Measuring Firm Performance Using Financial Assessment Answer

Answer:

Introduction

With the increasing ramified economic changes and complex busienss structure, each and every company needs to establish proper equilibrium between cost of the capital and financial leverage of company. In this report, appropriateness of the capital structure, the firm’s pay-out policy in the increased competition and corporate governance framework of company has been analyzed. The main outcomes of the report is to identify how company could maintain equilibrium between cost of the capital and financial leverage of company by having optimum capital structure i.e. debt and equity capital of the company and its profitability. This report emphasises upon the profitability, firm pay out, capital structure and how company has been performing in the market.

Sky Network Television is international New Zealand pay television satellite TV provider which has faced high down fall in its busienss due to increased demand of the streaming video services.  The government of the New Zealand and other countries make their interventions to promote advance technologies and system for the better satisfaction of clients.  The external factors such as market condition and negative business factors have also impacted the financial leverage and share price of company at large (Sky Network Television, 2017).

Purpose of the report

This assignment is prepared to identify the positive and negative factors of the company which will help investors to make effective investment decision.

Objective of this report

The main objective of this report is to analysis the potential of Sky Network Television and how it has been performing since last five years.

Events of the Company

Company raised capital from the long term debts to diversify its business and kept zero changes in its equity part capital

Capital structure

The capital structure of company is accompanied with the debt and equity portion of the company. Sky Network Television has faced high financial leverage in its business and in case of its less profitability; company has been facing risk of sustainable busienss. There are several ratios have been calculated as below to compute the capital structure ratio of company (Sky Network Television, 2013).

 

Debt to Assets Ratio

The debt to assets ratio is an indicator of the financial leverage which divulges the % of the total assets financed by the creditors, lenders. The debt to asset ratio is calculated by corporation's total liabilities by its total assets (Ehiedu, 2014).

Debt to Assets ratio= Total liabilities/ Total assets


Particular

Formula

2013

2014

2015

2016

2017

Debt to Total Assets ratio

Total liabilities/ Total assets

0.38

0.33

0.31

0.32

0.30


(Sky Network Television, 2015).

After evaluating the annual report of Sky Network Television since last five year, it could be inferred that the debt to total assets of company has been stable since last five years. In 2013, company had .38 points of debt to total assets which went down in 2014 by .5 points. After that in 2017 it further went down to .30 points. It shows that company has lower down its debt financing due to the sluggish market condition and negative busienss profitability (Robb, & Robinson, 2014).

Interest coverage ratios

The interest coverage ratio divulges company’s ability to pay off interest payment from its earnings before interest and tax. It is observed that company has been paying good amount of interest due to its high debt funding. It is observed that EBIT of company has gone down due to the decreased profitability and earning capacity of company (Robb, & Robinson, 2014).

Particular

Formula

2013

2014

2015

2016

2017

Interest Coverage Ratio

EBIT / Interest expenses

6.52

8.04

10.86

9.76

8.40


This ratio shows that company has increased interest coverage ratio by 2 points since last five years which is very less. It should increase its interest coverage ratio approximate to 45% as per the internal and external market factors (Delen, Kuzey, &  Uyar, 2013).

Reasons why bad if so

The interest coverage ratio is bad, as company has been decreasing its overall net profit which reflects the negative busienss indicator.

Strategic strengths and weaknesses regarding capital structure

The capital structure of company shows that company has high amount of debt funding which reflects that Sky Network Television will have lower amount of cost of capital. It will assist in increasing the overall return on capital employed (Mwangi, & Murigu, 2015).

Weakness of the Capital structure

Sky Network Television has been facing high financial leverage. With the decrease in its profitability, Company might go into winding up or liquidation if it fails to cover its interest payment to its debtors (Sky Network Television, 2017).

Conclusion

Capital structure policy of Sky Network Television over the past five years

After evaluating the annual report of Sky Network Television, it is observed that the debt to equity ratio of company is not stable. Company has decreased its debt funding since last five years. It has been observed that the capital funding is stable but due to the sluggish market condition, company has lower down its equity funding throughout the time (Owens, (2018).

Particular

Formula

2013

2014

2015

2016

2017

Debt to Equity Ratio

Debt/ Equity

                              1.24

             1.08

               1.05

           1.06

               0.97


It could be inferred that Sky Network Television has not followed stable dividend policy but kept its equity capital stable and lower down its debt funding.  The main reason of changes in debt portion is related to its fewer amounts of profitability and sluggish market condition.

The interest coverage ratio of Sky Network Television reflects that company has very less capability to pay off its interest payment. If this loan funding and interest payment is not decreased then Company in near future might face destruction of its business. The main reason is based on the decrease in tis overall profit which eventually resulted to lower down its operating income.  The level of financial distress in 2017 is normal but if in case in the future the profitability of the Sky Networks goes down then company might face destruction of its busienss an collapse at large (Sky Network Television, 2015).

The capital structure of company is not appropriate because of the profitability and debt portion part. Company should increase its equity financing by at least 20%. It has kept same equity capital since last five year which is not appropriate capital strategic decision. If company wants to win over the market then it must infuse more capital in its business by raising funds from issue of capital in market.  Now in the end, it could be inferred that Sky network needs to increase its capital portion to raise funds from the market if it wants to win over the market.

 

References

Delen, D., Kuzey, C. &  Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Ehiedu, V.C., (2014). The impact of liquidity on profitability of some selected companies: The financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.

Mwangi, M. & Murigu, J.W., 2015. The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, ESJ, 11(1).       

Owens, D. (2018). Simply Wall ST. Retrieved from https://simplywall.st/stocks/au/banks/asx-ben/bendigo-and-adelaide-bank-shares/news/what-makes-bendigo-and-adelaide-bank-limited-asxben-a-great-dividend-stock/

Robb, A.M. & Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies, 27(1), pp.153-179.

Sky Network Television, 2013, Annual report, retrieved on 12th May, 2018, from https://www.annualreports.com/Company/Sky-Network-Television-Ltd

Sky Network Television, 2015, Annual report, retrieved on 12th May, 2018, from https://www.annualreports.com/Company/Sky-Network-Television-Ltd

Sky Network Television, 2017, Annual report, retrieved on 12th May, 2018, from https://www.annualreports.com/Company/Sky-Network-Television-Ltd

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