Impact Of Aggressive Working Capital Management: Analysis Of Webjet Limited’s Financial Performance Using Ratio Analysis

Ratios analysis techniques

Financial statement of an organization is critically important for the evaluation of the entire performance of the business and finally analysis of better investment decision. A better financial evaluation analysis technique aids the business to sustain their market for long time and helps to combat their competitors in successful manner (Higgins, 2012).. Effective of the financial analysis techniques aid the management and business to determine organization performance trends, evaluating and analyzing the reason underlying those changes in successful manner. There are several tools and techniques are available for management to evaluate the financial analysis performance of the business. Among them, one of the financial techniques that are widely used by the organizations is ratios analysis techniques, which not only helps the business to evaluate the performance but also provides room for effective comparison of one organization to other organizations.

In present report, main objective is to evaluate the organization performance through ratios analysis techniques. In this report Webjet Limited organization is selected and their ratios for FYs 2014,2015,2016,2017 and 2018 have been evaluated and computed. In addition to this, present report also deals with the benefits and limitation associated with the organization. At last the report discussed about the profitability ratios analysis, liquidity ratios analysis, efficiencies ratios analysis and gearing ratios analysis.

Webjet Limited organization is digital travel organization spanning both wholesale market and global consumer market. The organization offers its services all over the world including New Zeeland, Australia, Hong Kong, and North America. The organization is registered office situated in Victoria, Melbourne (Australia).  The organization is founded in year of 1998 and offering domestic and international hotel accommodations, flight services, cruises, holiday package deals, travel insurance, car and motor home hire services.

The organization Webjet Limited revenues in year of 2018 were 291 million dollar and increases about 54% from FY2017 to FY2018. In addition to this, it is seen that organization performance in terms of revenues is in increasing orders from 2014 to 2018 respectively. In regards to market capitalization performance of the business indicates increasing orders about 31 %( FY2018; $1593 m, FY2017: $1212 m).  The organization’s strategies to make WebBeds is continuing to bear full with division delivering financial year bookings increases about 214% as well as four year CAGR of 147%. EBIT performance of the organization is increases about 71% (FY2018: $87.4m, FY2017: $51.0 m). Webjet Limited financial report 2018 indicates that TTV for continuing functions was$ 3012m, increases 54% compared to the previous year 2017. NPAT before AA was increased about 63% to $55.7m and NPAT was increased 30% to $43.2m.

Types of ratio Analysis:

Organization net assets performance in year of 2018 was increased $226 million. Cash balance of the organization was $190.6m as at 30 June 2018, involved $178.1m of client funds. This figure computed to the cash balance $178.1m in 2017 included $21.2m client funds. During this financial year approximately $74m of existing cash reserved were utilized to finance the acquisition of JacTravel. Cash flow performance of the organization indicates that cash conversion was 159% as compared to the 97% from FY2018 to FY2017 (Webjetlimited, 2018).. The increment of the financial was mostly due to the implementing of the new Enterprise resource planning system in business to business (B2B). The financial report also shows that domestic booking performance of the organization is increased about 8% and international booking was increased 14% during this financial year.

The financial report of the organization indicates that organization profits after tax was $49452000 in B2C travel, $5452000 in B2B Travel and ($13430000) in corporate. While comparing these performance with past years performance of the organization shows that organization performance in B2C is increases about 9.3%.

Financial ratios analysis technique is implemented in this report in order to evaluate and analyze the organization performance. As explained in introduction section, financial analysis techniques aids the business to offers better information and helps in decision making procedures. In present section financial ratios analysis of Webjet Limited from year 2014 to 2018 is evaluated. As studies conducted by Brigham, and Houston, (2012), explained that ratios analysis techniques help the management to compare the performance of the business in regards to market trends. According to Higgins, (2012), said that financial ratios analysis techniques offers information regarding environment, competitiveness, performance trends and reliability of present as well as future performance. In this section financial ratio for year of 2014 to 2018 is computed which includes the profitability analysis, efficiency ratios analysis, liquidity ratios analysis and solvency ratios based on income statement, balance sheet and cash flow statements. The outcomes and findings were evaluated and interpreted in successful manner and finally the judgements were made on outcomes.  

The tools of ratio analysis are being used to depict an at a glance picture of the different aspects of profitability, liquidity, efficiency, market prospect and level of solvency of a business organization. In the process of ratio analysis the approach of horizontal analysis has been followed.

In the types of ratios the first set of ratios on which focus has been put is the profitability ratios. The Profitability ratios is a kind  of financial ratio that is being  used to assess the ability of the business’s to generate earnings in relation to the expense incurred by the business.

Profitability ratios

The net profit margin which is also defined as net margin depicts how much net income or profit a company is capable to earn out of the total net sales earned by the business.  Higher is the net profit margin higher is the capability of the company in converting sales into actual net profit. Net profit margin analysis is different from the analysis   of the gross profit margin as under gross profit margin fixed costs are not included in calculation. Thus the net profit margin ratio calculation includes all costs that the business has incurred in order to find the final benefit of the income of a business (Saleem and Rehman,2011).

The huge difference between the gross and net or final profit margin indicates that the business is losing a substantial portion of profit in operational expenses that are being absorbed from the gross profit. The profit margin ratios has demonstrated a declining trend from 2015 onwards with a little recovery in 2017 as the business has put a continuous effort in controlling the  operating expenses of the business.

The gross profit margin ratio often defined as gross margin and the ratio of gross margin expressed as a percentage of net sales revenue earned by the business. The Gross margin indicates that how much profit the business has made after Cost of Goods sold being paid out.  The ratio describes efficiency of a company in using raw materials and labour that is being used the production process.  Higher is the Gross profit margin; higher is the efficiency of the company in generation of profit by making effective utilization of labour and raw material.

The above horizontal analysis of the ratios defines that the gross profit margin of the ratio was stable around 100% during the years of 2014-2016; that is during this period the business has managed to save almost total of the net revenue earned as gross profit. During the forecasting period of 2017 the business has managed to save 93% of the net earnings as gross margin. But in 2018 the gross margin has suddenly plunged to 37% as cost of goods sold has suddenly increased from 14 million AUD in 2017 to 471 million AUD in 2018.

The return on assets ratio, also defined as return on total assets is a profitability ratio that is used to assess the net income produced by total assets during the period under study. For the calculation of the ratio the net income of the business is being compared to the average total assets. Thus the return on assets ratio or ROA describes that how efficiently a company can use its assets for producing profits during the period. Generally the sole purpose of the company assets is to generate revenues and produce profits and that is why this ratio is used by both management and investors to assess how well the company is capable to convert its investments in assets into profits. Higher is the ratio grater is the capability of the company in generating return over total asset(Nazir and Afza, 2009).

The return on asset of the business has registered a declining trend during the period of study as over the years the net income has declined proportionately but the total asset investment has increased exponentially

Return on common stock holder’s equity is the ratio that is used to assess the ability of a firm to generate profits from its shareholders investments in the company. Therefore a ratio value of 1 indicates that every dollar of common stockholders’ equity invested in the company is capable to the generate 1 dollar of net income (Kabajeh, , Al Nuaimat and Dahmash., 2012)

The ratio has registered a declining trend and has declined to 38% in 2017 from 48% in 2014 as the net income has declined gradually and equity investment has increased gradually.

The book value per share ratio calculates the value per share of a company based on the basis of the equity value available to the common shareholders. The term “book value” refers to assets minus liabilities of the company and is sometimes mentioned as stockholder’s equity or owner’s equity or shareholder’s equity, or simply equity. Higher ratio indicates that the investors or potential share holders has a very good prospect in the company (Asness and Frazzini, 2013).

The book value per share of the company has grown satiability and has become 142% in 2018 from 24% from 2014 as the ratio as the equity investment in shares has increased exponentially but the number of outstanding shares has remained more or less same during the period of study.

The EPS defines the earnings per outstanding shares of the company assuming that the share4s has not being diluted. When a business issue more shares than the number of outstanding shares of the company increases and it causes a reduction in the earning per share. That is why the basic EPS is calculated in order to assess the actual earnings per share with respect to a company.

The study of the ratios defines that the EPS of the business has gradually increased from 24% in 2014 to 36% in 2018 and the ratio picked to 53% in 2017.The underlying g reason is that the outstanding shares of the company increased in a lesser proportion with respect to the increase in net income of the company over the years (Sharma, 2011).

Market Prospect ratios are used  by used by the investors for comparing  the stock prices of the publicly traded companies with other financial KPIs(key performance indicators) like earnings and dividend rates in order to analyze the trends of stock price and to  figure out a stock’s current and future market value. In other words the market prospect ratios describes that the what the investors can expect to receive from their investment in the stocks of a company. The ratios define what can be earned from the investors in terms of future dividends, and also from the appreciation of the stock value.

The price earnings ratio or the P/E ratio is a market prospect ratio that calculates the market value of a stock in relation to the earnings by comparing the market price of each share with respect to the earnings per share.  The ratio defines that what the market or potential investors of the market is willing to pay for a stock of a company based on the current earnings of the stocks of that company. Investors also use the ratio for evaluating fair market value of the stock for predicting the future earnings per share. Companies with high EPS are generally expected to issue higher dividends an d high prospect of  stock appreciation in near  future(Koller,  Goedhart and Wessels, 2010).

The P/E ratio of the company has registered a growing trend over the years and has increased from 11.9 in 2014 to 46 in 2018 and this indicates that the business is expected to issue higher dividends and high prospect of stock appreciation in near future.

The dividend payout ratio defines the percentage of net income that is distributed to shareholders in the form of dividends during the year out of net profit earned by the business. This ratio shows the trend of the portion of profits that the company has decided to set aside for the funding operations and the portion of profit that the company is ready to distribute among the shareholders. Investors often show their   interest in knowing the dividend payout ratio of a company foe assessing that how much of the net earnings the business is ready to pay out to the investors as dividend (Gill., Biger  and Tibrewala, 2010).

The dividend payout ratio of the business has registered a declining trend over the years and this indicates that the business is showing the trend of paying lesser and lesser proportion of net income as dividend.

As studies conducted by Brigham, and Houston, (2012), said that liquidity analysis techniques explain the capability of firms to fulfil their short term requirements with available of short term finance. The main objective of the findings of liquidity ratios analysis helps the management of the organization Webjet Limited to find out the organization solvency positions in successful manner.

The above table indicates that liquidity positions of the organization was 1.46 in FY2017, 0.93 in FY2018, 1.05 in FY2016, 1.34 in FY2015 and 1.59 in FY2014 respectively. The figure indicates that liquidity position of the organization is decreased from FY2017 to FY2018; whereas in FY2015organization performance is decreased from FY2014. From the analysis and findings it can be said that organization performance in terms of liquidity is not much better in this year as compared to previous years. While comparing the performance of the organization in context to acid test ratios, it is observed that organization performance in 2018 was reduced from 2017 and increases from 2016 to 2017 respectively. As studies conducted by Palmer, (2009), said that current ratios of the organization is above than one indicates that organization is performance well. Comparing this value with organization present scenario it is seen that company performance in below than one in 2018 but in 2017 its performance was good.  

An organization higher current ratios as well as quick ratios are considered to be more financial stable and able to fulfil short term liabilities than those with less current ratios and quick ratios. A higher liquidity ratios performance is vital for organizations themselves and their lenders, creditors, capitalists and others. Therefore to improve liquidity ratios performance of an organization management needs to enhance invoice collection period, increase turnover as well as sales performance and payoff liabilities as early as possible.

According to Palmer, (2009), said that efficiencies ratios mainly used by the firms for purpose of analyzing and evaluating the performance of the utilization of liabilities and assets. Efficient ratios are measured how well an organization is managing and organizing its routine affairs.

Accounts receivable turnover ratios or activity ratios help the organization to measures how time an organization may be able to turn its accounts receivable into money during certain time of period. The ratios indicate that how efficiencies and organization is at gathering its credit sales from consumers. Since account receivable turnover ratios aid the organization to measure its ability to efficiently gather its receivable, then it make sense that higher ratios indicates more favourable for organization (Healy and Palepu, 2012). From the computation it can be observed that organization accounts receivable was increased in 2018 to 2017 by 1.98 to 3.87 respectively. The findings also show throughout the period from 2014 to 2018; organization performance in context to accounts receivable turnover ratios was better in 2014. The performance of the business was not well in year of 2016 and 2017. Higher efficiencies are more favourable for business in cash flow perspective, so that if organization can gather cash from consumers sooner, than they will be capable to utilize that money to pay bills and other obligations. The value of organization’s turnover 3.87 indicates that organization receivables about 3.87 times in a years or once at every 115 days.           

Assets turnover ratios help the organization to measure an organization’s ability to generate organization sales from assets by comparing net sales performance with average total assets. Total assets ratios performance of the organization is computed by dividing net sales by average total assets. The main objective of these ratios is to find the efficiencies of an organization to generate sales; therefore the higher values of assets turnover ratios are more benefited and favourable for organization (Brigham and Houston, 2012). . Lower values of assets turnover indicates that organizations is not utilizing its assets more efficiently as well as most likely have production and management problems.  The outcomes indicate that total sales performance of an organization is increased from FY2018 compared to previous years from 0.46 to 0.95. The outcomes also show that organization performance was reduced from 2014 to 2016; this shows that management of the organization was not successfully manage its resources during these years. Assets turnover ratios of the organization was 0.95; which shows that each dollar in assets, organization only generate 95 cents. In other word, it is said that organization assets turnover is not very efficient with it’s utilizes of assets.

Day’s sales uncollected are mainly used to measure to estimate the number of days before receivables will be gathered. This information is mainly used by lenders as well as investors to find out the short term liquidity of an organization. This can also be used by the management of an organization to find out the effectiveness of its collection as well as credits. Since it is benefited to covert sales into cash quickly, this shows that a lower value is profitable or favourable for business whereas higher values are not favourable.  From the calculation and findings it is seen that, day’s sales uncollected performance of the organization is deteriorating trends. It is seen that day sales uncollected is 94.17; which means that an organization needs to take an average of 94 days before receivable is gathered. Mainly values of day’s sales uncollected below 45 is measured as favourable for organization and considered low, but values are also dependent on the business types.

From the above findings and analysis it is seen that organization performance in context to efficiencies in not up to the mark and it has a negative impact on organization performance in upcoming years (Higgins, 2012). The main reason of this situations are credit issues with consumers having negative credit standing, organization is offering consumers to buy goods and products on credits therefore that they can purchase more goods and products. In addition to this, an organization has not sufficient in its collection procedures.

In order to improve the efficiencies performance in effective and successful manner management of an organization needs to implement effective marketing strategies, opening new branches, enhance process to reduce production cycle times as well improve controls. In addition to this, it is said that the management of an organization needs to incorporate an effective cost cutting strategies as well as resource management strategies that helps them to improve its performance in terms of efficiencies in effective manner.

The solvency ratios define that how solvent the business is in handling the debt obligations of the company (Babalola and Abiola, 2013).

The Debt ratio indicates that business is trying to reduce the proportion of total debt in the asset of the company over the years

The equity ratio indicates that the business has maintained more or less same proportion o f asset as equity

The debt-Equity ratio define that the business is showing the trend of gradually declining the proportion of   debt volume with respect to the equity.

The Times interest earned ratio has registered a declining trend over the years and this indicates that the debt interest serving capability of the EBIT or operating income of the business is declining over years(Kemal,  2011).

The net cash used in investing activities and financing activities is less than the cash holding at the beginning of the period (sum of beginning cash & cash generated from operating activities) and the business has managed to maintain a positive cash balances during the period of study thus the business is maintaining a strong liquidity position over the years and handling the cash related expenditures efficiently (Hongxia, 2009)

Conclusion:

From the findings and analysis it can be concluded that financial ratios analysis, cash flow analysis and financial statement analysis plays the major role for business and helps them in decision making procedures. The above findings indicates that organization is not implemented an effective resource management strategies as well as cost management strategies and outcomes is to degrade the performance in efficiencies and liquidities. The observation also shows that  profitability ratios, profits margin ratios, gross profits margin ratios of the organization is decreasing orders which indicates that organization is not performing well in market.

Therefore from the above analysis and findings, some recommendations are made that helps the organization to solve its issues in successful manner.              

• It is suggested that management of an organization needs to implement lean principles in its resources management process that can helps the organization to determine risks in their supply chain management strategies(Chandra, 2011). It would also helps the organization to look for better opportunities to deliver an effective customer services and values “better, cheaper and faster”. This strategy would also help the organization to create better marketplace differentiation and helps in decision making process.     
• It is suggested that organization needs to improve technology integration in their business approach. Implementation of information system technology speed up the process of organization and save customers times that improve customer satisfaction services. Implementation of the technology is organization sometime hurting organization’s efficiencies; therefore it is suggested that before use new technology organization needs to review their affected end to end process to ensure that information system actually improve their operations and performance.

References

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morningstar (2018). Balance Sheet for Webjet Ltd (WEB) from Morningstar.com. [online] Financials.morningstar.com. Available at: https://financials.morningstar.com/balance-sheet/bs.html?t=WEB&region=aus&culture=en-US [Accessed 17 Sep. 2018].

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