Profitability Ratios:
| 2016 | 2015 | 2014 | 2013 | ||
| Net Profit Margin | Net profit after tax/Sales | (328.32)% | (500.64)% | (162.67)% | (85.59)% |
| Return on Assets | Net profit after tax/total assets | (563.06)% | (306.72)% | (62.35)% | (201.91)% |
I remember reading a while ago that the Net Profit Margin can be one of the most important indicators of a business’s financial health. It can often give a more precise observation of how profitable a business is than just reading its cash flow figures. The Net Profit Margin is a measure of how much out of every dollar (or in my case, pound) of sales a company actually keeps in earnings. So this means that in 2016, FitBug/Kin Wellness lost £3.3 for every £1 of total revenue earned, in 2015 the loss was £5 for every £1, 2014 was -£1.6 and 2013 was -£.85. There are a few reasons why companies can have a negative Net Profit Margin. These can include large increases in the cost of raw materials, labour costs, disruptive new technologies and macroeconomic developments such as a recession. In the case of FitBug/Kin Wellness, I think that the major cause of their downfall as a company was disruptive new technologies. FitBug took FitBit to court in 2013 suing against trademark infringement, unfair competition & business practices and stated that FitBit had caused irreparable harm and damage to FitBug’s brand in the four years prior. FitBug ultimately lost the lawsuit as they had waited more than four years to pursue FitBit in court. Between 2015 and 2016, once the lawsuit was finalised, FitBug then became the Digital Wellness solutions provider, known as Kin Wellness. Before the lawsuit had even been started the branding (and honestly better technology from FitBit, from reading reviews) of FitBit had lost potential clients and potential business partners for FitBug.
The Return on Assets ratio shows the percentage of profit a company earns in relation to its overall resources. When a company has a negative Return on Assets, it shows that the company is investing a high amount of capital into its production while also receiving little income. For FitBug/Kin Wellness, the total comprehensive income was always a large negative.
Because the Net Profit Margin and the Return on Assets are shown in a percentage rather than pound values, it makes it much easier to compare the profitability of two or more companies regardless of what the size difference is between them. However, for the Return on Assets, it is best to compare the figure against previous figures, rather than other companies that are not similar.
Efficiency (or Asset Management) Ratios:
| 2016 | 2015 | 2014 | 2013 | ||
| Total Asset Turnover Ratio | Sales/Total Assets | 1.71 | 0.61 | 0.38 | 2.36 |
The Total Asset Turnover Ratio measures how well a company can generate sales from its assets or really how efficiently a company can use its assets to generate sales. It seems that the higher the ratio, the better the company is performing because higher ratios show that the company is generating more revenue per pound of assets. For every £1 of assets, FitBug/Kin Wellness generated £1.71 in 2016, £0.61 in 2015, £0.38 in 2014 and £2.36 in 2013 of sales. This figure confused me as the rest of the performances of FitBug/Kin Wellness in their other figures are so poor, yet this ratio is showing that they are making fairly good sales from their assets (in 2016 and 2013).
I could not find the figures used for the ‘Days of Inventory’ so I could not calculate that ratio.
Liquidity Ratios:
| 2016 | 2015 | 2014 | 2013 | ||
| Current Ratio | Current Assets/Current Liabilities | 0.81 | 1.38 | 2.32 | 0.40 |
The current ratio measures how well a company can pay back their short and long term obligations; this is by their ability to pay back any liabilities with their assets. As such, this can be a good ratio for giving a rough estimate of the company’s financial health. In my research on the Current Ratio, I found that a ratio under 1 shows that a company’s liabilities are larger than the assets which means that the company would be unable to pay off its commitments when they came due. This ratio (while not the best ratio to use as it needs to be more specific) shows for FitBug/Kin Wellness that their 2013 ratio was horrible and 2016 was not much better. I have found this to be another interesting ratio! The Total Asset Turnover Ratio shows that 2014 and 2015 were the worst years in terms of how well they could generate sales from the assets, and yet according to the Current Ratio 2014 and 2015 were the best years when comparing assets and liabilities. So this simply means that in the years 2014 and 2015, while FitBug/Kin Wellness was losing money on their assets, their current assets and liabilities were healthy but overall their total liabilities were still much greater than the total assets.
Financial structure Ratios:
| 2016 | 2015 | 2014 | 2013 | ||
| Debt/Equity Ratio | Debt/Equity | 130.8% | 125.2% | 282.7% | 138.1% |
| Equity Ratio | Equity/Total Assets | 324.4% | 396.7% | 54.7% | 262.8% |
The Debt/Equity Ratio is mainly used to measure a company’s financial leverage and shows how much debt a company is using to finance its assets compared to the amount of value represented in shareholders’ equity. This then can show the degree to which shareholders’ equity can fulfil a company’s obligations to creditors in the event of liquidation. I have noticed in my online searchings that if a company has a high Debt/Equity Ratio, that company has a high risk level as they have been heavily taking on debt; which shows that the company may not be able to produce enough cash to satisfy its debt commitments. What then does that mean for FitBug/Kin Wellness? Their Debt/Equity Ratio has been up to nearly 300% which shows that they are a very high risk level company and that they have been very aggressive in financing their growth with debt.
The Equity Ratio can show what the owners of a company would be left with if all the assets were sold and all debts were paid. This Equity Ratio also can show us the investor’s stake in the company. If an Equity Ratio (for example) is 60%, then the contribution from shareholders is 60 cents and the creditor’s contribution is 40 cents for every pound.
Market Ratios:
| 2016 | 2015 | 2014 | 2013 | ||
| Earnings Per Share (EPS) | Net profit after tax/no’s of issued ordinary shares | £(0.0029) | £(0.0224) | £(0.1562) | £(0.0157) |
| Dividends Per Share (DPS) | Dividends/number of issued ordinary shares | N/A | N/A | N/A | N/A |
| Price Earnings Ratio | Market price per share/earnings per share | (0.592) | (0.424) | (0.552) | (0.558) |
Earnings Per Share (EPS) can show how good a company is at producing profits for its shareholders, or in this case, losing money when the Earnings Per Share is in a negative. When the EPS is positive each share would have a claim on some pence of those earnings. In the case of FitBug/Kin Wellness, because their EPS is in a negative, the share owners won’t have to actually pay cash money back to the business, but they will still ‘pay’ for the loss in another form. The net loss decreases the value of the firm, which then lowers the value of the stock. The negative Price Earnings Ratio for FitBug/Kin Wellness means that the company is not earning enough to break even or turn a profit- this we already knew.
I was not able to calculate the Dividends per Share for my company. I believe this is because they were making a loss each year so they were not paying out any money to their shareholders.
Ratios based on reformulated financial statements:
| 2016 | 2015 | 2014 | 2013 | ||
| Return on Equity (ROE) | Comprehensive income/shareholders’ equity | (173.59)% | (77.31)% | (113.94)% | (76.83)% |
| Return on Net Operating Assets (RNOA) | OI/NOA | 5828.13% | (1324.80)% | (265.77)% | (435.70)% |
| Net Borrowing Cost (NBC) | Net financial expenses after tax/net financial obligations | (4.25)% | (0.03)% | (6)% | 2.93% |
| Profit Margin (PM) | OI/Sales | (320.52)% | (500.44)% | (150.71)% | (89.45)% |
| Asset Turnover (ATO) | Sales/NOA | 18.18 | (2.65) | (1.76) | (4.87) |
The Return on Equity Ratio shows the ability of a company to generate profits from the shareholders investments in the company, and just how much profit each pound of stockholders equity generates. In the case of my company, the last four years have all been negative; this means that the shareholders of FitBug/Kin Wellness are losing value- and at a very high rate. In 2016, for every £1 that was invested, my company lost £1.73. This, just like the majority of the other ratios I have calculated, shows just how bad of a position FitBug/Kin Wellness were in before they sold their company.
The Return on Net Assets (RONA) is again a measurement of the financial performance and can show how well a company is performing against others in the same industry.
I have looked into a few of the ratios from FitBit’s (FitBug’s biggest competitor and the ultimate reason why they failed as a business) financial statements.
- In 2015 FitBit’s Net Profit Margin percentage was 6.14% while FitBug’s was (162.67) %
- In 2014 the Return on Equity percentage for FitBit was 480.64% while FitBug’s was (500.44) %
Economic Profit:
| Shown in £’000 | 2016 | 2015 | 2014 | 2013 | |
| Economic Profit | (RNOA-cost of capital) x NOA | (3446.08) | (6348.16) | (3615.61) | (2825.75) |
When calculating the ratio used for Economic Profit I utilised 10% for the Weighted Average Cost of Capital (WACC) as I could not find the cost of capital in FitBug/Kin Wellness’s annual reports for any year.
The Economic Profit (or loss) Ratio shows the difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. As you can see in the table above, FitBug/Kin Wellness has had quite a large loss over the last four years of trading.
I believe that the only way FitBug/Kin Wellness could have possibly stood a chance against FitBit was to take them to court (four years) earlier when they first noticed that the names were very similar and the products too. This could have led to a dramatic difference in their overall ratios. I think the figures are in such a large negative as FitBug/kin Wellness were getting more and more into debt everyday (from 2013 to 2015) before finally getting rid of the FitBug side of the business (which was failing) and transitioning into the online health group known as Kin Wellness. This had caused some improvement in the final year that I have been examining but ultimately not enough to save the business.
After speaking with other students about their ratios it is clear to see that not one company is the same as another. A few of the companies I had reviewed had ‘standard’ or ‘normal’ ratios- compared to my large negative figures anyway. It was interesting to hear exactly why they had those figures and it will be interesting to see in the future how those businesses are doing.
Comparisons
| Asset Turnover (ATO) | Sales/NOA | 18.18 | (2.65) | (1.76) | (4.87) |
| Total Asset Turnover Ratio (TATO) | Sales/Total Assets | 1.71 | 0.61 | 0.38 | 2.36 |
When comparing my ATO to the TATO in my spread sheets, I found that they were generally in proportion with each other- except for 2016. The ATO for 2016 was much greater and was also the only positive figure in the last few years by a large margin. The value of FitBug/Kin Wellness’s sales compared to its assets has me quite confused. The company was still headed downhill, so why was their Asset Turnover comparatively so good that year? FitBug had already stopped trading as such and selling their ‘physical’ products (such as watches and scales) and moved onto the online scene prior to 2016 so I don’t think that this figure has come from selling of excess stock or the like.
| Return on Net Operating Assets (RNOA) | OI/NOA | 5828.13% | (1324.80)% | (265.77)% | (435.70)% |
| Return on Assets (ROA) | Net profit after tax/total assets | (563.06)% | (306.72)% | (62.35)% | (201.91)% |
Again, this is another comparison that has me a bit confused. Just like the comparison above, all figures are negative except for the 216 RNOA which is massively different at 5000% compared to the negative 200-1300% of the previous years. The main difference between the ROA and the RNOA is that the RNOA shows the return in the company’s assets that are generating revenue.
To sum up step 8… this was a mammoth task! I have really tried to wrap my head around all the figures and ratios and understand exactly what they mean for my company- but I still have many, many questions and much to learn.
Kayla's Accounting Journey 