Analysis Of Equity And Debt Position Of Two Public Limited Companies

Understanding of Equity for Selected Companies

Computershare Limited and NEXTDC Limited are two well-known entities in information technology industry in the country. A detailed investigation of the annual reports of these two companies shall be conducted to identify the different items disclosed under different elements of financial statements of these companies.

Equity also refers to as owners’ equity is the combined amount of share capital, profit attributable to shareholders, retained earnings and other reserves. A brief discussion on the different items of equity and the changes in these item balances over the years would help in dissecting owners’ equity effectively (Weygandt, Kimmel and Kieso, 2015).

Contributed equity: An organization needs capital to operate. In case of entities established under the Corporations Act 2001 they can issue equity shares in the market to raise funds for business. Contributed equity represents the face value received from issue of equity shares of an organization. NEXTDC and Computershare Limited, both companies have showed contributed equity under owners’ equity (Mathuva, 2015).

Reserves: Amount transferred to different reserves by an organization is accumulated and shown under reserves. Both companies have disclosed reserves under owners’ equity. It is important to note that except free reserves no other reserves are allowed to be used to issue dividend and bonus shares of an organization (Brown et. al. 2015).

Accumulated Losses: An organization that fails to earn profit from its business operations for more than a year and instead incurs losses from business operations for number of years accumulates such losses. The accumulation of such losses is shown under accumulated losses in the Balance sheet under owners’ equity. Since NEXTDC has incurred significant losses over the years hence, the company has disclosed accumulated losses to reduce the owners’ equity (Berzkalne and Zelgalve, 2014).

Retained earnings: An entity operating with efficiency in all probability will earn profit from business operations. Such profits are available for distribution to the shareholders of the entity. The excess amount of profits remaining after distribution to the shareholders will be accumulated in retained earnings and to be shown in the Balance sheet under owners’ equity. Computershare Limited has disclosed the amount of retained earnings to increase the owner’s’ equity (Barth et. al. 2014).           

Extract from financial reports of NEXTDC provided below would be helpful in analysing the changes in each items of owners’ equity over the past year.

As can be seen that during 2017 NEXTDC has received contributions of $148,951,000 net of transaction costs from issue of equity shares thus, the contributed equity balance has increased to $524,458,000 in 2017 from $375,507,000 in 2016 (Chen, Miao and Shevlin, 2015).

The share based payments of $1,456,000 has increased the reserves balance from $3,534,000 in 2016 to $4,990,000 in 2017. Accumulated losses have not changed during the past year.

Extract provided below from the financial statements of the company shall be helpful in assessing the changes in different items of equity of the company.   

Contributed equity has remained unchanged throughout the number of years now. The increase in negative value of reserves is due to buy back of shares and cash purchase of shares on the market. In 2017 the reserves of the company stood at ($98,487,000) from ($95,872,000) of 2016. The amount of retained earnings of the company has increased during the past year. In 2017 the retained earnings of $1,315,607,000 due to the sale of financial assets (Alin-Eliodor, 2014).

Changes in Each Item of Equity for Selected Companies

Taking into consideration the amount of debt and owners’ equity of NEXTDC and Computershare Limited as on June 30, 2017 the following table has been calculated. The table below shows the debt and equity position and resultant debt to equity ratio of the two companies (Grant, 2016). 

Note: Only long term borrowing have been considered as debt.

Debt to equity ratio of NEXTDC is 0.58 suggests that the company has a stable debt to equity position however, with 1.18 debt to equity ratio it is clear that Computershare will have to improve its debt and equity position by reducing the proportion of debt to the overall equity of the company. Hence, the debt and equity position of NEXTDC Limited is far better than Computershare Limited as on June 30, 2017 (Žager, Mališ and Sa?er, 2017).     

Items reported in cash flow statements and changes in these items over the years:

NEXTDC and Computershare both have disclosed cash flows under three broad categories, these are operating activities, investing activities and financing activities (O’Hare, 2016).

Under operating activities the amount received from customers has been included by both the companies. This is the amount received from customers in the ordinary course of business. Payments to suppliers and employees are the amount paid for purchasing the raw materials necessary for conducting the operations of business. The employees are paid salaries and wages for the services they provided to both the companies. Payment of interests and other finance costs are for loans taken for operating purposes. Apart from that tax paid has been deducted from gross operating cash flows to determine the net cash flow from operating activities in case of Computershare Limited. No such tax has been paid by NEXTDC as it has incurred losses (Penman, 2016).

Investing activities are the acquisition and disposal of non-current assets such property, plant, equipment, machinery and other investments. The payment of cash for acquisition of non-current assets including PPE and other investment assets have been deducted from proceeds received from sale of non-current assets and investment properties by the companies to compute the net cash flow or used in investing activities of the respective companies (Nobes, 2014). 

Cash received from issue of equity shares, proceeds received from borrowings are the inflows from financing activities. Cash paid for repayment of borrowings, buy back of shares, payment of dividend and payment of finance leases are the main items where cash has been paid under financing activities (Cooper, 2017).

In case of NEXTDC let’s have the cash flow statement of the company before discussing about the changes in the items of the company:

The increase in sales has resulted increase in receipt of cash from customers. In 2017 the company has received $133,220,000 for customers which is significantly higher compared to the $94,639,000 in 2016. Payment to suppliers and employees of the company has also increased due to the increase in scale of operations of the company with $78,765,000 in 2017. Increase in interest payment and payments for bank guarantee is also due to the use of extensive operating loans in 2017 compared to 2016. The company has invested significantly high amount of $143,550,000 in 2017 on property, plant and equipment as compared to $87,304,000 in 2016 (Guay, Samuels and Taylor, 2016). Term deposits has matured in 2017 hence, the company has paid $96,500,000 to discharge the liability and has also acquired intangible assets of $5,031,000. These are the major changes in items of investing activities in cash flow statement. Net cash flow from financing activities is $280,601,000 in 2017 has increased from $205,604,000 of 2016 due to the increase amount of proceeds receipts from issue of notes. Also the company has paid cash of $160,000,000 to repayment notes.

Comparative Analysis of Debt and Equity Position

The changes in cash flow items of Computershare Limited can be understood better with the help of the following extract from the financial statements of the company.

Net cash from operating activities of the company has increased by $152,590,000 in the past year, i.e. from 2016 to 2017. The mi factor that contributed to the increase in operating cash inflows of the company in 2017 is the increased amount of cash received from the customers of the company during the year (Coates IV, 2014). The investment in investing activities have reduced significantly in 2017 as the company only invested a net of $53,400,000 in investing activities as compared to $218,128,000 in 2016. It is due to reduced amount paid to acquire business combination as well as proceeds received from sale of non-current assets of the company. The net cash used in financing activities in 2017 has increased due to increase in repayment of borrowings from $439,840,000 in 2016 to $680,565,000 in 2017.

NEXTDC Limited: The table contains the three broad categories of cash flows of the company for last four years. 

Cash flow from operating activities of the company has increased every year since 2014. In 2014 the company had a negative cash flows from operating activities however, by 2017 the company has generated a net cash inflow of $44,925,000 from operating activities. The company has increased its investments every year, in 2017 the investing activities of the company has used net of $245,081,000 cash. In 2016 net investment in cash made was only $89,378,000. Cash flows from financing activities of the company in 2017 is $80,445,000, significantly less than $138,512,000 of 2016. This is due to the increase in repayment of borrowings amount during 2017 (Oliver, 2014).    

Computershare Limited: The cash flows from operating, investing and financing activities of the company for last 4 years are provided below. 

      The ability of the company to generate positive cash flows from operating activities has increased every year since 2015. In 2015 the company generated cash inflow of $372,132,000 from operating activities. This has increased to $457,682,000 in 2017. Though the company has used significant amount of cash in investing activities prior to 2017 with $218,128,000 used in 2016 however, in the latest year ending on June 30, 2017 the company has only used a net of $53,400,000 in investing activities. Huge increase in repayment of borrowings during 2017 has resulted outflow of cash of $416,418,000 for financing activities (Morris, 2017).

The information provided below indicates the amount of cash flows under three broad categories of two companies for the year ending on June 30, 2017.

It is clear from the above comparative information about cash flows of the two companies that Computershare has better cash position as compared to NEXTDC Limited. This is specifically due to the ability of Computershare to generate huge amount of cash flow from business operations. The company has generated $457,682,000 in net from operating activities whereas NEXTDC has only managed to generate $44,925,000 from operating activities (Citron, 2015). The differences in investing activities is quite big for the two companies in 2017 however, it can be seen that for Computershare this is an exception to use such low amount on investment activities. In cash of cash flow from financing activities again Computershare has used far more cash in financing activities with $416,418,000 than $280,601,000 in net used by NEXTDC (Black, 2016).

Cash Flow Statements and Changes Over the Years

Other comprehensive income:

NEXTDC Limited: The Company has not reported any item in other comprehensive income statement as it does not have any such items to be reported to the other comprehensive income statement.

Computershare Limited: Following items have been reported in the financial statements of 2017:

I. Gain on reclassification of available for sale financial assets.

II. Loss on cash flow hedges.

III. Loss on translation of exchange differences for foreign operations.

IV. Gain on income tax on components reported in other comprehensive income statement (Du, McEnroe and Stevens, 2016).

The items reported in the other comprehensive income statements are not gain or loss arising to these companies in the ordinary course of business. Thus, these cannot be reported in income statement.

Thus, there is no comparison between the two companies as one has reported none compared to the other that has reported a net income of $1,613,000 in other comprehensive income statement.

In case the items would have included in income statement of the company the total income of Computer share would have been increased by the amount $1,613,000 in the financial year 2017. No effects in the income statement of NEXTDC because the company has no items in its other comprehensive income statement. 

The performance of the managers should be assessed by taking into consideration the other comprehensive income or loss. The managers are not only responsible to run the day to day affairs of an organization but also responsible to make appropriate strategy to deal with various risks such as foreign exchange rate differences, hedging cash flow items etc (Van Dooren, Bouckaert and Halligan, 2015).

ix. Income tax benefit of NEXTDC reported in 2017 as per the income statement is $10,172,000. Computershare in the same period has reported $94,223,000 as income tax expense as per its income statement.

x. Effective tax rates of the two companies have been calculated in the table below: 

   

Thus, effective tax rate for NEXTDC is negative 79.30% as the company has reported a tax benefit in 2017. However, the effective tax rate of Computer share is 25.75%. Thus, the higher effective tax rate is that of Computershare Limited with 25.75% because the effective tax rate of NEXTDC is negative (Richardson, Taylor and Lanis, 2015). 

Computershare has reported deferred tax assets of $178,675,000 in 2017 and $178,644,000 in 2016. Deferred tax liabilities of the company for the respective periods were $258,251,000 and $232,100,000.    

NEXTDC Limited has showed an amount of $12,601,000 as deferred tax assets in 2017 and nil in 2016. No deferred tax liabilities of the company for the same periods were reported.

The reason that deferred tax assets and liabilities are recorded is due to the timing differences in items of revenue and expenditures. The income tax provisions and accounting principles are different. This resulted in different amount of accounting income and taxable income. Deferred tax assets and liabilities are recorded for differences in taxable and accounting profit that can be reversed in the future (Al?Hadi et. al. 2017).

Conclusion

NEXTDC:

Deferred tax assets of the company was nil in 2016 thus, the entire amount reported as deferred tax asset in 2017 is increase in the year. No deferred tax liabilities have been reported in any of the two years.

Computershare Limited:

Deferred tax assets have increased by $31,000 in 2017 and deferred tax liabilities have increased by $26,151 in 2017 (Zhou, 2016).

Thus, cash tax amount of Computershare is $133,631,000 for 2017 and for NEXTDC Limited it is $2,429,000 in the same period.

Cash tax rate of Computershare with 36.52% is higher than 18.94% of NEXTDC Limited.

Cash tax amount is calculated by making necessary adjustments to income tax expense for increase and decrease in deferred tax assets, deferred tax liabilities, current tax liabilities and current tax assets. Hence, the book tax rate which is calculated by simply taking the income tax expense is different from cash tax rate (Wang, Butterfield and Campbell, 2016).

Conclusion:

An in-depth knowledge about the various elements in financial reports of two practical entities operating in Australia has been acquired subsequent to the completion of this document. It is important to have such knowledge to evaluate financial reports of companies. This will help in taking correct decisions by the users of financial reports. 

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