Ratio Analysis for the New Wave Group – Let us discuss and compare!

I’m still here! I have been a little quiet lately due to commencing back at work from maternity leave, and also trying to juggle another uni subject. It’s definitely been hard to try and find the correct work/uni/life balance but I have almost finished what has been the craziest semester thus far.

I have finally put together a draft of my ratio analysis for the New Wave Group, and would love to discuss and compare with other students.

Sorry if it is a bit bland, I found the calculations more fun than the actual commentary.

I will be posting up a full assignment draft for feedback over the next couple of days, but for now let’s discuss 🙂

Profitability Ratios

Net Profit Margin

		2015	2014	2013	2012
Profitability Ratios
Net Profit Margin	Net profit after tax/sales	2.9%	4.1%	4.6%	0.1%

The net profit margin ratio (presented as a percentage) indicates the profit being made on sales. That is, how much profit is generated per each dollar of sales. So for 2015, the New Wave Group saw 2.9 cents of net profit made per $1 of sales which I initially thought was quite low. However I later learnt that between 0% – 10% is considered ‘average’, so this is within normal range. Looking at the trend over the years, the company saw an increase in net profits in 2013 compared to 2012, however this margin decreased in both 2014 and 2015. I investigated further into the 2015 Annual Report to see if I could find a reasoning for this decrease, and the company has stated it is due to changes in the mix of products, customers and regions. All three of these factors could have contributed in the drop of sales which in turn reduced the net profit margin.

Return on Assets

		2015	2014	2013	2012
Profitability Ratios
Return on Assets	Net profit after tax/total assets	2.7%	3.4%	4.4%	0.1%

The return on assets ratio indicates how efficient a firm has been in order to produce a profit from their assets. This ratio had the same trend as the net profit margin above, with the company seeing an increase in the return on assets in 2013 compared to 2012, however this margin decreased in both 2014 and 2015. This may indicate that the change in the mix of products that the company implemented isn’t performing as favourably as previous years hence the decrease in the return on assets. I think a 2.7% return on assets for 2015 could be considered low to average for a company. I have made this assumption by comparing other investment options on the current market at the moment, For example, there are 12 month term deposits being offered with a 3% return on your cash (asset).

Efficiency (or Asset Management) Ratios

Days of Inventory

		2015	2014	2013	2012
Efficiency (or Asset Management) Ratios
Days of Inventory	Inventory/av.daily cost of goods sold	327.74	340.01	242.96	248.60

The days of inventory ratio indicates the average amount of days it takes from when the company buys the inventory, to when it is sold. The lower the figure for the days of inventory ratio would indicate the firm is performing well with sales and turnover of inventory. The above figures for the New Wave Group do seem alarming, as 328 days as an average to sell inventory is quite high. Although this ratio is high, the trend does seem to be consistent, seeing a reduction in days in 2013, increase in 2014 and then a reduction again in 2015 with the figure staying around the same with no major increase. The New Wave Group may need to put a further focus on their inventory management system to see what they can do to improve this, whether it be to hold less stock for example.

 

Total Asset Turnover Ratio

		2015	2014	2013	2012
Efficiency (or Asset Management) Ratios
Total Asset Turnover Ratio	Sales/total assets	0.91	0.82	0.96	0.96

The total asset turnover ratio indicates how many times the value of our assets we are generating in sales. The higher the figure for this ratio, the more efficient the company is with managing their assets.

So for 2015, the New Wave Group generated 0.91 of sales, for every $1 of assets. These ratio figures seem to be a little low, ideally the company would be performing better if this was at least a 1:1 ratio, but they are not too far off this. Looking at the trend with this ratio, the figure remained the same for both 2012 and 2013, saw a decrease in 2014, and then an increase in 2015.

Liquidity Ratios

 Current Ratio

		2015	2014	2013	2012
Liquidity Ratios
Current Ratio	Current assets/current liabilities	3.59	4.89	4.37	4.19

The current ratio indicates the firm’s ability to turn their assets into cash in order to repay their financial debts. To gauge this ability, the current ratio considered the current assets and current liabilities.

The New Wave Group has quite high figures for current ratio, which indicates they have a good amount of assets in comparison with their current debts. This measure is said to be good if it is at least 1:1, so the figures for New Wave Group are great. The company saw in increase in 2013, and again in 2014, and then a slight decrease in 2015. Even though there was a slight decrease in 2015, the ratio is 3.59 which is more than satisfactory.

Financial Structure Ratios

Debt/Equity Ratio

		2015	2014	2013	2012
Financial Structure Ratios
Debt/Equity Ratio	Debt/equity	117.96%	117.73%	100.76%	126.82%
Debt/Equity Ratio	Debt/equity	1.18	1.18	1.01	1.27

The debt/equity ratio is an indicator of risk, and shows what percentage of the company financing comes from the bank (creditors) and investors (shareholders). The lower debt to equity ratio would indicate that the firm is more financially stable compared to those firms with a high debt to equity ratio, which is considered more risky to creditors and investors.

The New Wave Group has a 118% debt to equity ratio for 2015, which indicates more creditor financing (bank loans) is used rather than investor financing (shareholders). Initially I thought this was a really concerning figure since every year has been over 100% (or 1), however after further investigation I discovered that each industry has a different debt to equity ratio benchmarks, and some firms tend to use more debt to finance compared to others.

The highest equity to debt ratio was 127% in 2012 which is still within the acceptable debt to equity benchmark. The New Wave Group could definitely work on improving this figure as some creditors and investors may consider large leveraged amounts of debt unfavourable incase the firm is unable to make payments to the bank.

It should be noted that the ratio has dropped since 2012, and has not changed much since 2014.

Equity Ratio

		2015	2014	2013	2012
Financial Structure Ratios
Equity Ratio	Equity/total assets	45.9%	45.9%	49.8%	44.1%

The equity ratio indicates how much of the firm is funded by its equity owners (shareholders). The higher the figures, the lower the risk of operation of the firm as this means the more of the firm that the shareholders own. In turn, the lower the figures, the higher the risk of operation as the less it is owned by the shareholders.

The New Wave Group has an average reading of 45.9% at the end of 2015, which is slightly concerning seeing as the company has been operating since 1990. It means that just under half of the company is owned by its equity investors, and probably should be higher for a long running company. It’s important to note that the equity ratio has seemed to be sustainable from 2012 to 2015, and stayed between 44% to 50%. Ideally, the company should be aiming to have this figure higher than 50% so the company is owned majority by the shareholders.

Market Ratios

Earnings per Share (EPS)

		2015	2014	2013	2012
Market Ratios
Earnings per Share (EPS)	Net profit after tax/nos of issued ordinary shares	$2.19	$2.67	$2.82	$0.09

The earnings per share (EPS) ratio indicates the amount which can be earned per unit of a firm’s stock. The New Wave Group’s earnings per share for 2015 is $2.19, which means the firm can earn $2.19 on each unit of share being sold. This is a great figure, and should be noted that it has risen from $0.09 which was the figure in 2012. The trend saw an increase in 2013, with a decrease in both 2014 and 2015. These figure also almost match the firms annul reports, the difference is just due to the way we have calculated the EPS.

Dividends per Share (DPS)

		2015	2014	2013	2012
Market Ratios
Dividends per Share (DPS)	Dividends/number of issued ordinary shares	$1.00	$1.00	$1.00	$1.00

The dividends per share (DPS) ratio indicates the amount that needs to be taken out of the earnings per share to be repaid in dividends to the equity investors. This ratio is important as the main goal of the firm is to return value to the shareholders.

The New Wave Group has a DPS of $1.00 that has remained the same from 2012 to 2015. This means that for every share that is sold by the firm, $1 needs to be returned in dividends per unit of shares purchased by the shareholder. This figure appears favourable for the New Wave Group, and that fact the DPS has remained constant is a good indicator.

Price Earnings Ratio

		2015	2014	2013	2012
Market Ratios
Price Earnings Ratio	Market price per share/earnings per share	15.75	14.36	11.67	285.96

The price earnings ratio indicates the number of years it will take for the firm to earn back the investment in the share. To interpret this figure, the lower the number of years to earn back the price of the market shares is said to be better as this displays the firms efficiency to generate profits.  As you can see with the above figures, the price earnings ratio for the New Wave Group has dropped quite significantly from 286 days in 2012, down to 15.75 years in 2015. This big improvement should be considered favourable as it demonstrates that the New Wave Group is able to reduce the number of years taken to gain a return on the sales of its shares.  Although price earnings ratio did see a little increase from 2013 to 2015, it remains quite stable. The 2015 price earnings ratio of 15.75 years also falls within the generalised benchmark of 15 – 25 years for firms, so is considered quite normal.

Ratios Based on Reformulated Financial Statements

Return on Equity (ROE)

		2015	2014	2013	2012
Ratios Based on Reformulated Financial Statements
Return on Equity (ROE)		6.89%	15.64%	10.04%	-3.59%

The return on equity (ROE) ratio indicates the rate of return on profits generated on shareholders equity, in other words what comprehensive income has the firm generated for the shareholders. The higher the ratio, the better the company is as this displays the ability of high return on equity for shareholders.

The ROE for the New Wave Group varies quite a bit from year to year. 2012 saw a negative ROE figure, which increased substantially in 2013 and 2014, and then decreased in 2015. In comparison with other students firms, a 6.89% ROE for 2015 seems average and nothing to be concerned about. This means that for every $1 invested, shareholders will receive a 6.89% return on their investment. This return would be better than the current term deposits being offered by banks at the moment, although shareholders may want to invest in other companies that have a higher ROE.

Return on Net Operating Assets (RNOA)

		2015	2014	2013	2012
Ratios Based on Reformulated Financial Statements
Return on Net Operating Assets (RNOA)		5.15%	9.56%	7.48%	-0.78%

The return on net operating assets (RNOA) ratio is the same as the return on assets ratio listed above in the profitability ratio section, except RNOA uses the figures from the restated financial statement after isolating the operating income after tax (OI) and the net operating assets (NOA). The RNOA is normally a slightly better figure compared to the return on assets ratio as all of the financing assets have been taken out of the equation, focusing on the operating totals only therefore the common denominator is smaller in the calculation resulting in a higher percentage. This ratio indicates how efficient the firm has been in order to produce a profit from their net operating assets.

The RNOA trend remains the same as the return on assets ratio as expected, seeing an increase in 2013 and 2014, than quite a substantial decrease in 2015. Overall even though there has been a decrease in the last financial year, the RNOA seems to be performing satisfactory as it has seen quite an increase since 2012, and 5.15% return is not a bad profit on assets, more so average.

 

Net Borrowing Cost (NBC)

		2015	2014	2013	2012
Ratios Based on Reformulated Financial Statements
Net Borrowing Cost (NBC)		2.93%	1.75%	3.36%	2.75%

The net borrowing cost (NBC) ratio indicates the average interest rate the firm is paying on its financing. The higher the ratio, the greater the interest expense is being incurred by the firm.

The NBC for the New Wave Group is low, which is a good indication regarding the average interest expense of the company. The NBC did see an increase in 2013, following by a decrease in 2014 and then another increase in 2015. Overall though, the ratio has remained quite low which indicates the company is efficient with their debt management policies.

Profit Margin (PM)

		2015	2014	2013	2012
Ratios Based on Reformulated Financial Statements
Profit Margin (PM)		4.66%	9.57%	6.30%	-0.64%

As already mentioned above, the profit margin indicates the profit the firm is making on sales. I didn’t expect much to change for the profit margin generated by the restated figures, as the only thing that has changed is the financial costs have been taken out of the calculation, focusing only on the operating income after tax (OI). The profit margin for 2015 is 4.66 cents profit is made for every $1 of sales, which is similar to the 2015 net profit margin recorded above of 2.9 cents. The profit margin figures still remain within what is to be considered as a ‘normal’ range (between 0% to 10%), so the firm has an average profit margin. The trend also remained the same as the net profit margin, which saw an increase in 2013 and 2014, and then a decrease in 2015, the figures for the profit margin were just a little higher due to the isolation of the operating income.

Asset Turnover (ATO)

		2015	2014	2013	2012
Ratios Based on Reformulated Financial Statements
Asset Turnover (ATO)		1.11	1.00	1.19	1.22

Compared to the total asset turnover ratio discussed above, there is actually an increase with the asset turnover (ATO) which indicates the New Wave Group is becoming more efficient with managing their assets. I did expect the ATO figure to be higher than the total asset turnover as we have isolated the operating assets, so therefore the common denominator is smaller in the calculation due to taking out the financing items. The trend is very similar to the total asset turnover, seeing a decrease in 2013 and again in 2014, and then an increase in 2015. These figures are satisfactory as they are meeting the expectation of reaching the 1:1 ratio for asset turnover.

Economic Profit

The economic profit is a measure of performance, which calculates the amount left over after the cost of capital has been taken out of the accounting profit. This is a great indicator as to where the firm is heading, and in turn assists investors making the decision as to whether the firm is worth investing in.

The economic profit formula is: (RNOA – cost of capital) x net operating assets (NOA).

The below table displays all of the key data which was used to calculate the economic profit for the New Wave Group, along with a couple of other ratios that I found were the main components to impact the economic profit of the firm.

	Return on Net Operating Assets (RNOA)	Cost of Capital	Net operating Assets (NOA)	Profit Margin (PM)	Return on Equity (ROE)	Economic Profit
2015	5.15%	11.20%	$4,492.3	4.66%	6.89%	-$271.89
2014	9.56%	11.20%	$4,276.6	9.57%	15.64%	-$70.12
2013	7.48%	11.50%	$3,407.3	6.30%	10.04%	-$38,928.72
2012	-0.78%	11.50%	$3,517.5	-0.64%	-3.59%	-$40,478.58

The cost of capital indicated above was sourced straight from the New Wave Groups annual reports. You will note there is a change in 2014 onwards from 11.50% to 11.20%. I was quite happy using these figures, as they are close to the recommended average of 10% that Martin suggested for those companies who do not list a cost of capital.

Graph One: Economic Profit for the New Wave Group

As you can see with the above Graph One, the economic profit for the New Wave Group, although is in the negative, is trending upward which looks promising for the firm. Most companies have a negative economic profit as they are unable to cover the cost of capital, so these figures are considered within normal range. Now let’s look further into the components that have an impact to the economic profit in the below graph:

Graph Two: Economic Profit Drivers

It is quite interesting to look into the components that impact on the economic profit for the firm as per the above Graph Two.

Looking to the firm’s profit margin (PM), it saw the exact same trend at the economic profit. An increase in both 2013 and 2014, then a slight decrease in 2015. When the economic profit was at its highest point in 2014, the profit margin was also at the highest point.

The return on net operating assets (RNOA) followed the exact same trend, with an increase in both 2013 and 2014, then a slight decrease in 2015. When the RNOA was at its highest point in 2014, so was the economic profits.

There is no surprise that the return on equity (ROE) saw that exact same trend, and the years where the ROE was improving, so was the economic profits.

Please note that I found the Asset Turnover ratio (ATO) was not really linked when looking at this firms economic profit, it was more so the profit margin, return on net operating assets and return on equity that were the main drivers in this instance.

Overall, after analysing the financial statements for the New Wave Group, I feel like I have such a better understanding of the components that investors should look at to determine the financial health of this firm.