Harvey Norman - Financial Analysis Free Sample Solution

Question: Discuss about thFinancial Analysis of Harvey Norman. Answer: Introduction The present report aims to carry out financial analysis of Harvey Norman Holdings Limited. In this context, the report conducts vertical and horizontal analysis of companys assets as depicted in its balance sheet from the annual report of financial years 2014-2015. Vertical analysis reports each entry in the companys balance sheet as a percentage of another item. On the contrary, horizontal analysis examines each entry on the financial statements by comparing it with previous years entries (Moyer, McGuigan and Rao, 2014). The report also evaluates and examines liquidity, solvency, and profitability ratios for the financial years 2014-2015. The ratio analysis is carried out for providing recommendations to the investors for making effective decisions regarding investing in the company. Description of the Companys Business Activities Harvey Norma is recognized as one of the major large Australian-based, multi-national retailer headquartered in New South Wales. It is mainly involved in retailing business of furniture, bedding, computers, communications and electrical products. The company conducts its business activities outside Australia through franchising model. The company receives lease payments from its franchise stores on the basis of sales percentage. The company presently owns about 260 retail stores in Australia and franchise stores across the world. It is public listed company on Australian Securities Exchange (ASX) and is believed to have a workforce diversity of about 5,160 people (Annual Report, 2015). The company operates its branded department stores in Australia, New Zealand, Singapore, Malaysia and Ireland. It is regarded as worlds largest retailer of computer hardware and software products. It also owns leadership position in electrical goods, furniture, electrical appliances, home improvements, bedding and flooring. It also realizes considerable income from property investments and also from franchisees. Besides this, the company also realizes its income from providing credit services to customers and also trading in listed securities (Company Profile, 2008). Horizontal Analysis of Financial Statements of Harvey Norman Horizontal Analysis of Harvey Norman Income Statement Particulars 2014 2015 Variance % Change Revenue $ 1,513,662,000.00 $ 1,617,161,000.00 $ 103,499,000.00 6.84% Cost of Good Sold $ 1,064,892,000.00 $ 1,126,894,000.00 $ 62,002,000.00 5.82% Gross Margin $ 448,770,000.00 $ 490,267,000.00 $ 41,497,000.00 9.25% Other Income $ 103,624,000.00 $ 1,101,286,000.00 $ 997,662,000.00 962.77% Distribution Expenses $ (15,114,000.00) $ (18,744,000.00) $ (3,630,000.00) 24.02% Marketing Expenses $ (348,952,000.00) $ (370,124,000.00) $ (21,172,000.00) 6.07% Occupancy Expenses $ (233,881,000.00) $ (229,081,000.00) $ 4,800,000.00 -2.05% Administration Expenses $ (427,604,000.00) $ (447,198,000.00) $ (19,594,000.00) 4.58% Other Expenses $ (136,846,000.00) $ (124,082,000.00) $ 12,764,000.00 -9.33% Finance Cost $ (36,437,000.00) $ (32,872,000.00) $ 3,565,000.00 -9.78% Joint Venture Income $ 17,501,000.00 $ 8,658,000.00 $ (8,843,000.00) -50.53% Profit Before Tax $ 301,061,000.00 $ 378,100,000.00 $ 77,039,000.00 25.59% Income Tax Expenses $ (88,823,000.00) $ (109,186,000.00) $ (20,363,000.00) 22.93% Profit of the year $ 212,238,000.00 $ 268,914,000.00 $ 56,676,000.00 26.70% (Annual Report, 2015) Horizontal Analysis of Harvey Norman Balance Sheet Particulars 2014 2015 Variance % Change Current Assets Cash $ 144,957,000.00 $ 185,840,000.00 $ 40,883,000.00 28.20% Inventories $ 297,670,000.00 $ 298,381,000.00 $ 711,000.00 0.24% Other Current Assets $ 1,107,431,000.00 $ 1,192,247,000.00 $ 84,816,000.00 7.66% Total Current Assets $ 1,550,058,000.00 $ 1,676,468,000.00 $ 126,410,000.00 8.16% Non Current Assets Plant and Equipment $ 569,057,000.00 $ 552,603,000.00 $ (16,454,000.00) -2.89% Investment Properties $ 1,903,504,000.00 $ 1,935,936,000.00 $ 32,432,000.00 1.70% Other Non Current Assets $ 183,512,000.00 $ 193,537,000.00 $ 10,025,000.00 5.46% Total Non Current Assets $ 2,656,073,000.00 $ 2,682,076,000.00 $ 26,003,000.00 0.98% $ - Total Assets $ 4,206,131,000.00 $ 4,358,544,000.00 $ 152,413,000.00 3.62% Current Liabilities Trade payables $ 740,681,000.00 $ 813,474,000.00 $ 72,793,000.00 9.83% Other Current liabilities $ 521,551,000.00 $ 469,605,000.00 $ (51,946,000.00) -9.96% Total Current Liabilities $ 1,262,232,000.00 $ 1,283,079,000.00 $ 20,847,000.00 1.65% Non Current Liabilities Provisions $ 7,332,000.00 $ 6,054,000.00 $ (1,278,000.00) -17.43% Loans $ 238,094,000.00 $ 290,000,000.00 $ 51,906,000.00 21.80% Other Liabilities $ 207,367,000.00 $ 222,551,000.00 $ 15,184,000.00 7.32% Total Non Current Liabilities $ 452,793,000.00 $ 518,605,000.00 $ 65,812,000.00 14.53% Total Equity $ 2,491,106,000.00 $ 2,556,860,000.00 $ 65,754,000.00 2.64% Total Liabilities and Equity $ 4,206,131,000.00 $ 4,358,544,000.00 $ 152,413,000.00 3.62% (Annual Report, 2015) Horizontal analysis of financial statements helps to identify the changes in the items of financial statements over one year span of time (Dlabay Burrow, 2007). Through using the horizontal analysis it is easy to find out any big change in the financial figures so that any major change can be noticed and can be taken care of. In this report horizontal analysis of Harvey Norman has been carried out to identify any major change in the assets items of balance sheet. Looking at the changes of asset items in the balance sheet during 2014 and 2015 it has been found that there was 28.20 % positive change in cash and cash equivalents. It shows that Harvey Norman was able to collect its cash payments more rapidly in year 2015 as compare to year 2014 (Moynihan Titley, 2001). There was overall 8.16% increase in value of current assets that shows that company has increased its liquidity position in year to increase its capability to pay the current liabilities in smooth manner. Apart from this there was overall 0.98 % change in non current assets in year 2015 as compare to value in year 2014 (CTI Reviews, 2016). Vertical Analysis of Financial Statements of Harvey Norman Vertical Analysis of Harvey Norman Income Statement Particulars 2015 Percentage 2014 Percentage Revenue $ 1,617,161,000.00 100.00% $ 1,513,662,000.00 100.00% Cost of Good Sold $ 1,126,894,000.00 69.68% $ 1,064,892,000.00 70.35% Gross Margin $ 490,267,000.00 30.32% $ 448,770,000.00 29.65% Other Income $ 1,101,286,000.00 68.10% $ 103,624,000.00 6.85% Distribution Expenses $ (18,744,000.00) -1.16% $ (15,114,000.00) -1.00% Marketing Expenses $ (370,124,000.00) -22.89% $ (348,952,000.00) -23.05% Occupancy Expenses $ (229,081,000.00) -14.17% $ (233,881,000.00) -15.45% Administration Expenses $ (447,198,000.00) -27.65% $ (427,604,000.00) -28.25% Other Expenses $ (124,082,000.00) -7.67% $ (136,846,000.00) -9.04% Finance Cost $ (32,872,000.00) -2.03% $ (36,437,000.00) -2.41% Joint Venture Income $ 8,658,000.00 0.54% $ 17,501,000.00 1.16% Profit Before Tax $ 378,100,000.00 23.38% $ 301,061,000.00 19.89% Income Tax Expenses $ (109,186,000.00) -6.75% $ (88,823,000.00) -5.87% Profit of the year $ 268,914,000.00 16.63% $ 212,238,000.00 14.02% (Annual Report, 2015) Vertical Analysis of Harvey Norman Balance Sheet Particulars 2015 Percentage 2014 Percentage Current Assets Cash $ 185,840,000.00 4.26% $ 144,957,000.00 3.45% Inventories $ 298,381,000.00 6.85% $ 297,670,000.00 7.08% Other Current Assets $ 1,192,247,000.00 27.35% $ 1,107,431,000.00 26.33% Total Current Assets $ 1,676,468,000.00 38.46% $ 1,550,058,000.00 36.85% Non Current Assets Plant and Equipment $ 552,603,000.00 12.68% $ 569,057,000.00 13.53% Investment Properties $ 1,935,936,000.00 44.42% $ 1,903,504,000.00 45.26% Other Non Current Assets $ 193,537,000.00 4.44% $ 183,512,000.00 4.36% Total Non Current Assets $ 2,682,076,000.00 61.54% $ 2,656,073,000.00 63.15% Total Assets $ 4,358,544,000.00 100.00% $ 4,206,131,000.00 100.00% Current Liabilities Trade payables $ 813,474,000.00 18.66% $ 740,681,000.00 17.61% Other Current liabilities $ 469,605,000.00 10.77% $ 521,551,000.00 12.40% Total Current Liabilities $ 1,283,079,000.00 29.44% $ 1,262,232,000.00 30.01% Non Current Liabilities Provisions $ 6,054,000.00 0.14% $ 7,332,000.00 0.17% Loans $ 290,000,000.00 6.65% $ 238,094,000.00 5.66% Other Liabilities $ 222,551,000.00 5.11% $ 207,367,000.00 4.93% Total Non Current Liabilities $ 518,605,000.00 11.90% $ 452,793,000.00 10.77% Total Equity $ 2,556,860,000.00 58.66% $ 2,491,106,000.00 59.23% Total Liabilities and Equity $ 4,358,544,000.00 100.00% $ 4,206,131,000.00 100.00% (Annual Report, 2015) Vertical analysis is the method of financial statement analysis that helps to find out percentage of each item in the financial statements keeping the base as revenue in income statement and total assets or liabilities in case of balance sheet (Albrecht, Stice Stice, 2010). In this report vertical analysis of Harvey Norman has been carried to find out the relative composition of assets in the balance sheet. According to the changes noticed in the above table it has been found that cash and cash equivalents was 3.45% in year 2014 and 4.26 % in year 2015 to the total assets. It reflects that there was 23.47 % increase in cash and cash equivalents in year 2015 as compare to year 2014 (Megginson Smart, 2008). Looking at non current assets it has been found that in year 2015 it got reduced by 1.61 % in year 2015 that shows there was increase in current and decrease in non current assets. Financial Ratio Calculations Liquidity ratio Liquidity ratio shows the overall short term solvency of the company and shows the ability of company to pay off the short term liabilities (Werner Stoner, 2010). Current Ratio: It is current assets divided by current liabilities. It shows the short term liquidity position of the company (Mumba, 2013). Current ratio of Harvey Norman in year 2014: 1.23 Current ratio of Harvey Norman in year 2015: 1.31 Liquidity position of Harvey Norman was sound in year 2015 as compare to year 2015 as current ratio was increased to 1.31 as compared to 1.23 in year 2014. Solvency Ratio Solvency ratios tell the long term liquidity performance of the company during the year (Coyle, 2000). Debt Equity ratio: It is debt divided by the equity. It shows total debt present in the company as against the equity. Debt Equity of Harvey Norman in year 2014: 0.18 Debt Equity of Harvey Norman in year 2015: 0.20 Debt equity ratio increased in year 2015 by 0.02 that shows company has taken some more debt in year 2015. Still the solvency position of company was sound through looking at profitability position in both the years (Graham, Smart Megginson, 2009). Profitability Ratio Profitability ratio shows the earning capacity of company and tells how assets and capital is applied to earn the profits. Net profit ratio: This ratio shows the percent of profit earned by the company to the total revenue. It is net profit margin divided by the total revenue. Net profit ratio of Harvey Norman in year 2014: 14.02% Net profit ratio of Harvey Norman in year 2015: 16.63% Net profit ratio got increased by 2.61% in year 2015 that shows company has used its assets wisely and earned maximum profits out of them (Mumba, 2013). Recommendations Looking at overall performance of the company in both the years and making analysis trend analysis of financial statements it is highly recommended to the investors to buy or hold the shares of Harvey Norman in order to earn maximum return in future period. It was seen that company has maintained positive trend in profit margin over last five years (Moyer, McGuigan Rao, 2014). Conclusion It can be said that financial position of Harvey Norman was better in year 2015 as compare to year 2015. It can be said that liquidity and profitability position of Harvey Norman was outstanding ion both the years. Solvency position was also strong and there was scope to take some more debts in case company wants to go for expansion. References Albrecht , W. S., Stice, E. K. Stice, J. D. (2010). Financial Accounting. Mason: Cengage Learning. Annual Report 2015. Harvey Norman. Retrieved October 12, 2016, form www.harveynormanholdings.com.au/pdf_files/2015-Annual-Report.pdf Brigham, E.F. Houston, J. F. (2012). Fundamentals of Financial Management.Cengage Learning. Company Profile. 2008. Retrieved October 12, 2016, form https://www.harveynormanholdings.com.au/companyprofile.htm. Coyle, B. (2000). Venture Capital and Buyouts. USA: Global Professional Publishing. CTI Reviews. (2016). Essentials of Corporate Finance: Business, Finance. Cram101 Textbook Reviews. Dlabay, L. R. Burrow, J. L. (2007). Business Finance. Mason: Cengage Learning. Graham, J. R., Smart, S. B. Megginson, W. L. (2009). 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