NOPAT margin – the company is expected to maintain the margin for the net operating profit after tax at 18.40% consistently for terminal year and beyond that. Further, the NOPAT level for the current year as well as the previous year was also 18.40%.
WC to sales – the working capital to sales ratio is expected to maintain at -17.10% consistently for terminal year and beyond that. Further, the WC to sales level for the current year as well as the previous year was also -17.10%. The negative WC to sales ratio represents that the company’s current liabilities are more than its current assets, which in turn states that the company is not in a position to pay off its short-term obligation with the available current assets.
LT assets to sales - the Long term assets to sales ratio is expected to be maintained at 110.60% consistently for terminal year and beyond that. Further, the LT assets to sales level for the current year as well as the previous year was also 110.60%. Higher level of this ratio indicates that the company is using the fixed asset efficiently to create sales.
Debt ratio - the debt ratio is expected to be maintained at 46.10% consistently for terminal year and beyond that. Further, the debt ratio for the current year as well as the previous year was also 46.10%. It states that the company has 46.10% debt in comparison to its asset. Therefore, the assets are sufficient to pay-off the debt (Fullwiler 2016).
After tax cost of the debt - the after tax cost of debt is expected to be maintained at 4.9% consistently for terminal year and beyond that. Further, for the current year as well as for the previous year, the after tax cost of the debt was 4.9%. It shows that the cost of the debt after tax benefit is moderate for the company.
Dividend rate – it is identified that the company does not pay any dividend to its shareholders and not planning to pay in future too. Various reasons behind non-payment of dividend may be the financial trouble that the company may go through, any unexpected expenses or deferring the preferred dividends.
Analysis of overall performance
Looking at various financial data and ratios, it is identified that irrespective if negative sales growth, the company is consistent in earning profit after tax. Further, the company is using the fixed asset efficiently to create sales. However, the company is not able to pay-off its short term obligation efficiently. Moreover, the company is not paying any dividend to its shareholders. Therefore, the company must try to pay off some of its current obligation to make it at lower level as compared to the current assets (Vogel 2014). Further, it shall accumulate some income to pay that as dividend to the shareholder, which in turn will create faith among the shareholders and the potential investors will consider the company for investment.
Under the abnormal earning method, each stock is valued as the company’s book value for each share if the investor’s expectation with the the company is earning normal rate of return in future. The earning result and management decision makes the stock less or more valuable as compared to the benchmark for book value (Ho et al. 2016). Abnormal earning is the difference between net income and cost of the equity. It is identified from the financial data of the company that the company has a positive abnormal earning for the forecast period as well as for the period beyond the fore cast period. Therefore, it can be identified that the firm can earn the return that is more than its cost of capital (Kesavan and Mani 2013). Further, it represents that the company is able to sell its equity at a premium. Therefore, if the abnormal earnings for the company is taken into consideration, it can be identified that the company is in a better position to sell its equity at premium.
Fullwiler, S.T., 2016. The Debt Ratio and Sustainable Macroeconomic Policy. World Economic Review, 7, pp.12-42.
Ho, K.C., Lee, S.C., Lin, C.T. and Yu, M.T., 2016. A Comparative Analysis of Accounting-Based Valuation Models. Journal of Accounting, Auditing & Finance, p.0148558X15623043.
Kesavan, S. and Mani, V., 2013. The relationship between abnormal inventory growth and future earnings for US public retailers. Manufacturing & Service Operations Management, 15(1), pp.6-23.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.