Accounting Analysis for Myr and Sul

Company background research

Super Retail Group Ltd. operates a chain of retail stores throughout Australia. The Stores sells a wide range of automotive parts and accessories, tools, camping products, gardening and outdoor equipment and boating equipment throughout Australia and New Zealand. (SUL 2016, p.6)

Myer Holdings Ltd. operates department stores. The Company retails women’s wear, men’s wear, youth fashion, children’s wear, intimate apparel, beauty, fragrance, cosmetics, house wares, electrical goods, toys, fashion accessories, and general merchandise. (MYR 2016, p.9)

Similarly, SUL and MYR are primarily involved in the retail industry and they mainly focus on Australia’s market and open stores in every state of Australia. What is the difference is that SUL has larger retail network, spread in Australia and New Zealand, than Myer. SUL also sells 3 main products including Auto, leisure and sports. While Myer is an integration of various commodities. Besides, SUL’s auto stores don’t need good location, while Myer has to open their stores at city center.

There are two economic factors for SUL. Fiscal policy and currency exchange rate are relevant economic wide factors that could affect the financial performance of SUL. Positive fiscal policy would reduce the taxation, which decrease the tax expense in the statement of income. Currency exchange rate could affect the balance sheet of SUL. When the currency is depreciated substantially, it will increase SUL’s debt burden in local currency and make the value of SUL’s net assets decreased.

There are two industry factors for SUL. The location and environment of the retail enterprise store is one of the industry factors that affect the revenue of SUL. Whether the traffic is convenient, the flow of people would affect the size of business income and the result will reflect in the financial statement. The price of leasing commercial properties also become an important factor for retail enterprise. With the prices of real estate continue to rise, the rent expense would be increased and reflected on the statement of income and it would affect business profits significantly.

There are two specific factors for SUL. Omni-channel retail would affect the direct sales of SUL. Customers can now seamlessly shop online, choose their products and collect from their chosen Supercheap Auto store through 90 minutes click& collect service.  (SUL 2016, p.16) Customer loyalty provides the confidence that SUL need to invest in the right opportunities that will take SUL’s brands forward. For example, over 70 percent of total BCF sales are made by active club members, who also are typically highly engaged with the brand. (SUL 2016, p.21)

Here I put forward two specific factors for MYR. Managers is a significant factor for MYR when facing the ever-changing competition. For example, Myer operating Topshop’s Australian stores fell into administration (Singer, 2017), which would enhance administration expense for the company. The price is another factor. For example, Topshop competes for the same customers as H&M and, to a lesser degree, Zara, but has failed to exert the same pressure on prices as its rivals, which greatly weaken Topshop's competitiveness and reduce revenue from operating activities (Singer, 2017).

Memorandum for scenario 1

To: Head Office

From: Lending officer- Kai Xiang

Date: September 30, 2017

Subject: recommendation for whether the loan application should be accepted or rejected

Super Retail Group Limited(SUL) has submitted an application for a 10 years loan to expand their operating capacity. The loan equal to 220.2 million (30% of total shareholder’s equity at the end of the 2016 financial year) and SUL would secure the loan by their property.

In the financial year 2016, SUL achieved full year sales for the Group increased by 8.2% to $2,422.2 million. Auto and Sports Divisions performing strongly with Segment EBIT growth of 9.0% and 18.6% respectively. Leisure Division delivering 7.1% sales growth (SUL 2016, p.12).

Recommendation

Solvency ratios measure the ability of the entity to survive over a long period of time. Here I use two ratios to make a recommendation. Debt to total assets ratio is the percentage of the assets provided by the creditor in the total assets. The lower the debt to total assets ratio, the greater the equity available to our bank. The debt to total assets ratio of SUL are shown in Table1, it kept stable since 2014 and exceeded the number of industry average slightly. Times interest earned indicates the entity’s ability to meet interest payments as they come due. Though in Table1, the ratio fell from 7.45 to 5.5 since 2014 and the gap between industry average and SUL’s ratio was increasing, it still beyond the general rule that earnings should be approximately 3-4 times the interest expense. Thus, based on the company information and ratio analysis, I recommend that our bank should accept the loan application from Super Retail Group Limited.

Table 1 SUL's Solvency ratio

As is illustrated in the Figure 1 that the operating cash flow of SUL showed a slight downward trend since 2014 financial year, which meant SUL has stable operating cash flow and adequate cash to ensure its ability to continue the business. The investing cash flow showed an upward trend, which meant that the payment for purchase of PPE was decreased and indicated that SUL has planned to expand its business since 2014 but need cash to achieve expansion. The overall trend of financing cash flow was falling, it revealed the factors that SUL paid dividend stably and kept balance between borrowings and repayment of borrowings. Thus, this analysis is consistent with my recommendation.

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Figure 1 SUL’s Cash Flow

Finally, I use cash return on sales (Law, 2014) to support my recommendation. It calculates how efficiently a company is at generating profits from its revenue. In other words, it measures a company’s performance by analyzing what percentage of total company revenues are actually converted into company profits. In Figure2, the ratio decreased from 0.08 to 0.07 between 2014 and 2016. The value of cash return on sales were higher than profit margin since 2014, which indicated that SUL has excellent condition in cash return on sales. In other word, it is reasonable to accept the loan application from Super Retail Group Limited.