Step 3 – Ratios Commentary
When it comes to calculating ratios for our firms, that is a fairly straight forward task. But interpreting what they mean is a more difficult task as it involves delving into the performance of our firms.
The liquidity ratios assess how a firm is able to pay its current debt obligations. A good outcome would be a ratio above 1. The liquidity ratios calculated for Academies Australasia were all below 1, with the quick ratio’s 1 and 2 resulting in negative figures for the financial year ended 2023. This is a worrying sign for the firm as they will be unable to meet their current debt obligations.
Academies Australasia has many calculated ratios in a negative state. The return on equity (ROE) ratio is an indication on profitability and how a firm converts its equity capital into profit. In 2020 ROE was sitting at 11.56% but has declined each subsequent year to become negative 9.47% in the 2023 financial year. This shows that the firm is not efficiently converting its shareholders equity into profits. Their equity investors would be concerned by this outcome. Especially considering no dividends have been issued since 2020.
The firm’s asset turnover (ATO) ratio has also decreased over the last four years although it is still at a good level of 2.35 which indicates the sales relative to net operating assets are strong, despite its profit margin being negative.
The firm’s debt to equity ratio is greater than in 2020, with a slight dip in 2021 this has been steadily rising which displays it is using financial leverage to its advantage.
The equity ratio has slightly dropped from 32.59% in 2020 to 29.35% in 2023 which indicates the firm is relying more on its creditors than its shareholders to fund its operations. This is interesting considering it allowed one shareholder to purchase extra shares in 2023.
The Return on Net operating assets (RNOA) calculation was healthy at 29.17% in 2020, however the affects of lockdowns and lack of international students being allowed into the country has had a massive adverse impact on the RNOA. It was sitting at negative 6.26% in 2023, which is not a good result for the company.
The growth in sales and operating income was negative in 2021 and 2022 but was 29.04% and 346.65% respectively in 2023. It is a good indication that the firm is slowly recovering from the affects of the pandemic. However, they will need to reduce their operating expenses if the increase in sales and operating income is to have a positive effect on the firm.
The Free Cash Flow (FCF) ratio indicates the cash a firm has after deducting operating expenses and its required cost of capital. The result in 2023 for Academies Australasia is worrying as the ratio was negative 7,659.47, whereas in 2022 it was positive 4,087.02. The firm had to refund $10.6 million in 2023 to students due to visa rejections. There were also several other factors which affected FCF such as expenses required to operate new premises before it was delivering classes.
Economic profit is the profit left after deducting the weighted average cost of capital (WACC) from the accounting profit and indicates how efficiently a firm uses its assets. The results for my firm suggest they are not using their assets to their advantage as the economic profit has been declining to a negative 2,826.97 in 2023. This is another indication the refunds distributed in 2023 has put pressure on the firm and its ability to generate profits.
Overall, if the growth in sales and operating income continues to increase in subsequent years the firm should recover from the challenges it has faced in the past few years. Academies Australasia is waiting on approval to offer more degrees which shows they are committed to growing the firm to ensure it has a secure future.
Step 3 – Accounting Drivers Commentary
The key accounting drivers of a firms past economic profit is comprised of return on net operating assets (RNOA), the cost of capital and net operating assets (NOA). Profit margin (PM) and asset turnover (ATO) are the key accounting drivers of RNOA. These drivers are used to evaluate a firm’s financial position and how efficient or inefficient a firm is operating.
With the PM calculation using operating income after tax divided by sales, we can analyse how well a firm is generating profit. Unfortunately for Academies Australasia, their PM had declined from positive 8.32% to a negative figure of 2.67% in 2023, even though revenue had increased from the previous financial year. A large increase in student acquisition and teaching costs in 2023 along with the $10.6 million worth of refunds have been the major contributing factors in the profit margin loss. In 2020 the firm had not seen the full affects of the COVID 19 pandemic, but over the coming years the affect of border restrictions impinging the number of international students being allowed into the country had a severe effect on sales.
ATO uses sales divided by net operating assets to find out how well it is at generating sales revenue from its assets. I am surprised that the outcome of this ratio for Academies Australasia is good. In 2020 it was 3.5 which indicates for every $1 of assets, they are generating $3.50 in revenue. Although this ratio has fluctuated over subsequent years, in 2023 the ratio is sitting at 2.35 which indicates for every $1 of assets, they are achieving $2.35 in sales. This is not bad considering the PM outcome was unfavourable.
The resulting figures for RNOA was positive in 2020 at 29.17% however it is not surprising that this slowly declined to be negative 6.26% in 2023 as the firms profit margin was also declining and negative in 2023.
The free cash flow (FCF) calculation involves using operating income (OI) divided by the change in net operating assets (NOA). This represents the cash the firm has left after accounting for the firm’s operational expenditure and the required cost of capital. It is an important indicator of a firm’s ability to pay its debt, build up cash reserves and its ability to grow the firm. Academies Australasia prides itself on the fact it is debt free as indicated in the financial statements and Annual Reports. This gives the firm an advantage over other competitors who have experienced the same financial hardships but who have net borrowing costs.
The OI for my firm was a healthy $4,970,000 in 2020 before the full affects of the global pandemic were realised. However, by the end of the 2023 financial year this had rapidly declined to be negative $1,241,000. The large amount of refunds paid out in the financial year had a considerable impact on the resulting value of OI.
The firms NOA was high at $17,036,000 in 2020 and after a slight reduction in 2022 had risen to $19,827,000 in 2023. This was due to an increase in other current assets which comprised of prepayments and security deposits, and an increase in right of use assets presumably on the firms new building leases. Deferred tax assets had also increased. A lot of companies were given extra help from the Federal Government during the pandemic so this may be a result of this incentive scheme. The firm had higher operating liabilities of tuition fees in advance, trade and other receivables and lease liabilities in 2020 than what they did in 2023 which also contributed to NOA being greater in 2023.
The result of FCF was negative $594,000 in 2021, positive $4,087,000 in 2022 and negative $7,659,000 in 2023. Again, this comes down to the fact the firm had to process $10.6milliion worth of refunds during the 2023 financial year. The reliance on having international students’ study with the firm was risky, even though no one could have predicted the future and subsequent outcome for firms globally.
This FCF calculation is critical in the firm’s financial strength and long-term sustainability. The resulting negative FCF in 2023 is a worrying sign that the firm may not be able to pay its operating expenses and may become insolvent.
Step 4 – Economic and Business Drivers
Apparently, we are getting to the more difficult part of our analysis of our firm’s financial statements. Well, that makes me feel very apprehensive as I feel like this whole process has been quite challenging for me. While it has been difficult, I have enjoyed expanding my knowledge, I believe this may be a confidence issue on my part.
The economic and business drivers of firms are factors that impact the performance, decisions, and strategies a firm engages in. These economic and business drivers of firms require them to constantly monitor and adapt to changes in the external environment to maintain sustainability and competitiveness.
Academies Australasia has experienced regulatory constraints during the past few years due to confusion over visa requirements for international students and a backlog in the visa application process. By the end of 2023 this backlog had been cleared and “577,295 student visa had been granted – which was an increase of 119% in comparison to the 2022 program year” (Department of Home Affairs, 2023). The Australian Government has closed a loophole which saw students enrol into multiple courses which resulted in the requirement of Academies Australasia to refund millions of dollars and therefore lose revenue.
The Australian Government has recently introduced a new English Language Requirement as part of its migration strategy, which is designed to make the experience of studying in Australia more enjoyable for international students (New English Language Requirements, 2024). This new requirement may deter some students from applying to study in Australia and could therefore affect enrolment numbers in Academies Australasia’s courses.
It is difficult to say whether Academies Australasia is a market leader in their delivery of courses as there is lack of information on student numbers. This information over the past few years would give me great insight into the firm and would make it easier to estimate the number of students and therefore, sales, in the future. The number of courses on offer is increasing which displays the firm is committed to expanding and there is possibly demand for these courses amongst their target market of international students. It is a positive sign for sales to increase in the future.
The global financial markets can affect the number of international students applying to study with Academies Australasia. The economy in the students home country may be undesirable and therefore will affect whether they can afford to study in Australia. Likewise, if the Australian dollar is strong and the exchange rate is unfavourable to the student, this may deter them from studying in Australia. Exchange rates fluctuate and are subject to many different factors both domestic and internationally. How would this affect a student who is already studying here and the exchange rate changes dramatically and not to their benefit? Would they have to leave the course and return home?
Both the accounting drivers and economic and business drivers are critical to discovering the value of our firms. I believe it is possible to connect these drivers to the firms business realities. The key accounting driver of RNOA is directly connected to the regulatory constraints Academies Australasia has experienced in the past and the refunds they had to provide negatively affected the firms PM.
The results of a negative FCF are also linked to the obstacle Academies Australasia faced when they were required to process millions of dollars in refunds. All their financial results seem to come back to this one issue.
The use of fundamental analysis as a way to value our firm is a great way to give insight and understanding of our firm’s value. But I feel as an “outsider” there are aspects of my firm that I am unaware of, which would give me greater insight and clarity on my firm’s value. I am unsure if I have been able to gather enough knowledge of my firm to accurately evaluate its value and the accounting and economic and business drivers behind the results of this analysis.
My analysis has resulted in me not being confident in Academies Australasia being a successful firm at this point in time, as they have faced many hurdles in the past few years which have negatively impacted them financially. However, I do believe if they can stay solvent in the short term, then they will be successful in the future. They have a strategy in place to deliver more courses and have also leased new premises to deliver their courses. This displays they are actioning a strategic plan in order to be a successful business in the future. Hopefully they are not faced with any more major hurdles in the future.
Step 5 – Forecasting and Valuation
Background
Academies Australasia is an education training company which offers over 180 tertiary courses at 18 colleges in Australia and Singapore. They have been operating for over 112 years and were first listed on the ASX in 1977. They are committed to growing their list of offered qualifications and are consistently applying to the governing body in order to get the approval to deliver more courses. The number of students enrolled in their courses is unknown as I was unable to obtain this information from sites such as Australian Curriculum, Assessment and Reporting Authority (ACARA) or the Department of Education.
In their annual report for 2022, Academies Australasia were positive that after a few years of restrictions due to the pandemic, enrolment applications had increased and the future was showing improvement. However, in 2023 they were faced with refunding more than $10.6million in refunds to students due to confusion within the Department of Home Affairs and student migration. This had a massive affect on their financial outcomes.
Financial Highlights
The revenue generated in the 2023 financial year increased by 29% and I expect this trend to continue for the foreseeable future as globally, firms recover from the affects of the pandemic. Earnings before income tax, depreciation, and amortisation (EBITDA) also increased by 50% from the previous financial year for Academies Australasia. International student enrolment numbers in March 2024 across Australia, had increased to 16% greater than the same period in 2019 and this growth was highest in the VET sector with a growth of 48% (Australian Government, 2024).
Key Aspects of Forecasts
- Sales Growth: the growth in sales is expected to increase in the future as more courses are offered and government regulations in reference to student visas are streamlined. International students are an important factor to the Australian economy and the government will ensure this trend continues in the future. According to the Australian Financial Review “spending by international students accounted for more than half of Australia’s economic growth in 2023” (Read, 2024).
- Profit Margin: this is expected to slowly increase over time in line with the increase in sales growth.
- Asset Turnover: this is expected to stay at the same level as 2023, then have a slight increase as the firm attracts more students and sales revenue.
- WACC: I have not been able to calculate a concrete WACC so I have assumed this will be at 8% in line with our learning.
- Growth Rate: This value is based on comments in the 2023 Annual Report which uses the assumption that growth will be at 5.8% in the financial years 2025 – 2028. This assumption is still subject to many economic and business factors which can at times, be beyond a firm’s control.
Share Price Valuation
The share price on 30/11/2023 was $0.27 and at 29/05/24 is sitting at $0.15 per share. I cannot interpret why the price has dropped so much. I assume it is to do with normal fluctuations of share prices which occur all the time.
Adapted from https://www.asx.com.au/markets/company/akg
(Markets, 2024)
The share price valuation using my estimates on growth, profit margin and asset turnover may be totally incorrect as there is a huge difference between my forecast the current market share price. However, I am confident my analysis will be close to correct in the future.
| Enterprise Value | $ 161,078,820 |
| Number of Issued Shares | 132,614,467 |
| Valuation Share Price | $ 1.21 |
| Current Market Share Price at 29/05/2024 | $ 0.15 |
Recommendation
My recommendation is for the current shareholders to HOLD their shares, even though the figures don’t look appealing at the moment. The firm has plans to grow in the future and I firmly believe once they have recovered from past difficulties due to the pandemic and regulations associated with it, they will indeed be profitable to their equity investors.
ACCT13017 Unit Reflection
My experience this term has been tough at times, as I feel it take me a lot longer to understand and learn new concepts that when I was younger. Although I do feel that having held many different finance roles since graduating high school in 1991 has assisted my learning at CQUniversity. I cannot imagine how much harder it would have been if I was to study this course when I was 18 years old.
The use of Peer wise, feedback from fellow students and the many YouTube videos available to me has supported my learning and knowledge in this unit. Even though there is a lot of work involved, I have enjoyed learning new concepts and interacting with students I wouldn’t normally be in contact with when studying online.
I admit I haven’t interacted with my fellow students as often or as regular as we were instructed due to time constraints but I feel when I provided feedback on assessment 1, it was conveyed in a constructive and encouraging manner.
One of the most important concepts I learnt in this unit is that financial statement analysis is not all about the numbers and there are many other factors which affect a firm’s success (or not) and which influence the accounting, economic and business realities of a firm.
ACCT13017 Survival Kit
- Brush up on your knowledge of key accounting terms.
- Your blog will make a revival so be prepared.
- Using Peer wise strengthens your understanding of the key concepts.
- Watch every YouTube video provided by Martin.
- Interact with fellow students, particularly if you are struggling.
- Putting in the required study time each week makes submitting assessments less stressful.
- Lots of coffee!
- Healthy snacks to boost your brain.
- You are amazing and will survive a Term studying financial statement analysis.
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