I really like calculating ratios, there is something therapeutic about it, but anyone can learn how to calculate ratios. It’s our understanding of what these ratio’s tell us that’s important.
My firm’s profitability ratios show me that they are doing pretty well at generating income from their revenue and utilising their assets well to generate returns. They are doing well at controlling their operating and overhead costs. ROA dropped slightly in 2020, which I put down to the effects of the pandemic. I had a look at Lindsay Transport to compare these ratios and it appears as thought they took a harder hit in 2020. K&S are a significantly larger company so this reflects their ability to withstand economic pressure.
I expected them to have a relatively high total asset turnover in comparison to their net profit margin which was shown to be true in 2017. The next three years were a switch around. The net profit margin was high and the total asset turnover was low, not an extreme variance though. I suspect since they have a large fixed asset base they wouldn’t be turning over assets quickly through sales- they are an asset intensive company – large proportion of P,P&E for their operations. The ATO and PM from an enterprise standpoint are very interesting in their differences, which I will note in my accounting drivers commentary. The current asset turnover ratio was a lot higher than the net profit margin. Trades and other receivables is the largest current asset, so given this information I would suspect that their collection methods are sound, but I want to look into this further because the ratio has gone up and down over the last 4 years and ideally you want to be collecting as quickly as possible. I’m also not sure what the industry benchmark is here so I will do some more digging.
Liquidity ratios tell me a sombre story. They only had enough current assets to meet their current liabilities in 2020, which I put down the the increase in cash and cash equivalents (government stimulus) , and decrease in current liabilities (interest bearing loans and borrowings). They also refinanced in 2020 and the classification of some line items changed, so it this really an accurate reflection of liquidity? I would be more inclined to go with the last three years that indicates ratios below 1. This is where I need to look further to answer why this is the case. When you take receivables out of the equation the ratio drops drastically which shows me they rely heavily on the trade and other receivables to meet their current obligations. This indicates a higher risk of default and an area I need to look further into given their industry and the economic challenges they may face in the future.
They are leveraging quite high indicating they are structured towards debt over equity financing. In 2018 for every dollar in equity they had 1.51 in debt, this decreased to 1.21 in 2020, but it’s still high. This will be an interesting comparison with my enterprise ratio’s. There isn’t a problem with heavy leverage in a larger company that has significant cash flow but not when a company is in decline. I’m going to look at their cash flow statements to get a little more information on this. I know we are concentrating on our enterprise ratio’s but I think this is something worth looking at further.
The equity ratio shows me for every dollar of assets, between 39.9% and 45.3% over the last 4 years has been financed by equity. This ties in with the last ratio as it indicates they are a leveraged company. This can also raise solvency issues as it ties back to their ability to meet their debt obligations in a timely way. The times interest earned ratio shows that they can meet their interest expenses two times over in 2020 but it hasn’t stayed stable in the previous years. In 2019 it was 1.40 which would question their abilities to pay their interest expenses. I am going to look further into this because it’s a solvency issue and if they fall on hard times and receivables go down, they run the risk of not being able to meet their obligations which they rely heavily on receivables to do.
That’s enough for today I think. I will post again on their other ratio’s hopefully within the next week and their accounting drivers as well.
How is everyone else’s ratio and accounting drivers commentary going?
I'm accounting on you! 
My company is Logicamms and saw significant changes in the 2019 financial year. When researching I found that the most likely reason for these changes would have been the merger that occurred with OSD Pipelines. The financials indicated that during the merger OSD paid a substantial amount to pay off part of a debt which saw the Debt to Equity ratio decrease. With this merger there was also an increase in assets and expenses resulting in further changes to the ratios. I believe that moving forward Logicamms will see improvement in ratios and its overall position. Did your ratios raise any questions? Mine raised the question as to whether or not the merger will be a beneficial move in terms of the financials and how long it might be before they see any real results from this. Also will we see the merger strengthen or will it eventuate that it was a bad business decision and be sold? Would love to discuss further!
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How interesting is the story our company’s ratios tell us. I just hope my story is going to make sense 🤣 At first glance I thought my company was doing well. Overall this may be true given how they are a big player in their industry and they are no spring chickens, but their liquidity ratios make me think twice as their current assets don’t cover their current liabilities. Given the nature of their business they are heavily reliant on trade and other receivables (which is evident with what quick ratio 2 shows) to meet their obligations, so how do they weather economic changes? They are structured more towards debt which is fine and ties in with the current and quick ratios, but this then poses problems in economic downturns. I’m trying to steer away from giving that too much time as we are focusing on operating activities and I don’t have the time to go down the rabbit hole, although it’s likely my mind will go there.
Making the connections between them from a company ratio perspective and enterprise ratio perspective is eye opening. My company’s ATO ratio has been stable (low as expected as they have a large fixed asset base and aren’t turning over assets into revenue quickly) with PM seeing some growth, so what’s driving the profit margin? sales growth What’s driving sales growth?………… mainly transport services rendered with sale of goods (fuel) playing a small part. So their relationships with their customers is where I need to look further. What’s their competition doing? Environmental concerns with emissions and compliance moving forward, the vehicles they use, import and export challenges, the price of oil, artificial intelligence in the industry, ongoing effects of COVID 19, the transport industry as a whole and where they are heading given aviation restrictions. Forecasting is going to be challenging but fun I think. I haven’t fully done my accounting drivers commentary yet but their free cash flow and economic profit is interesting. From an operating standpoint I just don’t know how I feel about them at the moment lol. So many moving parts. Once these SOA’s ,which are now the bain of my existence, are done, I’m really looking forward to seeing if I can provide a convincing valuation. It’s going to be interesting to see if I can actually focus on what we need to focus on, rather than going off on my own tangent 🤣
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It will be interesting! Especially the concept of environmental factors as there is a large movement towards better alternatives! I wonder will they be able to keep up with the new requirements? and how it will effect their overall position long term! I often wonder if companies look to these changes as a positive change and really work to strive for better or if they see it as a negative impact? I am also really interested in the after effects of Covid-19 in everyone’s companies! it will be interesting as locally, so many businesses really improved their profit margins. Especially nurseries, this was due to their “drivers” where people saw that by growing their own veggies they would be free from relying on the supermarket. This drove sales very high and in one business we saw that they tripled sales! amazing! So many different factors for every industry to be considered
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