ACF5130 Financial statement analysis and business valuation
Week 7: Financial Analysis
Discussion Question 1: Analysing Woolworths’ ROE
ROE data from Sandip’s Woolworths Valuation
Discussion Questions:
● How would you interpret Woolworths’ performance?
● Discuss some advantages of time-series analysis of financial ratios.
● Discuss some limitations of time-series analysis of financial ratios.
Discussion Question 2: Analysing Woolworths’ ROE
Competitor ROE data from DatAnalysis Premium; Woolworths ROE from Sandip’s Woolworths Valuation
Discussion Questions:
● How would you interpret Woolworths’ performance, relative to that of competitors?
● Discuss some advantages of cross-sectional ratio analysis.
● Discuss some limitations of cross-sectional analysis.
Discussion Question 3: Advanced DuPont Analysis
Imagine you're conducting a financial analysis of two technology sector companies, Company A and
Company B, both of which have similar business models and revenue streams but divergent capital structure strategies.
Upon reviewing their financial statements, you observe that both companies exhibit a return on equity (ROE) lower than their respective returns on net operating assets (RNOA). Further investigation reveals that while Company A's net borrowing costs (NBC) exceed its RNOA, Company B, however, does not face this issue.
Considering the Advanced DuPont decomposition of ROE:
ROE = RNOA + SPREAD*FLLEV
Explain why Company B's ROE is lower than its RNOA, despite its NBC being less than RNOA. Both companies maintain positive equity.
Evaluate the sustainability of the capital structures of Companies A and B based on your analysis. Additionally, propose any strategic adjustments you would recommend to the management of each company.
Discussion Question 4: Advanced DuPont Analysis
The following exhibits are the partial financial statements of ABC Ltd for the years ended 31 December 2022 and 2023 respectively.
Discussion Question 4: Advanced DuPont Analysis
The following exhibits are the partial financial statements of ABC Ltd for the years ended 31 December 2022 and 2023 respectively.
Supply the missing numbers and calculate the ROE. Show the Reformulated Income Statement and Balance Sheet and the advanced DuPont decomposition of ROE. Assume that the tax rate is 35%.
ROE = RNOA + FLEV * SPREAD
Notes:
● ROE: Return on Equity: Ratio of Net Income to Average Stockholders’ Equity
● RNOA: Return on Net Operating Assets: Ratio of Net Operating Income to Average Net Operating Assets
● NBC: Net Borrowing Costs: Ratio of Net Financial Expenses to Net Financial Obligations (NFO)
● FLEV: Financial Leverage: Ratio of NFO to Average Stockholders’ Equity
● SPREAD: Difference between RNOA and NBC
Discussion Question 5: Advanced DuPont Analysis
Below are the condensed Income Statement and Balance Sheet of ABC Ltd.
Prepare the Reformulated Income Statement and Balance Sheets (for 2022 and 2023).
What do you notice about net financial obligations and net financial expenses?
How do you think such a capital structure will affect ROE?
Discussion Question 6: Ratio Analysis
The Table below presents some financial ratios (from DatAnalysis Premium) of Kogan Ltd (ASX:KGN) for the period 2019-2023. Analyse the company’s liquidity and solvency based on this information. Also, using the information provided, comment on whether the company’s capital structure is optimal.