Investment Analysis

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Investment Analysis Table of Contents Introduction 3 Financial Statement Analysis 3 The financial statements under consideration 4 Measuring company performance 4 Profitability of a company 5 Financial liquidity 5 Asset utilization 5 Financial leverage 6 Our Analysis: Activistic limited and Battery limited 6 Financial leverage 6 Asset utilization 7 Profitability 9 Activistic Limited cash flows 10 Batteries Limited cash flows 11 Recommendation 13 References 15

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Investment Analysis Introduction Activistic Limited is a technology company that owns a micropayment platform that provides the users with a simple means that can be used to make regular donations, especially to charities and other fundraising organizations through their mobile phones. The company has also been established to commercialize a new generation of online betting and social gaming products. Some of the company's products include sports lottery, charity lottery, and lotto betting, among others. On the other hand, Battery limited is a diversified mining development and minerals exploration company that is dedicated to exploring and developing mineral deposits in Mozambique. Currently, the company is working on maintaining a focus on its two graphite projects. It aims to produce high-quality graphite flake, which is an important ingredient in the efficient operation of lithium-ion batteries. The paper considers a comparative analysis of the performance of two firms and investment decisions.

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This is achieved by conducting a five-year trend analysis to understand each company's consistency and profitability, hence offering advice to the client on the investment decision.

Financial Statement Analysis This refers to the process of analyzing the financial statements of a company for the purpose of decision making. The external stakeholders can use the information to understand the overall health of an organization and evaluate the business value and financial performance. The financial statements of a company record important financial data on all activities of a business, hence making it possible to evaluate the company on the basis of the current, past, and projected performances. The rationale for financial statement analysis entails the need to reassure confidence among the investors and be used to evaluate the performance of a company using various metrics such as liquidity and profitability (Linares-Mustarós, Coenders & Vives-Mestres, 2018).

The Financial Statements under Consideration The major financial statements here include the balance sheet, the income statement, and the cash flow statements. The balance sheet provides information on what the company is worth from a book value perspective. It gives a more comprehensive picture of the company's liabilities, assets, and the shareholder’s equity on a given date. It paints a picture of a company's long-term assets and how efficiently a company can manage its receivables in the short term. The income statement provides details on the revenue earned by a company and the expenses involved in its operating activities. It shows the direct, indirect, and capital expenses that are incurred by a company. The income statement helps the analysts to look at the operating efficiency. Finally, the cash flow statement provides a view of a company's overall liquidity by showing cash transaction activities. It takes into consideration the cash inflows and outflows over

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the course of an accounting period, with the summation of the total cash available. Ideally, cash flow statements are supposed to be broken into three parts, namely, operating, financing, and investing (Lev, Li & Sougiannis, 2010). The cash flow statement is supposed to capture the net increase and decrease in total cash in each of the three areas.

Measuring Company Performance Company performance is measured by taking into consideration both numerical and financial factors. Apart from the numerical factors such as the profit margin, other indicters allow one to evaluate a company's performance on purely financial terms. Solvency and liquidity ratios evaluate a company's performance in line with ensuring that it can continue its operations.

Ratios can be compared to those of other companies in order to evaluate performance. Other factors that can be considered when measuring a company's performance include cash flow, working capital, cost base, and borrowing, among others.

Profitability of a Company Various ratios can be used to measure the profitability of a company. The ratios here include return on equity (ROE), return on capital (ROC), and return on assets (ROA). ROE determines the company's growth rate of earnings as it measures the profitability of the equity investment exhibited by a company. ROC shows the earning for every dollar of the capital invested in a company in the long term. ROA shows the income earned for every dollar earned by a company (DeFusco et al., 2015).

Financial Liquidity Liquidity refers to the ability to convert assets into cash cheaply and quickly. The internal analysis of the liquidity entails using the multiple accounting periods, which are reported using the same accounting methods. A higher liquidity ratio involves using multiple accounting

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periods, which are reported using the same accounting methods (Dahmash, 2015). The ratios here include the current ratio, cash ratio, and quick ratio. The current ratio measures a company's ability to pay off its current liabilities with its current assets, such as accounts receivable, cash, and inventories. The quick ratio measures a company's ability to meet the short-term obligations with its most liquid assets and therefore excludes inventories from the current assets (DeFusco et al., 2015).

Asset Utilization This is measured by a ratio called asset turnover, which shows how efficient a company can use assets in line with the generated sales for each dollar of assets. Higher turnover ratios give a more positive impression to the investors as it shows a good ability to generate sales using the assets.

Financial Leverage Financial leverage is normally determined by checking on the proportion of assets to equity. Unfavorable leverage happens when a company is not in a position to earn more than the funds cost. This makes it costly for the company to borrow funds and depicts own levels of profitability or losses.

Our Analysis: Activistic Limited nd Battery Limited In order to do an in-depth analysis of the companies, data for four consecutive years was considered for analysis purposes. The financial years include 2016, 2017, 2018, and 2019.

Financial Leverage The table below shows the financial leverage of the two companies. Considering the two companies, it is clear that Activistic Limited had a higher leverage ratio than Battery Limited.

Activistic was in a better position to raise more capital using debt, which was able to steer it

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forward for every financial year. It was able to take advantage of debt better than Battery Limited, which maintained a leverage ratio of 1.

Activistic Limited 2016

2017

2018

Total assets

1813928

2897921

1019920

Total equity

1461568

689020

-1967772

Leverage ratio

1.2

4.2

0.5

2017

2018

2019

Battery limited 2016

2019

Total assets

16,417,563.00 19,864,463.00 45,666,553.00 11,278,660.00

Total equity

15108275

17846393

44644641

10904565

Leverage ratio

1.1

1.1

1

1

However, Activistic Limited exhibits a higher risk of having equity losses. There is also a high likelihood that their sales and profits will not be stable as a result of its financial structure.

On that note, Battery Limited is deemed to have a better leverage ratio as compared to Activistic Limited.

Asset utilization Asset utilization ratio 2016

2017

2018

2019

Activistic limited

52%

42%

54%

54%

Battery Limited

42%

49%

56%

55%

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As mentioned earlier, the asset utilization ratio determines the total revenue for every dollar of assets which is owned by a company. For instance, in the year 2016, Activistic limited had an asset utilization of 52%. With an asset utilization ratio of 52%, it means that the company earned $.52 for each dollar of assets held by the company. Increasing asset utilization means the company is being more efficient with each dollar of assets it has. Both Activistic and Battery Limited companies have exhibited some consistency and a positive trajectory when it comes to the asset utilization ratio. For instance, for Activistic limited, the asset utilization dropped from 52% to 42% in the year 2017. However, the company was able to maintain a constant asset utilization ratio of 545 for both 2018 and 2019.

On the other hand, Battery Limited has also exhibited some strength when it comes to asset utilization, with consistent growth of 42, 49, 56, and 55%, respectively. This implies that the company is increasingly becoming more efficient when it comes to utilizing the assets in a bid to make sales. When the two companies are compared, both companies are at the same level on the issue of efficient asset utilization. However, Battery Limited exhibits more positive prospects considering the manner in which the asset utilization has been growing. Activistic limited has been more resilient and consistent, which is a good indicator too. This ratio is frequently used to compare a company's efficiency over time (DeFusco et al., 2015).

Financial Liquidity The current ratio, quick ratio, and cash ratio are used to evaluate and compare the liquidity of the two companies (Reilly & Brown, 2011). Considering the companies' cash ratios, both companies have some ability to pay the current liabilities without having to sell or liquidate other assets. The cash ratios were healthy except for 2017 for Activistic Limited and Battery limited in the year 2016. The quick ratios for the companies are also not badly off, although

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Battery limited appears to perform better in this regard. Activistic limited is able to cover its current liabilities, though its liquid assets are not quite able to meet each dollar of short-term obligations. Battery limited is in a better position to do so, especially during 2016 and 2019.

Activistic limited

Financial liquidity 2016

2017

2018

2019

Current ratio

0.8

1.2

1.1

Quick ratio

0.7

0.8

0.9

Cash ratio

1.1

0.9

1.2

Current ratio

1.7

0.9

0.8

1.3

Quick ratio

1.7

0.9

0.7

1.2

Cash ratio

0.9

1.3

1.2

1

Battery limited

A quick ratio tends to be more conservative as compared to the current ratio because it excludes the inventory and other current assets, which tend to be a bit difficult to turn into cash.

The quick ratio is supposed to consider only asserts that are supposed to be converted to assets more easily. Although prepaid expenses are considered assets, they cannot be used to pay for current liabilities, implying that they are omitted from the quick ratio. The current ratios also point to the fact that the companies are in a better position to pay the current debts and other payables (Sullivan & Mackenzie, 2017). They are all placed to meet the short-term obligations that are due within one year. Battery Limited exhibited a more robust performance in the year 2019 for the current ratio.

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Profitability To gauge the company's profitability, there was a need to narrow down to return on sales recorded by the two companies. The tables below give a summary of the return of sales for the two companies.

Return on sales 2016

2017

2018

2019

Activistic limited

12.30% 13.50% 12.90% 13%

Battery limited

10.20% 9.40%

12.20% 11.50%

The two companies are not doing very well when it comes to converting sales into profits. However, Activistic limited appears to perform better than Battery limited when it comes to return on sales. Although the margin is small, Activistic Limited has consistently performed better than Battery Limited.

Activistic Limited Cash Flows Receipts from Customers

0.00

66,832.00

93,180.00

-5,928,058.00

-5,275,582.00

-2,925,079.00

0.00

0.00

0.00

16,700.00

10,705.00

11,263.00

-24.00

-10,235.00

-189,992.00

Tax Paid

0.00

0.00

0.00

Other Operating Cash flows

0.00

389,857.00

0.00

-5,911,382.00

-4,818,423.00

-3,010,628.00

-10,879.00

0.00

--

Payments to Suppliers and Employees Dividends Received Interest Received Interest Paid

Net Operating Cash flows Payment for Purchase of PPE

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Proceeds From Sale of PPE

0.00

0.00

--

Investments Purchased

0.00

0.00

--

Proceeds From Sale of Investments

0.00

0.00

--

Subsidiaries

0.00

37,657.00

--

Proceeds from Sale of Subsidiaries

0.00

0.00

--

Loans Granted

0.00

-660,000.00

--

Loans Repaid

0.00

0.00

--

Other Investing Cash flows

0.00

0.00

--

-10,879.00

-622,343.00

--

3,905,000.00

3,560,000.00

2,446,999.00

Proceeds from Borrowings

0.00

1,500,000.00

1,150,000.00

Repayment of Borrowings

0.00

-125,000.00

-250,000.00

Dividends Paid

0.00

0.00

0.00

Other Financing Cash flows

-309,881.00

-302,090.00

-162,000.00

Net Financing Cash flows

3,595,119.00

4,632,910.00

3,184,999.00

Net Increase in Cash

-2,327,142.00

-807,856.00

174,371.00

Cash at Beginning of Period

3,985,010.00

1,448,617.00

606,265.00

Exchange Rate Adj

-209,251.00

-34,496.00

0.00

0.00

0.00

0.00

1,448,617.00

606,265.00

780,636.00

Payments for Purchase of

Net Investing Cash flows Proceeds from Issues

Other Cash Adjustments Cash at End of Period

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Batteries Limited cash flows Receipts from Customers

0.00

0.00

0.00

0.00

Payments to Suppliers and

-2,836,695.00

-3,779,528.00

-6,414,986.00

-4,496,334.00

Dividends Received

0.00

0.00

0.00

0.00

Interest Received

28,113.00

36,341.00

144,280.00

472,157.00

Interest Paid

0.00

0.00

0.00

0.00

Tax Paid

0.00

0.00

0.00

0.00

Other Operating Cashflows

0.00

0.00

0.00

0.00

Net Operating Cash flows

-2,808,582.00

-3,743,187.00

-6,270,706.00

-4,024,177.00

Payment for Purchase of PPE

-2,826,493.00

-4,569,662.00

-

-4,277,699.00

Employees

22,726,191.00 Proceeds From Sale of PPE

0.00

0.00

0.00

0.00

Investments Purchased

0.00

0.00

0.00

0.00

Proceeds From Sale of

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

264,320.00

67,553.00

Loans Granted

0.00

0.00

0.00

0.00

Loans Repaid

0.00

0.00

0.00

0.00

Other Investing Cash flows

0.00

302,939.00

-3,523,792.00

366,844.00

Net Investing Cash flows

-2,826,493.00

-4,266,723.00

-

-3,843,302.00

Investments Payments for Purchase of Subsidiaries Proceeds from Sale of Subsidiaries

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25,985,663.00 Proceeds from Issues

14,636,459.00 6,375,497.00

34,065,982.00 5,110,500.00

Proceeds from Borrowings

0.00

0.00

0.00

0.00

Repayment of Borrowings

0.00

0.00

0.00

0.00

Dividends Paid

0.00

0.00

0.00

0.00

Other Financing Cash flows

-737,747.00

-403,783.00

-2,244,527.00

-326,944.00

Net Financing Cash flows

13,898,712.00 5,971,714.00

31,821,455.00 4,783,556.00

Net Increase in Cash

8,263,637.00

-2,038,196.00

-434,914.00

-3,083,923.00

Cash at Beginning of Period

1,479,605.00

9,755,258.00

7,723,112.00

7,252,709.00

Exchange Rate Adj

12,016.00

6,050.00

-35,489.00

-49,626.00

Other Cash Adjustments

0.00

0.00

0.00

0.00

Cash at End of Period

9,755,258.00

7,723,112.00

7,252,709.00

4,119,160.00

Both companies were able to record positive cash flows. There is a significant amount of cash available from the operating cash flows after accounting for the capital expenditures to maintain the current production capacity. The companies have been able to generate more cash than the amount that has been channeled into operation initiatives. Activistic limited has been able to do fairly well to the extent that it was able to lend some loans. Proceeds from issues have been within a very good margin and have been able to supplement the cash at the beginning of the financial period. The cash flows for the three consecutive years for Activistic Limited have exhibited an upward trajectory (Dahmash, 2015). Conversely, the cash flows for Battery limited have also been stable, although they have been on a declining trajectory.

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Recommendation From an investor's point of view, both companies are worth considering because they exhibit both strengths and weaknesses. When it comes to the cash flows, Batteries Limited has exhibited more robust positive cash flows. The financial liquidity of Battery Limited is also better. Battery limited also performs better when it comes to efficiently utilizing the assets. On the other hand, Activistic limited also has the upper hand when it comes to returns on sales. Other indicators for Activistic Limited are also healthy from an investor's perspective. However, Battery limited has better prospects, judging by how the company has exhibited strength in growth, strong cash flows, and better liquidity, among other factors.

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References Dahmash, F.N. (2015). Size effect on company profitability: Evidence from Jordan. International Journal of Business and Management, 10(2), 58.

DeFusco, R.A., McLeavey, D.W., Pinto, J.E., & Runkle, D.E. (2015). Quantitative investment analysis workbook. John Wiley & Sons.

Lev, B., Li, S., & Sougiannis, T. (2010). The usefulness of accounting estimates for predicting cash flows and earnings. Review of Accounting Studies, 15(4), 779-807.

Linares-Mustarós, S., Coenders, G., & Vives-Mestres, M. (2018). Financial performance and distress profiles. From classification according to financial ratios to compositional classification.

Advances in Accounting, 40, 1-10.

Reilly, F.K., & Brown, K.C. (2011). Investment analysis and portfolio management. Cengage Learning.

Sullivan, R., & Mackenzie, C. (Eds.). (2017). Responsible investment. Routledge.