Interdisciplinary Research In Business: Analysis Of Vector Limited

Company Profile

Discuss About The Interdisciplinary Of Research In Business.

Investment analysis is a process to evaluate the investment position of an organization on the basis of profitability and risk level of the company. The main motto of the investment analysis is to measure that whether the investment into a particular security would offer great return to the investors or not. Investment analysis process judges the investment of an organization on the basis of risk, income, resale value etc. It is important for every investor to evaluate at least profitability position of the company, intrinsic value of the stock and cash flow analysis of the company to evaluate the performance of the company (Weygandt, Kimmel & Kieso, 2015). The report has been prepared to offer the investment details and the investment position of vector limited.

Vector limited is a gas and electronic distribution company which is running its business in Auckland, New Zealand. Vector limited is the largest electricity Distributor Company and number 2 in case of LPG. The company owns a fibre optic cable network to manage the distribution of electricity and gas. The company has been founded in 1999. Main services of the company are electricity distribution, LPG retailing and natural gas retailing. Formerly, the company used to known by Mercury energy limited. The company has listed itself in 2005 in New Zealand stock exchange. The financial performance of the company explains about the rapid changes (about us, 2018). The current net earnings of the company are $ 166 million.

Business and financial analysis is a process to evaluate the performance and position of an organization on the basis of its strategies, financial statement, future prospect etc of the company. The main motto of the business and financial analysis is to measure the performance of the company and forecast the future performance of the company (Snyder & Davenport, 2013).

Business strategies are a plan which is prepared by the companies to reach over a specific point. Strategies of an organization are success plan which helped the company to reach to business growth, strong financial position and competitive position. Business strategies of vector explain that the company has announced to offer efficiency and sustainable energy solutions to its customers with acquisition of E-co products group and PowerSmart.  The company has used diversification strategy to manage the performance and reach over the main objectives of the company. Diversity and inclusion strategy of the company briefs that the great diversity has helped the company to get richer range of ideas and the broader ideas and perspective to understand the customer’s needs and serve them efficiently which has enhanced the business growth of the company (Diversity and Inclusion, 2018).

Business and Financial Analysis

This strategy of the company has helped the company to enhance the level of the revenue in the market as well as customer’s satisfaction level of the company has also been enhanced. Further, the company has also focused on the health, safety and environment of the society. These policies have helped the company to manage a better system ad position in society. The customer relationship management functions of the company are also competitive (Our approach, 2018).

The main prospect of the company is to enhance the market share through entering into the new market and grab the market. The company has planned the diversification strategy for that only. The performance and the new prospect of the company explain that the company would enhance the revenue and the market position of the company as well in near future. The strategy and the policies have been prepared by the company in such a manner that the prospect could be easily achieved by the company.

Financial analysis is a process to evaluate the financial performance and the financial position of an organization on the basis of its financial statement, market stock price etc of the company. The main motto of the financial analysis is to measure the performance of the company and forecast the future financial performance of the company. The study of financial analysis on Vector limited expresses about rapid changes into the performance of the company. On the basis of income statement of the company, it has been evaluated that the total revenue of the company has been lowered in last 5 years due to the industry changes and the economical factors which have also affected on the net profit of the company (Morningstar, 2018).       

Further, the statement of financial performance of the company briefs the better available resources. However, the company has enhanced the level of debt more than the equity level to manage the resources and the funds of the company. Cash flow analysis also explains that the free cash flow of the company is continuously reducing due to lower sales and the bad cash conversion cycle of the company. For evaluating the investment position of the company, return on capital (ROC) of the company has been evaluated.

Return on capital is a profitability ratio. It is calculated to measure the total return of investment of capital contributors of the company i.e. shareholders and the debt holders. ROC indicates about the effectively of the company as well on the basis of total capital and the net profits of the company (Hillier, Grinblatt & Titman, 2011).

Business Strategy and Prospect

Return on capital evaluation on company explains that the position of the earnings and the investment of the company have been lower in 2017. In 2016, the return on capital of the company was 2.55% which was highest in last 5 years.

The return on equity level of the company has been lowered because of less net income as  well as the dividend amount in 2017 was also higher which lead to less net income after dividend and the total capital of the company was also almost similar to the last year. It explains that the financial position and the investment position of the company are not good on the basis of its profitability position.

However, ROC is not enough to make a decision about the investment into a particular company. And thus, various other factors have also been evaluated further to measure the investment position of the company.

Weighted average cost of capital (WACC) is a process to calculate the total cost of capital of an organization on the basis of equity weight, preference weight, bond weight and debt weight. All the sources through which the company raises the funds are included in the process and evaluated to identify the total cost of capital of the company. To calculate the WACC of the company, cost of each fund is calculated with their weight and the total weight product is sum (Hansen, Mowen & Guan, 2007).

WACC calculations process has been done on Vector limited to recognize the total cost of capital of the company. There are only two options on the basis of which long term funds are generated by the company i.e. debt and equity. Thus, WACC of the company has been evaluated on the basis of debt and equity.

Cost of debt is the total interest amount which is paid by the company on its debt amount. The interest per debt is shown in percentage rate. The cost of debt of the company is calculated on the basis of tax rate (Davies & Crawford, 2011). Here, in case of vector limited, the cost of debt has been calculated. The interest rate of the debts of the company has been found in the annual report (2017) of the company which is 6.5%. The total tax rate of the company is 28% (Annual report, 2018). On the basis of it, the total cost of debt of the company is 4.68%.

Financial Analysis

Further, cost of equity is the total return which a firm pays to the shareholders of the company. The total return amount is shown in percentage rate. The cost of equity of the company is calculated on the basis of risk free rate, market risk premium, volatility in stock price of the company etc. Here, in case of vector limited, the cost of equity has been calculated (Garrison et al, 2010). The risk free rate and market premium of the company has been found in the Bloomberg (2018) which is 2.76% and 8%. The total volatility in the stock price of the company is 0.073 (Yahoo Finance, 2018). On the basis of it, the total cost of equity of the company is 3.14%.

Further, the weight of debt and equity has been evaluated to generate the WACC of the company. Annual report (2017) of the company briefs that the total debt and total equity of the company was $ 1771 and $ 2431 in 2017 which leads to total capital of $ 4202. On the basis of it, the total weight of debt is 0.42 and total debt of equity is 0.58 (Saleem & Rehman, 2011). Further, the cost of debt and cost of equity is 4.68% and 3.14%. It explains that the total weighted average cost of capital of the company is 3.79%.

WACC calculations explain that the current cost of capital of the company is 3.79%. The company must make the decision of new investment on the basis of it.  If the internal rate of return of the investment is lower than the 3.79% than the project should not be accepted by the company. The current cost of capital of the company is quite lower and express that the company could generate more funds through equity to manage the optimal capital structure, more funds and the performance of the company.

Valuation of equity is a process to analyze the actual worth of the equity in the market. The main aim of equity valuation is to analyze the value of the organization for the society; the main assumption of equity valuation is that the actual worth of security is driven by the underlying business of the company. There are various primary equity valuation models which helps the financial managers and the financial analyst to evaluate the actual worth of the company. The methods are dividend discount model, discounted cash flows, enterprise value to assets, price to book value, price to free cash flow etc. (Ali, Klasa & Yeung, 2008).

Return on Capital

In case of vector limited, dividend discount model and discounted cash flow methods have been taken into the concern to evaluate the performance and the position of the company. On the basis of dividend discount model calculations, it has been found that the dividend discount model takes the concern of total dividend expected, growth rate, discount rate etc to analyze the actual worth of the stock per shares of the company.

The dividend expected has been calculated on the basis of total stockholder return of company of last 5 years (Yahoo finance, 2018). Further, the growth rate has been calculated on the basis of return on equity * retention rate which is 1.66% (Morningstar, 2018). In addition, the discount rate has been calculated on the basis of total cost of equity of the company which is 3.14%. It explains that the total intrinsic value of the stock per unit of the company is 0.61.

(Annual report, 2018)

It explains that the stock price per share of the company on 4^th May 2018 is 3.2 and the intrinsic value of the company is $ 0.61. It explains that the stock price of the company is overvalued.

On the basis of discounted cash flow calculations, it has been found that the discounted cash flow (DCF) process takes the concern of average cash flow of the company of last 5 years, discounting rate of the company etc to analyze the actual worth of the stock per shares of the company.

The average free cash flow of the company of last 5 years are $ 46.6 million (Morningstar, 2018). Further, the discount rate has been calculated on the basis of return on equity which is 3.47% and the growth rate of cash flows of the company is 1.66% (Morningstar, 2018). It explains that the total intrinsic value of the stock per unit of the company is 9.08.

On the basis of above evaluation, it has been found that the stock price per share of the company on 4^th May 2018 is 3.2 and the intrinsic value of the company is $ 9.08. It explains that the stock price of the company is undervalued.

Two methods of equity evaluation has been conducted and it has been found that the result of both the methods are different. Though, the discounted cash flow method is more reliable as it takes the concern of historical data of the company and the current trends of the company together (Zellweger & Nason, 2008). Thus, the stock price of the company is undervalued and this is the right time to make investment into the company.

Conclusion:

The above study brief about the financial position and non financial position of Vector limited to reach over a conclusion about the performance of the company. On the basis of financial analysis and return on capital of the company, it has been found that the investment into the company would offer huge loss. However, the stock evaluation explains that the market position of the company is quite better and thus the investment into the security of the company would offer huge return at the time of selling the security. So, it is concluded that the investors should invest into the company for great profits; the dividends of the company are not good but the investment into the company would offer huge profit at the time of selling the security. Thus the investors should invest into the security of the company.

References:

About us. (2018). Vector Limited. (Online). Retrieved on 6^th May 2018 from: https://www.vector.co.nz/about-us.

Ali, A., Klasa, S., & Yeung, E. (2008). The limitations of industry concentration measures constructed with Compustat data: Implications for finance research. The Review of Financial Studies, 22(10), 3839-3871.

 Annual report. (2018). Vector Limited. (Online). Retrieved on 6^th May 2018 from: https://vectorwebstoreprd.blob.core.windows.net/blob/vector/media/vector-regulatory-disclosures/annualreportvec173_ar2017_web_final.pdf.

Bloomberg. (2018). Rates and bonds. (Online). Retrieved on 6^th May 2018 from: https://www.bloomberg.com/markets/rates-bonds.

Davies, T. & Crawford, I., (2011). Business accounting and finance. Pearson.

Diversity and inclusion. (2018). Vector Limited. (Online). Retrieved on 6^th May 2018 from: https://www.vector.co.nz/about-us/diversity-and-inclusion.

Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial accounting. Issues in Accounting Education, 25(4), 792-793.

Hansen, D., Mowen, M. & Guan, L., (2007). Cost management: accounting and control. Cengage Learning.

Hillier, D., Grinblatt, M. & Titman, S., (2011). Financial markets and corporate strategy. McGraw Hill.

Morninsgtar. (2018). Vector Limited. (Online). Retrieved on 6^th May 2018 from: https://financials.morningstar.com/balance-sheet/bs.html?t=VCT&region=nzl&culture=en-US.

Our Approach. (2018). Vector Limited. (Online). Retrieved on 6^th May 2018 from: https://www.vector.co.nz/personal/help-safety/our-approach.

Saleem, Q., & Rehman, R. U. (2011). Impacts of liquidity ratios on profitability. Interdisciplinary Journal of Research in Business, 1(7), 95-98.

Snyder, H. & Davenport, E., (2013). What does it really cost? Allocating indirect costs. Asian Libraries.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons.

Yahoo Finance. (2018). Vector Limited. (Online). Retrieved on 6^th May 2018 from: https://finance.yahoo.com/quote/VCT.NZ/history?period1=1367778600&period2=1525545000&interval=1mo&filter=history&frequency=1mo.

Zellweger, T. M., & Nason, R. S. (2008). A stakeholder perspective on family firm performance. Family Business Review, 21(3), 203-216.

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