Eduspec Holdings Performance Analysis Assignment Sample

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• Subject Name : Financial Management

Financial Management

1) Introduction to Financial Management

In Malaysia, Services sector has a very significant place in the growth, expansion and development the economy. In particular we will look at the educational services sector which is undergoing a sea change. The government is trying to digitalise a lot of educational services offered earlier on traditional basis. The policies of the government show a change towards a more technologically advanced education system. It is trying to create platforms which are more evenly constituted in terms of content and quality. More and more students are also opting for digital/online learning courses as compared to traditional methods. The companies doing business in corporate sector will also fuel the demand for digital learning methods in near future. The growth rate of enrolments in school is for lower and higher grades both are showing an increasing trend.

Eduspec Holdings is a Malaysian company which works in the field of information technology and educational sector. It has multiple branches in various other parts of the nearby geographical location. It develops digitalised solutions for the educational purpose. It provides solutions in the field of engineering, science, maths and technology to various level of students.

Financial analysis refers to the techniques which are used to perform analysis of the performance of the company for current and previous years. They are also used for the estimation and forecasting of future parameters. They help in taking decisions for investment in the company. The comparison with its peers in the same industry is also done to find out its relative growth as compared to others in the same industry.

2) Background of Eduspec Holdings and Its Industry

The Services sector has considerable part to play in the growth and development of country’s economy. The sector has shown tremendous growth with is very similar to the growth of service sector in other developed economies. In developed economies, the service sector forms a major part of the GDP as compared to other sectors. A study conducted by WTO (World Trade Organization) suggest that among the largest exporters of services there are 8 developing nations which feature in the list. Malaysia is one of them so the export of these services also plays an important role and helps in the growth of economy.

Eduspec Holdings Berhad is an investment holding company. It is a public limited company. The main business of the company is to develop educational products in congruence with information technology. It also offers services related to the same business. It provides digital solutions, customised to various needs of the end consumer. It started its operations in 1984 and since then it has been providing integrated learning solutions. They also drive innovation in schools. Their complete list of services include consultancy services, expanding teaching capabilities, provide blended and integrated learning options to schools and other educators. They are responsible for management of information technology infrastructure in schools and other institutions. They aim to provide cost effective solutions, quality and relevant content which will help in increasing effectiveness of teaching.

Programs provided by Eduspec:

The revenue of the group is received majorly from Programs, Digital School Solutions (DSS) and Integrated Education Solutions & Services (IESS).

IT learning and Robotics program: Since the company started its operations in 1984, it is engaged in developing Systematic IT learning and Robotics programs for young children. The content is formed by teachers according to the corresponding ages of students. 

STEM Computer Science and STEM Robotics: Science, Technology, Engineering and Maths with Computer Science is not only related to learn programming. It is inclusive of learning and surviving the dynamism of the world which is now-a-days so much dependent on technology and is such well-connected socially. It also includes innovation, exploration and developing new techniques and solutions to problems. It incorporates technological advancements. It relates to the design, development, construction, operation, and application of robots. Computer systems are also developed so as to control them and analyse and interpret data received by them.

Digital School Solutions (DSS): The main aim of the Digital School Solutions is to provide computer based system for learning and management. It helps in equipping the learners with skills which might be of use in future. The survival in diversified environment and increase in innovation is the need of the future. The aim of the company is to integrate these philosophies, skill content into school teaching methods.

Integrated Education Solutions & Services (IESS): IESS helps in the unification of technology with hardware and software via an all-inclusive way. This ensures long-term collaboration with partners. Education is varied field which may require customized programs. These solutions are implemented and even after the implementation the company keeps on providing the requisite services and support to the associated partners.

3)Performance of Eduspec Holdings Using Financial Ratios

The data has been collected with the help of annual reports on the company website. Important parameters that need to calculate the financial ratios have been summarised in a table. The annual report for 2017 shows data till 30^th September 2016. Similarly in case of 2018, the date is 30^th September 2017 and in case of annual report of 2019, the financial statements are till 28^th February 2019.

The table for the financials is as follows:

Note: Above data is provided in annual report and the financial are taken on bases of published data as mentioned in the reference also.

The financial ratios are used to assess the financial performance of a stock over the previous years and also gives an impression about the financial health of the organisation. They are also used to forecast the future performance of the firm. In the considered case of EDUSPEC Holdings, the various ratios are calculated and shown in the below table. 

The current ratio is calculated by dividing the current assets by current liabilities. The ratio shows that if the firm is able to meet its short term obligations or the dues which fall in one year’s time. In this case, the current ratio has been decreasing for the past three years. The value has decreased from 3.24 in 2017 to 1.88 in 2019. That means, the ability of the firm to pay its short term dues is also getting reduced. This ratio is a liquidity ratio.

The quick ratio is also a liquidity ratio and is also popularly known as acid test ratio. It is calculated by subtracting inventories from current assets and then dividing the result by current liabilities. This shows whether the current liabilities can be paid with cash and its equivalents or not. If the quick ratio value is greater than the company is able to meet its obligations easily whereas if it is less than the company is not able to pay its obligations. The ratio can be equal to one. The value of this ratio is different for different sectors. In current case the ratio value is showing a decreasing trend that means it has decreased from 3.21 in 2017 to 1.28 in 2019. This does not bode well for the investors because the liquidity or cash pile of the company is drying up. But this is still greater than 1 so the company is still able to meet its obligations in full.

The cash ratio can be calculated by dividing the cash and its equivalents by current liabilities. It is also a measure of liquidity and also helps in assessing whether the company will be able to pay its short term dues easily or not. Normally the cash ratio of 1 is considered to be fine but the value varies across different sectors. Also, the cash may be used for expansion purposes etc so, the cash pile may be low in some cases. The situation in above case shows cash ratio increasing from 0.035 in 2017 to 0.072 in 2019. This value is increasing but the absolute value still remains very low. This shows that the company has shortage of cash and only a handful of its obligations can be paid by this.

The operating cash flow ratio is calculated by dividing the cash flow generated from operations by current liabilities. This ratio helps in understanding the position of liquidity in the company. It assesses whether the cash flow generated by operations are able to cover the current liabilities or not and by how much. The ratio of one is a good ratio. But in above case, the ratio shows decreasing trend. It decreased from positive value in 2017 to negative value in 2019. This shows that the company will not be able to pay its dues in the short term with the cash flows generated. Rather it will have to borrow additional money to pay its dues.

Analysing the liquidity position of the company over the years it has been understood that, the performance is deteriorating and it is not worthwhile to invest in the company.

The Asset turnover ratio is an efficiency ratio and assesses the capability of the company’s assets to generate sales. The higher the ratio the better it is for the company because it shows more sales are generated. It is calculated by:

This ratio decreased in 2018 and then improved in 2019 but still the value is very low. This shows that the assets are not able to generate proper revenue which in turn does not bode well for the future of the company.

The ratio is calculated by the aforementioned formula and denotes the number of times the inventory is sold or changed. Generally, the ratio should lie between 4 and 6, but different industries have different inventory turnover. This has decreased drastically in 2019 as compared to 2017.

This ratio shows the number of days or the time required by the company to convert its inventory and WIP materials to sales. The lower this ratio the better. But in this case, the days are continuously increasing which shows that the company is facing difficulty in converting the inventory to sales.

This ratio calculates the profit without subtracting administrative expenses, depreciation, tax etc and divides it by Revenue. The Gross Profit Margin in this case had decreased in 2018 as compared to 2017 and then increased again. The profit is positive which shows that company is generating profit from its sales over the cost of product. The margin is very low overall.

Net profit margin shows Gross profit minus administrative expenses. In the above case, the profit is decreasing and not only it is decreasing, it has become negative which shows that the company is facing overall loss. If the Gross profit is positive and still the company is making loss than it is not properly governed as the administrative expenses are very high. The company should strive to lower the unnecessary expenditure.

This ratio shows the amount of profit earned by the investors on their money. The ratio value has decreased from 0.068(positive) in 2017 to -0.3525(negative). This shows that the shareholders are facing losses by investing in the company. This ratio is used to gauge the valuation of the company. A company with atleast fifteen percent return is considered to be normal.

This ratio shows the capability of the management of the company to use the assets so as to generate profits from them. In the current scenario the ratio has shown substantial decrease from positive value of 0.0322 to negative value of -0.03546 which show that company is not able to generate profits on assets.

It is a profitability ratio. It assesses whether the company can efficiently generate profits from the employed capital. Since the ROCE ratio in this case is showing a decreasing trend and has gone from positive to negative, this shows that the company is not making profit from the employed capital.

When we look at the above ratios, the negative returns show that the investment in the company should not be made.

Gearing ratio shows the amount of debt in the company as compared to equity. A high gearing ratio means that the amount of debt is increasing. If this happens then the interest which has to be paid to the debtors will increase thus the net profit will decrease. The company should have an optimum balance of equity and debt. In this case, the debt is rising and return are decreasing along with the gross/net profit margin.

The EPS ratio has also become negative in 2019 which shows that there is no earning per share rather it is loss per share. Similar is the case of PE ratio, which has become negative.

All the values show that the company is not performing well. High interest to be paid, high administrative expenses, management incapability to derive profit etc have resulted in losses in the company. Thus, the company is not recommended for investment.

The financial ratios are calculated in the following table:

DuPont Analysis

We can also use the DuPont Model, it is a framework for analysing the key financial and fundamental performances, popularized by DuPont Corporation. It is named as DuPont because it was developed in 1920 by DuPont Corporation. It is technique used for analysis to decompose the different drivers of Return on Equity (ROE), by doing this decomposition of ROE, investors get a chance to focus on the key metrics of various financial performances individually to identify its strengths and weaknesses.

In DuPont Analysis, there are three key financial metrics which drive Return on Equity (ROE):

• Operating Efficiency
• Asset usage Efficiency
• Financial Leverage

In other words, it break downs the ROE into different components, so that two different companies can be compared by shareholders and investors to find out the real financial health of the organisation. To calculate the DuPont ROE the formulae is as follow:-

Return on Equity = Net Profit Margin X Asset Turnover Ratio X Finance Leverage

= (Net Income / Sales) x (Sales / Total Assets) x (Total Assets / Total Equity)

We have already calculated this ratios above, so here we can just apply those as:-

For the Year 2017

ROE = (5021480/8,32,71,702) X (8,32,71,702/19,31,24,385) X (19,31,24,385/12,27,37,960)

= .06 X .043 X 1.57 = .04

For the Year 2018

ROE= (-1,48,14,438/5,43,44,949) X (5,43,44,949/21,44,06,384) X(21,44,06,384/11,52,00,420)

= -0.27 X 0.25 X 1.86 = -0.13

For the year 2019

= (-5,23,28,025/5,30,56,942) X (5,30,56,942/13,96,05,617) X(13,96,05,617/7,54,17,701)

= -0.99 X 0.38 X 1.85 = -0.69

On the basis of above three performances , companies are able to identify the problem area that what is reason for low ROE , whether it is lower profit margin , Asset turnover or poor financial leverage. It gives management a direction to utilize its efforts and resources in the required direction. In this case it clearly shows that there is a problem in their profitability itself though Dupont was not of much help for this case study , because if a company is incurring losses its ROE is definitely going to be negative and needs improvement.

Main Features or takeaway

• ROE is split into three parts to understand the changes in returns over a period of time
• With changes in profit margin, and increase in sales the companies bottom line will improve with higher returns on equity..
• A company will gain more per asset it owned if the Asset turnover shows an increase in turn will improve the ROE.
• Same way an increased financial leverage ratio will also lead to improvement in ROE, because more debt finance brings increases interest and cost of capital which reduces tax liability.

4) The adjusted mean method is generally used when statistical averages are required to be corrected due to imbalances and variances in the data sets. One way to adjust mean is to add categories for the different variables that separate the data finely. In this outliers which are present in the data sets are removed to determine the adjusted mean to avoid the impact they have in the overall result or analysis. Outliers may have different reasons, which in normal conditions may be not exist and should be consider for decision making, a very good and recent example is COVID 19 . Many businesses have incurred losses because of this but ideally this period if considered in financial figures of overall past data , will surely give a misleading result. So it should be considered as outlier and data pertaining to this period should not be considered for any business analysis of trend setting purpose. It is also termed as least square mean.

Adjusted means are generally used by an analyst to set a trend line which depicts the normal condition scenarios and gives a direction in decision making process, but it outliers cannot be removed just like that it is done only for those cases where the for those data point or data set the reasons are known..

Researchers and Forecasting professional or data analyst who remove these outliers generally prefer Regression equation model. Regression analysis provides a more accurate result and more reliable data at the conclusion of a study. Aside from regression analysis, there are also more basic ways of adjusting a mean.

Following are some key takeaways for this model:

• Adjusted mean is generally used to correct the statistical averages which include identified and obvious imbalances and outlier in the data set. 
• Most professional use multiple regression model to rely for the outcome of statistical adjusted mean calculation
• Simple approach to calculate the adjusted mean is to separate the data more finely and use and add variable categories.

 For the case study, the historical data about the stock is collected from the website for the years 2015, 2016, 2017, 2018. 2019 as required in the question statement. The value for close price is chosen as adjusted close price as it gives a better measure of price. The data selected is on monthly basis. Return has been calculated for stock by the formula:

R_(i,t) = (P_t – P_(t-1) )/ P_(t-1) );

Similarly, historical data is collected for the market index. Return is calculated by the same formula as listed above, for the said time period. The risk free rate of return can be derived from the 10 year Government bonds issued by Government. The historical prices are also derived from the same website. The collected data is represented in the form of a table below. Excess return from stock as compared to the risk free rate and excess return from the market are also calculated. The values are given in the table.

The mean adjusted model is shown by:

Expected Return E_(r,t) = ̅R_i

It means that expected return over the time period is equal to the average return in this time frame. That means any stock can use its average return as its expected return over the time frame. (Brown and Warner, 1985).

Calculating the expected return consistent to the above formula,

Eduspec Holdings Return = -2.77% in this time period.

Market Return = -0.142% in the same time period.

This shows that the Eduspec Holdings underperformed the market returns. Investment in the market index would have yielded better returns as compared to the company.

Capital Assets Pricing Model (CAPM) attempts to prices securities by examining relationship that exists between expected risk and return. This model indicates that generally investors always combine two types of securities or assets one risk free and another risky assets in the form of market portfolio. If further implies that Investors expect return as per the risk a asset or a security inherits, i. more risk means more return.

5) The Beta Coefficient is a technique to measure the sensitivity and Correlation of an assets or a security or an investment portfolio to its market movement.. We can derive a statistical measure of risk by comparing the returns of an individual security/portfolio to the returns of the overall market and identify the proportion of risk that can be attributed to the market

One of the most popular uses of Beta is to estimate the cost of equity (Re) in valuation models. The CAPM estimates an asset’s Beta based on a single factor, which is the systematic risk of the market. The cost of equity derived by the CAPM reflects a reality in which most investors have diversified portfolios from which unsystematic risk has been successfully diversified away.

After performing linear regression to the above table, beta coefficient can be calculated. Beta is a financial measures which assesses the variation in the stock with respect to the variation in the overall stock market. The formula for beta is given by:

The results of linear regression are given in the following table:

The value of beta as per the table of linear regression is 1.224 and the value of alpha is the value of intercept which comes to -0.02677. We look at the t statistic for both the values which are significant at p value less than 5%. So, these values are useful in the calculations.

Beta is used to assess the volatility of the stock with respect to the market. The value of beta for the market movements are considered to be 1. The various other stocks of the market either have beta more than one or less than one or equal to one. If the beta is more than one that means the stock is more volatile as compared to the market. If the beta is less than one that means the stock is less volatile as compared to the market. And if the beta value is equal to one that means its movement is similar to the market. In the above case the beta value comes to 1.224 which means that as compared to the changes in the market value, the stock is more volatile.

Alpha is the measure of extra return on an investment as compared to the market index. The alpha and beta are measures of risk. When the investment is made in one security, the risk related to it is due to its own characteristics. The calculation of alpha is done by first assessing the expected rate of return dependent on the risk-free rate of return, beta and market risk premium, and then subtracting it from the actual rate of return. In linear regression it is shown by the value of intercept. In above case, the alpha comes to -0.02677. If the alpha of a stock is positive, that means the return on the stock is less than the expected return. If the alpha is negative, the return on the stock is less than the expected return. Since the alpha is negative in above case, that shows the return by the stock is less than the expected return in the considered time frame. The alpha of a formula is given by:

α = Ri – [Rf + (Rm – Rf) β]

6) Conclusion and Recommendation on Financial Management

Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, conducting due diligence related to an acquisition, or assessing a subsidiary’s performance. After analysing company’s financial ratios it seems that financially the company is not performing well. Any investment in the company will not be profitable. The ratios suggest company was earlier making profits but now it is making losses. The management is incapable of generating profits from its assets. The operating cash flows are insufficient to cover current liabilities which can be seen from liquidity ratios. The difference in the gross profit margin and net profit margin shows that there are lot of interest expenses and administrative expenses which need to be paid off resulting in net loss.

The increase in the debt part carries a lot of risks as if these obligations cannot be fulfilled then the control of the promoters is lost to the lenders. The free cash flow cannot pay the dues of the company.

As per the mean adjusted model, the return on the stock is not commensurate with the performance of market index. The stock has underperformed the market which is also giving negative returns. So, it is not recommended to invest in the stock of this company.

It is seen that in every type of model and calculation it shows that there is downfall in the overall performance of the company, Ratio Analysis, Dupont Analysis, Mean Model Test, Beta Coefficient all indicates one thing that company is currently not safe to invest. And management requires immediate strategy change to improve the financial health of the company.

References for Financial Management

Brown, S., and J. Warner (1980), Measuring security price performance, Journal of Financial Economics 8: 205-258.

EDUSPEC Holdings BHD. Annual Report 2018. Retrieved on June 8, 2020, from http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=194954&name=EA_DS_ATTACHMENTS

EDUSPEC Holdings BHD. Annual Report 2018. Retrieved on June 8, 2020, from https://www.eduspec.com.my/AnnualReport/EDUSPEC_Holding_AR_2018_complete.pdf

EDUSPEC Holdings BHD. Annual Report 2017. Retrieved on June 8, 2020, from https://www.eduspec.com.my/AnnualReport/EDUSPEC-AnnualReport2017(1).pdf

EDUSPEC Holdings BHD. Annual Report 2016. Retrieved on June 8, 2020, from https://www.eduspec.com.my/AnnualReport/EDUSPEC-AnnualReport2016.pdf

EDUSPEC Holdings BHD. Annual Report 2015. Retrieved on June 8, 2020, from https://www.eduspec.com.my/AnnualReport/EDUSPEC-AnnualReport2015.pdf

EDUSPEC (0107.KL). Historical Prices. Retrieved on June 8, 2020, from https://finance.yahoo.com/quote/0107.KL?p=0107.KL&.tsrc=fin-srch

FTSE Bursa Malaysia KLCI. Historical Prices. Retrieved on June 8, 2020, from https://finance.yahoo.com/quote/%5EKLSE%3FP%3D%5EKLSE/history/

Henry, E. Robinson, T.R. Greuning, J. (2011). Financial Analysis Techniques. https://www.cfainstitute.org/-/media/documents/support/programs/cfa/2019-L1V3R26-footnotes.pdf

Ken Research. (2019, September 10). Malaysia E-Learning Industry Revenue is Expected to Reach Over USD 2 Billion by 2023: Ken Research. Prnewswire. https://www.prnewswire.com/news-releases/malaysia-e-learning-industry-revenue-is-expected-to-reach-over-usd-2-billion-by-2023-ken-research-300914849.html

Malaysia Investment Development Authority. (2019). Services Sector. https://www.mida.gov.my/home/services-sector/posts/

Sitthipongpanich, T. (2011). Understanding the event study. Journal of Business Administration. 130, 63-64

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