Analysis of the financials of My Essential Care Limited

Essential Care Limited

You are a senior auditor with Mason and Associates Pty Ltd. Your audit partner, Amanda, has approached you to undertake an independent review of the preliminary risk assessment for one of the company’s clients, My Essential Care Limited.

My Essential Care Limited Group, which includes four entities, has been operating for ten years. The group produces organic personal care products, including a skincare range and personal grooming products for both men and women, using primarily an Australian sourced essential oils. However, they also import oils from several overseas sources. The group has also expanded through the acquisition of several smaller manufacturers over the past five years, and now supply over 1,000 health food stores and hairdressing salons through-out Australia and New Zealand. The group also sells their products to major department stores, as well as maintaining an online presence.

In 2010 the group entered into five-year contracts with major department stores in Australia, the US and Europe. These stores include David Jones and Myer in Australia, Bloomingdale’s and Saks in the US, and Selfridges and Fortnum & Mason in the UK. After successful in-store and online sales in the US and Europe, the group began a strategic expansion program, via a new subsidiary My Essential Care International, and established high-end boutique retail stores in New York, London, Paris, Milan and Moscow. Initially, these ventures were highly successful. However, over the last couple of years results from some of these stores have been disappointing.

In 2016 following the non-renewal of some department store contracts and disappointing sales in the boutique stores, My Essential Care Limited, diversified into animal care products and acquired a 100% control of MyPet Limited. In 2017, on the back of rising demand for healthy alternatives, they acquired a company that produces vitamin supplements and essential oils. These products are sold online and stocked in the retail stores. This year, they also decided to sell a subsidiary that was involved in the transport industry, retaining a 49% stake in the company.

 

Below are the financial figures, excluding cash flow statements and changes in equity statements, for the last three years.

 

My Essential Care Limited
Income statement
For the year ended 30 June
2018 2017 2016
$’000  $’000 $’000
Revenue from continuing operations 722,040 779,230 743,764
Cost of goods sold (382,657) (364,149) (337,767)
Other income 13,931 2,553 3,531
Selling, general and administrative expenses (322,498) (282,331) (234,894)
Other expenses (271,809) (72,385) (60,536)
Finance costs (20,487) -18,576 (12,582)
Share of net profit after-tax of associate accounted for using the equity method 147
(Loss)/profit before income tax  (261,333) 44,342 101,516
Income tax benefit 19,991 1,925 (28,933)
(Loss)/profit from continuing operations  (241,342) 46,267 72,583
Profit from discontinued operation after income tax 103,002 12,756
(Loss)/profit for the year  (138,341) 59,023 72,583
Loss attributable to non-controlling interests 516 547 411
(Loss)/profit for the year attributable to the members of My Essential Care Limited  (137,825) 59,570 72,994

 

 

My Essential Care Limited
Consolidated balance sheet
As at 30 June
2018 
$’000 
2017 
$’000
2016 
$’000
ASSETS 
Current assets
Cash and cash equivalents 158,632 72,429 104,371
Trade and other receivables 122,518 187,188 199,189
Inventories 146,601 174,369 120,200
Current tax receivables 9,311 7,929 1,792
Other 12,400 12,513 13,791
Total current assets 449,461 454,427 439,343
Non-current assets
Receivables 5,780 7,053 8,586
Investment accounted for using the equity method 67,290
Property, plant and equipment 80,077 92,426 85,239
Intangible assets 397,950 634,231 559,154
Deferred tax assets 35,549 17,982 11,328
Other 3,829 3,865 1,511
Total non-current assets 590,474 755,556 665,817
Total assets 1,039,935 1,209,983 1,105,160
LIABILITIES 
Current liabilities
Trade and other payables 160,113 172,017 157,773
Borrowings 114,544 7,631 10,263
Current tax liabilities 1,477 920 4,410
Provisions 29,589 14,037 4,945
Total current liabilities 305,722 194,604 177,390
Non-current liabilities
Borrowings 124,535 597,903 202,467
Provisions and other payables 22,091 46,909 11,136
Deferred tax liabilities 40,173 25,003 27,408
Deferred payments 33,783 164,103 77,971
Total non-current liabilities 220,581 833,918 318,981
Total liabilities 526,302 1,028,522 496,370
Net assets 513,633 181,461 608,790
EQUITY 
Contributed equity 421,634 339,475 335,881
Other reserves -81,993 -75,759 -42,646
Retained profits 174,645 333,016 315,145
Capital and reserves attributable to members of  My Essential Care Limited 514,286 596,732 608,380
Non-controlling interests (653) 1,688 410
Total equity 513,633 598,419 608,790

 

 

At this stage, the following additional information has been provided by My Essential Care.

 

Revenue

 

Revenue consists of seventy percent credit sales, twenty percent online “cash” sales and ten percent in-store sales.

 

Accounts receivable

2018 2011 2016
$’000  $’000  $’000
Trade receivables 124,757 180,607 205275
Provision for impairment of receivables (19,776) (9,927) (10,761)
104,981 170,680 194,514
Other receivables 17,537 16,508 4,675
122,518 187,188 199,189

 

In 2018, $51,350,000 trade receivables were outstanding more than 3 months ($44,266,000 in 2017 and $54,449,000 in 2016). Impairment for receivables was $16,105,000 in 2018 ($2,792,000 in 2017).

 

Other receivables 

Include monies owed under a debt factoring arrangement

Inventory

2018 2017 2016
$’000  $’000 $’000
Raw materials and stores – at cost 1,921 2,970 2,451
Work in progress – at cost 3,867 5,688 4,485
Finished goods
–  at cost 127,911 156,298 97,146
–  at net realisable value 12,902 9,413 16,118
146,601 174,369 120,200

 

Intangibles

During 2018 goodwill was impaired by $144,340,000 and finite intangibles were impaired by $184,714,000.

Dividends

For the 2018 financial year, the company paid a dividend $20,547,000. The dividend paid in 2017 was $41,699,000.

Current liabilities (non-borrowing)

The current liabilities include income tax payable of $1,476,500 and provisions of $29,588,500 (this includes an onerous lease/contract provision of $17,794,000).

Current Borrowings

Total unsecured borrowings include a revolving multi-currency facility of $108,279,000 (to be repaid from a rights issue in 2018-2019), lease liabilities of $719,000,000. Secured borrowings include bank loans of $3,894,000 and a bank overdraft of $800,000.

Non-current Borrowings

The unsecured non-current liabilities include the remaining balance of the multi-currency facility $108,310,000 and lease liabilities of $3,285,000. Secured non-current liabilities include a draw-down facility of $12,940,000.

The Group’s lenders require the group to maintain a positive tangible ratio, and a quick ratio of 1:1. They are also expecting to see an improved profit/reduced loss in the 2018-2019 financial year.

 

Required:

Prepare a report for the audit partner that includes:

  1. Analysis of the financials of My Essential Care Limited that covers: a simple comparison of the movement in the accounts between 2017 and 2018, a trend analysis, and the profitability, liquidity, solvency and efficiency ratios for the last three years (2018, 2017 and 2016).  This analysis is to be attached as an appendix to your report. (11 marks)
  2. A commentary on any perceived going concern issues for My Essential Care Limited, with reference to each of the ratio areas, the other analysis, and the background information provided in the question. (5 marks)
  3. The identification, and justification, of four key account areas or balances that could potentially be materially misstated and would require additional audit resources. (12 marks)
  4. The identification and justification of two primary assertions for each of the accounts/areas in (c). (12 marks)
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