Financial analysis of Navitas Ltd and recommendations to investors

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Assignment one

Part one: Introduction

The main purpose of this report is to prepare a business report to a potential investor who is considering investing in Navitas Ltd.We will give all the investors who is considering investing in Navitas a quite visualized analysis of the business condition and some prospect of Navitas Ltd. I hope this report will help the most of investors recognize both of the risk and the benefit of investing this company and make a really cautious decision on whether invest it or not. Hope all the investors will get cashed in on their investments.

To make this analysis clear, my report will be divided into four parts. The first part is a briefly introduction about the statement of objectives, analysis techniques, justification of the choice of the competitor and the structure of the report is made. The second part would be focusing on NVT’s business activities and corporate strategy, relevant aspects of economy and its place in the industry will be provided. Besides, the analysis of NVT’s future profitability will be made based on the previous data. In the third part, we would do comprehensive financial analysis to comment the performance of NVT and then list the financial strengthens and weakness. In addition, related industry (known as G8 Education Ltd) statistics will be provided. The analysis will be made based on the information provided in these two companies’ balance sheet, income statement and cash flow statement by calculating sufficient ratios and analyzing two companies’ overall financial positions. Finally, this report is going to provide some reasonable advice for investors so that they can make some rational and good decisions.

There’re four reasons why I choose RDH as a benchmark: Firstly, they are all listed on ASX. Secondly, they are all education company. Thirdly, they have similar business conditions. Last but not least, they have same accounting periods

Part two: Business and Strategic Analysis

2.1Company’s activities

Navitas Ltd is one of the biggest education companies in the world. It is an educational services provider. Navitas offers a wide range of educational services. It offers educational services through three divisions to students and professionals including university programs, creative media education, professional education, English language training and settlement services. Navitas offers 32 university programs and pre-university programs in Australia, UK, USA, Canada, New Zealand, Singapore and Sri Lanka. It offers professional and English programs (PEP) and courses on health, criminology, counseling, psychology and social work. From Navitas’ official website, we can see that NTV owns about 50 companies and is planning to expand its market in other countries. Its university partners include Umass Boston, UMass, Florida Atlantic University, WKU, among others.

2.2Analyses of Economy

The global financial crisis, also known as the world financial crisis, subprime mortgage crisis, credit crunch, but refers to the global financial assets or financial institution or a financial market crisis. Specific performance of the global financial asset prices fall or collapse or near collapse of the financial institution or a financial markets such as the stock market or the bond market crash and so on. For example, in 1930 triggered the Great Depression of the Western financial crisis and the September 15, 2008 and the outbreak of the global economic crisis triggered a financial crisis.

US subprime mortgage crisis occurred in 2007, and developed into a full-blown financial crisis, but also penetrate to the real economy, spreading to the world, have a serious impact on the world economy. In 2014, the developed economies in economic operation, slower growth in developing economies, the world economic recovery is still tortuous.The world economy is still in crisis after the repair period.In 2014, the world economy is still in the depth of the adjustment process after the international financial crisis, countries deeper, structural problems unsolved.

2.3Analysis of the industry company’s place in the industry:

2.3.1 Education industry

Australia has always been a hot study abroad countries for overseas students, international education is also the economic development of Australia's fourth largest pillar industry.In recent years, however, the Australian international education industry has a downward trend gradually. In 2009, according to the Australian bureau of statistics data released by the international students tuition income up to 17 billion Australian dollars, while in 2012 fell to $14.5 billion. In terms of the number of students, according to the Australian immigration statistics, in 2009 the number of student visas is about 319600, and 2013 fell to about 259300, falling at a rate of 18.9%.The cause of Australia with falling number of international students is the government tightened visa policy since 2010, strictly students after graduation to apply for permanent or temporary residence policy restriction, etc. At the same time, deloitte economic issue, according to a study by the international financial crisis led to the government funding for education industry, strong Australian dollar rising tuition, and on Indian students racial discrimination events frequently occur and other reasons have led to the Australian international education industry is flagging.To restore the competitiveness of the studying in the global market, Australia pine was then to emphasize the importance of international industry, and promised to create more employment opportunities for international students with immigration.30, the latest data show that student enter a school growing Australian international education sector to face greater growth this year.Data refers to, all the students in the field of education enrollment in the first three months of 2015 compared with the same period last year increased by 11%.Education minister Christopher Pyne welcomed the data results, according to all the evidence shows that 2015 will be another good harvest in the field of Australia's international education years. International education service belongs to Australia's third largest export industry, for all over Australia into at least 130000 full-time jobs.English language course enrollment rate increased by 9%. Australia got a large number of international higher education students last year. Data from the beginning of 2015, the number of students in study in Australia this year will continue to rally.

2.3.2Companys place in industry

Navitas is one of the world's leading education institutions, provides a wide range of education services by students and professionals, including three major university programs, the school of creative media education, professional education, English language training and settlement services.

As the largest university bridging program network provider, Navitas education group, in conjunction with the university of Australia, Canada, the UK's famous hand in hand to provide you with a variety of courses and learning. Every year, tens of thousands of students choose Navitas courses as their way to the best level of higher education, to prepare for their future career.

2.4Analysis of the company’s competitive and corporate strategy:

Navitas' clear strategy is on overseas expansion. The number of Australian colleges of Navitas accounts for 70 per cent of enrolments, followed by the UK (13 per cent), North America (6 per cent) and Asia (11 per cent). But in the next five years, it’s possible that index of Australia will drop to 53 per cent. “That doesn't mean we won't get growth in Australia, but not the 20-25 per cent growth rates (as in the past),” (Jones,2010) .Over the next year, Navitas is projected to set up eight new colleges - two in the Old Dart, two in Australia and four in the US, where it hasn't really strayed. Jones thinks the US as a relatively untouched international student destination. About the only bum note for Navitas was the company's decision to shut down a college in Zambia, which became a loss-maker after that nation’s copper-supported currency headed south.

2.5Analysis of the implications of all of these for its future profitability:

Navitas’ strategy matches to the market trend quite well: Navitas is yet to evolve for they have ridden a niche market here in Australia with no real competition and they are going to expand their overseas market, following the trend of the fly of number of international students. Additionally, Navitas unveiled a leap in profit of 31 per cent to $64.3 million - itssixth successive record profit- on an 18 per cent revenue to $556m. Unusually, Navitas is confident enough to pay out all of its earnings per share (18.8c) as a dividend. Given those information, we can expect a good future profitability of Navitas. But be cautious about the tough economy environment The unsolved financial problems, high unemployment and stagnate income all over the world add in some uncertain risks for the future prospects for Navitas.

Part three: Financial Analysis

Ratio analysis

To identify which company has better financial condition and to show a good performance, it is reasonable to analysis each ratio and compare Navitas with its competitor Redhill to conclude which one is better. Ratio can reflect this company whether is in good condition or not, it can help investors complete understand this companies’ financial condition and to decide whether they should invest this company.

3.1.1Profitability ratio

  1. ROE (Return on equity)

The ROE ratio measures how well a company has used the capital from its shareholders to generate profits. It is a key index to shareholders and those potential investors. It has strong relationship between these people and their benefits from the company. The ROE ratio for Navitasis is relatively stable and pretty high among these three years(2012:31.5%, 2013:31.8%, 2014:24%) and the three-year average ROE is 29.1%, which means the company can generate 29.1 cents for every dollar of shareholders’ equity. Compared with Redhill,the average ROE ratio is -31.9%(2012:-125.8%, 2013:-15.1%, 2014:45.2%), which indicates that Redhill is really in a terrible condition although it shows a rising tendency. These figures all show demonstrate that Navitas generate way more profit based on shareholders’ equity than Redhill.

  1. ROA (Return on assets)

ROA ratio measures an entity’s performance in using assets to generate

profit. The ROA of NVT throughout three years is 9.63%(2012:11.6%, 2013:10.4%, 2014:6.9%), but its competitor RHL just has -0.13%(2012:-55.7%, 2013:-6.0%, 2014:22.4%). We know that NVT has more assets from its balance sheets, so we can draw a conclusion that NVT can efficiently apply its assets to generate more earnings.

  1. Profit margin

Profit margin indicates that whether company can efficiently to control all costs and reflect whether the company has a good net profit. On average, the profit margin of NVT is 8.93%(2012:10.7%, 2013:10.3%, 2014:5.8%),meaning NVT can pay back 8.93% of total revenue into net profit. However, RDH’s average profit margin is just -12.73%(2012:-57.9%, 2013:-5.4%, 2014:25.1%) which means they made a loss in these three years in total. In conclusion, these figures show that NVT has a stronger ability to turn revenues into net profit.

  1. Gross margin

The gross profit margin ratio represents the efficiency of generating profits. The average gross margin of NVT is 13%(2012:15.1%, 2013:14.5%, 2014:9.4%) so we can find NVT earns 13 cents for each dollar of sale. With a view of RDH, its average gross margin is just -38.3%(2012:-44.4%, 2013:-5.3%, 2014:11.4%). Therefore, we can perorate that NVT make more profits from sales than RDH.

3.1.2 Market based ratio

a. P/E ratio

P/E ratio equals previous close divided by earnings per share. P/E ratio is used to judge if the stock price is overestimated or underestimated. From 2012 to2014, the P/E ratio of Navitas are 22.26(2012), 28.85(2013), 52.04(2014) and these figures are relatively high which means Navitas stock price is overestimated.

b. Dividend yield ratio

Dividend yield equals annual dividends divided by previous close. We use it to measure if it’s worthwhile investing this stock. Through these years, it’s dividend yield ratio are2.73%, 3.38%, 4.49% respectively.

3.1.3 Trend analysis and common size statements

In the trend analysis of two companies, the increasing asset of NVT is fewer than RDH. (rised by 14.8%, 41.4% respectively from 2012 to 2014). While the changes of their liability are alike. (NVT: 28.8%, RDH: 26.6%). Revenue both directly went up approximately 30% between 2012 and 2014. However, NVT has a high level of cash outflow on tax and marketing expense, compared with RDH. RDH has a large amount of tax shield in 2014.(deferred tax mentioned in their annual report 2014).

In the common size statement, RDH has more current asset than NVT in the resent three years and the proportion of non-current assets of NVT accounts for more than70%, which indicates that RDH has a better ability of liquidity for working capital. Then, NVT has a greater sum of liability (both current and non-current) than its competitor. Total liability ascends from 63.3% to 67.4 and then 71.1%. This is the reason why Navitas comes out its second competitive and coerporate strategy—reducing high marketing expenditure, (around 14% of its revenue, Lisa mentioned, 2014), academic and other expenses. And we can find NVT is gradually solving the internal problems in its daily operation from some innovative programs. (NVT’s fresh HY report has shown a positive tendency that the scale of losses may be smaller in this financial year).

3.2.1 Comment on performance of NVT

Industry statistics



Service industry on average

Revenue in 2014


28485(Industry Revenue/ Industry Revenue)

(Reuters, 2015 May 2nd )

The PSI (Performance of Services Index) has been going on a downtrend in this year (Greg, 2014). However the education industry is still booming with a large amount of international students coming to Australia. As what is shown above, although NVT has a drop in its annual profit, it still exceeds service industry average revenue in 2014. (exceed (50802-28485)/28485= 78.35%)

3.3.1Commet on NVT based on media information

In July 2014, Macquarie University stopped the cooperation with Navitas for some reasons and this is also the main cause why there is a dramatic decline (about 30%)in Navitas stock price and impairment of goodwill. Then, the reason for its high P/E ratio can be explained. Although Navitas did quite well in other parts of its business, it didn’t perform well in 2014 because of this.

In the resent half year, Navitas starts new programs which indicates a possible increase of their profit. Media reported that Deakin and Navitas rebrand successful pathway college on 16 April 2015. Navitas and Florida Atlantic University launch partnership on 16 Jan 2015 and Navitas partners with FAU for sixth US college. Navitas prepares to establish its program in other English-speaking countries like USA, UK and etc (all from NVT official website). We believe that NVT applies two of the strategic methods perfectly up to now. Most experts also deem that NVT would have a potential growth in the Australia service industry. We’re supposed to cautiously hold the shares.

3.4.1 Financial strengths and weaknesses

After the whole analysis, the main internal weaknesses and strengths of NVT emerge, followed by its external threats and opportunities (SWOT):

Weaknesses and threats:

1. Weak ROA and ROE coupled with low net profit margin indicates poor profitability;

2. Slow asset and debtors turnover indicate low business efficiency;

3. P/E ratio larger than industry averages and Red Hill’s as well as the wobbling EPS indicate that NVT’s market-based performances in 2014 was worse than 2013;

4. Facing the relatively slow economic recovery environment and booming competitors worldwide.

Strengths and opportunities

  1. Most ratios we mentioned above (including ROE,ROA,P/E and so on) are stable than RDH;
  2. Relatively low market price in its history providing a good chance for investors to purchase;
  3. Clear strategic policy with the right direction to withstand its challenges in a global market;
  4. The very recent surprising recovery of the nation’s economy (ABC, 2014) offers opportunities for NVT to attract more demand and expand its domestic market.

Part four: Conclusion and Recommendation

4.1.1Summary and conclusion

According to this a large amount of calculations and analysis between NVT and RDH. Consider the whole economies environment and the partial industry statistic. Think about media advice and our own analysis between NVT and its competitor. NVT struggled over the past two years led to a relatively historic lowest share price. (approximately 4 dollars per share rise and fall) Considered its stabilization, wise strategic adjustment and large occupation among education services industry in Australia. It is still expected that NVT will be resuscitated and suitable to invest in the coming years.

4.2 Limitations of analysis and assumptions made

1. Without the full picture, financial analysis based on the aggregation of numerical ratios cannot address other important factors such as customer satisfaction and other underlying profit like reputation.

2. Ratios based on historical or momentary performance may not be representative enough to yield accurate results. The deviation of data can also be a concern when extrapolating into the future

3. A lack of analysis of cash flow statement.

4. There may be a few intrinsic differences between two companies’ operation as well as the consumer bases they cater to, posing a limitation on the ratio-based analysis and comparison.

5. For different kinds of investors, we should also give different advice. (a risk averse or a risk chaser and different needy degrees for expected return)

6. The competitor (RDH) cannot represent the whole education industry and is just a reference to our analysis and judgement.

7. Ratio analysis does not mention efficiency, liquidity and leverage which seems narrow-scaled and not wide enough.