Sample Accounting Term Paper on Financial Performance and Risks of Briscoe Group Limited

Financial Performance and Risks of Briscoe Group Limited

EXECUTIVE SUMMARY

The retail industry in New Zealand is highly competitive due to the presence of numerous companies and the availability of substituted products. The government also imposes high taxation level to companies. These factors have contributed negatively by reducing the profitability and financial performance of Briscoe Group Limited. Despite that, the retail market in New Zealand is highly favorable due top good macro environment. Over the past three years, Briscoe Group Limited has recorded remarkable performance in both financial and non-financial categories; its profits steadily increased in 2014, 2015, and 2016. It is good company to investment in if you want to receive high returns on your investment.

INTRODUCTION

Briscoe Group Limited is a retail chain company that operates within New Zealand. The company has its root in England where it was first established in Wolverhampton in 1781 before steadily expanding to other countries that were under British colony including New Zealand and Australia. The first retail warehouse of the company was opened in New Zealand in 1862 along the Jetty streets in Dunedin. Since then, the company has continued expanding its business links in New Zealand and in 2016 there were a total of 44 stores spread across major towns in the country.

Being in a retail business, Briscoe specializes in the retail of sporting and home ware goods; it sells various products such as home furnishings, cushions, bedroom products, and outdoor furniture, sporting goods, floor coverings, bathroom products, gardening accessories, footwear, sporting apparel, fitness equipment and other related merchandise. Briscoe use chain of retail stores to offer these products to its customers.

 The main objective of writing this report is to evaluate the financial performance and risks of Briscoe Group Limited for the 2014, 2015 and 2016 financial years then use result of the analysis to determine whether it worth investing in. This analysis was designed to provide investors with accurate information that would lead them to making wise choices about investing in the company.

The scope of this report was limited to assessing the financial performance and risks of Briscoe Group Limited between 2014 and 2016. It only analyzed the company’s financial data and the associated business risks. The analysis was organized into discussing the external environment and corporate strategy, financial analysis, and finally providing the necessary recommendation.

FINDINGS AND DISCUSSIONS

External environment and corporate strategy

(a) Macro-environment

New Zealand offers the primary market for Briscoe’s retail business and analysis of its macro-environmental factors would help understand the risks and opportunities that contributed to the company’s financial performance level in the previous years.

  • Political factors – unlike other countries, New Zealand is recognized for its stable government, a factor which has largely contributed to the economic stability of the country. It has strong rules and regulations which give businesses great chance for success. In New Zealand, political change usually takes place after every three years and the new government might create new rules for businesses. However, the country has strict labor laws which make labor force expensive. Companies operating in New Zealand pay more taxes because of high tax and lending rates thus reducing their profit margins. However, the good thing with New Zealand is that it has allowed freedom for business and trade thus companies can operate easily without government interference.
  • Macro-economic factor – the current macro-economic situation in New Zealand is excellent and has enabled the country to register a remarkable growth level within the last 5 years. The country has a population of about 6.4 million people with a per capita income of $ 3,450. The economy is growing steadily and the GDP is expected to reach $207 billion by 2018; the growth in GDP is driven primarily by domestic demands alongside private consumption and investments. Because New Zealand’s economy depends highly on trading with other countries, any change in external demand may affect its economic situation significantly. However, the favorable business climate in New Zealand continues to attract huge FDI inflows into the country.
  • Social factors – with a total population of 6.4 million people, the country has high market for sporting and home ware goods because 86% of them live in urban centers. Tourism activity is thriving well in New Zealand and is steadily becoming the number one source of income. The country has established a wonderful social system that depends on doing business with its neighbors and trade partners.
  • Technological factors – it is important to note that New Zealand depends on other countries for much of the technology it uses. In 2015, the number of paved roads reached 68% which is not enough for a high income country such as New Zealand. However, the air transport is thriving well and the country and the total number registered in 2015 was 215,000. Over the past 5 years, the government has been improving the digital situation in the country by spreading the use of internet all over.

(b) Competitive Dynamics in the Industry

We used Porter’s Five Forces Analysis to determine dynamic forces driving competition in the retail industry in New Zealand and how they have affected the performance and profitability of Briscoe Group Limited. In this analysis, Porter argued that the five forces that greatly influence competitive dynamics in the industry are five namely supplier power, buyer power, competitive rivalry, threat of substitution, and threat of new entrants.

  • Supplier Power – in New Zealand, the supplier power in retail business is generally small because most companies source their products from external manufacturers; majority of sporting and home ware goods sold by Briscoe are supplied by external manufacturers. Even though the external manufacturers are indispensable, they have very minimal control of the retail business in New Zealand and can always be swapped out a factor which has contributed to relatively low input prices. In addition, the strength of supplier power New Zealand’s retail business is low due to the availability of numerous external suppliers combined with a few local ones. This has increased competition in the market thus pushing prices down as currently enjoyed by Briscoe Group Limited.
  • Buyer Power – Briscoe Group Limited faces the challenge of significant bargaining power of buyers; there are many buyers in the New Zealand’s retail environment especially for sporting and home ware goods. Because there is large population of retail buyers in this country, Briscoe cannot easily exert pressure on other competitive firms.in addition, the company is facing the challenge of high diversity of buyers, which is making it to have a weak force ion the market. This has acted negatively to Briscoe by pushing prices down thus a reducing profit margin.
  • Competitive Rivalry – the intensity of competitive rivalry is very strong in New Zealand’s retail industry because there are numerous stores that sell the same or similar products. The large number of firms in the retail market exerts a strong force on Briscoe; most of them are highly aggressive. However, the advantage that Briscoe has is that not many of these retail firms specialize in the sale of sporting and home ware goods. Some of the leading competitors to Briscoe Group include Warehouse Group Limited, Super Cheap Auto, Kmart discount stores, and Farmers Departmental stores among others. The presence of these rival companies intensely increases the level of competition for customers, prices as well as market. This has resulted in lower prices of the retail goods and Briscoe had to close some of its branches within the last three years due to nonperformance and reduced profitability (Böhm, 2008).
  • Threat of Substitution – in the New Zealand’s retail market, customers can easily find alternative or same product from other companies; the threat of substitute product is relatively high in New Zealand’s retail sector because there is large number of rival retail firms selling the same products. Because of this, customers can easily find substitute products thus greatly impacting the performance of Briscoe thus exposing it to potential reduction in profitability as well as market share. It is also essential to note that Briscoe Group Limited offers a wide range of retail products, some of which there are ready substitutes in the market while others there is none. However, for products that do not have substitutes in the New Zealand’s market, consumers cannot easily walk away from them to other competitors.
  • Threat of New Entry – in New Zealand’s retail market, the threat of new is a major force that directly affects the operation of already established companies such as Briscoe Group Limited. Because the retail industry is considered highly profitable, many new firms are attracted to it thus increasing the threats of new entrants. Even though small in size, new retail firms often entre the New Zealand’s retail market every year thus potentially reducing the profitability and market share of Briscoe Group Limited. In 2014 and 2015, new firms that entered the retail industry were 4 and 3 respectively. These new firms entre the market and compete with Briscoe for the limited customers on the basis of location, convenience, and specialty.

(c) The Competitive Strategy

The corporate retail market in New Zealand is tough and challenging due to stiff competition, low prices, high taxes, and other factors. Despite the presence of these factors, Briscoe Group Limited is pursuing some competitive advantages and strategies that would enable it enable it emerge strong and highly profitable in the market. Some of these strategies have helped the company to seen sustainable growth in earning over the past three years. The strategies currently being pursued by Briscoe include online offerings, offering of premium products, private partnerships, and acquisitions (Parmentier & Cuypers, 2015).

  • Online offerings – Briscoe Group Limited is currently focusing on launching its new online offering to increase its sales outlets in New Zealand. The new advanced online offering would enable the company to reach out to the large untapped online buyers thus potential increasing its sales volume to a significant level. The company is also planning to use the new online offering to focus on their customers thus creating a long lasting relationship. The company has realized that majority of consumers are nowadays being met online where they carry out their transactions through web portals. The company recently launched online sales for its three major brans namely Rebel Sport, Briscoe Home ware, and Living & Giving brands.
  • Premium products – another competitive advantage and strategy being pursued by Briscoe Group is the offering of premium products to its customers. Offering premium products would guard the company against constant threats of price discounting by competitor firms such as Warehouse Group Limited, Super Cheap Auto, Kmart discount stores, and Farmers Departmental stores among others. Briscoe has stood firm that despite the price discounting by other companies, they are going to enhance their premium products in order to create high value for its customers.
  • Private partnerships and acquisitions – Briscoe Group Limited is planning to start partnering with other local and international companies in the New Zealand’s market. The private partnering is intended to increase Briscoe’s market share and performance. Apart from private partnering, the company intends to buy small retail firms in New Zealand in order to increase its market share; the recent purchase of Kathmandu Holdings Limited is one of these pans that have been successfully achieved.

FINANCIAL ANALYSIS

In order to evaluate the financial performance and risks of Briscoe Group Limited for the 2014, 2015 and 2016 financial years, the financial data the respective years were analyzed by considering the company’s profitability, liquidity, leverage, asset utilization, as well as share market related performance (Fridson, Fridson & Alvarez, 2011).

(a) Profitability

Briscoe Group Limited consist of three separate segments namely Rebel Sports, Briscoe Homeware, and Living & Giving, which contributed differently to its profitability level in 2014, 2015 and 2016. Majority of the Living & Giving and Briscoe Homeware products are imported from other countries, and throughout 2015 they contributed greatly to the company’s profitability due to the strengthening of New Zealand dollar. The company’s revenues from these brands from the year 2011 is shown in the grown below.

The table below gives the overall financial performance of the company between 2014 and 2016.

Briscoe Financial Performance (NZ$ Millions)

 201420162016
Sales revenues483.6507.512.8
Cost of goods sold-297.4-309.8-315.1
Gross profits186.2197.2201.2
Gross profit margin (%)38.5%38.9%40.49%
Other operating income0.12.32.2
Total operating expenses-135.3-140.9-141.2
Taxation-13.4-15.6-16.2
Net profit33.639.340.3

Company’s Profitability Indicators for 2014/5/6 ($ Millions)

201420152016
Tax Rate (%)28.4528.4028.89
Net Margin (%)6.947.758.53
Financial Leverage1.531.511.43
Return on Equity (%)24.9426.5429.46
Asset Turnover2.382.252.35
Return on Assets (%)16.4917.4620.05
Return on Invested Capital (%)24.0325.6829.30
Interest Coverage102.99

The financial data above indicates that Briscoe achieved consistent growth in sales, revenues and profitability between 2014 and 2016. A combination of effective marketing strategy, strong stock management and value proposition has helped the company achieve the remarkable result over the recent years. Currently, the company is in good control of its operating expenses and enjoys a relatively stable gross profit margin which has resulted in consistent growth in profitability over the past three years. Other factors that enabled Briscoe to increase its profitability of the past three years include creation and expansion of online stores, as well as refurbishment of physical stores in New Zealand.

(b) Liquidity

Financial liquidity is the ability of the business to easily convert its assets into cash; liquidity can be used to evaluate the level of company’s financial performance. Analysis of Briscoe’s share price range, transactions, as well as average volume can help give a clear picture of its liquidity level. The average volume of shares traded more than doubled in 2015 basically following the announcement of takeover of Kathmandu Holdings Limited. Despite this, the volume being traded remained generally low in 2014, 2015, and 2016 financial years. The graph below shows the performance of Briscoe’s share price over the last two years.

Relative Over/Under Performance

The chart indicates that in 2014 and 2015, Briscoe Group Limited slightly performed well against the NZX50 Capital Index indicating its potential to reward investors who buys the shares. In addition, the chart shows that the company’s share price were at a premium for the last two years indicating that its business is viewed favorably in the market thus holding good liquidity.  Over the past three years, the company has maintained good working capital, based on its current assets and current liabilities; however there was a drastic drop in 2015 which taint its future financial health as shown in the table below.

Working Capital ($ Millions)

 201420152016
Total Current Assets73.3972.7445.91
Net PP&E25.3526.2526.98
Intangibles0.670.620.65
Other Long-Term Assets0.590.4026.45
Total Current Liabilities34.4533.4329.85
Long-Term Debt
Other Long-Term Liabilities0.250.310.30
Working capital38.9439.3116.06

Briscoe’s Liquidity Indicators for 2014/5/6

201420152016
Current Ratio2.132.181.54
Quick Ratio1.181.220.30
Financial Leverage1.531.511.43
Debt/Equity

(c) Financial Leverage

Financial leverage is the practice of using borrowed capital or other financial instruments to increase the return on an investment. It can also be considered as the amount of debt that is currently being used in financing the company’s assets. Analysis of financial data for the financial years 2014, 2015, and 2016 reveals the level by which Briscoe Group Limited has been leveraged; the company is not debt-free. The table below provides an overview of the company’s level of leverage

Financial Leverage for the Years 2014/5/6

 201420152016
Total liabilities34.4533.4329.85
Total assets73.3972.7445.91
Total equity38.9439.3116.06
Net cash flow from operating expenses46,0924890052040
Long term debt000
Financial Leverage1.531.511.43
Debt to total assets ratio0.460.450.65
Debt to equity ratio0.880.851.85
Cash flow from operating to debt ratio133714621743
Cash flow from operating to long-term debt000

The last three items on the table above indicates the financial leverage position of Briscoe Group over the last three years. First, the company does not have any long term debt, something which has potential of increasing its financial performance over the next years. In addition, the current company’s debt level is sustainable. Also, Briscoe Group has minimal risk of failing to discharge its financial obligations. It is also interesting to note that within the last three years, the company has ben placing its cash on short term financial derivatives and investments.

(d) Asset utilization

The analysis of asset utilization ratios determines how well the company’s assets are currently being used in generating profits. To determine Briscoe’s asset utilization ratios over the last three year, we calculated accounts receivable turnover, average collecting period, fixed asset (PPE) turnover, total asset turnover, and stock turnover and the results presented in the table below.

Table of Asset Utilization Ratios

 201420152016
Accounts receivable turnover235.66194.46302.87
Average collecting period51.1953.9661.43
Fixed asset (PPE) turnover9.758.738.84
Total asset turnover2.382.252.35
Stock turnover (times a year)4.444.344.28

The data indicates that the company is not effectively using its assets to generate profits because it has relatively low stock turnover; this have a long term effect of reducing the profitability level. In addition, the fact that the company has high level of account receivable turnover indicates that it is not effective in collecting its debts thus not much of its capital is used in generating profits.

(e) Share market related performance

Other information that could be sued to analysis the financial performance of Briscoe Group include adjusted closing price, basic earnings per share, P/E Ratio, return on invested capital as well as number of ordinary shares on issue. The table below gives a summary of these statistics for the last three years.

Other Performance Ratios

 201420152016
Basic earnings per share0.610.660.75
P/E Ratio0.150.170.21
Dividends0.100.160.20
Return on Invested Capital (%)24.0325.6829.30

The basic earnings per share steadily increased in the three financial years to a maximum of 0.75 in 2016, which is an indication of a growing return on investment and promising high profitability in the future.  On the other hand, the earnings per share ratio is considerably small, however the value increased significantly in 2016 further indicating steady growth of income and promising better profitability. Lastly, the return on capital investment is considerably high showing that investors to receive lucrative income from their investments; it also has been increasing steadily over the past three years.

CONCLUSION & RECOMMENDATION

The report has provided a deep analysis of the financial and non-financial performance of Briscoe Group Limited for three year from 2014 till 2016. During these three financial years, several external environment factors influenced the level of the company’s performance in the New Zealand’s market. The macro environmental factors in New Zealand such as political stability, stable market and strong rules improved the company’s business activities. However, its profitability level was minimized by high tax rates in the country.

Other factors that contributed to low performance are high level of competition in the market, availability of substitute products as well as threats of new market entrants; these factors pushed the prices down this lowering the profitability of Briscoe Group Limited.

In the same period, the company comes up with new corporate strategies that helped boost its market performance. For instance, the company launched online offering for all its three brands which eventually increased the overall sales volume. The company also purchased Kathmandu Holdings Limited, a move that boosted its market share significantly leading to high performance in increased share performance in the stock market.

Analysis of Briscoe’s financial performance over the last three financial years indicates that it is a good company to investor in. first, the profitability level has steadily risen over the last three and the future performance is promising as the company continues with its private partnering and acquisition program. The current company’s debt level is sustainable is sustainable and the company does not have any long term debt at the moment. All these indicators together with others indicate that it is reasonable to investment in Briscoe Group Limited that is it is recommended.

References

Böhm, A. (2008). Interpretation of key figures in financial analysis. München: GRIN Verlag GmbH.

Fridson, M. S., Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: A practitioner’s guide. Hoboken, N.J: Wiley.

Parmentier, G., & Cuypers, B. (2015). Business valuation: Using financial analysis to measure a company’s value. Cambridge, UK: Intersentia.