Thorn Group Limited: Financial Performance Overview And Investment Strategy

Overview of Thorn Group Limited

The company that has been chosen for the purpose of the report is Thorn Group Limited. The company had been established in the year of 1937 and had been Australia’s one of the top financial service providers. This corporate entity aims to provide a vast range of financial solutions for the purpose of meeting up to the growing demands of niche consumer and that of the consumer markets. The core activities of the company range within the scope of developing working capital and growth capital financial solutions for the small and medium sized enterprises. It has been operating in a competitive market with Radio Rentals being a market leader in terms of household goods and consumer leasing market (Thorn.com.au. 2018).

A particular event in the history of the company that provides a picture into the company is that the company became an ASX listed company in the year of 2006. However, the fundamental business of the company around which the business evolved is Radio Rentals, which opened its first store in 1937. Radio Rentals then gradually became a household name (Thorn.com.au. 2018).

The names of the substantial shareholders that have been listed in the register of the company for the financial year ended, 31^st May, 2016 are as follows:

• Investor Mutual Funds – the percentage of issued capital that the entity holds is 7.62%
• Vinva Investment Management Limited – the percentage of issued capital that the entity holds is 6.07%
• IOOF Holdings Limited – the percentage of issued capital that the entity holds is 5.94%

There have been no substantial shareholders, who hold more than 20% of the shareholdings (Thorn.com.au. 2018).

The main people of the organization are as follows:

• The chairman – Joycelyn Morton
• The Board of Director – the directors of the company are Andrew Stevens, Peter Hinley, David Foster, Oycelyn Morton, Jamed Marshall and Stephen Kulmar
• CEO – James Marshall

None of the shareholders had the same surname as any of the substantial shareholders. Moreover, all the substantial shareholders have been corporate entities 

The variable TA indicates total assets and variable OE indicates ownership equity and these two variables are interrelated with ROA and ROE. An increase in total value of assets with value of net profit remaining same indicates that there will be reduction in return on assets as they are not utilized efficiently for generating profits. An increase in value of assets with profit remaining same will generate lower debt equity ratio and therefore, there will be higher return on equity. Therefore, the value of ROE and ROA is determined by the total value of assets and total value of equity.

From the above table, it can be seen that return on equity (ROE) is greater than return on assets (ROA) for all the four years. Both the concepts depict the efficiency of organization in using resources for generating assets. Return on equity is less than return on assets because of lower value of total ordinary equities compared to total value of assets. A healthy organization always has total value of assets more than total equity because the values of assets are more than equity when liabilities of organization have reduced

Shareholders and Management

As can be observed from the above prepared graph which reflects or compares the movements in the share price index of the company to All Ordinary Index, a small change in the All Ordinary Index has led to a large change in the share price index of the company. This means that the shares of the company are volatile to a high degree. This is because a rise by nearly 5% of the All Ordinary index leads to a rise in the share price index of Thorn Group Limited by nearly 9%. This is evident from the above graph. 

The significant factors that have been influencing the share price of Thorn Group is that the debt of the company have been unprecedentedly high and has been reflecting an upward rising trend from the past five financial years. The financial health of the company has not been at par with the industry standards. Moreover, the firm has failed to derive the advantages of financial leveraging thus, the share price of Thorn Group has been influenced in a negative way.

Weighted average cost of capital:

Conservative investment refers to that strategy of investment that aims at the preservation of the portfolio value of the investment by investing in securities that carry lower risks such as money market securities and the equities that are in the nature of large capitals.

Thorn Group Limited on the other hand makes use of conservative investment. This is evident from the fact that the company makes no mention of investment in securities in its annual reports. The substantial investments that have been undertaken by the company are the improvements in the corporate governance structure of the company by the appointment of the Chief Risk Officer. The further purchases that have been done by the company in the financial year of 2016 increased the purchase ledger book by 35 percent with $12 million of purchases. There has also been a mention of an investment in the unrated notes which is evident enough to deduce the conclusion that the firm deals in conservative investment strategy (Jault 2015).

The implications that a higher WACC has on management evaluation on prospective investment projects can be understood by the better understanding of the usefulness of the Weighted Average Cost of Capital. The Weighted Average Cost of Capital is an important financial tool in the hands of the management and can be evidently used for the computation of the important metrics like the net present value. From the perspective of the management of a company, the weighted average cost of capital refers to the blended cost that the company will have to pay for utilizing the capital of the owners and the third party borrowers. To be more precise, it refers to the minimum amount of return that should be ensured by the company for the creation of value for the investors (Bodie,Kane and Marcus 2014).

Financial Performance

A high weighted average cost of capital signifies that the investment project has higher degrees of risk associated with them. This will result in the investors wanting more returns in order to compensated for the assumed risks. Therefore, the implication of higher WACC implies that there is a greater amount of risk to be assumed along with a increased amount of returns from an individual investment project (Chandra 2017). 

There has been enough debt that has been incurred by the company over the past two years. The debts that have been borrowed by the company amounted to a total of $240,000 for the financial year of 2016 and $210,000 for the financial year of 2015. Furthermore, it has been stated in the annual report of the company that the senior non-securitized debt increased from $84 million to $116 million in the fiscal year of 2016. The debt ratios that have been computed in this particular study for the consecutive financial year of five years represent an increasing trend. This signifies that the total liability of the company has been increasing continuously which is not at all healthy for business. This evidently proves that the debt structure of the company has not been stable and that there is no established optimal structure for controlling the amount of incurred debt by the organization (Cosio, Estrada and Kritzman 2015).

The gearing ratio of the company reflects an increased value of 53.2 % from 38.7%. this means that the company has involved itself in borrowing more debts which has resulted in a rise in the gearing ratio for the financial year of 2016. However, it has been mentioned in the annual report of the company that the increase in the gearing ratio has been due to the funding of the contribution of the company to the securitized vehicle in regards to equipment finance. Furthermore, the company makes the payment or meets up to all the debt covenants as and when they become due. It should be noted here that there have been no disclosures in the financial report in regards to the financial instruments utilized for the repayment of the debts (Kashyap 2016).

There has been no dividend policy that has been mentioned in the annual report of the company for the financial year of 2016. It is very important for a firm to have a dividend policy of its own. A dividend policy of a company refers to the disclosure in the financial report of a particular company that efficiently states the percentage of income that a company is ready to pay out as dividends. An optimum dividend policy is the one, which adds to the value of the firm. The absence of a particular dividend policy for thorn Group Limited indicates the fact that the firm has been dealing in loss for the financial year of 2016 (Aouni,Colapinto and La Torre 2014). 

Investment Strategy of Thorn Group Limited

Dear ABC,

Queensland

Australia

Respected Sir,

This letter is intended to list out the potential factors of the organization, Thorn Group limited that make it worthwhile to be included in your investment portfolio. It is with much motivation that I am willing to recommend Thorn Group Limited. The financial proceeding of the firm though does not reflect any huge amount of profits gained by the company, I have been an investor in the company and I have obtained enough returns from selected investment venture. It is accepted that the returns from the company has not been high enough but they represent a stable trend and ensure a continuous flow of income (Bi and Wu 2017).

It has been evident from the above discussions that the company lacks a proper debt structure, which has resulted in unrestricted incurrence of debt that has in turn led to an unprecedented rise in the total liabilities of the firm. This phenomenon is evident from the debt ratio that has been computed in this particular project. However, it can also be concluded that the establishment of an optimal debt structure will enable the business to enjoy the benefits of financial leveraging that will ultimately lead to higher returns (Bonelli and Bossy 2017).

Moreover, it should not be forgotten that, Radio Rentals, the primary business of Thorn Group Limited represents huge profitability and in all probabilities will result on optimum returns from the undertaken investments.

The company as revealed in the financial is undergoing huge restructuring, including the appointment of a risk officer. Thus, the issue of high risks associated with the investment will be, in all probabilities, resolved (Kranner, Stoughton and Zechner 2017).

Thus, it is highly recommended that the organization Thorn Group Limited should be included in your investment portfolio.

Thanking you,

ABC

Investment Company 

References and Bibliography:

Aouni, B., Colapinto, C. and La Torre, D., 2014. Financial portfolio management through the goal programming model: Current state-of-the-art. European Journal of Operational Research, 234(2), pp.536-545.

Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.

Bonelli, M. and Bossy, M., 2017. Portfolio Management with Drawdown Constraint: An Analysis of Optimal Investment.

Chandra, P., 2017. Investment analysis and portfolio management. McGraw-Hill Education.

Cosio, R.M., Estrada, J. and Kritzman, M., 2015. New Frontiers in Portfolio Management.

Jault, J.B., 2015. Investment Portfolio Management.

Kashyap, R., 2016. The Circle of Investment: Connecting the Dots of the Portfolio Management Cycle… arXiv preprint arXiv:1603.06047.

Kranner, S., Stoughton, N. and Zechner, J., 2017. A Natural Experiment in Portfolio Management.

Lashley, G., Parker, G., Singh, S., Wise, J. and Polwitoon, P., 2017. Managing Your Investment Portfolio: All Things ETF.

Magazzini, L., Pammolli, F. and Riccaboni, M., 2016. Real Options and Incremental Search in Pharmaceutical R&D Project Portfolio Management. Creativity and Innovation Management, 25(2), pp.292-302.

Schyns, P.F.M., 2016. The technological future of the wealth management industry for portfolio management investment services (Bachelor’s thesis, University of Twente).

Editorial, R. (2018). ${Instrument_CompanyName} ${Instrument_Ric} Quote| Reuters.com. [online] U.S. Available at: https://www.reuters.com/finance/stocks/overview/TGA.AX [Accessed 25 Jan. 2018].

Thorn.com.au. (2018). Available at: https://www.thorn.com.au/irm/PDF/2165_0/AnnualReporttoShareholders2016 [Accessed 25 Jan. 2018].

Bi, F. and Wu, W., 2017, July. Research on portfolio management of university education funds taking harvard university for example. In Industrial Economics System and Industrial Security Engineering (IEIS’2017), 2017 4th International Conference on (pp. 1-5). IEEE.

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