In the context of revenue, it is apparent that the company has witnessed surge in FY2016 and FY2017. This surge has primarily been on account of inorganic growth considering the company’s global footprint and the increased foray of the company in the digital space. Two noteworthy acquisitions in FY2017 are Plarium Global Limited (US$ 500 million) and Big Fish Games Inc (US$ 990 million) (Aristocrat Leisure, 2017). It is quite evident that the inorganic growth path of the company seems to be margin accretive which is apparent from the fact that the rise in cost of revenue has been lower than the corresponding rise in revenue. The net result is that gross profit has shown impressive growth driven by both growing revenue and also expanding margins (Damodaran, 2015).

In the recent years, the design and development costs have also witnessed increased which is positive from the company’s perspective as it not relying only on inorganic growth and infact intends to use these acquisitions as platform to widen the product portfolio and the geographical reach. Two costs which have witnessed the highest rise are the finance costs and administrative costs. The increase in finance costs is on expected lines owing to the big ticket acquisitions enacted by the company. Further, as the geographical and product portfolio of the company widens, the administrative costs would also witness an increase.  The net result of the company’s strategy is that the net profit barring FY2014 has shown significant jump which is quite sizable in FY2016 and FY2017 when the jump in net profits are 300% to 400% of the net profits witnessed in FY2013. This is indicative of the growth potential of the business.

Ratio Analysis

The ratios for the company are represented in the tabular format shown below (Aristocrat Leisure, 2017;2015;2013)

Ratio Analysis – Discussion

For the five year ratios that have been computed above, the relevant discussion is captured as follows.

Profitability Ratios

The tabular representation of the profitability ratios five year trend is highlighted below (Aristocrat Leisure, 2017;2015;2013).

The return on total assets has plummeted from  13.42% iu FY2013 to 1.65% in FY2014.  One of the main reasons responsible for this drop is the plummeting net profit on account of abnormal expense to the tune of $ 13.1 million on account of restricting and acquisition cost. Additionally, the company also witnessed a loss of $ 43.4 million in relation to lottery related investments disposal. Besides, the company also observed an impairment loss to the tune of $78 million in relation to Japan Pachislot business (Aristocrat Leisure, 2015). All these abnormal losses and costs lead to plummeting of net profit and hence the ROA. However, from FY2015 onwards, there has been constant improvement in this regard as is evident from the ever improving values. Infact the ROA in FY2017 is better than that observed in FY2013 implying the success of the company’s strategy in generating higher profit per unit asset (Damodaran, 2015).

A similar trend is also observed for ROE which has plummeted in FY2014 but has shown significant improvement in the following years. The improvement in ROE in FY2016 and FY2017 need to be seen in context of the significant jump in shareholders’ equity primarily on account of surge in retained earnings. The operating margins of the company also show a healthy trend as is apparent from FY2015 – FY2017. In FY2016, there is an improvement in the operating margins by 800 bps while in FY2017, this is about 400 bps. This is attributed to the relentless focus on the part of the company to rationalise costs while maximising revenues. The gross profit margins for the company are on a continuous uptrend and during the five year period has shown improvement of about 675 basis points. Based on the above profitability ratios, it would be fair to conclude that the company has done exceedingly well with regards to profitability during the last five years.

Efficiency Ratios

The tabular representation of the efficiency ratios five year trend is highlighted below (Aristocrat Leisure, 2017;2015;2013).

During the last five years, there has been a decrease in the inventories turnover period. The inventory turnover period for the company is significant owing to the potential obsolescence of inventory considering that technology is advancing very fast and hence it is quite possible that old games may not be able to sell. Hence, lowering inventory period as witnessed FY2015 onwards is a very positive trend for the business (Damodaran, 2014).

The settlement period for debtors has also shown significant improvement from FY2015 onwards. This is because lowering value of this metric implies that the company is able to obtain cash from sales in lesser time which would reduce the cash cycle and hence lower the working capital needs of the company (Ross, Trayler and Bird, 2014). This in turn would help the company in saving finance cost.  The asset turnover has seen a decline over the years which are primarily on account of significant jump in the assets of the company especially on account of intangible assets. The revenue on account of these assets would be realised in the long term and hence the lower asset turnover does not pose any challenge (Brealey, Myers and Allen, 2014).

Liquidity Ratios

The tabular representation of the liquidity ratios five year trend is highlighted below (Aristocrat Leisure, 2017;2015;2013).

The liquidity ratios highlight whether the company is expected to face any cash crunch in the short term owing to difficulty in meeting the current liabilities. For the given company even though, there has been some deterioration in the current ratio of the company, it is not of any concern considering that the ratio still remains at a healthy level thereby implying that current assets are significantly greater than the corresponding current liabilities (Ross, Trayler and Bird, 2014). Quick ratio is a more suitable measure for determining liquidity since obsolescence of inventory is quite common for the company and hence the current assets besides inventories need to be taken into consideration (Damodaran, 2015). The quick ratio in  the given period has shown some decline but remains quite robust and pose no short term liquidity threat (Brealey, Myers and Allen, 2014).

Financial Gearing

The tabular representation of the gearing ratios five year trend is highlighted below (Aristocrat Leisure, 2017;2015;2013).

The debt to assets ratio does not show a particular trend owing to the volatile nature on a y=o-y basis. However, it is quite impressive to see that despite going for organic growth funded by debt, the company has managed to keep the liabilities under control. The value of 0.59 as on September 30, 2017 does not pose any threat and provides leverage to the company to focus on the future expansion plans (Aristocrat Leisure, 2017). Over the recent years, the company has done well in lowering the same which is primarily on account of significant increase in the retained earnings which is causing a rise in the equity and hence keeping the liabilities under check (Ross, Trayler and Bird, 2014). The interest coverage ratio witnessed a decline till FY2015 owing to higher finance charges (in FY2015) and lower operating profits (in FY2014). However, during FY2016 and FY2017, there has been a significant improvement in this regards and there is immense comfort provided to lenders with regards to principal and interest repayments (Damodaran, 2015).

Investment Ratios

The tabular representation of the investment ratios five year trend is highlighted below (Aristocrat Leisure, 2017;2015;2013).

The earnings per share for the company has shown significant improvement barring FY2014 when it was negative owing to host of one-time costs and loss on discontinued operation. Further, the growth in EPS In FY2016 and FY2017 has been quite spectacular. The P/E ratio for the company has been hovering in the mid to high 20’s and there has been no significant deviation regarding the same. This clearly highlights that the market participants are able to predict the growth of the company which is being delivered by the management. Even though the dividend per share has been growing every year during the given period but owing to rapid increase in price, the dividend yield has seen a decline (Damodaran, 2015).

References

Aristocrat Leisure (2017) Annual Report 2017, [Online] Available at https://ir.aristocrat.com/news-releases/news-release-details/2017-annual-report [Assessed August 13, 2018]

Aristocrat Leisure (2015) Annual Report 2015, [Online] Available at https://ir.aristocrat.com/static-files/b9f34e34-014b-485e-a2eb-7ac383fa108e    [Assessed August 13, 2018]

Aristocrat Leisure (2013) Annual Report 2013, [Online] Available at https://ir.aristocrat.com/static-files/fab83cc2-d657-4d77-bd66-b72c418f2bf3 [Assessed August 13, 2018]

Brealey, R. A., Myers, S. C. and Allen, F. (2014) Principles of corporate finance, 2nd ed. New York: McGraw-Hill Inc.

Damodaran, A. (2015). Applied corporate finance: A user’s manual, 3rd ed. New York: Wiley, John & Sons.

Ross, S. A., Trayler, R. and Bird, R. (2014) Essentials of corporate finance. Sydney, Australia: McGraw-Hill Australia.