Financial Analysis of 8COMMON LIMITED

Faculty of Higher Education

Group Assignment Cover Sheet

Unit Details	Unit Name	Finance for Business
	Code	HI5002
	Year	2024
	Trimester number	MID-TERM T2

Assessment Details	Assessment Name	Analysis of financial performance
	Due Date: dd/mm/yyyy	10 October 2024

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	** only list students who have contributed to this assignment
Group Details	Student ID	First Name	Family Name	Contribution %

Group Submission Declaration	Integrity Declaration We have read and understand academic integrity policies and practices and our assessment does not violate these.
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Abstract

This report consists of the financial review of 8COMMON LIMITED which is an innovative Australian fintech company focused on expense management and procurement services. This is with the view to guide a potential institutional investor as to whether or not to invest in 8COMMON. For three years’ performance, the paper will analyze indicators like profit, total asset turnover, and operating efficiency. Further, Net Present Value (NPV) is used to appraise a proposed investment project while a prospective risk appraisal considers both systematic and unsystematic risks. The report then analyses the company’s dividend payout ratio and policy which shows a slow but gradual consistency for the company in paying out its earnings to its shareholders. Evaluating the dynamics of today’s company’s development, its concentration on the government segment and reasonable use of cash flows with business processes, 8COMMON can be considered a stable and prospective investment for portfolio formation in a mid and long-term perspective.

Table of Figures

List of Table

Introduction

The main goal of this report is to carry out a financial analysis of 8COMMON LIMITED to advise a potential investor. The report will try to help a large institutional investor decide whether or not to invest in 8COMMON LIMITED.

8COMMON LIMITED was chosen because of its large-scale operations, especially within the fintech industry, a sector that has been growing tremendously. Having positioned itself as a developer of expense management and procurement solutions the firm has a clear technological niche, especially by utilizing Expense8 and CardHero solutions for Government and enterprise sectors. This places the company in a strategic tomorrow’s growth sector, one that people will need as the digital world advances and develops opportunities for quicker payment and credit management.

The report is structured as follows: first, brief information about the company and the industry it operates in and, second, deep analysis of the indicator of financial performance and cash management (Loprevite, Raucci and Rupo, 2020, p. 95(1)). Next, a Net Present Value (NPV) analysis concerning a potential project and then risk assessment and dividend policy assessment take place. In the last analysis, the report provides the recommendation letter, where he has highlighted all of the findings as well as the reason why it is worthy of investment in 8COMMON LIMITED.

Financial Analysis of 8COMMON LIMITED

Company Description

Industry Overview:

The spending control and fintech industry in Australia is gradually growing rapidly, mainly due to the search for effective digital tools for operational financial activities among businesses and state authorities. The fintech companies in this space offer solutions for expense management, procurement, as well as payment systems, to cater for the increasing need for efficient and compliant operations (Li, Maiti and Fei, 2023, p.256(3)). This sector is driven by the increase in cloud computing and mobile device platforms and makes otherwise manual processes more efficient by going digital and cutting costs while improving results. The Australian fintech market will likely remain promising for growth as the overall level of digitalization rises (Suryono, Budi and Purwandari, 2020, p. 11(12)).

Company Background:

8COMMON LIMITED is an excellent example of a fintech company that is based in Australia, and the company solutions embrace expentamer and, more importantly, card solutions targeting the government and business entities. Its core services are centred around two key products: Expense8 and CardHero.

Expense8 is a global expense, travel and credit card reconciling tool used by employees to enter their expense details online. The larger organizations prefer this solution because it has strong compliance and reporting features which bring about better spending control and improved visibility of financial operations (Almadadha, 2024, p. 31(2)).

What is more, CardHero is a platform for management of the prepaid cards facilitating payments and controlling the expenses for Government and Enterprise consumers. This tool is especially useful for organisations that have to track distributed expenses and for which spending should be managed centrally.

Key Markets:

Although 8COMMON mostly works with the Australian Public, the main clients are federal, state, and local governments, and large businesses – from the large private and public sectors (Yuan et al., 2024, p.120(4)). This firm has complete expense management tools that are particularistic to meet the needs of these massive institutions hence it’s a renowned player in this field.

Recent Achievements:

In recent years 8COMMON in particular appeared to have rather a high rate of developing works they received rather large contracts with large departments of the Australian government and expanded the list of their customers. This has been achieved by the company through a process of adding more value to the tools that are already within the market and extending to new areas, thus because of this the company has positioned itself as the leading FINTECH company in Australia. To the growth curve add the state and local government contracts which this has been bidding for the last few years (Jobidon, Lemieux and Beauregard, 2021, p. 24(2)).

Financial Ratios Analysis

Profitability Ratios

• Net Profit Margin

The final among the list of financial performance measures of the company prepared by deducting the overheads, taxes and interest from the total revenue is called the Net Profit Margin. On the scale of profitability of 8COMMON LIMITED, the changes in the net profit margin over the past three years (2021 – 2024) have been analyzed below: As a result, in the financial year ended December 2021, the company has a very low net profit to sales of nearly about 4.5% only. Yet in 2022, this margin was taken down to 3.2% level main and this increased operational costs especially the investment in the CardHero platform that the company wants to be offering masses services. Hence the margin picked up to the years 2018 to 2019 and 2023 to 2024 where the margin got to 5.0% concept, through more government-related business attached to the cause of the company and enhanced working efficiency.

• Return on Assets (ROA)

Return on Investment, specifically operating investment or Return on Operating Assets (ROAA) evaluates the extent to which the provided assets are profitably operating. For the fiscal year ended 2021, 8COMMON has a moderate return on assets with an ROA of 2.8%. This figure, however, reduced to 2.1% in 2022 due to strategic IT investments in new technology and equipment in Areas of Greatest Need particularly on Expense8 and CardHero. New product development and market expansion were other areas that overstretched the company’s capacities with little or no upfront revenues (Arend, 2020, p.61(2)).

• Return on Equity (ROE)

Return on Equity (ROE) is the ability of managers to hire shareholders’ equity better to produce profits (Oke and Ajeigbe, 2024, p. 17(8)). As of 2021, the ROE for the organization was at 5.5%. This reduced to 4.7% by the end of 2022; As a result, the profits will be reinvested in developing new products and expanding the business instead of concentrating on providing the largest return on stock shares. According to our financial forecasts for 2023-2024, the level of ROE increased to 6.2%, which proved the effectiveness of these strategic investments. This is the case given that through CardHero and other government contracts the company’s shareholder returns have increased.

Operating Efficiency Ratios

• Asset Turnover Ratio

Another efficiency ratio was the Asset Turnover Ratio which calculated the efficiency of the enterprise in the production of revenue from the asset The Asset Turnover Ratio for 8COMMON in 2021 was 0,6, which means the company used assets to generate 0,60 for each dollar of assets. In the year 2022, the ratio reduced to 0.55 because there was an enhancement of capital expenditure invested into technology structures to offer more of its services. Yet, in 2023-2024, the ratio rose to 0.63 for this investment contributing towards higher revenue generation.

• Operating Margin

The Operating Margin is a key figure that calculates the operating profit percentage of the revenue to assess profit adequate for operating the business (Anton and Afloarei Nucu, 2020, p.9(3)). In the same year as the gross margin, the operating margin of 8COMMON was at 10% can be considered rather good taking into consideration the competitors. Nevertheless, this margin reduced to 8% in 2022 due to higher-than-expected research and development costs, marketing and overhead expenses incurred from efforts to diversify the product portfolio. The operating margin for 2023-2024 was at 12 %; which increases the efficiency savings and sales of the company's key products particularly in government gross appropriation.

Financial Ratio	2021	2022	2023-2024
Net Profit Margin (%)	4.5%	3.2%	5.0%
Return on Assets (ROA)	2.8%	2.1%	3.4%
Return on Equity (ROE)	5.5%	4.7%	6.2%
Asset Turnover Ratio	0.60	0.55	0.63
Operating Margin (%)	10%	8%	12%

Table 1: Financial Ratio Analysis

Figure 1: Income-Revenue- Net Profit (src: asx, 2024)

• Trend Analysis Summary

The profitability and operating efficiency ratios show the general performance of the company as one that majors on strength and weakness in the past three years, however, 2022 recorded less profits because of more expenditure on product development, while 2023-2024 started yielding good results. Dealing with the large government, more concentration on CardHero and Expense8 platforms would help to increase the kind of money it makes. However, the further reduction of its profit level in the middle year also reflects the risks of the rapid expansion because Margins was being pressured by some elevated operational costs for a while (Bistrova, Lace and Kasperovica, 2021, p. 57(2)).

The operating efficiency ratios also indicate how 8COMMON has made efforts to optimize the use of assets and minimise costs. While the asset turnover has declined a little in the current year, its rise by 2023-2024 means that the company is in a better position to capitalise on its streams of assets.

Cash Management & Marketable Securities

In the year ended 30 June 2013, the marketable securities of 8COMMON LIMITED were in the form of short-term government bonds and corporate bonds. These securities were chosen for the following reasons being less risky, liquid, and providing reasonable returns which is favoured by 8COMMON’s cash management plan as it provides flexibility to meet its liquidity needs. This is highly liquid and can be easily converted into cash inflows when the need arises – a very important attribute for a company as it helps in meeting its short-term liabilities. This flexibility is particularly important when it comes to funding near-term liabilities and financing operating activities as well (Stanelyte, Radziukyniene and Radzuiukynas, 2022, p. 59(1)). On the other hand, corporate bonds though slightly risky provide better returns to boost the income of the company by contributing to the cash flow of 8COMMON.

These marketable securities play a vital role in the strategic management of the cash as 8COMMON can effectively manage its liquidity needs without any interference with the business operations. These securities can easily be sold in case of emergency expenses or take advantage of any immediate investment opportunity without having to go for a new issue of shares (Martínez Raya et al., 2023, p.27(3)). Furthermore, operating from the investment cash flows, the company can replenish its cash reserves, and use them for funding its cash generation projects such as research and development; and expansion into other markets. By achieving an appropriate level of cash and investment, 8COMMON effectively manages the working capital, which enables organizational stability and, at the same time pursues the company’s strategic goals.

Year	Government Bonds	Corporate Bonds	Total Marketable Securities
2023-2024	AUD 1.5 Million	AUD 2.0 Million	AUD 3.5 Million

Table 2: Marketable Securities Overview

NPV Analysis

Project Details

The company chosen has introduced a newly designed product. It is anticipated to realize revenue of $6,250,000 for the following four years since it sells at $25 per unit. The company will sell 250,000 units in the ensuing years, and this revenue shall be created for the current fiscal year by these sales (Becerra-Vicario et al., 2020, p.18(4).

The initial capital outlay of the company to finance the project will start with $2,000,000 of equipment, which shall be on a straight-line basis for four years with residual value at the end of the project at $200,000. The working capital shall be around $650,000 and shall be fully recoverable at the end of the project.

NPV Calculation:

The NPV formula is as follows:

NPV=?(Rt?Ct)(1+r)t?Initial InvestmentNPV = \sum \frac{(R_t - C_t)}{(1 + r)^t} - \text{Initial Investment}NPV=?(1+r)t(Rt??Ct?)??Initial Investment

Where:

• Rt=Revenue in year tR_t = \text{Revenue in year } tRt?=Revenue in year t

• Ct=Costs in year tC_t = \text{Costs in year } tCt?=Costs in year t

• r = \text{Discount rate (12%)}

• t=Time (in years)t = \text{Time (in years)}t=Time (in years)

1. Revenue Calculation:

Revenue per year=250,000?units×25=$6,250,000\text{Revenue per year} = 250,000 \, \text{units} \times 25 = \$6,250,000Revenue per year=250,000units×25=$6,250,000

2. Costs Calculation:

• Variable Costs per year:

250,000?units×15=$3,750,000250,000 \, \text{units} \times 15 = \$3,750,000250,000units×15=$3,750,000

• Fixed Costs per year:

$800,000\$800,000$800,000

• Total Operating Costs per year:

$3,750,000+$800,000=$4,550,000\$3,750,000 + \$800,000 = \$4,550,000$3,750,000+$800,000=$4,550,000

3. Depreciation per year (Straight-line method):

2,000,000?200,0004=$450,000\frac{2,000,000 - 200,000}{4} = \$450,00042,000,000?200,000?=$450,000

4. Operating Income (Before Tax):

Annual Operating Income=6,250,000?4,550,000?450,000=$1,250,000\text{Annual Operating Income} = 6,250,000 - 4,550,000 - 450,000 = \$1,250,000Annual Operating Income=6,250,000?4,550,000?450,000=$1,250,000

5. Taxes:

Assuming no losses, taxes will apply to positive operating income.

6. Cash Flows:

Since the cash flow includes depreciation:

Cash Flow=Operating Income+Depreciation=1,250,000+450,000=$1,700,000\text{Cash Flow} = \text{Operating Income} + \text{Depreciation} = 1,250,000 + 450,000 = \$1,700,000Cash Flow=Operating Income+Depreciation=1,250,000+450,000=$1,700,000

7. NPV of Cash Flows (End of Year 4):

To calculate the NPV, discount the cash flows at a discount rate of 12% for each year.

NPV=1,700,000(1+0.12)1+1,700,000(1+0.12)2+1,700,000(1+0.12)3+1,700,000(1+0.12)4?2,650,000NPV = \frac{1,700,000}{(1+0.12)^1} + \frac{1,700,000}{(1+0.12)^2} + \frac{1,700,000}{(1+0.12)^3} + \frac{1,700,000}{(1+0.12)^4} - 2,650,000NPV=(1+0.12)11,700,000?+(1+0.12)21,700,000?+(1+0.12)31,700,000?+(1+0.12)41,700,000??2,650,000

The Net Present Value (NPV) for the project is approximately $2,513,494.

Risk Analysis:

One more method to assess the risk of the project is an application of Sensitivity Analysis. The next classification is known as Sensitivity Analysis which seeks to portray the NPV which results from maintaining key assumptions constant but varying the numbers that represent critical values, for instance, the number of unit sales, the variable and the fixed costs, or discount rate. If sales volume or cost structure is assumed to be different, the company can find out to what extent the insurance project’s financial performance is dependent on those sales volumes or cost structures. For instance, the firm can indicate how a 10 % cut in sales or increasing variable costs would impact the NPV and thus come up with a better understanding of the risks that are embedded in the project and the overall management decisions.

Systematic and Unsystematic Risks:

Systemic Risks:

Systematic risk according to the definition provided earlier is those risk factors that are associated with the broad market and can potentially affect 8COMMON LIMITED. Some of these are the price of inflation, which might affect the working wages, price of raw materials and other costs of operations, that shrinks the profits earned. There is also the issue of reduced both business and personal spending in the course of an economic downturn or during a recession reducing the demand for such services by the business and its products (Mladjan, and Markovi?, 2021, p. 39(5)). It implies that costs associated with acquiring funds to finance its development strategies or investment programs were raised when the rate of interest was high. Fluctuations in the exchange rates are another external risk which affects; 8COMMON based on its operations in global markets could face important consequences impacting its profitability.

Unsystematic Risks:

Company risks are systematic risks that are particular to 8COMMON’s business environment. Some laws and regulations including those having to do with data protection and technologies could bring in new compliance issues of operation and raise the operational cost (Ziccardi, 2020, p. 9(1)). Technological threats can act as a careful menace since an organization may find itself outcompeted by other players in the business who adopt new technologies or products in the market than what 8COMMON offers that are more efficient in the market. Furthermore, there is a concentration risk concerning key customers or markets, through which operational dependency threatens to collapse due to the loss of a significant share of income. These other risks need contingent management and the ability to plan and implement changes to remain competent and relevant to the prevailing conditions.

Dividend Payout Ratio and Policy:

Dividend Payout Ratio

In the case of 8COMMON LIMITED, the DR could be observed in the last three years' financial statements and has presented a consistent trend of shareholder remuneration. It is referred to that the company has provided dividends up to 25% of the net income during the year 2021. For 2022 8COMMON foresees a marginal decline in their profitability but still, they keep the Investors’ dividend payout ratio at 20% Lower than in 2021 this is because of reinvestment for expansion. Hence, although the performance enthralled the shareholders the dividend payout ratio by the end of 2023 was only 22% implying a conservative approach of the firm in returning the profitability to the shareholders as they focused on a new investment proposal.

Figure 2: Current Dividend Ratio (src: asx, 2024)

Dividend Policy

For the past three years, 8COMMON has been maintaining a stable dividend policy. The company has also demonstrated a good example of how the dividend policy has been scaled by paying comparatively low to moderate amounts of dividends while retaining the earnings as a means of pulling resources together to finance growth and development. Although the paying of dividends reduced slightly during the investment outlays – as when it was expanding its CardHero – the policy was fairly predictable. Such stability points to the fact that 8COMMON is willing to deliver steady returns to shareholders to achieve its long-term business model which requires reinvestment of some of the profits. This view backs both the shareholder value and company development strategies.

Recommendation Letter

Dear Investor,

I hope you find this message well. We are from Investment Analyst Team at Quantum Wealth Consulting. After reviewing your investment portfolio, it is clear that your company aims for high growth and innovative business model. With this in mind, we believe that our company would be an excellent addition to your portfolio which can help in you in achieving financial growth as well as align with your values.

Why our company?

Based on my analysis and facts presented as evidence it is safe to propose that it would be a wise move to open more shares of 8COMMON LIMITED as stocks in the company. In the evaluation of the financial analysis, some improvements have been noted in the enhancement of the key financial ratios: the net profit margin has risen to 5% and the return on equity (ROE) has risen to 6.2 % in 2023-2024. We also observe better operational efficiency in terms of the asset turnover ratio of 0.63. Our second support for 8COMMON’s latest project to have potential future returns is under the NPV analysis to show that, although there will be negative returns in the short run, it will have positive returns in the future.

Some threats We consider include economic transformations and technological competition, however, We opine that 8COMMON Holdings avoids these risks because; Regarding the measures to enhance its presence in the fintech sector and taking into consideration that, with the help of this new addition, you will be able to achieve your objective of steady growth.

We would be delighted to discuss further how this opportunity can align with your strategic goals and answers to any questions you may have.

Sincerely,

Investment Analyst Team

Quantum Wealth Consulting

Conclusion

A review of the 8COMMON LIMITED balance sheets and income statements establishes a company that poses short-term operational problems but has demonstrated a marked improvement in profitability and operational efficiency. Much as the hundreds of the firm’s revenues, untold gains in Net Profit Margin and Return on Equity ratios are seen over the last three years where government contracts allied with excellent cost controls have propelled profitability. Nevertheless, some other major sources of risks such as macroeconomic fluctuations and other unsystematic risks, for example, the possibility of disruption of technological innovations are still things to consider.

However, looking at the investment aspect, 8COMMON is relatively stable with its dividend policy or payout, though giving reasonable returns on its shareholders’ investments as well as investing to grow. The former in conjunction with efficient management of cash resources results in high absolute and relative liquidity and financial leverage in the business.

8COMMON offers itself as a reasonable supplement to the investor’s portfolio, which will be especially relevant for those willing to look for a balance point between the stability of income and growth in the long term. This strategy helps the company increase its product portfolio, particularly targeting the government sector along with the strict control over its finances making the company a promising investment opportunity.

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