A.

Analysis of Financial Health: Cash Flow Health Dimension

 Analysing Dairs’ Statement of Cash Flows for 2020

Selected items 2020 ($'000) 2019 ($'000)

Net cash from operating 97,307 35,017
Net cash from investing (50,040) (6,959)
Net cash from financing (40,020) (24,102)
Change in cash 7,247 3,956
Source: Figures from Dairs Limited, 2019-2020 Full Financial Report, p. 53.
In 2020:
Net cash inflow from operations (Receipts from customers was very big).
Net cash outflow for investing (In this year, the Group accquired all of shares and voting rights in
Mocka Limited).
Net cash outflow for financing (This figure increased than the prior year because they sent much
money on payment of principal portion of lease liabilities and dividends).
Overall increase in cash
Overall, show signs of healthy cash flow position.
 Analying Dairs’ cash flow health
1. Major sources and major uses
Major sources 2020 (inflows):
 Operations ($97,307,000).
 Receipts from Government Grants ($7,136,000).
Major uses 2020 (outflows)
 Acquisition of subsidiary, net of cash acquired ( The Group acquired all of shares and
voting rights in Mocka Limited).
 Dividends paid ($13,270,000).
 Payment of principal portion of lease liabilities ($26,885,000).

A significant event is the acquisition of subsidiary recognised in investing and lease

liabilities in financing, accounting for some of the reduction in payments to suppliers and
employees and increase in CFFO in 2020.

2. As noted earlier, overall net increase in cash. This is a good sign.

3. a. Also as noted earlier, CFFO is positive. It is good for a mature company.
b. CFFO in 2020 ($97,307,000) > CFFO in 2019 ($35,017,000). It’s a good sign for business
c. CFFO in 2020 > net profit ($35,382,000)1. Good. Major differences are depreciation and
amortisation, inventory, other payable and provisions.

1
Figures from Dairs Limited, Financial Report 2020, note 5, p. 70
 d. CFFO ($97,307,000) > Capex ($7,531,000). It is good because cash flow available for
financing.
e. CFFO ($97,307,000) > dividends paid ($13,270,000). It is a good sign.

4. Cash received from customers > payment to suppliers and employees.It is good as it suggests
sufficient cash margins and sales volumes and customer paying. Payment to suppliers and
employees fell slightly in 2020 compare to 2019.

5. Capex ($7,531,000)>depreciation and amortization on PPE and intangibles ($7,217,000 for PPE
and $712,000 for computer software)2. It is a warning sign. It indicates shinking operating
capacity.
6. Drawings of borrowings > repayment of borrowings. This increased financial risk. However, in
2019 the drawing of borrowings and repayment of borrowings were equal. In 2020, they needed
more moneys to invest long-term assets and subsidiary. So this maybe a potential warning sign.
Overall increase in cash is a good sign (especially it incresed much more than the prior year).
Overrall, no major warning signs, suggesting a healthy cash position.
However, something to watch:
- Dairs got themselves into some trouble with the markets a few years prior due to
perceived overload debts. In 2020, they had to pay a lot of money to lease liabilities and
dividends.

2
Figures from Dairs Limited, Financial Report 2020, note 3, p. 67
 B. Analysis of Financial Health: Other Dimensions
Adairs ratio analysis

ROE PE ratio
2020: 27.26% 2020: 10.71x
2019: 25.28% 2019: 7.93x
2018: 28.23% 2018: 12.12x

ROCE Gearing ratio

2020: 26.16% 2020: 52.32%
2019: 27.43% 2019: 24.39%
2018: 28.18% 2018: 27.77%

Op profit margin Sales to CE Interest cover

2020 :15.18% 2020: 1.72x 2020: 9.45x
2019 : 12.64% 2019: 2.17x 2019: 35.18x
2018: 14.39% 2018: 1.96x 2018: 30.43x

Current ratio
2020: 0.82x
2019: 1.47x
2018: 1.59x

Source: Author calculations based on figures from Dairs, Fianancial Statement FY2020 and FY2018.
 Profitability
Despite a small improvement in sales revenue, there was a slight deterioration in the gross profit
margin. However, the small drop in administrative expenses improved the 2020 operating profit
margin compared to 2019.
Despite the fall in gross margin being small in percentage point terms, it is of concern because the
cost of sales is the largest expense of the business (42.9% of sales revenue in 2020).
A more than fivefold increase in finance costs (mostly due to rearrangements of financing
facilities), along with increased tax led to the slight rise in net profit margin.
In addition, the return on equity for 2020 was 27.26%, which was a slight improvement on the 2019
ROE of 25.28% but there is room for further improvement, given the 2018 ROE was 28.23%. To
understand the reason for the rise, we look to ROCE and the gearing ratio. The main reason for the
ROE rise appears to relate to the gearing ratio, which went up significantly in 2020 that leads to
financial risk. The ROCE deteriorated in 2020 compared to 2018 and 2019 so it was not good for
business. The operating profit margin improved in 2020 compared to 2019 but was slightly higher
than the 2018 the operating profit margin of 14.39%.
Overall, profitabiliy improved slightly.
 Efficiency
The sale to capital employed for 2020 was 1.72 times, which was a marginal deterioratiton on the
2018 and 2019 the sales to capital employed with 1.96 times and 2.17 times respectively.
This deterioration is refected in both PPE management and working capital management.
 Fixed assest turnover:
2020: 18.85x, 2019: 16.6x and 2018: 15.33x. An increase in the ratio suggests more
efficient use of fixed assets in 2020.
The operating cycle remained at about 96 days in 2019 and 2020 but it shortened than 2018
(98 days) although the improvement in inventory turnover. There was a modest increase in
CCC from 2018 to 2020. The reason for this is the average settlement period A/R ratio in
2020 increased to 2.27 days compared to 2019. This means customer paid this company
longer than in 2019 and 2018. Furthermore, average settlement period A/P ratio for 2020
fell to 41 days while this figure was about 43 days in 2019 and 48 days in 2018. This also
rose the cash conversion cycle period due to the company paying suppliers faster in 2020.
The 3 days increase in the CCC to around 56 days in 2020 means a larger investment is
needed to working capital.
Overall, in 2020 this company was less efficiency than last 2 years.
 Liquidity
The 2020 current ratio shows a significant deterioration by nearly doubling on 2019. This was
mostly the result of the increase in current liabilities ($94,282,000 in 2020) due to leasing standard.
The increase in current assets ($77,618,000 in 2020) was not sufficient to outweigh the current
portion of lease liabilities.
The acid-test shows slight deterioration due to the lower 2020 cash.
These liquidity ratios appear very low.
 Financial gearing
The gearing ratio for 2020 was 52.32%, which was more than doubled than 2019 the gearing ratio
of 24.39%. This suggests significant additional financial risk due to higher proportion of funding by
external parties.
Look at the below table, we consider the debt to assets ratio (using total liabilities),we see a
significant increase in 2020 financial risk because the debt ratio increased.
2018 2019 2020
Debt/assets 40.42 41.74 63.88

Ability to cover interest impoved in 2020, despite the rise in finance costs.We can also see that the
increased financial risk (higher gearing), combined with slightly improvement in profitability, has
led to a reduction in interest cover.
 Investment performance
 The EPS improved in 2020 ($0.210) compared to 2019 ($0.179) and 2018 ($0.184).
The PE improved in 2020 compared to 2019 but was still not as good as 2018. This shows the
greater the confidence in the company’s future earning power.
The market appears to have responded positively to changes made by the company in 2020. The
market per share price improved from $1.42 in 2019 to $2.25 in 2020.
C. Evaluation of financial health
Overall, indicates strong financial health but with some potential weaknesses in gearing (shown up
in ratio analysis). Recognition of all lease liabilities further illuminates gearing and financial risk.
It seems efficiency in working capital is the weakness in 2020 because CCC deteriorated resulting
in longer collection of account recievable and faster payment of accounts payable. That might
impact negatively on relations with customers and suppliers. In addition, liquidity deteriorated
slightly in 2020 that indicates another weakness of the company. It might affect the ability to cover
short-term obligations.
Other dimensions of financial health that appears particularly strong:
- Improvement in operating cash flows and profitability, with increased gross profir margin
and reasonable control over operating expenses during this period.
- The market appears to be factoring in some future improvement, given the increase in share
price. The investment has improved in the current period.
 Appendix

Adairs ratio analysis

Dimension Ratio 2020 2019 2018

Return-on-equity 27.26% 25.28% 28.23%
Return-on-capital-employed 26.16% 27.43% 28.18%
Profitability Gross profit margin 57.11% 57.23% 60.25%
Operating profit margin 15.18% 12.64% 14.39%
Net profit margin 9.07% 8.61% 9.71%
Efficiency Sales to capital employed 1.72 2.17 1.96
Ave settlement period A/R 2.27 1.59 1.05
Inventory turnover period (days) 94.29 94.59 97.09
Operating cycle (days) 96.56 96.18 98.14
Ave settlement period A/P (days) 40.95 43.18 48.03
Cash conversion cycle (days) 55.61 53 50.11
PPE turnover (times) 18.65 16.5 15.33
Financial gearing Gearing ratio 52.32% 24.39% 27.77%
Interest Cover 9.45 35.18 30.43
Liquidity Current 0.82 1.47 1.59
Acid test 0.31 0.46 0.48
Investment Earning per share (EPS) $0.210 $0.179 $0.184
Dividend per share (DPS) $0.110 $0.145 $0.135
Market per share $2.25 $1.42 $2.23
PE 10.71 7.93 12.12

Income statement analyses

2019 2020 Common size

% change
$'000s $'000s 2019 2020
Revenue 344,430 388,933 12.92 100.0% 100.0%
Cost of sales (147,306) (166,814) 13.24 42.8% 42.9%
Profit 197,124 222,119 12.68 57.2% 57.1%
Other income 347 296 -14.70 0.1% 0.1%
Expenses from admin, operations (137,391) (142,893) 4.00 39.9% 36.7%
Other expenses (16,557) (20,481) 23.70 4.8% 5.3%
EBIT 43,523 59,041 35.65 12.6% 15.2%
Financial cost (1,237) (6,250) 405.25 0.4% 1.6%
Profit before tax 42,286 52,791 24.84 12.3% 13.6%
Tax (12,643) (17,510) 38.50 3.7% 4.5%
Net Profit 29,643 35,281 19.02 8.6% 9.1%