PMV Company Analysis: Financial Ratios, Competitors, And Regulatory Environment

Competitors of PMV

The company Premier Investments Limited (PMV) is based in Australia and operates in the market of speciality retail fashion in countries like Australia, New Zealand, Europe and Asia. The other segment where the company operates is the investment in listed securities and the deposits in the money market. The company has two business segments, which are retail and investment. The retail segment has a major contribution from the Just Group (Premier Retail). The nature of the revenue stream from the company's retail segment is based on the transactions. The retail segment mainly operates through its physical stores, which are almost 1200 in number, and the online revenue is approximately 20% of the total revenue from the retail segment. On the other hand, the investment segment generates revenue through dividends and profit on the sale of investments (Premier Investments Limited 2021).

Its retail segment has seven major brands Just Jeans, Peter Alexander, Jay Jays, Dotti, Portmans, Smiggle and Jacqui E. Under these brands, it offers retail fashion products of premium quality. The brands offer clothing to wear for adults and kids. Apart from this, the investment segment of the company does not offer any products or services but mainly focuses on investments that hold the company's balance sheet in a strong position. The main competitors of the company's retail segment are Woolworths Group, Mosaic Brands, and Cotton On Clothing Pty Ltd, which are the major fashion retails operating in Australia and pose major competition to PMV.

The regulatory environment consists of the laws and regulations applicable to a company. PMV has to abide by the Corporations Act, 2001, under which it also needs to follow the accounting standards provided by Australian Accounting Standards Board (AASB). The company is listed on the Australian Securities Exchange (ASX), which requires it following the listing requirements. The company also has to file its direct and indirect taxes as per the Australian taxation system (Hanna 2019).

Table 1: Ratio Analysis

Profitability Ratio

PMV can maintain good profitability throughout the two years from 2020 to 2021. On average, the company has generated more than 60% gross profit from its operations after paying for the cost of sales for generating the revenue. The company also has a positive net profit ratio that has improved from 110.30% in 2020 to 18.82% in 2021, which improves the net profit margin. It is observed that the profitability is higher in the half years than the full year, which shows the company has better profits in the first half of the year. Another profitability ratio is the return on assets, which measures a company's amount of profits from its total assets. PMV has almost doubled its return on assets from 2020 to 2021, both in half and full-year analysis. This ratio shows that the company is generating profits on its assets and improving them through an increase in net profit.

Liquidity Ratio

The liquidity is measured with the help of two ratios: current and quick ratios. The current ratio represents a firm’s ability to pay its short-term debts through its current assets only (Madushanka and Jathurika 2018). PMV has improved its current ratio from 2020 to 2021 when 1.48 times at the year’s ending. This indicates that the company can pay up to 1.48 times the current liabilities by its current assets. On the other hand, the quick ratio is an absolute measure of liquidity which indicates the ability of a company to pay its current obligations without selling its inventories. The ratio has improved from less than 1 time to greater than 1 time in 2021, which implies that the company can pay its debt obligations in the short run without selling its inventory.

Regulatory Environment of PMV

Activity Ratio

The activity ratios are an indicator of the efficiency of a company. The efficiency is measured through assets turnover, inventory turnover and debts turnover ratios (Lomidze 2016). The assets turnover shows the company’s efficiency in using its assets to make sales. According to the analysis, PMV can generate 0.64 times sales from its assets, which is an improvement over the turnover in 2020. The inventory turnover shows how efficiently a company can sell its inventory. It dropped in 2021, indicating the slow down of the pace of inventory movement. The debt turnover measures the company’s efficiency to receive money from its customers. The ratio has increased from 45.71 to 72.57 times in 2021, indicating an increase in the efficiency of receiving payments from debtors.

Solvency Ratio

The solvency ratios indicate the company’s long-term stability and ability to back its borrowings (Satryo, Rokhmania and Diptyana 2017). A equity ratio of 0.67 indicates that the company has a high degree of capital from equity which means it has less debt. Lower debt makes the stability of a company high and minimises the risk of insolvency. The debt-to-equity ratio also decreased in 2021, indicating a lower potion of debt than equity in the company's capital structure.

Impact of ratio analysis on the audit engagement

The financial ratios are an indicator of a company’s performance and condition. It is useful to highlight the issue present in the company relating to liquidity, solvency, profitability or efficiency. The issue that is highlighted in the ratio analysis helps in forming the further audit procedures that are required in the audit. These ratios are useful for variance analysis, which highlights high variances between two periods that may posses a threat to the company. As observed from the ratio analysis, the efficiency of the company has doubled in terms of collection from debtors. The doubling of the efficiency just in one year raises concerns about the company, the accounts related to this ratio should be checked for any discrepancy. In the same manner, the substantive audit procedures will be designed to validate the financial information and the reason behind the sudden spike or drop in the ratios.

As per the analysis, three accounts that might be misstated are as follows:

• Accounts receivable- There is a major increase in the debts turnover ratio, which is due to the fall in the accounts receivable that has almost doubled the efficiency of the company. It has to be checked that the amounts from the accounts receivable have been received as the increase in sales is not reflected in the accounts receivable.
• Net profit- The return on total assets increased in 2021. The profits have almost doubled in the year. The gross profit does not confirm the increase in the profits due to which the other expenses of the business have to be checked for their decrease in the year that has led to such high net profits.
• Interest-bearing liabilities- The debt-to-equity ratio has reduced in 2021 as compared to 2020, indicating a reduction in debt. The debt has to be checked through proper checking of interest-bearing liabilities that have been reduced by almost half in the year.

The going concern assumption has to be checked as per the ASA 570: Going Concern for the presence of any events that question the going concern assumption of the company (Standards.auasb.gov.au 2020). The company needs to discuss with the management of the company regarding any event that affects the going concern. According to Accaglobal.com (2022) the factors that should be considered are as follows:

• Any conversion of long-term debt to current debt due to nearing its repayment date. The company’s solvency and liquidity have to be checked for verifying the company’s ability to pay the debt.
• The cash flows of a company have to be checked if the net cash flow is negative during the year and high degree of losses incurred during the year or continuing losses from past years.
• The closure of any major business segment of the company has to be checked that may lead to loss of business and question the going concern.
• Lastly, the company’s compliance with the laws and regulations that are applicable to it have to be checked, and any pending litigation against the company may lead to the closing of the business.

Table 2: Audit Report Information

Source: (Australian Securities Exchange 2022)

The company’s auditor, Ernst & Young, gave an unqualified audit opinion on the group’s financial statement that is prepared as of 31^st July 2021. The audit opinion is expressed as per the ASA 700: Forming an opinion and reporting on the financial report, which means the auditor gives a reasonable assurance that the financial information provided in the financial statements is void of any misstatement material in nature (Auditing and Assurance Standards Board 2021). The opinion is expressed on the basis of audit procedures adopted by the auditor and the evidence obtained from them. The auditor’s compliance with requirements that are given under the Corporations Act, 2001 and code of ethics under APES 110 of the Accounting Professional and Ethical Standards Board, along with fulfilling other responsibilities, allowed them to conduct the audit and express their opinion.

The expressing of unqualified or unmodified opinion makes the requirement of emphasis of matter paragraph optional (Auditing and Assurance Standards Board 2020). It is required only if the auditor wants to draw the attention of the audit report users to some specific issue about the company. The audit report of Premier Investments Limited does not contain an emphasis of matter paragraph or other matter paragraph. The key audit matters of the company are expressed in the key audit matters section of the report as per ASA 701: Communicating Key Audit Matters in the Independent Auditor’s Report, in which the matters that were crucial in the audit are discussed by the auditor and his approach for auditing the same. The key audit matters in the audit report are the carrying value of an intangible asset, and the existence and valuation of inventory and leases. From the audit report of the group, it is understood that there will be no material misstatements in the company in 2021.

References

Accaglobal.com, 2022. Analytical procedures | P7 Advanced Audit and Assurance | ACCA Qualification | Students | ACCA Global. [online] Accaglobal.com. Available at: <https://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/analytical-procedures.html> [Accessed 19 April 2022].

Accaglobal.com, 2022. The audit of going concern | ACCA Global. [online] Accaglobal.com. Available at: <https://www.accaglobal.com/gb/en/member/discover/cpd-articles/audit-assurance/going-concern15.html> [Accessed 19 April 2022].

Auditing and Assurance Standards Board, 2020. Auditing Standard ASA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report. [ebook] Available at: <https://www.auasb.gov.au/admin/file/content102/c3/ASA_706_Compiled_2020.pdf> [Accessed 19 April 2022].

Auditing and Assurance Standards Board, 2021. Auditing Standard ASA 700 Forming an Opinion and Reporting on a Financial Report. [ebook] Available at: <https://auasb.gov.au/media/da0clvbr/asa_700_12_21.pdf> [Accessed 19 April 2022].

Australian Securities Exchange, 2022. PMV share price and company information for ASX:PMV. [online] Australian Securities Exchange. Available at: <https://www2.asx.com.au/markets/company/pmv> [Accessed 19 April 2022].

Hanna, N., 2019. The Application of Australia’s Domestic Tax Laws and Tax Treaties Where a Foreign Company Is a Resident. AUSTRALIAN TAX REVIEW, 48(3), pp.163-189.

Lomidze, N., 2016. Upgrading the liquidity and activity ratios for the residential real estate development business. Preparation for the Future Innovative Economy, p.47.

Madushanka, K.H.I. and Jathurika, M., 2018. The impact of liquidity ratios on profitability. International Research Journal of Advanced Engineering and Science, 3(4), pp.157-161.

Premier Investments Limited, 2021. Annual Report 2021. [ebook] Available at: <https://www.premierinvestments.com.au/wp-content/uploads/2021/10/Premier-Investments-Limited-Annual-Report-July-2021.pdf> [Accessed 19 April 2022].

Satryo, A.G., Rokhmania, N.A. and Diptyana, P., 2017. The influence of profitability ratio, market ratio, and solvency ratio on the share prices of companies listed on LQ 45 Index. The Indonesian Accounting Review, 6(1), pp.55-66.

Standards.auasb.gov.au, 2020. ASA 570 (June 2020) | AUASB Local. [online] Standards.auasb.gov.au. Available at: <https://standards.auasb.gov.au/asa-570-jun-2020> [Accessed 19 April 2022].

Premier Investments Limited, 2019. Appendix 4E – Preliminary Final Report. [ebook] Available at: <https://www.premierinvestments.com.au/wp-content/uploads/2020/03/PMV-Appendix-4D-Half-Year-Report.pdf> [Accessed 19 April 2022].

Premier Investments Limited, 2020. Appendix 4E – Preliminary Final Report. [ebook] Available at: <https://www.premierinvestments.com.au/wp-content/uploads/2021/03/Appendix-4D-Half-Year-Report.pdf> [Accessed 19 April 2022].

Premier Investments Limited, 2020. Appendix 4E – Preliminary Final Report. [ebook] Available at: <https://www.premierinvestments.com.au/wp-content/uploads/2020/09/FY20-Appendix-4E-Preliminary-Final-Report.pdf> [Accessed 19 April 2022].

Premier Investments Limited, 2021. Appendix 4E – Preliminary Final Report. [ebook] Available at: <https://www.premierinvestments.com.au/wp-content/uploads/2021/09/PMV-Appendix-4E-Preliminary-Final-Report-31-July-2021.pdf> [Accessed 19 April 2022].