Financial Accounting Tools For Business Decision Making

Description of the Companies

The report discusses the financial performance of two Australian companies named as MYOB Group Ltd and Xero Limited. It covers all the aspects from measuring the performance with the help of key ratios to comparing the value of companies’ stock with its current share price. The report provides a brief overview of both the companies, outlining their core activities, competitive advantage and their historical performance. Further, various categories of performance ratios are calculated which evaluates and compares the financial position of both companies for the past two years. In the later part, the report explains the share price movements of both the entities and compares the same with the fluctuations in the market prices of ASX S&P 200. In addition, the report also explains the calculation of companies’ stock by using Constant Dividend Growth Rate model and compares the value with its recent market price of the stock. At last, a conclusion is provided stating the findings of the analysis and concluding that which company has performed better in the past two years.

Mind Your Own Business (MYOB) is an Australia based multinational company engaged in providing various types of accounting software services to small and medium sized entities. The company was found in 1980 by a team of developers working at Teleware Inc. and got listed on ASX on 9 July 1999. The company develops and publishes software in New Zealand and Australia. It operates its business through three segments named as Payment Solutions, Clients and Partners and Enterprise Solutions. The segment payment solutions offer various types of services like payment gateway services, merchant services facilities, fraud management and invoice payments. Clients and Partners segment payroll, tax and other management solutions to SMEs and provide advisory services to the business. The division of Enterprise Solutions provides services related to business management software like enterprise resource planning, payroll and human capital management. Currently, the company is the leading provider of business management solutions across the country (Bloomberg. 2018).

It is software as a service (SaaS) company operating its business in Australia, United States and other countries. The entity deals with offering a platform for conducting online accounting services for the businesses and their advisors. There are two segments of the company through which it operates and they are Australia and New Zealand (ANZ), and International. Its cloud accounting software named as Xero for small businesses is provided in ANZ and United Kingdom. The software contains over 400 add-on applications that allow individuals to customize Xero as per their needs. It has various features including payments, reports, invoicing, cash flow, support and mobile. With help of such features, it offers online accounting training for small and medium size businesses as well as provides access to the real-time account information. Xero was founded in 2006 and it is one of the fastest growing software on international basis. It employs more than 2000 people and is considered as the World’s Most Innovative Growth Company in 2014 and 2015 according to Forbes. It is publically listed on ASX and is traded with the symbol XRO.AX (Reuters. 2018).

Calculation and Analysis of Performance Ratios

Being operating in the same market, both the companies give each other tough competition as they perform their functions in same industry. The competitive advantage of MYOB was gained by its acquisition of BankLink, a New Zealand accounting solution provider. This deal was the strategic move of the company in order to expand its cloud computing space and business management solutions (MYOB. 2013).

• Current ratio

It helps in evaluating the capability of the company by comparing its current assets and liabilities. The ideal CR is 2:1 which indicates that the entity must have its CA double of its CL so that it can easily meet its financial obligations (Saleem and Rehman, 2011).

	MYOB GROUP LTD		XERO LTD
Current ratio	2016	2017		2016	2017
Current assets (A)	96.0	100.0		191.0	135.0
Current liabilities (B)	91.0	101.0		42.0	60.0
CR (A/B)	1.05	0.99		4.55	2.25

(Morningstar. 2018).

From the above table, it can be interpreted that Xero Ltd has high current ratio as compare to MYOB Group Ltd. However, the ratio has been declined in 2017 for both the companies yet Xero had more assets and fewer liabilities comparatively. The reason for decline was the overall reduction in companies’ CAs and upsurge in their CLs respectively.

• Quick ratio

It is another liquidity ratio which determines the ability of the entity to meet its current obligations by utilizing its most liquid assets. Quick assets comprise of all current assets except inventory and prepaid expenses. The ideal ratio is 1:1 (Higgins, 2012). 

	MYOB GROUP LTD		XERO LTD
Quick ratio	2016	2017		2016	2017
Quick Assets (A)	96.0	100.0		185.0	130.0
Current Liabilities (B)	91.0	101.0		42.0	60.0
QR (A/B)	1.05	0.99		4.40	2.17

It can be interpreted that MYOB had no inventory in past two years which makes its QR equal to its CR. On the other hand, the same trend has been noticed in the quick ratio of Xero Ltd. in 2016, it was 4.40 which reduced to 2.17 in 2017. This was due to the significant decline in company’s cash balance and zero short term investments last year.

• Debt-to equity ratio

It requires the measurement of company’s debt and equity proportion against each other in order to figure out the portion of assets that are financed through debt and the assets funded by equity. Generally, entities having high D/E ratio are more risky as compare to the one having lower ratios (Tracy, 2012). 

	MYOB GROUP LTD		XERO LTD
Debt to equity	2016	2017		2016	2017
Total debt (A)	434.0	432.0		1.0	3.0
Shareholder’s equity (B)	857.0	844.0		251.0	205.0
D/E (A/B)	50.64%	51.18%		0.40%	1.46%

(Morningstar. 2018).

 The above calculations reflect that the D/E ratio of MYOB has increased in 2017 as compare to the previous year. In 2016, it was 50.64% which rose to 51.18% in 2017. This was because of the fact that the decrease in debt was lower than the decline in company’s equity. This anyway boosted up the ratio in 2017. On the other side, Xero ltd’s ratio has also increased but it was way lower than MYOB. It rose from 0.40% to 1.46% due to the significant upsurge in its total debt. However, the company has low debt as compare to its equity. This shows that it relies more on its owners’ equity for raising funds.

• Debt ratio

Short Term Solvency

It compares the total assets of the firm with its total liabilities and reflects the part of company’s assets that are financed through debt (Vogel, 2014). 

	MYOB GROUP LTD		XERO LTD
Debt ratio	2016	2017		2016	2017
Total Liabilities  (A)	532.0	555.0		44.0	63.0
Total Assets (B)	1,389.0	1,400.0		296.0	268.0
DR (A/B)	38.3%	39.6%		14.86%	23.51%

The same trend can be seen in debt ratio of both the companies. MYOB’s ratio rose from 38.3% to 39.6% due to the considerable increase in its assets and liabilities. Although, its interest bearing borrowings reduced in 2017 but its total non-current liabilities has shown an upsurge which ultimately affected the ratio. In case of Xero Ltd., there was an upward trend in the ratio and it increased from 14.86% to 23.51%. This was due to a significant upsurge in company’s long term borrowings from $1 million to $3 million in 2017. It boosted up the ratio to a great extent.

• Receivable turnover ratio

It shows how quickly a firm converts its trade receivables into cash. In other words, it determines the efficient and effective collection of company’s trade debtors so as to increase the overall revenue (Jenter and Lewellen, 2015).

	MYOB GROUP LTD		XERO LTD
Receivable turnover ratio	2016	2017		2016	2017
Total revenue (A)	369.0	414.0		187.0	270.0
Average receivables  (B)	14.0	17.5		7.0	9.5
DTR (A/B)	26.36	23.66		26.71	28.42

(Morningstar. 2018).

MYOB Group Ltd has low DTR which indicates that the company is inefficient in collecting its receivables. The reduction in ratio was contributed by the increase in MYOB’s receivables from $14 million to $17.5 million. On the other hand, Xero has shown a reverse trend in its ratio as it rose from 26.71 times to 28.42 times. This indicates that company is good at collecting its debtors and the same has been reflected by its cash balance.

• Asset turnover ratio

It measures the amount of company’s sales or revenue that is generated by utilizing its assets effectively and efficiently. It is calculated by dividing the total sales with average total assets of the firm (Kimmel, Weygandt and Kieso, 2010). 

	MYOB GROUP LTD		XERO LTD
Asset turnover ratio	2016	2017		2016	2017
Total revenue (A)	369.0	414.0		187.0	270.0
Average Total Assets (B)	1,384.0	1,394.5		333.5	282.0
ATR (A/B)	0.27	0.30		0.56	0.96

The ATR of MYOB has increased during the past two years but the same was less than the ATR of Xero Ltd. The upsurge in the ratio of MYOB was due to the noteworthy increase in its total assets and total revenue. Xero Ltd. has also shown the increase in its ATR from 0.56 times to 0.96 times during last year. Such upsurge can be defined by the reduction in company’s assets from $333.5 million to $282.2 million. Whilst its revenue also increased which ultimately boosted up the ratio.

• Net profit margin

It measure the net profit of the company earned from the total revenue during the year. The amount of the profit is expressed as a percentage of total sales and it indicates the overall profitability of the firm (Krantz and Johnson, 2014). 

	MYOB GROUP LTD		XERO LTD
Net profit margin	2016	2017		2016	2017
Net profit (A)	54.0	61.0		-74.0	-63.0
Total revenue (B)	369.0	414.0		187.0	270.0
NPR (A/B)	14.63%	14.73%		-39.57%	-23.33%

Long Term Solvency

From the above table, it can be interpreted that the NPR of MYOB has increased from 14.63% to 14.73% last year. This was because of the slightest hike in company’s profit from $54 million to $61 million. One of the reasons for such hike was the profitable business delivered by the acquisition of PayGlobal. On other hand, Xero has made losses in the past two years which makes its NPR negative. Reason being, the operating expenses of the company grew which causes the operating deficit in the year.

• Return on Assets

It reflects the amount of return generated by the total assets of the company. A high ROA indicates high profitability (Lee, Lee and Lee, 2009). 

	MYOB GROUP LTD		XERO LTD
Return on Assets	2016	2017		2016	2017
Net profit  (A)	54.0	61.0		-74.0	-63.0
Total Assets (B)	1,389.0	1,400.0		296.0	268.0
ROA (A/B)	3.89%	4.36%		-25.00%	-23.51%

This also showed the similar trend and rose from 3.89% to 4.36% in case of MYOB Group Ltd. Increase in assets and net profit gave a hike to the ratio whereas Xero Limited has negative ROA of -23.51% in 2017 because of the loss made during the period.

• Return on Equity

The ratio measures the return offered by the company to its shareholders on the portion of their capital invested in the business. Generally, companies delivering high profits give high returns to its investors (Nikolai, Bazley and Jones, 2009). 

	MYOB GROUP LTD		XERO LTD
Return on Equity	2016	2017		2016	2017
Net income available to shareholders (A)	54.0	61.0		-74.0	-63.0
Shareholder’s equity (B)	857.0	844.0		251.0	205.0
ROE (A/B)	6.30%	7.23%		-29.48%	-30.73%

Similar trend was observed in the ROE of MYOB as it rose from 6.30% to 7.23% in 2017. With high profits, the company is able to provide high returns to its shareholders and improve its profitability position. However, the same is not the case for Xero Ltd. as the firm has incurred losses in last two years which make its ROE negative and reflects that its profitability has been reduced.

• Earnings per share

This ratio shows the amount of company’s profit allocated to each outstanding share of the common stock. It is also an indicator of company’s profitability position (Penman, Reggiani, Richardson and Tuna, 2017).

	MYOB GROUP LTD		XERO LTD
Earnings per share	2016	2017		2016	2017
Net income available to shareholders (A)	54.0	61.0		-74.0	-63.0
Number of outstanding shares (A)	605.0	600.0		136.0	137.0
EPS (A/B)	0.089	0.10		–       0.54	–             0.46

As the profits of MYOB have improved during the year, its EPS has also shown an upsurge from 0.089 cents to 0.10 cents. As compare to this, Xero Limited had negative EPS because of its low earnings.

• Price-Earnings ratio

It is also known as price multiple and it measures the market price of the share against the earnings of the stock. In other words, it shows the amount an investor is willing to pay per dollar of earnings (Godwin and Alderman, 2012). 

	MYOB GROUP LTD		XERO LTD
Price earnings ratio	2016	2017		2016	2017
Market value per share (A)	3.229	3.301		17.4	24.2
Earnings per share (B)	0.089	0.1		-0.54	-0.46
P/E (A/B)	36.1768	32.4689		–     31.98	–           52.60

The P/E ratio of MYOB reduced from $36.17 to $32.46 during the year 2017. Such reduction in the ratio indicates that the stock of the firm is doing well as compare to the past trends. The investors will get benefits in future when the stock price increases. The similar trend is noticed in case of Xero Ltd. due to negative EPS, the P/E of the company also become negative and was at -$52.60 in 2017.

Debt Ratio

The below graph shows the movements in average return of MYOB Group for the last two years and the same is compared to the fluctuations in the market return. The trend lines in the graph depicts that changes in company’s returns are highly impacted by the variations in market. It can be observed that initially both the market and stock shown an upward trend and by the end of 2016, both declines to an extent. However, in the mid of 2017 the market return was negative whereas the stock return turns out to be positive during the same period.  After that the fluctuations in both market and company’s return are almost same but high variations were there in MYOB’s stock return as compare to market.  

 

(Source: Yahoo Finance. 2018).

(Source: Yahoo Finance. 2018).

From the above graph, it can be depicted that returns of Xero Ltd. are highly independent from the changes in market return. Both the trend lines are away from each other. It is observed that initially both increases but at the start of 2017, the company had high and positive return whereas the market was declining. After that the market return became steady for some period while Xero’s stocks were providing high returns. Overall, it can be said that the changes in company’s stock are independent of market variations.

The valuation of share is done by applying constant dividend growth rate model. The value of MYOB’s stock is $11.50 which is more than its current market price of $2.95. This means that the stock is undervalued. This means that the investors can purchase the stock when price reduces and sell the same at time of hike in price. The main reason for such scenario is that the market has lost confidence in the entity and believes that its assets are not sufficient enough to generate future profits. As far as Xero Limited is concerned, the company does not have any stock value because it did not declared any sort of dividends last year (Refer excel).

Conclusion 

From the above analysis, it can be concluded that the performance and position of Xero Limited has improved in 2017 apart from the profitability factor. However, it is observed that MYOB Group has positive and high profits but its efficiency, liquidity and capital structure has declined during the year. Moreover, its share price has also been affected by the changes in market whereas Xero’s stock returns are highly independent of the same. In addition, it is also concluded that MYOB’s shares are undervalued and do provide a buying opportunity to the potential investors. So overall, looking at the profitability aspect and return on equity, it will be recommended to invest in the share of MYOB Group Limited.

References

Bloomberg (2018). Company Overview of MYOB Group Limited. [Online]. Available at: https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=225593580 

Godwin, N., and Alderman, C. (2012). Financial ACCT2. USA: Cengage Learning.

Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.

Jenter, D. andLewellen, K. (2015). CEO preferences and acquisitions. The Journal of Finance, 70(6), pp.2813-2852.

Kimmel, P. D., Weygandt, J. J., andKieso, D. E. (2010). Financial accounting: tools for business decision making. New Jersy: John Wiley and Sons.

Krantz, M., and Johnson, R. R. (2014). Investment Banking for Dummies. New Jersy: John Wiley and Sons.

Lee, A. C., Lee, J. C., and Lee, C. F. (2009). Financial analysis, planning and forecasting: Theory and application. Singapore: World Scientific Publishing Co Inc.

Morningstar (2018). MYOB Group Ltd. [Online]. Available at: https://financials.morningstar.com/income-statement/is.html?t=XASX:MYO&region=AUS 

Morningstar (2018). Xero Ltd. [Online]. Available at: https://financials.morningstar.com/income-statement/is.html?t=XRO&region=aus&culture=en-US 

MYOB (2013). MYOB gains competitive advantage with completion of BankLink purchase. [Online]. Available at: https://www.myob.com/au/about/news/2013/myob-gains-competitive-advantage-with-completion-of-banklink-purchase 

Nikolai, L. A., Bazley, J. D., and Jones, J. P. (2009). Intermediate Accounting. USA: Cengage Learning.

Penman, S.H., Reggiani, F., Richardson, S.A. and Tuna, A. (2017). A Framework for Identifying Accounting Characteristics for Asset Pricing Models, with an Evaluation of Book-To-Price.

Reuters (2018). Xero Ltd (XRO.AX). [Online]. Available at: https://www.reuters.com/finance/stocks/company-profile/XRO.AX 

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

Tracy, A. (2012). Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet. RatioAnalysis. Net.

Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis. New York: Cambridge University Press.

Yahoo Finance (2018). MYOB Group Limited (MYO.AX). [Online]. Available at: https://finance.yahoo.com/quote/MYO.AX/history?period1=1467311400&period2=1530297000&interval=1mo&filter=history&frequency=1mo 

Yahoo Finance (2018). Xero Limited (XRO.AX). [Online]. Available at: https://finance.yahoo.com/quote/XRO.AX/history?period1=1467311400&period2=1498761000&interval=1mo&filter=history&frequency=1mo