FIN600 Financial Management Assignment Report

Assignment description 
Individual/Group Individual

Context

The purpose of the assignment is to provide you with the opportunity to apply the knowledge and skills acquired in FIN600 Financial Management, to a practical task, involving the use of ‘real‐world’ accounting information. This is intended to consolidate your accounting knowledge and skills.

Instructions

The basic requirement is to undertake a general financial analysis, comparing financial position and performance over the two most recent financial years, of an ASX listed company. Your Learning Facilitator will provide the details of the ASX listed company.

The analysis should consider each of the following financial ratios:

- profitability and market performance

- efficiency,

- liquidity,

- capital structure

This assignment will contain two elements:

1. Schedule(s) of relevant ratios and other useful calculations

- The detailed calculation of relevant ratios and other useful calculations should be included, as one appendix, prepared using Excel. An example template is provided under the assessment 2 information, FIN600 Assessment 2 Appendix template.xls.

- You will be advised by your facilitator as to which ratios to calculate.

- You are advised to show the formulae used in determining particular ratios and other figures.

2. A written report

The written report should:

- Explain what is revealed by the ratios and other calculations, in the context of them company’s profitability, asset efficiency, liquidity, capital structure, and market performance.

- In particular, any important changes over the two financial years should be identified, discussed and, where possible, explained.

- Provide an overall assessment of whether the company, over the recent financial year, has been better than the previous financial year, in the perspective of existing  equity investors (shareholders).

In preparing this report, students should:

- analyse the financial statements of the business;

- identify key ratios and apply ratio analysis;

- argue the case of why the organisation may or may not succeed in the future and what the business should be doing to help it succeed;

- consider the impact of the political and competitive environment on the business;

- include external factors that need to be taken into consideration and the likelihood of a merger or acquisition;

- provide a recommendation, that is, would you invest in this company after your own analysis or under what circumstances would you buy/save the business?

Solution 

Intoduction 

1.1 Background and Business

The Star Entertainment Group is engaged in leisure as well as entertainment services. The prime service of the company is entertainment followed by hospitality and gambling. Further, it is into different other services like sports, fitness, salons, and spas (Star entertainment group 2022). Apart from it, the group even comprises casino games. The company was founded in 2011 with headquarters based in Australia. The company caters to customers with its employee base of more than 8000 employees (Star entertainment group 2022).

The company is not only engaged in optimizing the business but also looks after the communities. The main area of operations is traced to Gold coast, Sydney and Brisbane. Moreover, international projects help the company in cementing its place in the industry. The services of the company are done through the brands like The Star Sydney, Treasury Brisbane, and the Star Gold coast (Star entertainment group 2022).
SGR Business segments

• The Star Sydney

It is a local landmark that is over 20 years and a main part of the community of Pyrmont and Darling. The dining portfolio of the Star Sydney is huge with more than 30-plus food and beverage offerings. It comprises of the highly awarded bars as well as restaurants that includes the famous Japanese inspired Sokyo, Black Bar and Grill and Michael Reid Art Bar (Star entertainment group 2022)

• The Star of Gold Coast

The Star gold coast abounds in luxurious accommodation followed by restaurants, entertainment and world class casino. It has everything under a single roof. It comprises of an impressive convention, exhibition and event space for a crowd of 2300 people, lively bars and casino for round the clock. It further has star hotels followed by dining space and classic café for proper enjoyment (Star entertainment group 2022). Undoubtedly it is the best sunniest destination

• Treasury Brisbane

It is one of the best opulent five star hotels and consist of the non – stop casino counter of 24 hours. It provides live entertainment followed by amazing food. The friendly environment makes it the best in the business. The presence of Will and Flow overwater bar makes it one of the prominent destination (Star entertainment group 2022)

Company Analysis

2.1 Current Financial performance, Key financial highlights, Economic outlook

Financial highlights/events of 2022

• Increment in revenue due to non gaming revenue 
• FY 2020, 2021 and 2022 hit by the pandemic
• The revenue fell down to 1.52 billion owing to the impact of pandemic 
• Reduction in the operating expenses by 23.3% to $911 million (Star entertainment group 2022)
• Reduction in the statutory EBIDTA by 44.3% making it $238 million
• Liquidity that was unused amounted to $513 million (Star entertainment group 2022)
• Debt level of the company standing at $1.15 billion 
• EBIDTA margin stood at 15%
• Share price slides on $32 million loss (Farley 2022)
• In the fourth quarter the company’s sales was better than the pre- pandemic level (SEG ASX release 2022)

Economic Outlook

• Presence of regulatory framework to regulate the on line gambling 
• The CAGR of online gambling market expected to touch 10.11%
• The success of online gambling is linked to Virtual reality and the tools of block chain
• Higher revenue can be attributed to the presence of bitcoin gambling 
• Presence of artificial intelligence will enrich the experience of the user

Ratio Analysis

3.1 Profitability and Market Ratios

The overall profitability ratio in 2022 has declined in comparison to 2021 and the same is denoted by a fall in the NPM, ROE and ROA.  The profitability took a hit because of the disruptions created by COVID-19. The factors such as disruptions in operations followed by property closure and suspension activities led to the downfall in the performance 

The ratio that needs attention is the net profit ratio, ROA and ROE. These three have posted negative returns which is vital for the company. Through these ratios, the investors gauge the profitability hence a negative indicator will prove to be negative for the company. 

The negative NPM is owing to the increment in the operating expenses which surged by 14% in contrast to the year 2021. The company witnessed higher labor cost which was owing to regulatory issues, high investment, and compliance functions.

At present the ratios do not show stability because the post-pandemic year is filled with huge volatility and hence the company has posted negative numbers. The company further did not pay any dividends because of negative profitability. The share price in 2022 dropped and hence the PE of the company dropped 13 times which is a cause of major concern. 

The computation of the ratio reflects that the company’s profitability has been disturbed and hence the major ratios are negative. It is still facing the challenge of the Covid impact. In this scenario, the company requires strong policies by the management to make amends and bring the business on track.

3.2 Efficiency Ratios

The efficiency ratio of SGR is strong because the company is undertaking a lesser number of days to receive the payment and even keeping the stock in hand for a lesser number of days before the sales happen. Overall the ratio has performed in an effective manner indicating better control of expenses and overheads. 
Days inventory of the company is high that is 74 days in 2022 and 89 days in 2021 due to the weak sales performance. The sales dropped to $1527.1 million and hence the day's inventory remained at a higher level (Star entertainment group 2022). 

The asset turnover of the company is weak which is 0.27 times in 2022 falling from a level of 8 times which is due to the bad collection methods. 
The inventory turnover has increased to 4.9 times indicating goods are being sold faster.  the times receivable turnover increased owing to the better collection policy.

The asset turnover needs specific attention as it has dropped to a low of 0.27 times and indicates the company is unable to utilize the assets in an effective manner and for generating sales. 

The favorable ratios are the day’s debtor, time inventory turnover, and the ties receivable turnover. All these ratios indicate the performance of the company has been steady when it comes to the realization of money from debtors and stronger cash flow

3.3 Liquidity Ratios

The liquidity ratio indicates the ability of the business in repaying the current obligation of the company (Atril 2014). As per the computation, it is witnessed that the overall liquidity of SGR is weak because the presence of current liabilities is more in comparison to current assets. This would be a constraint when it comes to the payment of liabilities.

The current and quick ratio in both years is below 1:1 indicating the presence of higher current liabilities as compared to current assets. The reason for the low current and quick ratio is due to the increment in the level of current liabilities which is $356.5 m which offset the increment in the current assets. Hence, the business has more obligations in comparison to assets. 

The cash flow ratio is below 1 in 2022 meaning the company has generated less cash than is needed to pay the liabilities. The cash generated from operating activities has fallen to $176.2 m in comparison to $464.5 m in 2021. The ratio is unfavorable because the liquidity of the company is weak and the business will face risk while repaying the liabilities.

3.4 Gearing Ratios

Debt is essential for the company to expand and to undertake growth opportunities. The same should be used in proportion else the company might have to pay heavy interest (Mersland & Urgeghe 2013). As per the computation, it is noted that the company has undertaken lower debt, and hence the debt to equity, debt, and equity ratio stands at 33.50%, 32.18%, and 59.96% respectively.  Moreover, the debt coverage is 8 times which means the company can easily repay the debts. The reason for the lower debt level of the company is the decline in the net debt of the company which declined from $1171 million in 2021 to $1149 m in 2022. Hence, the company has repaid the debts which made the company relatively debt free. 

The only issue company is facing is in the interest coverage ratio which is negative and hence is a question on the repayment of the debts. Overall, the ratios project great stability and with the rectification, in the interest cover, it can be more effective.

Recommendation 

Has the reporting year been better than the prior reporting year for the company?

Through the computation, it has been noted that the year 2021 was better in terms of performance as the company posted numbers when it comes to NPM, GPM, ROA, and ROE which stand at 3.75%, 22.22%, 1.05%, and 1.64% respectively. Moreover, the share price in 2021 was better in comparison to 2022. 
Coming to liquidity, year 2021 was better because the cash flow ratio stood above 1 at 1.49 times. However, the current and quick ratios remained below 1 in both years. The efficiency of the company was good in 2022 characterized by better days inventory, time receivable, and times inventory. However, the gearing of the company is better in 2022 because the company has a lower debt level and repaid the debts in 2022. Though there was a lesser difference between the ratio in 2021 and 2022 the year 2021 will still be considered best because of good profitability numbers.
 
Will The Company Succeed in The Future?

Yes, the company will succeed in the future as the fundamentals of the company remain intact. The business has suffered owing to the pandemic and hence the sales and other resources could not match up to the pre covid times. The company has a good position because the company has a lower proportion of debt. In this situation, the company is being able to manage with the lower liquidity level. However, the company needs to increase the debt level and try making the liquidity intact which will help to repay the obligations. Debt with a limited proportion is good for the company as it would help in expanding and selling more (Peirson et al 2015) 

As seen the efficiency and gearing of the company are strong. The only weak portion is the profitability and liquidity. The major concern is the NPM, ROE, and ROE which can be bettered by good management policies. On the other hand, liquidity needs to be corrected by rectifying the current and quick ratios. The financials of the company indicates that the company has been working to restore to the pre covid levels and going by the fundamentals it can be said that the company will restore the difference in the next financial year MBA assignment expert.

The Likelihood of a Merger or Acquisition of The Company?

The acquisition with the Crown failed in 2022 however going by the fundamentals and ratio of the company it can be commented that the company should not enter into a merger or an acquisition. It is because of the fact that the company has lower debt levels which are indicated by the lower debt to equity, debt, and equity ratio standing at 33.50%, 32.18%, and 59.96% respectively. Under this situation, the company has space for taking loans for expansion. Hence, at the current juncture, the company should not enter into a merger or acquisition.

The company posted good numbers before Covid and in 2021 which indicates high potential therefore; the company should perform without looking for merger/acquisition. 

Suggest What Should The Company Be Doing To Help It Succeeds

For succeeding, it is imperative that SGR needs to look into two major areas that are profitability and liquidity. The profitability of the company is weak which is seen with the downfalls in the returns of NPM, ROE, ROA, and PE ratio. It needs to correct its sales pattern and ensure that the collections are done at the due time for posting better numbers.

Secondly, SGR needs to correct the liquidity ratio which is weak. The current and quick ratio needs to stand above 1:1 which would indicate that the company has at least $1 of current assets for every $1 of current liabilities. 

Profitability and liquidity are observed by the investors before any investment is made hence both these areas need to be considered. For profitability, the company should opt for better practices that aim at a better grasp of the cost of the operation and to keep the cash flow steady. For this, the company needs to discount when early payment is done, avoid the buying prospect and hunt for leasing, and conduct credit checks

External Impacts That Need To Be Taken Into Consideration

The impact of government on the business

Star Entertainment is needed to follow different regulations and ensure that compliance is done with all the rules and regulations. Australian laws have undergone change and such changes are needed to be adhered to. The companies operating in Australia are required to follow the protocols. In lieu of this, a glaring example has been observed of SGR whereby the company has undergone a reduction of the goodwill by $162.5 million for regulatory issues (McGuire 2022). The business of Casinos is subject to changes and in lieu of this, it needs to be noted that the company needs to study the changes because flouting any law will lead to the cancellation of the license and a penalty.

Currency fluctuation even poses a major problem for the SGR because casino and gambling involve current hence fluctuations in the currency leads to an uprise or downswing in the business. 

Would you invest in this company?

From the overall study and evaluation of SGR, I would invest in the company because the share is trading at a low of $2.79. Hence, this is the correct moment to enter the stock. Though problem exists with profitability and liquidity yet its credentials are strong. Owing to the pandemic there has been a problem with sales and other factors that led to the downfall however with the fundamentals the stock will bounce back.
At the present level and below this level of $2.79 the stock should be accumulated and sold when the stock price rises. Overall, the market of SGR projects a strong base because the market of the company is diversified and has operations in three segments thereby it has a huge potential in the upcoming months. Investors want growth in the portfolio and with a share that is from the integrated resorts and gaming, the prospects are high. The company has got a robust look and is available at a cheap price so considering future expectations it can be added to the portfolio. The revenue from this sector is expected to grow in a coming couple of years. If SGR is able to tackle the expenses and make a formidable cash flow it would steer into the higher valuation zone.

Refreneces 

Atril, P 2014,  Financial Ratios. In: Financial Management for Decision Makers, (7th Edition), Pearson Education Limited, p. 70.

Farley, M 2022, Star Entertainment share price slides on $32 million loss, viewed 24 November 2022 https://www.fool.com.au/2022/08/22/star-entertainment-share-price-slides-on-32-million-loss/

McGuire, A 2022, The Star falls to $199m loss as inquiry, operating restrictions bite, viewed 24 November 2022 https://www.smh.com.au/business/companies/the-star-falls-to-199m-loss-as-operating-restrictions-bite-20220822-p5bbn6.html#:~:text=Star%20reported%20a%20statutory%20loss,the%20COVID%2D19%20pandemic%20restrictions.

Mersland, R., & Urgeghe, L 2013, International Debt Financing and Performance of Microfinance Institutions,  Strategic Change, vol. 22, pp. 36-47

Peirson, G, Brown, R., Easton, S,   Howard, P. & Pinder, S 2015,  Finance, 12th ed,  North Ryde: McGraw-Hill Australia. 
SEG ASX release 2022, ASX release, viewed 24 November 2022 https://www2.asx.com.au/markets/company/seg

Star entertainment group 2022, Star entertainment group annual report 2022, viewed 24 November 2022 https://www.starentertainmentgroup.com.au/wp-content/uploads/2022/10/2022-Annual-Report.pdf

The Star 2022, About the company, viewed 17 November 2022 https://www.starentertainmentgroup.com.au/about/