Myer Holdings Ltd and Harvey Norman Holdings Ltd Analysis

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Executive summary

Perceptive investors, lenders, and specific interests have a major role in conducting fundamental financial analysis in order to ascertain any firm’s financial health. This is normally carried out prior to settling or deciding to put some forms of investments in a particular corporation. The financial analysis involves the quantitative scrutiny of the filed financial statements across a specified fiscal period.

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One of the methods that are generally used to quantitatively analyze the company finances is through ratio analysis. From the ratio analysis, the company profitability, valuation measures, operational and general performances are indicated. In the context of Myer Holdings and Harvey Norman Holdings, investors can only ascertain whether the firms are eligible for investment after the analysis of their financial statements.

To determine whether these firms are eligible for future investments and to provide investors with full information on the firms that have future prospects for business growth and productivity, profitability, efficiency and financial stability ratios was performed. In the analysis, the firms, Myer Holdings, and Harvey Norman Holdings, profitability, efficiency, and financial stability were determined. The financial performances of these firms indicate that both have prospects for future investments. However, for perceptive investors, Harvey Norman Holdings have more prospects for investment compared to Hervey Holdings as indicated by its valuation and financial stability measures.

Introduction

Myer Holdings

Myer Holdings came into existence in the fiscal 1900 and became a public company in the same year. The firm is within the retail industry and operates departmental stores majorly within the main Australian cities. The company’s stores deal in women, men and children’s clothing, electrical appliances, furniture, children’s products such as toys, household products and accessories, general merchandise, as well as cosmetics and other beauty products (Myer Holdings: annual report 2012). Besides, the company offers the customers retail loyalty programs such as small loans, higher purchases, and other non-financial programs. With over 67 departmental stores spread all over Australia, the firm is currently boasting over two billion dollars in sales revenue with a market capitalization of over two billion (Yahoo Finance: business and finance 2013). The company’s departmental stores operate under the name Myer.

Harvey Norman Holdings

Founded in the financial year 1982 under the name Harvey Norman Holdings, the company was listed as a public company in the same year and is headquartered in Homebush West, Australia. Harvey Norman Holdings Limited is made up of a group of companies and its assets portfolios spreading within and outside Australia (Yahoo Finance: business and finance 2013). The company products consist of home and offices appliances, which are sold to retail businesses as well as office owners. As indicated, Harvey Norman Holdings consists of a group of companies, which hold its portfolio assets.

In Australia, Harvey Norman, Domayne, and Joyce Mayne complexes hold the property portfolios of the company (Harvey Norman Holdings: annual report 2012). Harvey Norman and Norman Ross stores found in various countries hold the company’s international assets. Currently, the company operates over 210-chartered stores within Australia and over 70 stores internationally. Not only does the group manages divisional supplies, but is equally involved in the media positioning dealings and chattels venture.

Profitability ratios

The profitability ratios of any firm typically begin with the profit margins. The profit margins generally indicate the profit quantity on sales that the company generates. In fact, profit margins indicate the return on sales at various points in the company balance sheet (Gibson, 2010). All profits margins are analyzed in this report except the return on capital employed.

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Net profit margin

In essence, Harvey Norman Holdings and Myer Holdings have used the net profit margins to compare their financial performance with other firms found in the industry. Harvey Norman Holdings’ greater net profit margins show that the corporation is profitable and manages to control its total costs (Guerard & Schwartz, 2007). For example, Myer Holdings’ net profit margin percentage declined from 9.65% reported in the fiscal 2011 to 8.80% recorded in the financial year 2012.

On the contrary, Myer Holdings has a low-profit margin, which specifies that its costs have considerably increased resulting in depressed profits. However, Hervey Norman Holdings reported a decline in the net profit margin percentage across the years under study. For example, Hervey Norman Holdings’ net profit margin percentage declined from 15.05% reported in the fiscal 2011 to 14.07% recorded in the financial year 2012.

Myer holdings Harvey Norman Holdings
2011 2012 % change 2011 2012 % change
Net profit margin 9.65 8.80 -8.81 15.05 14.07 -6.51

Comparing the net profit margins of the two firms, Harvey Norman Holdings has a greater net profit margin than Myer Holdings in the last two financial years. In other words, Harvey Norman Holdings have greater control of its costs and keeps in its earnings at the greater quantity of dollars (Harvey Norman Holdings: annual report 2012). However, the trend analysis indicates that the net profit margins for both firms are decreasing by almost a similar percentage. That is a decrease of 8.81 and 6.51 for Myer and Harvey Normans Holdings respectively. The decrease in the margins may be because of external factors affecting the industry in which these firms operate.

Gross profit margin

Most corporations tend to utilize the gross-profit margins to appraise the returns accruing from transactions once the trade overheads are deducted. Moreover, the companies have used the margin to measure their ability to meet their supplementary expenses as well to save for the future. Higher profit margins indicate that the firm is efficient and effective (Gibson, 2010).

Myer Holdings Harvey Norman holding
2011 2012 % change 2011 2012 % change
Gross profit margin 44.07 46.80 6.19 27.43 27.14 -1.06

As can be observed, Myer Holdings have greater gross profit margins compared to that of Harvey Norman holdings. Moreover, the gross profit margin for Myer Holdings has increased considerably in the last financial year (Myer Holdings: annual report 2012). For instance, the company, Myer Holdings gross profit margin increased from 44.07% to 46.80% in the financial years 2011 and 2012. This indicates that Myer Holdings sales have increased by 2.73% or costs of sales have decreased by a similar percentage. Besides, the computed financial ratios indicate that Myer Holdings is effective and is capable of meeting its supplementary expenses and saving for future investments (Myer Holdings: annual report 2012).

On the other hand, Harvey Norman Holdings have recorded a low gross profit margin and the margin shows a decreasing trend. For instance, the company, Hervey Holdings gross profit margin decreased from 27.43% to 27.14% in the financial years 2011 and 2012, which translated to a decline of 1.06%. The indication is that the company’s costs of sales have increased or its sales have reduced in the last financial year (2012) compared to fiscal 2011. The decreasing trend indicates that Harvey Norman Holdings may have trouble in meeting its supplementary expenses hence a reduction in its net profits.

Return on equity

Return on equity is the net income that is returned as a proportion of the investor’s equity. The investors need to know the returns the money they have invested has generated. This can only be achieved through computing the return on equity ratio. The calculated ratios for the period under study are shown in the table below.

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Myer Holdings Harvey Norman Holdings
2011 2012 % change 2011 2012 % change
Return on equity 19.05 16.04 -15.80 10.68 8.85 -15.73

Myer Holdings shows higher return on equity than Harvey Norman Holdings though both show some decreasing trends of 15.80 for Myer and 15.73 for Harvey Norman in the last two financial years (Market Watch: stock markets 2013). However, the computed return on equity ratios shows a decline across the study periods. For instance, the return on equity for Myer Holdings declined from 19.05% in fiscal 2011 to 16.04% in the financial year 2012. Conversely, the return on equity for Harvey Norman Holdings declined from 10.68% in the fiscal 2011 to 8.85% in the financial year 2012. Therefore, investors are likely to get more returns on their investment, particularly from Myer Holdings Corporation. Compared with the industrial average, both firms’ return on equity is above average. This further indicates greater opportunities for higher returns on investments.

Return on assets

In financial accounting, this is amongst the key productivity ratios utilized by the corporations to depict their net returns as a proportion of resources held. The companies use return-on-assets to evaluate their profitability by indicating the amount of profit they have generated from their assets (Guerard & Schwartz, 2007).

Myer Holdings Harvey Norman Holdings
2011 2012 % change 2011 2012 % change
Return on assets 9.59 8.55 -10.84 6.66 5.93 -10.96

Both firms have reasonable records on the returns on assets in the last two years. Myer holdings have higher returns on assets compared to Harvey Norman holdings. Both firms have also recorded decreasing trend in the returns on assets as shown by -10.84 and -10.96 respectively. In fiscal 2011, Myer Holdings’ return on assets was 9.59% but the ratio decreased to 8.55% in fiscal 2012. On the other hand, Harvey Norman Holdings’ return on assets was 6.66% but the ratio decreased to 5.93% in fiscal 2012. This could be attributed to shocks experienced in the industry across the fiscal years under study. However, the decreasing trends may be seen in the return on assets in the last two years. The high asset turnovers and advantages would result in increased return on assets particularly in Myer Holdings (Myer Holdings: annual report 2012).

Efficiency ratios

The efficiency ratios indicate how the firms have managed their resources or assets to generate sales. In other words, it shows how the firms have been effective in managing their assets and liabilities to increase revenues. Not only is it used to measure asset management, but also to offer more understanding on the firms’ success over their credit policy (Lee et al., 2009). Myer Holdings and Harvey Norman Holdings have utilized the receivables or debtor’s turnovers ratio and its collection period, the inventory turnover ratio and its collection period and the creditor’s turnover ratio in their analysis.

The debtor turnover

In accounting, the receivable proceeds, and the compilation of amount overdue are the corporations’ administration of the financial records for debts thus the credit guidelines. In general, better-quality proceeds from receivables are enhanced given that elevated proceeds designate that the business is accumulating its financial receivables statement promptly than anticipated. However, extremely high ratios as indicated in the table below may not be healthy for both the companies. To avert the situation the companies should reduce discounts or relax their restrictive credit policies. According to the analysis, both firms have good credit policies through the collection period is decreasing particularly for Harvey Norman Holdings.

This is clearly indicated by the greater percentage change in the company turnover days. For instance, the debtors’ turnover reduced from 0.67 to 0.64 in 2011 and 2012 for Myer Holdings. In contrast, the debtors’ turnover reduced from 257 to 240 in 2011 and 2012 for Harvey Norman Holdings. See the table below for the key financial statistics.

Myer Holdings Harvey Norman Holdings
2011 2012 % change 2011 2012 % change
Debtors turnover (days) 0.67 0.64 -4.48 257 240 -6.61

Inventory turnover

The inventory turnover ratio indicates the manner in which both firms have used their inventory to generate sales. Increasing inventory turnovers shown in the analysis indicate an increased rate in which both firms have turned their inventory into sales.

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Myer Holdings Harvey Norman Holding
2011 2012 % change 2011 2012 % change
Inventory turnover (days) 52.5 53.9 2.67 4.62 5.34 15.58

However, the sales will decrease in the event that the firms in question inventory turnovers have increased beyond the normal rate (Lee et al., 2009). Both firms are properly managing their inventories with average day’s turnover. Moreover, both firms have recorded increases of 2.67 days for Myer while Harvey Norman recorded an increase equivalent to 15.58 times. The increasing trend in which the firms turn their inventory sales is positive to the increased profitability.

Creditor’s turnover

This ratio weighs the creditors against the total credit purchases. Every day’s yield signifies the sum of time it may take the corporation to compensate its financiers. Greater creditor’s turnover ratio indicates prompt payment of creditors. This is equally proper with little credit phase or only some number of years the corporation may need to compensate the financiers. Greater credit turnover or lesser days indicate the creditworthiness of the firm. In contrast, an extremely favorable ratio indicates that the firm is not fully utilizing the credit facilities offered by the creditors.

Myer Holdings Harvey Norman Holding
2011 2012 % change 2011 2012 % change
Creditors turnover (days) 50 47.9 -4.2 212 212 0

The ratios indicate that Harvey Norman holdings have difficulties in paying its creditors. The accounts payable of the firm seems to be higher than the accounts receivable hence representing an unstable situation (Harvey Norman Holdings: annual report 2012). From the table, the creditors’ turnover for Myer Holdings decreased from 50 to 47.9 in 2011 and 2012. The creditors’ turnover for Harvey Norman Holdings remained constant at 212 in the fiscal 2011 and 2012. However, the firm is taking full advantage of the credit facilities provided by its creditors. Myer Holdings is credit worthy and it takes lesser days to pay its creditors. This indicates a healthy balance sheet and better liquidity.

Financial stability ratios

Current ratios

Myer Holdings Harvey Norman Holdings
2011 2012 % change 2011 2012 % change
Current ratio 0.81 0.88 8.64 1.64 1.63 -0.61

In this case, Myer Holdings indicates an increasing trend in the current ratio from 0.81% to 0.88% contrary to the decreasing trend of 1.64% and 1.63% reported by Harvey Norman Holdings in 2011 and 2012. Though Harvey Norman Holdings’ current ratio has decreased by 0.61 in the last financial year, it can still take a shorter time to meet its debt obligations compared to Myer Holdings. The current ratios for the two firms indicate that they have no difficulties meeting their current debt obligations (Reuters: stocks 2013).

Quick ratios

Myer Holdings Harvey Norman Holding
2011 2012 % change 2011 2012 % change
Quick ratio 0.12 0.11 -8.33 1.3 1.35 3.85

The trends of the companies’ financial years being analyzed indicate that the companies’ quick ratios are almost constant and the corporations are capable of meeting their short-term debts. Contrary to the positive increase of 3.85% in Harvey Norman Holdings’ quick ratio, Myer Holdings’ quick ratios have decreased by 8.3%. This shows that Myer Holdings will not be in a position to ensure that its future short-term debt requirements are met.

Debt to asset ratio

Normally, long-term debt is used in this ratio. The ratio measures the proportion of both firms’ assets financed using long-term debts. Long-term debts consist of loans repayable after one year.

Myer Holdings Harvey Norman Holding
2011 2012 % change 2011 2012 % change
Debt asset ratio (%) 56.36 54.29 -3.67 42.63 44.34 4.01

This ratio provides a general appraisal base for Harvey Norman Holdings and Myer holdings financial positions. Moreover, it specifies their capacities to wrap up the outlay of unpaid mortgages within a given duration. The decreasing trend in the Myer Holdings metric from 56.36% in 2011 to 54.29% in 2012 is a sign that the firm is progressively meeting its long-term debt. Moreover, Harvey Norman holdings ratios of long-term debt to the total assets have improved by 4.01% from the last financial years (Harvey Norman Holdings: annual report 2012). This shows that the firm has offset most of its long-term debt obligations.

Debt to equity ratio

A debt that bears interests is what is being considered in this ratio. This debt is the long-term debt. Therefore, it is long-standing arrears to stakeholders-assets that both corporations will draw on to assess the fraction of their equities being funded by debit.

Myer Holdings Harvey Norman Holding
2011 2012 % change 2011 2012 % change
Debt Equity ratio 1.29 1.18 -8.53 0.743 0.7967 7.23

Myer Holdings’ high long-term debt to equity means that the company is using much of its debt to finance its operations. In essence, Harvey Norman’s holdings are more stable as it uses less of its debts to finance most of its operations (Harvey Norman Holdings: annual report 2012). This is depicted by a decrease in the debt to equity ratio from 1.29% to 1.18% from 2011 to 2012. However, the debt to equity ratio for Harvey Norman Holdings increased by 7.23% across the periods under study.

Important information relevant to the analysis

The profitability ratios detail how the company has used its limited resources to generate revenues, which in effect add to the shareholder’s value (Guerard & Schwartz, 2007). For the firm to survive, devising effective and growth-focused long-term strategies for possible revenue generation remains indispensable. Lon-term profits are not only essential for the survivability of the firm, but also for the benefit of the shareholders who normally get the profits in form of dividends (Lee et al., 2009). Higher profits are also good indicators for investors especially those who value quick returns on their investments.

Investment valuation margins including return on capital employed, operating, and pre-tax profit margin are essential in investment decisions. In any typical firm’s productivity analysis, return on assets and the return on equities show the company’s effectiveness to use resources to generate income (Gibson, 2010). The ratios are the most vital for the investors since much of the investments are in form of assets, equity, or capital employed including borrowings.

The financial stability of the firm is determined by its ability to meet both short-term and long-term financial obligations. Short-term debt obligations are majorly determined by liquidity ratios. The company balances its most liquid assets to the immediate liabilities (Lee et al. 2009). Generally, greater liquid-asset coverage to current obligations ratio is better for the firm. The greater ratio indicates that the company can easily pay for due debt within the shortest period and can still meet the ongoing operations. On the contrary, a lower coverage ratio shows that the company is incapable of meeting its short-term needs and has complications in managing its operations (Reuters: stocks 2013). The most commonly used liquidity ratios are the current ratio and quick or the acid-test ratio.

It is important to note that the firm’s long-term debt obligations are determined by its solvency ratios. Solvency ratios include debt to asset and debt to equity ratios. The solvency ratios indicate the quantity of the firm’s after-tax income in exclusion of the non-cash depreciation expenses compared to the company’s total debt obligations (Lee et al. 2009). The ratios make available dimensions of the possibility of the businesses to keep on meeting their liabilities. Solvency ratios that are greater than 20% are considered financially healthy to the firm (Guerard & Schwartz, 2007).

It is also important to note that the industry in which these firms are operating is highly volatile. Therefore, these ratios are not the ultimate measure of their performance for investment decisions. Besides, the valuation ratios that take into consideration the firm’s share equities have not been considered. In fact, some of these ratios must be compared to industry averages to determine the exact measurements for drawing credible conclusions.

Limitations

Though profitability, liquidity, and solvency ratios indicate the firm’s financial position, it is important to take into consideration the valuation ratios since they give a clear picture of the firm’s financial position. To savvy investors, valuation ratios such as P/E ratio, market/book ratio, Enterprise Value to EBIDTA provide instant information on the firm’s performance (Market Watch: stock markets 2013). Therefore, relying only on profitability, efficiency, and financial stability ratios may not give a true valuation of the firm hence investment decisions. Investment decisions should be based majorly on the valuation ratios. Valuation ratios should also be leveraged against the industrial average to come up with a comprehensive conclusion.

Recommendations

Based on the analysis, Harvey Norman Holdings could be the best company to put your investments in. Though the firm profitability may be low, it has increased long-term prospects. This is indicated by its debt to equity ratio and the debt to asset ratio. Moreover, taking into consideration the valuation ratios including the P/E, EBITDA, share prices, and the dividend yield, (see the appendix on key statistics) the firm has future prospects for growth. In addition, the industry in which these firms are operating is highly volatile. Therefore, the long-term financial stability of the firm is a very important consideration.

The long-term financial stability is confirmed majorly by its debt to its shareholder’s equity ratio. Myer Holdings’ performance in financial stability is dismal, particularly where it uses much of its long-term debt to finance its operations. It is even more vivid that Myer Holdings’ high revenues have resulted from outside financing. At the end of the financial year, the cost of debt will be greater than the revenues the firm generates through investments and other operations. The result is that the firm will be bankrupt leading to insolvency. Conversely, Harvey Norman Holdings can generate revenues without outside financing. The increased earnings are then spread to the shareholders in form of dividends (Guerard & Schwartz, 2007).

Conclusion

As can be drawn from the analysis, the solvency ratios indicate Myer Holdings and Harvey Norman Holdings’ strong points concerning their abilities to offset the cost of prospective long-term investments. From the trend analysis, Harvey Norman Holdings has emerged to be the strongest firm. As a result, the firm is financially stable and viable for future investments and growth in terms of its equity.

The profitability ratios measure the firm’s growth in returns. As drawn from the trend analysis, the growth in returns for Myer Holdings is high though fluctuating. However, it is expected to increase in the coming years. Concerning the liquidity ratios, the trend indicates decreasing and fluctuating results in both firms. The decreases may be attributed to the explanatory short-term consequences. Generally, Harvey Norman Holdings have come out to be the best firm in terms of prospective long-term investments.

References

Gibson, C. 2010. Financial reporting & analysis: using financial accounting information, Cengage Learning, Farmington Hills.

Guerard, J & Schwartz, E. 2007. Quantitative corporate finance, Springer, Chicago.

Harvey Norman Holdings: annual report. 2012. Web.

Lee, A, Lee, J & Lee, C. 2009. Financial analysis, planning & forecasting theory and application, World Scientific, New Jersey.

Market Watch: stock markets. 2013. Web.

Myer Holdings: annual report 2012. Web.

Reuters: stocks. 2013. Web.

Yahoo Finance: business and finance. 2013. Web.

Appendices

Appendix 1: Analyzed Ratios

Meyer holdings Hervey Norman holding
2011 2012 % change 2011 2012 % change
Profitability Ratios
Net profit margin 9.65 8.80 -8.81 15.05 14.07 -6.51
Gross profit margin 44.07 46.80 6.19 27.43 27.14 -1.06
Return on equity 19.05 16.04 -15.80 10.68 8.85 -15.73
Return on assets 9.59 8.55 -10.84 6.66 5.93 -10.96
Efficiency Ratios
Debtors turnover (days) 0.67 0.64 -4.48 257 240 -6.61
Inventory turnover (days) 52.5 53.9 2.67 4.62 5.34 15.58
Creditors turnover (days) 50 47.9 -4.20 212 212 0
Financial Stability Ratios
Current ratio 0.81 0.88 8.64 1.64 1.63 -0.61
Quick ratio 0.12 0.11 -8.33 1.3 1.35 3.85
Debt asset ratio (%) 56.36 54.29 -3.67 42.63 44.34 4.01
Debt Equity ratio 1.29 1.18 -8.53 0.743 0.7967 7.23

Appendix 2: Key Statistics

Key Statistics Myer Holdings Harvey Norman
Share prices % (4thJan, 2012) 2.21
Valuation Measures
Market Cap (intraday) 1.29B 2.04B
Enterprise Value N/A N/A
Trailing P/E 9.32 11.88
Forward P/E 10.05 10.69
PEG Ratio -13.63 1.50
Price/sales 0.47 1.46
Price/Book 1.48 0.92
Enterprise value/Revenue N/A N/A
Enterprise value/EBIDTA N/A N/A
Profitability
Profit margin 5.11% 12.26%
Operating margin 8.44% 15.66%
Management Effectiveness
Return on Assets 7.39% 3.46%
Return on Equity 16.22% 7.84%
Income Statement
Revenue 2.73B 1.41B
Revenue per share 4.67 1.33
Gross profit 1.22B 427M
EBITDA 311.34M 298.70M
Net income 139.37M 172.47M
Diluted EPS 0.24 0.16
Earnings growth (yearly) 2.40% -63.90%
Balance Sheet
Total cash 38.06M 196.85M
Total cash/Share 0.07 0.19
Total debt 422.98M 779.35M
Total debt/Equity 48.19 34.38
Current ratio 0.88 1.63
Book value/Share 1.49 2.11
Cash Flow Statement
Operating cash flow 179.91M 200.95M
Levered free cash flow 97.76M 3.20M

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