting for Management - Joyce Corporation Ltd

Solution Code: 1AHJI

Question:Accounting for Management

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Accounting for Management Assignment

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TASK: Download from LMS a copy of Joyce Corporation Ltd (the Company) annual reports for the financial years 2015 and 2014 and write a report of the Company under the following sections. A) EXECUTIVE SUMMARY This section should be written up after your report has been written. It should give a summary of your main findings about Joyce Corporation Ltd in terms of its Profitability, Liquidity, Asset Efficiency, Capital Structure and Market Performance. B) COMPANY OVERVIEW This section should give the reader a broad sense of the Company’s operations (for example what its main operations are, the number of stores, the regions they operate in, the industry and competitors etc). Such information is easily available from the internet and also from the Chairman and Managing Director’s Review of the 2015 annual report. Please reference your sources. C) PROFITABILITY From the Company’s 2015 and 2014 financial statements and notes to financial statements, calculate the following ratios based on what you were taught. Use the 2015 and 2014 figures from the 2015 annual report, and use the 2013 figures from the 2014 annual report. Remember to use average numbers for some ratios as taught in class.

Explain what the ratios mean in general and comment specifically on what they tell about the Company’s performance.
Examine how the ratios are trending and comment/explain if the trend is favourable or not. Offer suggestions why a change in the ratio may have occurred by looking at how its components change in relation to each other.

D) ASSET EFFICIENCY Calculate the Company’s ratios below based on what you were taught.

Explain what each ratio measures in general, and comment on how efficient Joyce Corporation was.
Examine how the ratios are trending and comment/explain if the trend is favourable or not. Offer suggestions why a change in the ratio may have occurred by looking at how its components change in relation to each other.

E) LIQUIDITY Calculate Current Ratio and Quick Asset Ratio for the years 2015 and 2014. Show it in a table as in the previous sections and comment on the Company’s liquidity position. (F) CAPITAL STRUCTURE Calculate the following ratios (1) Debt/Equity ratio, (2) Debt ratio (3) Equity ratio. Show it in a table similar to the previous sections and comment on the Company’s capital structure. Below are the ratios of rival companies Fantastic Holdings Ltd and Nick Scali Ltd. Use this information in your comments about the Company’s capital structure.

Interest Servicing ratio (Interest Cover) Calculate and comment on the Company’s Interest Servicing Ratio for 2015 and 2014. (H) Cash Flow Examine the Company’s Statement of Cash Flow and answer the following short answer questions:

What are the names of the three sections that show the Company’s net cash flows?
Which section shows the strongest net cash inflow for the Company?
What is the reason for its strong net cash inflow from investing activities?

(I) Market Performance From https://au.finance.yahoo.com or elsewhere, obtain the Company’s share prices on 30 June 2015 and 2014. Using these market prices and the Earnings per Share (EPS) for the Company shown in Note 7 of its 2015 annual report, calculate the company’s Price Earnings ratio (P/E ratio). What does the Company’s P/E ratio indicate compared to the P/E ratios of competitors as shown below?

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Solution:

Executive Summary This report states about the operations of Joyce Corporations. The financial statement of the company has been analyzed by computing the financial ratios of the company to ascertain the performance of the company on various parameters like profitability, asset efficiency, liquidity etc. The profitability of the company has increased in the current year but this increment is due to income from discontinuing operations therefore, the company has to implement measures to enhance its profitability through continuing operations. The asset efficiency ratios of the company are satisfactory and have improved from the past year. The liquidity position has to be monitored and improved in order to prevent shortage of working capital during the operations of the business. The P/E ratio of the company has reduced in the current year but after analyzing the factors behind such fall the decrease is not a matter of concern for the company. The company has majorly financed its capital through equity and studying the liquidity position the approach is favourable for the company. Company Overview The company was founded in the year 1886 and its registered office is in Australia. The company is a specialist bedding franchise with the brand name of Bedshed. It deals in beds, mattresses and furnishings for the bed under this brand. The stores of the company under Bedshed are located across Australia. It leads innovation in the digital space and has the Bedroom Planner Technology where the customers can place their selected bedroom furniture in their virtual bedroom and can choose the furniture according to their preference. The company also operates through its brand Kitchen Connection and Wallspan which is associated with KWB Group. It specializes in kitchens and wardrobes. They have high end showroom across South East Queensland and Newcastle ("Kitchen Connection and Wallspan – Joyce Corporation LTD", 2016). Next is the business of Lloyds Auctioneer and Valuers. This segment has been in operation for the past 12 years and has generated high returns to the investors. The company has been providing its services to the Australian Government. Its competitors are Fantastic Holdings Ltd. and Nick Scali Ltd. Profitability

		2015	2014
Return on Equity (ROE)	Net Profit After Tax / Average Equity (%)	21.68%	7.00%
Return on Assets (ROA)	Net Profit After Tax / Average Assets (%)	12.67%	4.24%
Gross Profit Margin	Gross Profit / Sales Revenue (%)	49.68%	67.58%
Net Profit Margin	Net Profit After Tax / Total Revenue (%)	15.03%	4.81%

The profitability of the company has been assessed by studying the above ratios. We can observe that the ratios are contradictory in nature. This can be observed because even though the gross profit margin is less for the year 2015 all its other ratios are higher when compared to the ratios of the year 2014. The main reason behind this is the net income that has been earned by the company through its discontinuing operations in the year 2015 is very high when compared to the year 2014. The performance of the company is not satisfactory in the year 2015 because the operating profit has decreased in 2015. Though the returns are higher in 2015 they have not been earned by the business of the company rather they have been earned by discontinuing operations therefore, this income would not be earned in subsequent years and therefore, the positive parameters of the current year might become negative. Therefore, the trend of the ratio is unfavourable for the current year. Asset Efficiency

		2015	2014
Asset Turnover Ratio	Total Revenue / Average Assets (times)	0.74	0.40*
Days Inventory	(Average Inventory / Cost of Goods Sold) x 365 (days)	44.83	138.23*
Days Debtors	(Average Debtors/ Sales Revenue) x 365 (days)	5.44	8.18

Note: The figure has been calculated by considering the cost of sales in the Annual Report of 2014. The asset efficiency ratio states how efficiently the assets of the company are being utilized. Asset turnover ratio measures the ability of the company to generate sales from its assets. The higher the ratio, the better it is. For the Joyce Ltd, the asset turnover ratio has increased which is a positive sign. The days inventory means the average number of days the inventory is held before it is sold. The lower the days inventory the lesser is the holding cost of inventory for a company. In the given case the ratio has decreased. The amount of inventory has increased but there is a decrease in the days inventory due to an increase in the cost of goods sold of the company. The days debtors refer to the average number of days the revenue remains as credit revenue after it has been accrued. Lower the ratio the better it is for the company. Here this ratio has decreased in the year 2015 which is a positive indicator. The company has managed to reduce the days in which the sales is realized which implies a saving in the implicit cost of interest and reduction of bad debts. A greater rate of return for sales as compared to the average debtors has led to such results. Therefore, the trend is favourable for all the ratios. Liquidity

		2015	2014
Current Ratio	Current Asset/Current Liabilities	2.46	1.38
Quick Asset Ratio	(Current Asset – Inventories-Other Asset)/Current Liabilities	0.58	0.79

The current ratio of 2 is generally regarded as satisfactory. The company has a current ratio of 2 in the year 2015. The current ratio of the company has observed a favourable trend in the pattern in the past two years. The ratio was not satisfactory in the year 2014. This ratio states if the company would be able to meet its current obligations with its current assets. The quick asset ratio states if the company would be able to pay off its current obligations with its liquid assets therefore, the assets that are not readily realizable are not included in liquid assets. Quick Asset Ratio of 1 is satisfactory. However, the company has not maintained this ratio and it has further deteriorated in the year 2015 which is an unfavourable trend for the company. The other assets comprise of other receivables which does not form a part of the liquid asset and has led to drastic fall in the liquid ratio of the company. The current ratio is also strong due to presence of this ratio. Therefore, it is important for the company to monitor its liquidity position. Capital Structure

	2015	2014
Debt Equity Ratio (TL/TE)	73.2%	61.1%
Gearing/Debt Ratio (TL/TA)	42.3%	37.9%
Equity Ratio (TE/TA)	57.7%	62.1%

If we compare the capital structure of the competitors of the company we can state that Fantastic Holdings Ltd has a conservative capital structure mix because it has financed its capital majorly with equity while some portion comprises of the debt fund. The financing through debt is cheaper since the cost of debt is lower than the cost of equity and it is also tax deductible. However, the finance cost in debt is certain irrespective of the profit which is not the case with the equity financing. Therefore, the financing through debt is riskier. The Nick Scali Limited has an aggressive capital mix with the debt financing consisting of a greater proportion than the equity. The Jacob Corporation also follows a conservative approach and has its capital majorly financed through the equity. Keeping in mind the liquidity position of the company the approach that has been followed by the company is satisfactory. Since, the liquid position is weak it might not be able to meet its current debts therefore, reducing the debt through equity financing is satisfactory. Interest Servicing Ratio

		2015	2014
Interest Coverage Ratio	EBIT/Interest Expense	4.47	2.81*

Note: Ratio as per the Annual Report 2015. This ratio has increased in the current year which implies that the interest coverage has improved over the past year and the company is in a better position to meet its interest obligations. Cash Flow

The three sections that show the Company’s net cash flows are the operating activities, the investing activities and the financing activities.

The strongest net cash inflow for the Company is from the investing activities.

The reason for its strong net cash inflow from investing activities is the proceeds from the sale of various assets and cash acquisition as a result of business combination.

Market Performance

		2015	2014
P/E Ratio	Price/EPS	6.85	37.14*

Note: Ratio as per the Annual Report 2015. This ratio states the number of times the share price of the company has been priced to its earnings. The ratio has drastically declined in the current year but studying the reason, the decline will not be considered as significant. The EPS of the company has improved in the year 2015 as a result of discontinuing operations which has led to a fall in the P/E Ratio. If the EPS from continuing operations is considered the P/E ratio would be 22 times which is far better than its competitors.

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