Quantitative model for performance evaluate - Myassignmenthelp.Com

Question: Discuss about the Quantitative model for performance evaluate. Answer: Introduction This report consists of the financial analysis of Myer Holdings Limited which evaluates how well company has performed throughout the time. Ratio analysis, share price movement analysis and other financial analysis tool have been used to determine the true performance of Myer Holdings Limited. Present description of the company Myer Holdings Limited is an Australian Departmental stores chain trading in all Australian states. The stock price of company is traded at MYR(ASX)A$0.640.00 (-0.78%). The CEO of company is Richard who takes all the strategic decisions for the company. Ownership and governance structure The CEO of company is Richard who takes all the strategic decisions for the company The Gary Barber is the key persons who work as manager of company (Mayer Holdings Company, 2015). Owner of company Highland Capital management- owned 25% shares Anchorage Capital Group (owned 25% shares) Solus Alternative Asset Management- owned (25%) Other shareholders- Owned- 25% ( Mayer Holdings Company, 2017) Performance ratio analysis of Myer Holding Limited This ratio analysis is used to analysis the relation between two financial data of company (Mayer Holdings Company, 2015). Calculation of ROA and ROE Myer Holding Limited Particulars (Amount in Million 2014 2015 2016 2017 AUD$ AUD$ AUD$ EBIT 142 58 74 23 Net profit 98 30 61 12 Total Assets 1,933 1,887 1,868 1,879.00 Total Liabilities 1,039 1,024 760 806 Shareholders' Equity 893 863 1,108 1,073.00 Computation of Return on assets 1. Rate of Return on Assets 2014 2015 2016 2017 A. Net income 98 30 61 12 B. Total assets 1,933 1,887 1,868 1,879 (A/B) 5.07% 2% 3% 1% Interpretation It is considered that return on total assets of company is decreasing throughout the time. It is not good indicator for the company. Company has decreased its return on assets from 5.07% to 1% since last four years. Computation of Return on equity 2. Rate of Return on Equity 2014 2015 2016 2017 A. Net income available to equity shareholders. 98 30 61 12 B. Shareholders Equity 893 17,981 1,108 1,073.00 (A/B) 10.97% 0.17% 5.51% 1.12% Interpretation It is analysed that return of equity of company has went down by 90% which is not good for the business of Mayer Holding. The rate of return on equity of company has went down to 1.12 % in 2017 as compared to 10.97% return shown in 2014 (Brigham and Ehrhardt, 2013). Computation of Debt to equity 3. Debt Ratio 2014 2015 2016 2017 A.Total Liabilities 1,039 1,024 760 806 B. Total assets 1,933 1,887 1,868 1,879.00 (A/B) 54% 54% 41% 43% Interpretation Company has decreased its debt to equity ratio to 43% in 2017 which is 10% lower than the debt ratio shown in 2014. Mayer Holding Company has decreased its debt ratio with a view to reduce its financial leverage. However, it will eventually increase the overall cost of capital of company. Proving the equation This equation is done with a view to satisfy both sides of formula. Providing equation 2014 2015 2016 2017 Net profit After tax/OE 0.10974 0.034762457 0.05505 0.01118 EBIT/TA*NPAT/EBIT*TA/OE 0.10974 0.034762457 0.05505 0.01118 (Please see the excel sheet for the proper calculation) This equation hence proofed the calculation given above is true and fair. Comparison of share price movement of Mayer Holding with the all ordinary index Comparison of share price movement of Mayer Holding with the all ordinary index It is considered that all ordinary index movement since last two years is negative. However, Mayer holding company has reflected stable share price movement in spite of sluggish market conditions. Therefore, it is good indicator for the company that as compared to movement of share price of all ordinary indexes, Mayer Company has performed very well (Yahoo finance, 2017). All ordinary index share price has very high fluctuation which is negative indictor for the business (Mayer Holdings Company, 2017). Announcements In 2017, Company has reduced its overall return on capital employed and increased its overall cost. Company has no fluctuation in its share price and reduced its capital investment in its own business with a view to save it from the sluggish market condition (Mayer Holdings Company, 2017). Research via internet Stock information and Beta valuation The value of beta is calculated from the data fetch from Yahoo finance i.e. .15 Regression Statistics Multiple R 0.045307898 R Square 0.002052806 Adjusted R Square -0.04330843 Standard Error 310.4423703 Observations 24 ANOVA df SS MS F Significance F Regression 1 4361.39 4361.39 0.045255 0.833495333 Residual 22 2120238 96374.47 Total 23 2124600 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 0.134989975 0.218447484 0.617951611 0.542951979 -0.31804238 0.588022329 -0.31804238 0.588022329 X Variable 1 -8.193293 3.85147E-05 -0.212731339 0.833495333 -8.8068E-05 7.16814E-05 -8.8068E-05 7.16814E-05 The beta value is -.8. The value of the beta is negative as the share price movement of all ordinary indexes is highly negative. Therefore, market premium of company will also be negative. Computation of required rate of return by using CAPM method E(R) = E(R) = Expected rate of return = Risk free rate of return = Beta = Market Risk Premium (Zhu, 2014). Calculation of Required rate of return Risk free rate (A) 4% Beta (B) -8.193293 Market Risk premium (C) 6% Required rate of return [A+(B*C)] -45.16% (Please see the excel) The required rate of return of company is -45 It is negative as the beta of company is highly negative (Mayer Holdings Company, 2017). Determination of conservative investment It is evaluated that company has reduced its return on capital employed throughout the time. In addition to this, company is aggressive in its investment decision. It is diversifying its business by adopting aggressive investment style. Mayer Holding is less interested in plugging back of its profit in its present business due to sluggish market conditions. Mayer Company has very low return in its business. Therefore, in order to increase the value of equity shareholders capital, it has planned to increase its investment amount (Laudon, and Traver, 2013). Weighted Average Cost of Capital (WACC) Cost of equity (calculated above using CAPM Cost of equity (calculated through CAPM) = -45.16% Cost of Debt = 0% WACC = Cost of debt (interest rate after tax) + cost of equity WACC Capital Amount Cost of capital % of portion WACC Equity 1879 0 (It is stated in negative) 0.8548681 0 Debt 319 2.41% 2.41 2.41 Total capital 2198 WACC 2.41 The cost of debt of company is computed after deducting the tax rate of company (Mayer Holdings Company, 2016). Implications that a higher WACC on investment decision After evaluating the WACC of the company, it is evaluated that company has negative WACC in its business. It is evaluated that if company has higher WACC then it will show negative impact while selecting the particular project. In addition to this, Negative WACC will reduce the return on capital employed of company in determined approach. Management of company needs to evaluate that less WACC of company is the good indicator for the investment purpose of company. However, return on capital employed and adopting project investment decision is highly based on the WACC of company. The less WACC more positive it would be for organization. Consideration of debt ratio for the company Appear to stable It is considered that company has reduced its debt ratio throughout the time. However, company has decreased in its overall profit. Therefore, in order to save company from all the negative business factors, company has reduced its debt portion. 3. Debt Ratio 2014 2015 2016 2017 A.Total Liabilities 1,039 1,024 760 806 B. Total assets 1,933 1,887 1,868 1,879.00 (A/B) 54% 54% 41% 43% Company has decreased its debt to equity ratio to 43% in 2017 which is 10% lower than the debt ratio shown in 2014. Mayer Holding Company has decreased its debt ratio with a view to reduce its financial leverage. Gearing ratio discussion It is observed that company has effective gearing ratio of company has increased. The increase in gearing ratio is not a good indicator for the business success. Company has increased its gearing ratio to 48% in 2017 which is 300% higher as compared to data shown in 2014. This gearing ratio reflects how company has managed its business in context with its EBIT and interest payment. Company has strong gearing ratio which is good indicator for the organization (Mayer Holdings Company, 2014) Gearing Ratio 2014 2015 2016 2017 Gearing Ratio 16% 26% 15% 48% Divided policies of company Company has adopted profit based dividend policies. Company has increased its dividend amount on the basis of increased profit throughout the time. In addition to this, it has not given any single amount of dividend at the time when Mayer was having no profit. The dividend policies of company is determined on the basis of profit earned by company and dividend offered to its shareholders. It is considered that dividend policy should be positive as company having strong dividend policies would be highly attracted to clients in market. Letter of recommendation After evaluating the details, data of company, it is considered that Mayer Holdings Company has suffered high amount of loss in its overall profit throughout the time. The net profit of company has gone down by at least 30% since last four years. In addition to this debt to equity ratio has also went down which is good indicator. Since last four year, there is no fluctuation in share price and kept its price stable. IT has offered very less return to its shareholders. After evaluating the results calculated above, it could be inferred that company has maintained stable business which put negative impact on its capital value creation. It has also reduced the value of its core investment. Investor who wants to invest money in Mayer Holding Company can invest, but the investment should be for long run for creating value on their investment. Conclusion There are several financial analysis tools which could be used to evaluate the business performance of company. It is considered that Mayer Holding Company has stable business and offered less return to investors. Therefore, investors who want to invest money in Mayer Holding Company can invest, but the investment should be for long run for creating value on their investment. Now in the end, it could be inferred that Mayer Holding Company has been facing several problems in its business which has resulted to negative outcome for the company. References Brigham, E.F. and Ehrhardt, M.C., 2013.Financial management: Theory practice. Cengage Learning. Laudon, K.C. and Traver, C.G., 2013.E-commerce. Pearson Mayer Holdings Company, 2015, annual report, Retrieved on 29th November, 2017 from https://www.irasia.com/listco/hk/mayer/annual/index.htm Mayer Holdings Company, 2016, annual report, Retrieved on 29th November, 2017 from https://www.irasia.com/listco/hk/mayer/annual/index.htm Mayer Holdings Company, 2017, annual report, Retrieved on 29th November, 2017 from https://www.irasia.com/listco/hk/mayer/annual/index.htm Mayer Holdings Company, annual report, Retrieved on 29th November, 2017 from https://www.irasia.com/listco/hk/mayer/annual/index.htm Yahoo finance, 2018 retrieved on 19h January from https://in.finance.yahoo.com/ Zhu, J., 2014.Quantitative models for performance evaluation and benchmarking: data envelopment analysis with spreadsheets(Vol. 213). Springer