FINM036 Financial Decision Making Assignment

FINM036 Financial Decision Making Assignment

FINM036 Financial Decision Making Assignment

Introduction

The present report is developed for providing an evaluation of the key cost accounting and corporate finance concepts of a selected company to its Board of Directors. This is done on the perspective of a potential candidate seeking for the job of a finance director of a company listed on Alternative Investment Market (AIM) within the London Stock Exchange (LSE). It is developed as a part of the interviewing process for the job role that needs to be presented to the Board of Directors for presenting information in relation to the vision and strategic financial goals of the selected company. The financial performance of the company is selected with the use of financial ratios such as profitability, efficiency, liquidity and other that are relevant for gaining an understanding of its current and future financial outcomes. This is followed by carrying out a critical evaluation of the corporate governance framework of the selected company to analyze its impact on the brand and reputation. It has also provided a discussion in relation to the discussion of the proposed medium term financial strategies of the selected company for achieving a dominant position within its respective sector.

Brief Introduction of the Selected Company ‘CAPITALAND LIMITED’

The company selected for the analysis purpose is ‘Capital Land Limited’ that is a public-limited entity traded as SGX in Singapore. It is known to be one of the largest real estate company recognized for managing a global portfolio of real estate products. The company’s product portfolio consists of integrated developments, shopping malls, residencies, offices, homes and financial services. The company is providing its products and services in about 30 countries but its core markets include Singapore and China. It has recorded a turnover of about $93 billion as of the end of the year 2018. It is recognized as one of the largest investment management businesses across Asia and is estimated to provide employment to about 8.48K people around the world.

Section A: (Part 1): Performance of the selected company (Capitaland)

Ratio Analysis of Capitaland for last five years

Ratio analysis is an important management tool that is used to make the quantitative analysis of financial information contained in the financial statements of the company. The main purpose of ratio analysis is to evaluate the various aspects of company financial or non financial information such as profitability, solvency, liquidity, asset efficiency ratios and economic value added.

Profitability analysis

Financial data of Capitaland for last five years

Particulars

2012

2013

2014

2015

2016

2017

 

Amount in Singapore dollar

Net revenue

 

$ 3,977.00

$ 3,925.00

$ 4,762.00

$ 5,252.00

$ 4,610.00

Total Assets

$ 37,787.00

$ 36,155.00

$ 44,113.00

$ 47,053.00

$ 45,741.00

$ 61,446.00

Average total assets

 

$ 36,971.00

$ 40,134.00

$ 45,583.00

$ 46,397.00

$ 53,593.50

Shareholder's equity

$ 15,080.00

$ 16,068.00

$ 16,758.00

$ 17,905.00

$ 17,605.00

$ 18,382.00

Average shareholder's equity

 

$ 15,574.00

$ 16,413.00

$ 17,331.50

$ 17,755.00

$ 17,993.50

Net Profit

 

$ 850.00

$ 1,161.00

$ 1,066.00

$ 1,190.00

$ 1,551.00

(Capitaland: Annual Report, 2017, Capitaland: Annual Report, 2015 and Capitaland: Annual Report, 2013)

Financial Ratios of Capitaland for last five years

Profitability ratios

Ratios

Formula

2013

2014

2015

2016

2017

Net Profit Ratio

Net profit / Net revenue

21.37%

29.58%

22.39%

22.66%

33.64%

Return on asset

Net profit / Average total assets

2.30%

2.89%

2.34%

2.56%

2.89%

Return on Equity

Net profit / Average shareholder's equity

5.46%

7.07%

6.15%

6.70%

8.62%

Profitability analysis is an important financial measure that is used to measure the company’s ability to generate earnings in relation to sales, assets, and equity. Some of important profitability ratios are net profit ratio, return on assets and return on equity.

1. Net profit ratio: This ratio provides the percentage of net profit earned on net revenue. It is most important ratio from the investor’s point of view as the net profit percentage is something they look for in any company. On looking at the above graph it can be said that Capitaland has very high net profit ratio in current year (2017) as compared to previous years. Overall it can be said that there was increasing trend in net profit ratio of the company.

2. Return on Equity: This ratio is most important among all the profitability ratios as it reflects percentage of profits earned on owner’s capital. The graph above clearly indicates that in year 2017, Capitaland has earned maximum return on equity as compared to previous four years. It shows improvement in ability of company to earn maximum revenue. There was increasing trend in return on equity ratio (Brealey, Myers and Marcus, 2007).

3. Return on assets: This ratio is mainly calculated by the management to know their performance in utilizing the assets of the company to earn the revenue. This ratio provides percentage of net profit earned on total assets of the company. It seems that company earns very little profit percentage on the total assets employed by the company in a year. It is because Capitaland belongs to real estate industry where the value of assets is much more in compare to earnings earned by the company. However, it can be said that company has able to maintained the sufficient percentage of return on assets looking into the sector in which belongs.

Assets Efficiency Ratios

Financial data of Capitaland for last five years

Particulars

2012

2013

2014

2015

2016

2017

 

Amount in Singapore dollar

Net revenue

 

$ 3,977.00

$ 3,925.00

$ 4,762.00

$ 5,252.00

$ 4,610.00

Total Assets

$ 37,787.00

$ 36,155.00

$ 44,113.00

$ 47,053.00

$ 45,741.00

$ 61,446.00

Average total assets

 

$ 36,971.00

$ 40,134.00

$ 45,583.00

$ 46,397.00

$ 53,593.50

Shareholder's equity

$ 15,080.00

$ 16,068.00

$ 16,758.00

$ 17,905.00

$ 17,605.00

$ 18,382.00

Account Receivables

$ 1,485.00

$ 1,164.00

$ 963.00

$ 1,424.00

$ 1,859.00

$ 1,471.00

Average Accounts Receivables

 

$ 1,324.50

$ 1,063.50

$ 1,193.50

$ 1,641.50

$ 1,665.00

(Capitaland: Annual Report, 2017, Capitaland: Annual Report, 2015 and Capitaland: Annual Report, 2013)

Financial Ratios of Capitaland for last five years

Asset Efficiency ratios

Ratios

Formula

2013

2014

2015

2016

2017

Asset Turnover in days

Average total assets*365/Revenue

3393.11

3732.21

3493.87

3224.47

4243.30

Average collection period in days

Average accounts receivable *365/ Net Revenue

121.56

98.90

91.48

114.08

131.83

Asset efficiency ratio is also known as asset management ratios that aim to compare the assets of the company to the revenue earned by the company. The purpose of efficiency ratios is to evaluate the ability of the company to utilizing the assets in to generate the revenue. Some of the important asset efficiency ratios are average collection period in days, asset turnover in days etc.

1. Asset turnover in days: It is the most important improving efficiency ratio that measures how effectively and efficiently management is disposing the assets to generate the sales. In other words this ratio measures the productivity of assets to generate the profits for the company. Capitaland has very high asset turnover ratio in all the last five years. It is because Capitaland poses very high value of assets that needs time for disposal and also the profit margin is very low. Real estate industries generally have very high assets turnover ratio (in days) due to value of assets they kept to earn the revenue (Brigham and Houston, 2012).

2. Average collection period in days: This ratio is also called as accounts receivable turnover ratio as this ratio provide number of days taken by the company to collect the debtors balance. Generally in real estate sector, company takes longer period of time to collect the account receivable. It has been from the above graph the debtor’s collection period has been reduced from year 2013 to 2015 but in year 2016 and 2017 there was sharp rise in collection days that indicates poor assets management of Capitaland in current year as compared with previous year.

Liquidity Analysis

Financial data of Capitaland for last five years

Particulars

2012

2013

2014

2015

2016

2017

 

Amount in Singapore dollar

Current Assets

 

$ 14,663.00

$ 11,580.00

$ 12,627.00

$ 11,765.00

$ 12,227.00

Current Liabilities

 

$ 4,347.00

$ 7,002.00

$ 6,930.00

$ 7,728.00

$ 8,803.00

(Capitaland: Annual Report, 2017, Capitaland: Annual Report, 2015 and Capitaland: Annual Report, 2013)

Financial Ratios of Capitaland for last five years

Liquidity ratios

Ratios

Formula

2013

2014

2015

2016

2017

Current Ratio

Current Assets/Current Liabilities

3.37

1.65

1.82

1.52

1.39

The purpose of liquidity analysis is to measure the company ability to pay the short term debt obligations through used current assets (short term assets). It means this analysis provides with information on how much assets company have to pay the debt expenses as and when it falls due. The important liquidity ratios are current ratio and acid test ratio.

Current ratio: This ratio measures the ability of company to pay the short term obligations through use of current assets. It is measured through dividing current assets by current liabilities. Generally current assets and current liabilities that falls in next 12 months period is taken for calculation of current ratio (Higgins, 2012).

The above graph shows that there was sharp decline in current ratio in last five years which clearly indicates the poor liquidity performance Capitaland. However, the ratio is not below one which shows that company has capability to pay the liabilities in current year as well. There is need to improve the liquidity position of the company.

Other Ratios

Other Ratios of Capitaland for last five years

Economic Value Added

Ratios

Formula

2013

2014

2015

2016

2017

Economic Value Added

Net operating profit after tax (NOPAT) - Capital Charge

$ (379.30)

$ (36.10)

$ (150.40)

$ (57.40)

$ 368.50

(Capitaland: Annual Report, 2017, Capitaland: Annual Report, 2015 and Capitaland: Annual Report, 2013)

Economic value added is mainly used to measure the amount company generates from the total funds invested in the operations. The positive amount reflects that the company has derived some return for their shareholders while negative EVA indicates poor performance of the company (Deegan, 2013). From year 2013 to 2016, Capitaland has negative EVA while in year 2017 it was positive $368.50 million which shows a great improvement in the financial performance of the company.

Section B

 

 

Part 1: Critical Evaluation of Corporate Governance Compliance

 

CapitaLand Limited has placed high emphasis on attaining the highest standards of corporate governance and thus continually seeking the ways for its regular improvement. The company is focused on complying with the principle of the Code of Corporate Governance for promoting integrity and transparency in its overall business activities. The Board of Directors is responsible for developing the policies in relation to corporate governance framework of the firm. The framework needs to be followed by the business managers and employees for enquiring that they carry out their roles and responsibilities in an ethical manner. The company has disclosed the relevant information regarding its Board, remuneration, accountability and audit and shareholders’ rights in its investor section under the corporate governance (CapitaLand Limited, 2017).

The development of an effective corporate governance framework within the company has positive impacted its brand reputation. It is listed under the Singapore Governance and Transparency Index (SGTI) for having the presence of a well-governed and transparency corporate governance system. SGTI assess companies in relation to their corporate governance disclosures and practices by examining the transparency of their business policies and financial announcements. The presence of effective corporate governance policies has enabled the company in achieving trust and confidence among wide range of its stakeholders. The key stakeholders of the company include employees, customers, business associated, builders, suppliers and the local community (Meixian, 2018). The achievement of trust in the wide range of its stakeholders has enabled in promoting the growth and development of the company by gaining large capital inflows from the investors. The effective governance policy has enabled the company to disclose credible information to the shareholders, analysts and the media. It provides regular updates o its strategies, financial performance and operations through adequate announcements and press releases (CapitaLand Limited: Global Sustainability Report, 2017).

Part 2: Proposed Medium-Term Financial Strategies of Selected Company

The medium-term financial strategy for the company is proposed for supporting its growth and development of the company through business planning directed to develop adequate resources for meeting its adequate needs and priorities. In this context, the medium-term financial strategy propped to the company is recommending the development of capital structure having an adequate proportion of equity and debt. This is essential for continually meeting its funding requirements as the company operates in real estate sector and therefore a continuous flow of cash flow is important for carrying out its business operations. As a finance director, I would emphasize on continual review and monitoring of capital structure of the company to ensure that the capital needs and adequately met. Also, the development of capital growth strategies would be emphasized by the use of sources that reduced the financing cost on the company (CapitaLand Limited: Performance Review, 2017). The company should also place emphasis and identifying its funding sources through using a combination of bank facilities and capital market issuances to reduce the financial risk. This is essential for the medium-term growth and development of the company. The presence of an optimum capital structure would also ensure that the company manages its debt obligations on time which will help it to maintain a healthy financial position.

Conclusion

Overall financial performance of company is satisfactory in all the five years of review but in year 2017 company has shown drastic improvement in the financial performance. However, there is need to focus on the liquidity performance of the company. Capitaland has strong corporate governance policies that help the management to achieve the trust of the shareholders.

References

1. Brealey, R., Myers, S.C. and Marcus, A.J., 2007. Fundamentals of Corporate Finance. Mc Graw Hill, New York.
2. Brigham, F., and Houston.J. 2012. Fundamentals of financial developing management. Cengage Learning.
3. CapitaLand Limited. 2017. Corporate Governance Statement. [Online]. Available at: http://investor.capitaland.com/corporate_governance.html[Accessed on: 29 September 2018].
4. CapitaLand Limited: Global Sustainability Report. 2017. [Online]. Available at: https://www.capitaland.com/sites/SustainabilityReport/2017/social-and-relationship-capital.html [Accessed on: 29 September 2018].
5. CapitaLand Limited: Performance Review. 2017. [Online]. Available at: https://www.capitaland.com/sites/SustainabilityReport/2017/pdf/Performance_Overview_pg76-82.pdf [Accessed on: 29 September 2018].
6. Capitaland: Annual Report. 2013. [Online]. Available at: http://investor.capitaland.com/newsroom/20180406_070046_C31_YYVJWN4SCFO7W8OO.1.PDF [Accessed on: 29 September, 2018].
7. Capitaland: Annual Report. 2015. [Online]. Available at: http://investor.capitaland.com/newsroom/20180406_070046_C31_YYVJWN4SCFO7W8OO.1.PDF [Accessed on: 29 September, 2018].
8. Capitaland: Annual Report. 2017. [Online]. Available at: http://investor.capitaland.com/newsroom/20180406_070046_C31_YYVJWN4SCFO7W8OO.1.PDF [Accessed on: 29 September, 2018].
9. Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
10. Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
11. Meixian, L. 2018. Singtel, CapitaLand Mall Trust top corporate governance rankings again. [Online]. Available at: https://www.straitstimes.com/business/companies-markets/corporate-governance-rules-need-deliberate-calibration-not-kneejerk [Accessed on: 29 September 2018].