Premier Investments Limited: Audit Analysis and Financial Review for FY 2021

Premier Investments Limited: Audit Analysis and Financial Review for FY 2021

Dialogue

This report pertains to Premier Investments Limited and adopts the perspective of a senior auditor tasked with auditing the firm for the financial year ending on 30 June 2021. This report, as instructed by the engagement partner, aims to collect pertinent background information on the client as part of the audit processes to get a comprehensive knowledge of the company and its surroundings. Based on the collected information and acquired knowledge, the senior auditor is required to provide commentary on the sort of audit opinion to be delivered to the business.

Premier Investments Limited is a publicly traded corporation limited by shares and headquartered in Australia. The firm has been listed on the Australian Stock Exchange since December 15, 1987 (Premier Investments, 2022). The firm was first founded as an investment vehicle intended to optimize capital returns for its owners by purchasing or strategically holding stakes in Australian enterprises engaged in retail, distribution, and importing. The majority of the company's revenue is generated from running specialized retail fashion businesses. The firm employs approximately 11,000 individuals and operates in Australia, New Zealand, Europe, and Asia. The company's headquarters is located in Melbourne, Victoria (Bloomberg.com, 2022).

The firm works via two primary business segments: investments and retail. The investment sector comprises investments in publicly traded securities and money market deposits aimed at generating short- and long-term capital gains, as well as interest and dividend income (Simplywall.st, 2022). The retail sector include specialist apparel chains that provide brands such Smiggle, Just Jeans, Peter Alexander, Portmans, Jay Jays, Jacqui E, and Dotti. The company's principal subsidiaries are Premfin Pty Ltd, Metalgrove Pty Ltd, Jay Jays Trademark Pty Limited, Just Group Limited, Springdeep Investments Pty Ltd, Just Jeans Group Pty Limited, and Prempref Pty Ltd (Reuters, 2022).

The firm functions in a highly competitive market, with primary competitors including Accent Group, Mosaic Brands, Wesfarmers, and City Chic Collective Limited (Ibisworld.com, 2022). The company's activities and many facets are stringently controlled. Following comprehensive secondary research, the following rules have been collected for the company's adherence:

1. The Corporation Act and ASX Listing Rules pertaining to disclosures.
2. ASX Guidelines and Recommendations for Corporate Governance.
3. Workplace Gender Equality Act 2012 to enhance workplace diversity.
4. Competition and Consumer Act 2010 mandates the transmission of accurate information to consumers.
5. Modern Slavery Act 2018 on ethical procurement.
6. Compliance with Australian Accounting Standards and IFRS for financial reporting.

                                                  (Source: Calculated by Author)
The company's profitability may be determined using the gross margin ratio, net profit ratio, and return on assets ratio. The gross profit margin reflects a company's capacity to offset its direct expenditures with produced revenue (Griffin and Mahajan 2019). The metric rose from 61.06% in 2020 to 64.33% in 2021 due to a revenue growth. Similarly, the net profit margin ratio of the corporation is determined as the definitive indicator of the net profits an organization produces in relation to its sales. It is the income surplus remaining after covering the complete costs for the specific financial year. The statistic rose from 11.30% in 2020 to 18.82% in 2021. This results from a rise in revenue coupled with a decrease in various expenditures, including depreciation, impairment, amortization, and financing charges. Finally, the return on assets ratio rose from 6.94% in 2020 to 12.13% in 2021, demonstrating the effectiveness of resource use in profit generation.

Corporate Background and Overview

The company's liquidity condition may be assessed using the current ratio and quick ratio. The current ratio assesses the capacity of total current assets to satisfy the entire current obligations of the organization. The quick ratio, in contrast, depends only on quick assets, excluding inventories from total current assets, to satisfy all short-term debts and commitments (Easton et al. 2018). The company's current ratio has enhanced from 1.25 in 2020 to 1.48 in 2021, attributable to a rise in current assets and a little reduction in current liabilities. The quick ratio increased from 0.95 in 2020 to 1.07 in 2021. Given that these indicators exceed 1, the corporation has an appropriate liquidity level to fulfill its short-term commitments.

The company's operational situation may be assessed by analyzing the asset turnover ratio, inventory turnover, and debt turnover ratio. The asset turnover ratio indicates an organization's effectiveness in using its overall resources to generate income (Robinson 2020). The measure has risen from 0.61 times in 2020 to 0.64 times in 2021 due to a revenue growth. The inventory turnover ratio assesses the efficacy of inventory management, indicating the frequency with which a firm can sell its average inventory throughout a fiscal year. Notwithstanding a rise in sales, the company's ratio has slightly decreased from 2.90 times in 2020 to 2.82 times in 2021, attributable to an increase in the average inventory lot size. Finally, the debt turnover ratio illustrates the efficacy of debt collection from credit clients and quantifies the total instances of credit collection during a certain financial year. The measure rose from 45.71 times in 2020 to 72.57 times in 2021 due to a decrease in average receivables, indicating enhanced efficiency.

The company's solvency may be assessed using the debt-to-equity ratio and the equity ratio. The debt-to-equity ratio quantifies the entire amount of debt capital relative to each $1 of equity capital within the overall capital structure (Fridson and Alvarez 2022). The indicator decreased from 0.63 times in 2020 to 0.49 times in 2021 due to a substantial reduction in debt financing, which mitigates gearing and financial leverage vulnerability. As a result, the company's equity ratio rose from 61.18% in 2020 to 67.20% in 2021 due to a rise in the total shareholder stock value.

Ratio analysis findings are one of the analytical techniques upon which the auditor may depend on the audit engagement to evaluate outcomes and identify any discrepancies in the financial records kept and provided by the client. This entails comparing the ratio outcomes of the present time with those of previous periods to see if historical connections are progressing into the period under examination. According to the financial ratios computed above, the following three accounts are recognized as being susceptible to misstatements:

1. The company's total revenue rose from $12,187,800,000 in 2020 to $14,445,960,000 in 2021 (Premier Investments, 2022). Given the challenges posed by Covid-19 and the economic instability of the commercial landscape, the number may be susceptible to alterations to provide an advantageous financial outcome.
2. Net Profit: The definitive final number rose from $137,753,000 in 2020 to $271,840,000 in 2021, leading to a significant rise in the company's net profit margin. This statistic is very susceptible to manipulation to forecast favorable financial outcomes, hence inflating stock prices to enhance shareholder value and serve the personal interests of management.
3. Inventories: Despite a boom in demand leading to greater income, the value of closing inventory has risen markedly from $156,590,000 in 2020 to $208,760,000 in 2021, warranting the auditor's scrutiny.

Multiple financial signs suggest that the firm will persist as a going concern. The company's total sales has risen despite the repercussions of Covid-19, leading to an enhancement in profitability and profits per share, which are indicative of future development potential. Earnings per share have almost quadrupled from 86.89 cents in 2020 to 171.15 cents. The firm enhanced its liquidity position, as seen by improved liquidity ratios, indicating that it can depend on its liquid assets to fulfill short-term commitments, hence facilitating efficient business operations. Finally, the firm has successfully reduced its dependence on debt funding, resulting in a lower gearing ratio. This mitigates vulnerability to financial leverage and therefore the danger of default. These variables signify the company's capacity to operate as a continuing concern.

Ernst and Young, the auditor, has provided an unmodified audit opinion for the firm after the examination of its financial reports and those of its subsidiaries. The auditor has rendered the audit opinion in compliance with the stipulations of the Corporations Act, 2001. The company's financial statements have been audited to provide a true and fair perspective as of the year-end date and are produced in accordance with the Australian Accounting Standards and Corporations Regulations, 2001. Throughout the audit, the auditors did not identify any major misstatements attributable to fraud or mistake that would necessitate alternative reporting. Ultimately, the auditors have acquired enough and relevant audit evidence to support their conclusion delivered to the firm.

Final Assessment

This analysis concludes that PMV has robust financials, as shown by a comprehensive set of financial ratios that have been generated and compared to previous period results. The company's growth possibilities are substantial due to its profitability, liquidity, and solvency, which provide fair certainty of continued operations in the near future.

References

Bloomberg.com, 2022. Premier Investments Ltd - Company Profile and News. [online] Bloomberg.com. Available at: <https://www.bloomberg.com/profile/company/PMV:AU> [Accessed 27 April 2022].

Easton, P.D., McAnally, M.L., Sommers, G.A. and Zhang, X.J., 2018. Financial statement analysis & valuation. Boston, MA: Cambridge Business Publishers.

Fridson, M.S. and Alvarez, F., 2022. Financial statement analysis: a practitioner's guide. John Wiley & Sons.

Griffin, P.A. and Mahajan, S., 2019. Financial Statement Analysis. Finding Alphas: A Quantitative Approach to Building Trading Strategies, pp.141-148.

Ibisworld.com, 2022. IBISWorld - Industry Market Research, Reports, and Statistics. [online] Ibisworld.com. Available at: <https://www.ibisworld.com/au/company/premier-investments-limited/28172/#:~:text=Premier%20Investments%20Limited%20is%20a,head%20office%20in%20Melbourne%2C%20Victoria.> [Accessed 27 April 2022].

Premier Investments, 2022. Financial Results - Premier Investments. [online] Premier Investments. Available at: <https://www.premierinvestments.com.au/financial-results/> [Accessed 27 April 2022].

Premier Investments, 2022. Home - Premier Investments. [online] Premier Investments. Available at: <https://www.premierinvestments.com.au/> [Accessed 27 April 2022].

Reuters, 2022. [online] Reuters. Available at: <https://www.reuters.com/markets/companies/PMV.AX> [Accessed 27 April 2022].

Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.

Simplywall.st, 2022. [online] Simplywall.st. Available at: <https://simplywall.st/stocks/au/retail/asx-pmv/premier-investments-sharesx> [Accessed 27 April 2022].