ACCF101 Introduction to Accounting Trimester 1 2017

Financial Statement Analysis

Introduction:

The GPT Group is a Real Estate Investment Trust founded in 1971. It was the first Property Trust
in Australia that was managed by Lend Lase. The group focuses on acquiring real estates and its
portfolio includes prime shopping centers, offices, logistics and business park assets. GPT Goup
is now one of the largest diversified listed property groups in Australia.

In this report, I will assess the business status of the GPT Group for the past 2 years by looking at
their financial reports for the fiscal years 2015 and 2016 with respect to different financial
metrics such as the current ratio, debt to equity ratio, return on owners equity ratio, net profit
ratio, and expense ratio. Recommendations to improve future financial metrics will also be
provided after my assessment.

Part 1

Calculate the following ratios for each of the two years.

Current ratio (2 marks)

2016: 0,49

2015: 1,12

The current ratio measures a company's ability to meet its short-term obligations such as paying
its creditors, borrowings, etc. This metric also serves as an indication of a company's relative
efficiency. It is calculated by dividing current assets by current liabilities.

The current ratio of fiscal years 2015 and 2016 were 1,12 and 0,49 respectively. These ratios
show that 2015 had a significantly better short-term financial strength compared to 2016.
The current ratio of 2015 indicates that the company was efficiently using its assets in 2015
especially cash, cash equivalents, loans, and receivables. The company was managing its
working capital in 2015 compared to 2016.

On the contrary, the current ratio of 2016 was significantly low compared to 2015. Aside from its
comparatively low total current assets in 2016, the company had a high borrowing too. In
consequence, the company would not have resources to pay for its debts over the next 12 months
(2017).

Debt to Equity ratio (2 marks)

2016: 42,69%

2015: 46,62%

Debt/Equity Ratio is a debt ratio used to measure a company's financial leverage. This financial
metrics indicates how much debt a company is using to finance its assets relative to the amount
of shareholders equity. It is calculated by dividing a companys total liabilities by its
stockholders' equity.

The debt to equity ratio of 2016 (42,69%) is lower than 2015 (46,62%). This decrease in the
companys D/E ratio from 2015 to 216 shows that the company is not taking on debts as a means
of leveraging and this also indicates low risk. In other words, the company is efficiently on a
strategy to use it assets to grow the business.

To improve the company's debt to equity ratio, it can opt to consider the possibility of
restructuring its borrowings and payables. The company can seek to refinance its current debt at
a lower interest in order to reduce the interest expenses and monthly payments and consequently
will improve company's profitability. It can also look into ways to further minimize its
accumulated losses to increase its total equity and therefore would positively impact its D/E
ratio.
Return on Owners equity ratio (2 marks)

2016: 13,91%

2015: 11,53%

Return on owners equity is a percentage measure of the return received on a real estate
investment property as related to the equity in the property. It is calculated as the net income
returned as a percentage of shareholders equity

Fiscal year 2016 has a higher ROE (13,91%) compared to 2015 (11,53%). The increase of 2.38%
of the ROE from 2015 to 2016 indicates that the company has become more efficient in using it
stockholders equity to generate its profits.

The company can further improve its ROE by maintaining its strategy to minimize taking debt to
manage the business instead, optimize its assets and shareholders equity to generate profits.

Net Profit ratio (2 marks)

2016: 74,4%

2015: 68,16%

The net profit percentage is the ratio of after-tax profits to net sales. It reveals the remaining
profit after all costs of production, administration, and financing have been deducted from sales,
and income taxes recognized. As such, it is one of the best measures of the overall results of a
firm, especially when combined with an evaluation of how well it is using its working capital.

The net profit of 2016 is 6,24% higher compared to 2015. This increase in the net profit ratio
indicates that the company efficiently managing the business over the 2-year period.

Company can further improve by focusing on marketing to improve sales and review and avoid
the expenses which are not necessary. The company should focus more on strategies to increase
its profit margin such as improving occupancy of the properties, increasing rentals, and other
service-related income.
Expense ratio (2 marks)

2016: 24,6%

2015: 32,53%

The expense is equal to a company's expenses divided by its revenues. The measure is very
common in real estate analysis, whereby analysts are measuring the costs to operate a piece of
property versus the income it generates.

The expense ratio of 2016 has decreased compared to 2015. This indicates that the company was
more profitable in 2016 than in 2015. The improvement in expense ratio of 2016 is significantly
impacted by the reduction in finance costs and property expenses and outgoing costs.

The company can further improve by keeping its expenses at a minimum or focus on marketing
to improve its sales and revenues.

Conclusion:

After the assessment of the GPT Groups 2 years financial reports, my inference are;

The company could further attract more stockholders with its positive trend of Return on
owners equity. This will further help the growth of the business.

The company is managing the business very well as seen in the improvement of its net
profit ratio and expense ratio. The debt to equity ratio of from 2015 to 2016 indicates that
that the company does not rely on borrowing in order to run the business.

Overall, GPT Group is doing well the REIT! GPT seems focus on its strategy to build a stronger
company and become more sustainable.