You are required to undertake financial statement analysis on Adairs Ltd and prepare a written report -

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Question:

You are required to undertake financial statement analysis on Adairs Ltd and prepare a written report - see required structure below.

• Use the data from Adairs Ltd’s financial statements to undertake financial statement ratio analysis – see below.

• Your report must incorporate financial statement analysis that examines the profitability, asset efficiency, liquidity, capital structure (solvency) and cash flows of Adairs Ltd.

• Your report should cover a 3-year period for the periods ending 2020, 2019 and 2018 and should be sufficiently broad in scope to demonstrate your understanding of findings, following the analysis.

• The Adairs Ltd Annual Reports can be downloaded via the Adairs’ website or via Canvas.

REPORT STRUCTURE

1. Title Page

• Title of your report

• Student names and I.D.

2. Executive Summary

• A brief discussion of the aim and scope of the report.

• A brief discussion of the company.

• A brief discussion of key findings and recommendations.

3. Company and Industry Background

• Brief company profile of Adairs Ltd – include its history, financial highlights, and other relevant company information such as when and where it started operations; any major expansions and acquisitions from then to now; types of products/services it offers, significant business relationships.

• Industry – includes identifying which industry it operates in, an understanding of the state of the industry and identifying major competitors.

4. Ratio calculations

The minimum ratios to be calculated for each of the 3 years are:

• Profitability

o Return on Equity

o Return on Assets

o Gross Profit Margin

o Net Profit Margin

o Cash Flow to Sales

o Asset Turnover

• Asset Efficiency

o Days in Inventory

o Days in Debtors

o Activity Cycle

• Liquidity

o Current Ratio

o Quick Ratio

o Cash Flow Ratio

• Capital Structure (Solvency)

o Debt to Equity Ratio

o Debt Ratio

o Equity Ratio

o Interest Coverage

o Debt Coverage Ratio

• The calculations of the above ratios involve detailed workings (show your steps in both the formulas and the figures) for all ratios calculated for each of the three years. All the ratio workings should appear in the appendices, and not in the body of the report.

7.1. Assumptions and other useful information for calculating ratios:

• Use the 2020 Financial Statements to collect the 2020 and 2019 figures.

• Use the 2018 Financial Statements to collect the 2018 and 2017 figures.

• Provide 2 decimal points for your ratios.

• Ratio formulas to be used as per the Week 7 and 8 Lecture Summary Videos.

• Use Trade & Other Receivables shown in the balance sheet when calculating Days Debtors.

• Assume that 10% of sales are credit sales.

5. Analysis and interpretation of financial ratios

• Based on the financial reports and other information, undertake financial statement analysis and interpretation that covers the prior three financial years ending 2020, 2019 and 2018, concentrating on the following aspects:

• Profitability

• Asset Efficiency

• Liquidity

• Capital Structure (Solvency)

• Please note that analysis does not mean just restating the ratios or their formulas you need to discuss the implications!

6. Your analysis should incorporate benchmarking such as comparison to competitors and industry averages.

7. Analysis and Interpretation of Cash Flow Statements

• Your analysis should also include a review of Adairs Ltd’s operating, investing, and financing cash flows over the prior three years. Consider absolute figures, trends and any relevant ratios to assist your analysis.

8. Assessment of other relevant information

• An assessment of other information, including non-financial, that is relevant to the assessment of Adairs Ltd. For example; global events, industry developments and issues, unusual or one-off events, structural changes to the company such as changes in board composition, mergers or acquisitions, economic factors and any other relevant issues which may potentially impact on the operations of the company.

• Consider also its environmental and social performance.

9. Summary and conclusion

• Based on your analysis and findings, summarise Adairs Ltd’s current financial situation, consider its potential outlook and make any recommendations.