Governance Long Term Operating Performance - MyAssignmenthelp.com

Question: Discuss about the Governance Long-Term Operating Performance. Answer: Company description Mobile Embrace operates in Australia as the mobile marketing and mobile payment company. It operates mainly through 2 segments, they are Convey and 4th Screen Advertising Australia. The 4th Screen segment provides the services related to mobile media development and design. It also offers solutions related to mobile advertising or marketing, infrastructure for m-payments and engages customers through tablets and mobiles. On the other hand, Convey segment provides m-commerce platform and trading desk for mobile media. The company is based in East Sydney of Australia (Mobile Embrace 2017). Ownership governance structure Substantial shareholders Greater than 20% of shares no shareholder is there who is holding greater than 20% of shares Greater than 5% of shares Waughdoc Pty Ltd holding 22,176,639 shares that is 5.01% of shares. Name of key persons Chairman Drew Kelton Board members apart from chairman and CEO the board members are David Andrew Haines Christopher Thorpe CEO Neil Wiles It is recognised that none of the key persons are holding more than 20% or 5% of shares and therefore will not be considered as substantial shareholders. Key ratios of Mobile Embrace Return on assets (ROA) = (NPAT / Total Assets) Return on Equity (ROE) = (Net profit after tax / Ordinary equity) Ratio Formula 2017 2016 2015 2014 Return on assets NAPT / Total asset 0.026 0.072 0.095 0.130 Return on equity NPAT / Ordinary equity 0.038 0.123 0.135 0.148 Debt ratio = Total liabilities / Total assets Ratio Formula 2017 2016 2015 2014 Debt ratio Total liabilities / Total assets 0.305 0.418 0.295 0.120 EBIT/TA * NPAT/EBIT * TA/OE = NPAT/OE EBIT/TA * NPAT/EBIT * TA/OE = 10,35,812/603,65,057 * 15,95,677/10,35,812 * 603,65,057/419,77,943 = 0.038 NPAT/OE = 15,95,677 / 419,77,943 = 0.038 Hence, from above calculation it can be proved that EBIT/TA * NPAT/EBIT * TA/OE = NPAT/OE Phenomenon of TA/OE variable It equation stands for the total assets of the company against its owners equity. It is based on various factors like the industry status, economic status and revenue earning capacity of the company. If the total asset goes up it will reduce the return on asset. On the contrary when the total asset goes down it will increase the companys return on the asset (Halili, Saleh and Zeitun 2015). There is no ideal average for the total asset to owners equity ratio. However, the high ratio states that the company is stable and will be considered sustainable for long term. Reasons for higher ROE as compared to ROA ROE or return on equity is net income that is returned as the percentage of the owners equity. It measures the profitability of the company through revealing the amount of profit the company generates with shareholders invested money. On the other hand, ROA or the return on assets indicates the profitability of the company as compared to the total assets. It gives the idea regarding the efficiency of the management to use its assets for generating earnings. It is calculated by dividing the net income of the company by its total assets and is shown in percentage form. ROE higher than ROA represents that the total asset of the company is more than the shareholders equity. When the debt portion of the capital structure increases, the equity portion is decreased, which in turn increases the ROE as the equity is put in denominator while calculating the ROE (Baos-Caballero, Garca-Teruel and Martnez-Solano 2014). Further, if the company raise additional fund through borrowing the ROE will i ncrease if compared with ROA ASX Information Monthly stock movement Mobile Embrace Limited - Mobile Embrace Limited Date Adj Close Changes 31-12-2015 0.3 31-01-2016 0.31 0.033 29-02-2016 0.315 0.016 31-03-2016 0.35 0.111 30-04-2016 0.335 -0.043 31-05-2016 0.305 -0.090 30-06-2016 0.35 0.148 31-07-2016 0.32 -0.086 31-08-2016 0.295 -0.078 30-09-2016 0.27 -0.085 31-10-2016 0.13 -0.519 30-11-2016 0.12 -0.077 31-12-2016 0.14 0.167 31-01-2017 0.061 -0.564 28-02-2017 0.057 -0.066 31-03-2017 0.055 -0.035 30-04-2017 0.047 -0.145 31-05-2017 0.05 0.064 30-06-2017 0.084 0.680 31-07-2017 0.075 -0.107 31-08-2017 0.059 -0.213 30-09-2017 0.052 -0.119 31-10-2017 0.055 0.058 30-11-2017 0.047 -0.145 All Ordinary Index - All Ordinary Index Date Adj Close Changes 31-12-2015 5005.5 31-01-2016 4880.899902 -0.025 29-02-2016 5082.799805 0.041 31-03-2016 5252.200195 0.033 30-04-2016 5378.600098 0.024 31-05-2016 5233.399902 -0.027 30-06-2016 5562.299805 0.063 31-07-2016 5433 -0.023 31-08-2016 5435.899902 0.001 30-09-2016 5317.700195 -0.022 31-10-2016 5440.5 0.023 30-11-2016 5665.799805 0.041 31-12-2016 5620.899902 -0.008 31-01-2017 5712.200195 0.016 28-02-2017 5864.899902 0.027 31-03-2017 5924.100098 0.010 30-04-2017 5724.600098 -0.034 31-05-2017 5721.5 -0.001 30-06-2017 5720.600098 0.000 31-07-2017 5714.5 -0.001 31-08-2017 5681.600098 -0.006 30-09-2017 5909 0.040 31-10-2017 5969.899902 0.010 30-11-2017 6065.100098 0.016 Report on movement of above stocks The report on stock movement reveals the information related to closing and opening rate of the stock on particular dates. This is used for tracking the movement of stock over the period of time. It is recognised from above graphs that the stock of Mobile Embrace is downward moving and the value f their fell significantly in last 2 years. On the other hand, stock of All Ordinary Index has been moved upward moderately during last 2 years period (Heikal, Khaddafi and Ummah 2014). It was further found that the stock of Mobile Embrace is more volatile as compared to All Ordinary Index. Further, the correlation among 2 stocks comes to 0.834. Therefore, the stocks are negatively correlated. Recent announcement Name change - The company changed its name from Mobile Embrace to Impelus Limited Board composition Chris Thorpe, the non-executive director of the company has decided to step down from board for pursuing other interests. Acquisition of C2B Solutions the company acquired C2B Solution for strengthening the marketing business for digital performance Litigation the company settled the ongoing litigation with the GBD Ventures Pty Limited under which the company was sued for $ 3.537 million. Increase of shareholding the company increased its shareholding in the Award Winning Clipp App, which is a leading smart phone app for mobile payment and loyalty. Stock field Calculated beta of the company is 2.42 Risk free rate = Rf = 4%, Market risk premium = Rm = 6% Therefore, required rate of return of the companys share = R = Rf + ( Rm Rf ) R = 4% + 2.42* (6% 4%) = 8.84% Conservative investment The investment made in lower risk securities and regular payments are known as conservative investment. This method of investment is the one that is exposed to preserving the purchasing power of the investor with lower possible risk (Lara, Osma and Penalva 2016). Under the conservative investment the investor selects less fluctuating stocks for investment. This is the wise strategy for investment when the money from investment is required in short term period or when the economy is going through significant downturn. Though the conservative investment protects the investor against inflation, the investor misses out the considerable growth during economic prosperity. The conservative investor must decide the return with the acceptability level of risk (Eisdorfer, Giaccotto and White 2013). However, it has been found that the beta of the company is 2.42, which is considered as quite high. Further, for the last 2 years the company did not pay any dividend to its shareholder (He and Kris hnamurthy 2013). Therefore, it will not be considered as a conservative investment. WACC (weighted average cost of capital) Computation of WACC WACC = E/V * Re +D/V * Rd * (1-Tc), Where, E/V = Equity percentage in the capital structure = 88% D/V = Debt percentage in the capital structure = 12% Re = Cost of equity = 8.84% Rd = Rate of debt = 1.02% Tc = corporate tax rate = 30% The given information for computation of WACC are as follows Amount in $'000 Amount of Debt 59,94,380.00 Amount of Equity 419,77,943.00 Total 479,72,323.00 Percentage of debt 12% Percentage of equity 88% Thus, WACC = 88*8.84% + 12*1.02% (1- 0.30) = 7.78 + 0.09 = 7.86% The implication of higher WACC WACC or the weighted average cost of capital is average of minimum after-tax requirement for rate of return that the firm must be able to earn for its shareholders. The WACC is measured through finding the cast of each capital component and then multiplied it by its percentage to total capital and finally summing up all the cost (Arsov, Shanahan and Williams 2013). It is an important tool as it analyses whether the particular project is able to increase shareholders wealth or not. Higher WACC represents that the company is highly leveraged and associated with higher level of capital risk. Therefore, the management shall raise additional fund through cheaper source of capital that is the fund with lower level of risk and cost (Zabarankin, Pavlikov and Uryasev 2014). Optimal debt structure Optimal structure for capital Debt ratio Total liabilities / Total assets Year 2017 = 0.305 Year 2016 = 0.418 It is the structure at which the value of the company can be maximised. It is the structure under which the firm determines best mix for equity and debt financing for using in its expansions and operations. The debt ratio around 0.40 or less than that is considered as optimal debt ratio. It is found from the above table that the debt ratio of the company for 2016 is 0.42 and it further improved in 2017 as the debt ratio for 2017 is 0.31. Therefore, the company is maintaining optimal structure (Akeem et al. 2014). Gearing ratio Gearing ratio is the general segregation that explains the financial ratio and compares the form of shareholders equity as against the borrowed funds of the company (Amba 2014). It is the measurement of companys financial leverage that demonstrates the level to which the activities of the company are sourced from the owners capital as against the funds of creditors. It measures the owners equity against the debt. The higher level of gearing ratio of any company indicates that it is exposed to higher leverage risk and is susceptible to the economic downturns (Master and Hao 2014). The reason behind this is that the company with higher level of leverage will have higher debt as compared to equity. It can be seen that the capital structure of the company is composed of 88% equity and only 12% of debt. Therefore, for adjusting the gearing ratio it increased its borrowing from $ 56,26,666 to $ 59,94,380 over the year from 2016 to 2017. However, the directors report mentioned nothing for s uch adjustment. Dividend policy The dividend policy is guidelines set that any company uses for deciding how much of the net income it can pay to the shareholders. Generally the investors are not concerned regarding the dividend policy of the company as they always have the option to sell the equity portion if they prefer cash (Levy 2015). It is identified from the annual report of Mobile Embrace that no dividend has been paid by the company for the year 2016 as well as for the year 2017. Further, the directors did not recommend any dividend payment for financial year ended 30th June 2017. The company did not pay any dividend to keep the amount available for other investment (Renneboog and Szilagyi 2015). Recommendation Generally, before considering the stock for investment, the investor takes into consideration various factors like required return, expected return, associated risks, purchase costs, stability and sustainability of the company. Risk of the stock plays major role in selection of the portfolio as the risk taking approaches of different investors are different. It is suggested based on the above analysis that if the client is looking for stable return and lower risk investment then the stock of Mobile Embrace shall not be included in his portfolio. However, if the other factors are taken into consideration that is the net income, ROA and debt ratio, the company can be considered as stable and sustainable for long term period. Therefore, the client shall include the stock in his portfolio. Reference Akeem, L.B., Terer, E.K., Kiyanjui, M.W. and Kayode, A.M., 2014. 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