Financial Analysis Of K2fly Limited

Beta Calculation

K2fly Limited carries out the activities of asset management technology in Australia. The company offers the mobility like the app related to task management, DocMan, HandoverNotes, property Inspector, asset inspection, app for electronic information and solution for data analysis management. Further, the company offers asset management for complete infrastructure through the industry specific services and software. The company has its own IPR and also the company resells the solutions regarding the market leading solutions from UK, USA and Australia. It allows the asset management professionals to get the access to centralised system for maintaining and managing all the asset data for enabling more effective and efficient outcomes. It has strong track record for allowing the organizations for making better decisions for long-term period (k2fly 2018).   

1. Substantial shareholders

Various shareholders are there among which some are considered as substantial shareholders. Though no shareholder holds more than 20% shares of the company, some of the shareholder holds more than 5% shares. They are – “Kalgoorlie Mine Management Pty Ltd” holds 8.27% shares, “Talos Mining Pty Ltd < Talos Mining A/c > holds 5.34% shares and “MR Paul Cozzi” holds 5.34% shares.

1. Name of key persons

• Chairman – Brian Miller
• Board members – other key personnel are –
• Neil Canby – Non-Executive Director
• James Deacon – Non-Executive Director
• Jenny Cutri – Non-Executive Director
• CEO – Brian Miller

1. Return on assets (ROA) = (NPAT / Total Assets)

Debt ratio = Total liabilities / Total assets

Return on Equity (ROE) = (Net profit after tax / Ordinary equity)

“(EBIT/ TA) x (NPAT/EBIT) x (TA/OE) = (NPAT)/(OE)”

“(EBIT/ TA) x (NPAT/EBIT) x (TA/OE) = EBIT x NPAT/EBIT x 1/OE”

“EBIT x (NPAT/EBIT) x (1/OE) = (NPAT)/(OE)”

 Hence, “(EBIT/ TA) x (NPAT/EBIT) x (TA/OE) = (NPAT)/(OE)”

1. Impact of TA/OE on the management’s decision

The TA/OE variable represents the percentage of total asset of the company that is owned by the shareholders of the company. The ratio is calculated by dividing TA that is the total asset by OE that is the owner’s equity (Streby et al. 2014). The company uses this metric for analysing the solvency of the company. If the company has higher ratio that will indicate that the equity component is low and debt component is high. Therefore, at a certain level the company will face the un-sustainability risk as higher amount of interest and obligation will put more financial burden on the company. Therefore, under such circumstance, the management of the company shall pay off the debt to reduce the interest burden and for additional requirement of fund it shall raise the fund through equity rather than debt (Hombert and Thesmar 2014).

• Reasons behind higher ROE than  ROA

Both ROE as well as ROA are the financial metrics used for measure the profitability of the company. As per the general rule, with the increase of equity component the debt component of the company reduces and vice versa. However, higher ROE as compared to ROA represent that the cost of the debt is lower as compared to the required return of the company. In such circumstances, for additional fund requirement the company shall opt for debt rather than equity or mix of debt and equity. Looking into the ROE and ROA of the company it is identified that both the ratios for the company are not favourable as it was not able to earn any amount over the past 2 years.

1. Stock movement on monthly basis

K2fly Limited
Date	Adj Close	Changes
12/31/2015	0.0564
1/31/2016	0.0564	0.000
2/29/2016	0.006	-0.894
3/31/2016	0.0564	8.400
4/30/2016	0.0564	0.000
5/31/2016	0.0564	0.000
6/30/2016	0.0564	0.000
7/31/2016	0.006	-0.894
8/31/2016	0.0564	8.400
9/30/2016	0.0564	0.000
10/31/2016	0.096	0.702
11/30/2016	0.094	-0.021
12/31/2016	0.085	-0.096
1/31/2017	0.076	-0.106
2/28/2017	0.074	-0.026
3/31/2017	0.072	-0.027
4/30/2017	0.053	-0.264
5/31/2017	0.043	-0.189
6/30/2017	0.047	0.093
7/31/2017	0.038	-0.191
8/31/2017	0.038	0.000
9/30/2017	0.048	0.263
10/31/2017	0.054	0.125
11/30/2017	0.134	1.481

All Ordinary Index
Date	Adj Close	Changes
12/31/2015	5005.5
1/31/2016	4880.899902	-0.025
2/29/2016	5082.799805	0.041
3/31/2016	5252.200195	0.033
4/30/2016	5378.600098	0.024
5/31/2016	5233.399902	-0.027
6/30/2016	5562.299805	0.063
7/31/2016	5433	-0.023
8/31/2016	5435.899902	0.001
9/30/2016	5317.700195	-0.022
10/31/2016	5440.5	0.023
11/30/2016	5665.799805	0.041
12/31/2016	5620.899902	-0.008
1/31/2017	5712.200195	0.016
2/28/2017	5864.899902	0.027
3/31/2017	5924.100098	0.010
4/30/2017	5724.600098	-0.034
5/31/2017	5721.5	-0.001
6/30/2017	5720.600098	0.000
7/31/2017	5714.5	-0.001
8/31/2017	5681.600098	-0.006
9/30/2017	5909	0.040
10/31/2017	5969.899902	0.010
11/30/2017	6065.100098	0.016

Calculation of Required Rate of Return

The stock of K2fly Limited is fluctuating as compared to the All Ordinary stock. Therefore, its stock will be considered highly volatile. On the other hand, the stock of All ordinary stock is less volatile and upward moving.  Correlation among 2 stocks is 0.369 and they are un-correlated (Briston 2017).

• The company awarded with the new contract win with the API management that is expecting to increase the share price of the company
• Company entered into new contract with new service and software with  Arc infrastructure for implementing Affinity Fieldreach solution.

1. Calculated beta of company is 11.92
2. Risk free rate = R_f= 4%, Market risk premium = R_m = 6%

Therefore, required rate of return of the company’s share =

R = R_f  + β ( R_m – R_f )

R = 4% + 11.92* (6% – 4%) = 27.84%

• Conservative investment

Under the conservative strategy the investors invests in such fund that involves lower level of risk and provide regular return. Various investors are there those are segregated on the basis of their level of risk tolerance. Based on this the investors are categorised as aggressive, moderately aggressive or risk averse. The conservative investor’s risk tolerance level is low to moderate (Blitz, Falkenstein and Van Vliet 2013). Though these kinds of investors loose the opportunity of getting higher return, it protects them against the inflation. Looking into the details of the K2fly Limited, it is observed that the beta of the company is significantly high that is 11.92. Further, the income position of the company for the last 2 years are considerable unfavourable. Therefore, stock of K2fly Limited will not be considered as the conservative investment.

1. Computation of WACC

WACC = E/V * R_e +D/V * R_d * (1-T_c), Where,

D/V = Debt percentage in capital structure

E/V = Equity percentage in capital structure

R_e = Cost of equity = 27.84%

R_d = Rate of debt =

T_c = corporate tax rate

Despite of getting the tax benefit on the debt expenses, some firms opt for zero debt policy. The reason behind this policy may be to reduce the interest burden of the firm. Looking into the annual report of the company it is recognized that the company does not have any borrowings for the years ended 30^th June 2017. However, the company does not fall under zero debt category as is had the borrowing for the years 2016 that is already repaid. As it does not have any borrowing the WACC of the company will be the rate of equity that is 27.84% (Serghiescu and V?idean 2014).

1. Higher WACC implication

WACC is the computation of the company’s cost of capital under which all the capital category is weighted proportionately. While calculating the WACC, all the capital like common stock, borrowings and preferred stocks are taken into consideration (Barry and Robison 2014). Generally the publicly listed entities have various sources of funding and the WACC therefore tries to create the balance among the associated costs of various sources. This is the crucial consideration for the corporate valuation with regard to the application of loan and assessment of operational activities. While the WACC of the company goes up, the risk of the company also increases. It further reduces the value of the company. Higher WACC represents that the management need to find out the way of earning additional return to cover up the higher level of risks (Frank and Keith 2016).

1. Optimal structure for capital

Debt ratio

Total liabilities / Total assets

Year 2017 = 0.080

Year 2016 = 2.340

Debt Ratio Analysis

It is the best debt to equity ratio for the company that will provide optimum return to the company with the minimization of the cost. The optimal capital structure generally focuses on the capital structure to enable the company carrying out its operations smoothly without being largely dependent on the outside debt. The company has option of raising the fund through debt or equity and both have its own advantages as well as disadvantages (Zhuo-hua et al. 2015). Debt costs are lower as compared to equity as the debt payments are tax deductive and equities are not. However, debt obligates the firm to pay interest on debt and if the debts are of very high proportion, it may lead the company to unsustainable level. Looking into the debt structure of the company it is observed that the debt ratio of the company for 2016 was significantly higher at 2.34. However, it was able to pay of its borrowing and reduce the ratio to 0.08. However, for further borrowing the company can opt for equity as the debt portion is is significantly low in 2017 (Chandra 2017).  

1. Gearing ratio

It is the analysis ratio for comparing the long-term debt of the company with the equity capital. These ratios are used by the investors for analysing the ability of the company to sustain under the situation of economic downturn (Downes and Goodman 2014). It represents the leverage of the company that means what proportion of the funds is raised from creditors and how much is raised from the shareholders. It can be observed that the debt ratio of the company for 2016 was 2.34 that are, considered as significantly high. To adjust the gearing ratio the company paid off its borrowings and increased their issued capital from $ 48,13,977 to $ 11,682,697 over the years from 2016 to 2017 (Chandra 2017). Nothing regarding these adjustments has been pointed out by the directors in their report.

As the net income of the company is in negative, the company did not declared or paid any dividend since the opening of the year and no dividend has been recommended by the company to pay any dividend for the financial year (DeFusco et al. 2015).

Looking at the unfavourable results of the company with regard to the ROE, ROA, net income of the company, the client will not be recommended to include the stock of K2Fly Limited in his portfolio. Further, the risk of the stock that is beta of the company is 11.92 which is, significantly high.

Reference 

Barry, P.J. and Robison, L.J., 2014. Economic rates of return and investment analysis. The Engineering Economist, 59(3), pp.231-236.

Blitz, D., Falkenstein, E.G. and Van Vliet, P., 2013. Explanations for the Volatility Effect: An Overview Based on the CAPM Assumptions.

Briston, R.J., 2017. The stock exchange and investment analysis (Vol. 3). Routledge.

Chandra, P., 2017. Investment analysis and portfolio management. McGraw-Hill Education.

DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E., 2015. Quantitative investment analysis. John Wiley & Sons.

Downes, J. and Goodman, J., 2014. Dictionary of finance and investment terms. Barron’s educational series.

Frank, K.R. and Keith, C.B., 2016. Investment analysis and portfolio management.

Hombert, J. and Thesmar, D., 2014. Overcoming limits of arbitrage: Theory and evidence. Journal of Financial Economics, 111(1), pp.26-44.

k2fly., 2018. About Us. [online] Available at: https://www.k2fly.com/about-us/ [Accessed 2 Feb. 2018].

Serghiescu, L. and V?idean, V.L., 2014. Determinant factors of the capital structure of a firm-an empirical analysis. Procedia Economics and Finance, 15, pp.1447-1457.

Streby, H.M., Refsnider, J.M., Peterson, S.M. and Andersen, D.E., 2014. Retirement investment theory explains patterns in songbird nest-site choice. Proceedings of the Royal Society of London B: Biological Sciences, 281(1777), p.20131834.

Zhuo-hua, Z.H.O.U., Wen-nan, C.H.E.N. and Zong-yi, Z.H.A.N.G., 2015. Application of cluster analysis in stock investment.