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HI-TECH GROUP OF AUSTRALIA Financial Analysis

1.0           INTRODUCTION

HiTech Group is an Australian leading specialized ICT firm that provides the Australian and International organizations with talented pool of employees and deliver the IT services in best possible way  (HiTech Group of Australia, 2019a). The company aims at giving the clients what they want by matching their needs with candidates’ talent profile. HiTech uses its successful and proven business model for recruiting the top ICT professions within various industries (IBISWorld, 2019).

HiTech Group of Australia has more than 25 years of experience in the consulting and recruitment industry within which it has developed a diverse client database. It was first incorporated in 1993 and listed on Australian Securities Exchange on 17th April, 2000 with its ASX code of HIT (HiTech Group of Australia, 2019a). The main services provided by HiTech Group of Australia include placement of Information & Communications Technology (ICT), provision of permanent staff, aiding in contracting sales and marketing services and guidance in office support. It also provides its services to Federal and State Government departments with their ICT departments  (HiTech Group of Australia, 2019a).

This report is presented to analyze the risks and success factors faced by HiTech Group of Australia along with detailed analysis of its financial statements for the recent year. Furthermore, this report will also evaluate the accounting strategy of HiTech, the industry within which it operates, company’s notes to the financial statement and overall performance of HiTech Group of Industry. The parts below will provide the detailed industry analysis, competitive strategy analysis, nature of financial statements, performance analysis, analysis of the notes to financial statement, evaluation of accounting strategy and recasting of the financial statements.

2.0           RISK AND PROFIT POTENTIAL OF HITECH LTD

This part of the report will be based on industry and competitive strategy analysis. Risk and profit potential of HiTech Group of Australia will be evaluated as well.

2.1             INDUSTRY ANALYSIS

HiTech Group of Australia is currently operating in the ICT recruitment industry. The overall industry will be analyzed using Porters’ Five Forces. The model analyzes the collective strength of the five forces i.e. competitive rivalry, buyers’ power, suppliers’ power, barriers to entry and threat of substitute products (Dobbs, 2014). All the five forces enable the researchers to determine the profit potential of the industry. The model also helps in understanding the strategic implications of the firms within the industry (Dobbs, 2014).

FORCE

LEVEL

DESCRIPTION

Threats of Entry

High

With low barriers to entry in the recruitment and consultancy industry in Australia, the threats of new entry are high. New competitors are easily able to penetrate into the market for competing with the existing firms and capturing market share (Wilson, 2017). The barriers to entry in recruitment industry of Australia can exist as a result of government regulations, high start-up cost and industry regulations (Future People, 2019). Currently there are over 7,462 agencies working in the industry with employment of 165,400 staff and revenue of $15 billion (IBISWorld, 2019).

Bargaining Power of Suppliers

Moderate

The main inputs into recruitment business are the candidates and the staff members. As the staff cannot be restricted to only one firm, so they are free to move to a rival, client or even set up own consultancy firm (Wilson, 2017). Hence, the bargaining power of suppliers is considered to be moderate to high as well in the industry with freedom of staff and candidates to move from one firm to another.

Bargaining Power of Buyers (Clients)

High

Buyers of the industry are the clients who need recruitment or placement services by the HiTech Group of Australia. Upon analysis, it is found that the bargaining power of clients is a significant force in determining the current and future recruitment industry’s structure (KPMG, 2016). The fees paid by clients is set by competition in the open market and are paid directly by the employers who receive the services (KPMG, 2016). Hence, due to presence of several agencies, market setting of fees and lower switching cost, the bargaining power of the clients is high.  

Competitive Rivalry

High

The Australian recruitment sector is dominated by several small and medium agencies with only a few large organizations. The four largest recruitment agencies of Australia hold around 14% of the total industry revenue (KPMG, 2016). This indicates that large chunk industry’s revenue comes from the small-medium recruitment agencies. Hence, the competitive rivalry is high in the industry.

Threat of Substitute

Moderate

There are number of substitutes to the traditional recruitment services. The candidates/clients can find jobs through personal contact, word-of-mouth, press advertisements, internal promotions, staff loyalty programs, social media (Facebook, LinkdIn, Twitter) and even through e-commerce consultancy firms (CIMA Global, 2019).

 

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The industry is becoming competitive with lack of barriers to entry and low control of client switching. HiTech is suggested to look at its processes and technology and conduct urgent strategic review of its business. Moreover, the industry is fragmented with less differentiation of services. HiTech is also recommended to find a service for niche market and decide upon differentiating its services.

2.2       COMPETITIVE STRATEGY ANALYSIS

Cost Leadership

HiTech is uses its new business model for ensuring that the operating costs are kept minimum so that the services given to clients are priced low.

Differentiation

HiTech has diversified into non-ICT sector areas of recruitment like office support, sales, accounting, legal and healthcare along with ICT sector. This allows it to offer differentiated services from its rivals.

Cost Focus

HiTech use this strategy for offering services to ICT industry by focusing on cost-minimization through keeping operating costs low.

Differentiation Focus

HiTech’s recruitment business is broadly based in the ICT sector while offering full services including infrastructure support, cloud integration, skill sets and system development.

Source: (Kim, Nam, & Stimpert, 2004)

 

 

SOURCES OF COMPETITIVE ADVANTAGE

 

Differentiation

 

Cost

 

 

3.0           ACCOUNTING ANALYSIS

3.1             NATURE OF FINANCIAL STATEMENTS

HiTech Group of Australia uses all four major financial statements that are discussed below:

  • Consolidated statement of profit or loss and other comprehensive income: This statement shows the revenue and costs associated with operations with parties that are external to the group of entities. This statement does not include intra group transactions (Penman, 2007). The profits are attributed to non-controlling interest (subsidiary) as well in this statement.
  • Consolidated statement of financial position: This statement shows all the assets and liabilities of all the subsidiaries owned by HiTech Group Australia Limited (parent entity) as at 30th June 2018 (Penman, 2007). Under this statement, all the subsidiaries (HiTech Contracting Pty Ltd and eConsulting Australia Pty Ltd) and parent company (HiTech Group of Australia) is considered as a one single consolidated entity (HiTech Group of Australia, 2018).
  • Consolidated statement of changes in equity: This statement reconciles the beginning and ending balances in a company’s overall equity during a reporting period (Penman, 2007).
  • Consolidated statement of cash flows: This report shows the cashflows from operating, investing and financing activities of all the subsidiaries and the parent company altogether(Penman, 2007).

3.2             PERFORMANCE ANALYSIS

HiTech Group of Australia

Years

Net Income

Net Sales

Net Profit Margin

2018

2,569,497

26,356,197

9.75%

2017

2,309,921

23,322,238

9.90%

Source:  (HiTech Group of Australia, 2018)

HiTech Group of Australia

Years

Net Income

Average Total Equity

ROE

2018

2,569,497

7,038,335

36.51%

2017

2,309,921

6,309,260

36.61%

Source:  (HiTech Group of Australia, 2018)

HiTech Group of Australia

Years

Net Income

Shareholders’ Equity

ROA

2018

2,569,497

7,411,833

34.7%

2017

2,309,921

6,664,836

34.7%

Source:  (HiTech Group of Australia, 2018)

HiTech Group of Australia

Years

Total Liabilities

Total Shareholders' Equity

Debt to Equity

2018

2,111,299

7,411,833

0.28

2017

1,678,970

6,664,836

0.25

Source:  (HiTech Group of Australia, 2018)

HiTech Group of Australia

Years

Current Assets

Current Liabilities

Current Ratio

2018

8,507,149

1,986,329

4.28

2017

8,046,565

1,576,016

5.11

Source:  (HiTech Group of Australia, 2018)

 Commentary:

- The net profit margin has reduced from 9.90% (2017) to 9.75% (2018). This shows that HiTech Group of Australia is now able to convert 9.75% of its sales into profits as compared to 9.90% in 2017. The decline is not significant and the NPM can be considered to be a healthy one.

- The ROA has remained same for both years at 34.7% with no change in it.

- The debt to equity ratio has increased from 0.25 to 0.28 in 2018. It shows that now company is using 0.28 times more debts to run its business as compared to its equity. The increase in leverage means more risk.

- The current ratio has declined from 5.11 times in 2017 to 4.28 times in 2018. Despite of falling, the current ratio is very high. A ratio higher than 2 means the company is keeping a lot of cash and is not utilizing its current assets at its full potential.

3.3       ANALYSIS OF NOTES TO FINANCIAL STATEMENT

The financial statements of HiTech Group of Australia were prepared in accordance with the AASB standards, Accounting Interpretations of Australia and the Corporations Act 2001. The consolidated statements also complied with the International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board (IASB)  (HiTech Group of Australia, 2018). Furthermore, the financial statements used historical convention of costing that was modified wherever needed using fair value measurement of selected financial assets and financial liabilities.

The going concern basis and accrual accounting concepts were used for preparing the financial statements. Revenues were also measured at the fair value of the consideration to be received or have been received  (HiTech Group of Australia, 2018). The revenue was derived at by deducting trade allowances, amounts collected on account of others and rebates. Tax was charged at the rate set at the end of reporting period and deferred income tax was also calculated using liability method  (HiTech Group of Australia, 2018). Goodwill and intangible assets were amortized and tested for impairment every year. Trade receivables were also calculated using fair value and amortized cost using effective interest methods. The trade receivable settlement time was settled at 30 days based on ongoing method.

In the notes to financial statement, HiTech Group Australia Ltd. indicated following new accounting standards to be used in future; AASB 9, AASB 15 and AASB 16  (HiTech Group of Australia, 2018). Various risks were also identified in notes to financial statement i.e. credit risk, market risk and liquidity risk.

4.0           ACCOUNTING STRATEGY EVALUATION

In order to stay in the industry and reap potential profits, the company is required to diversify its product portfolio furthermore by focusing on differentiation. Although HiTech Group of Australia has diversified into non-ICT sector as well by expanding its services by including office support, sales, accounting, legal and healthcare support, infrastructure support, cloud integration, skill sets and system development (HiTech Group of Australia, 2018).

The accounting report of the company shows the profitability and financial health of the company effectively. The accounting annual report is prepared in accordance with AASB and IFRS along with an audit report (HiTech Group of Australia, 2018). The annual report also shows key audit matters and how those are addressed by the auditor. Hence, the accounting quality of the company is considered to be high. 

5.0           RECASTING OF FINANCIAL STATEMENTS

Standard Accounts

Income Statement

FY 2018

Revenue

Revenue

100.00%

Cost of revenue

Cost of revenue

79.97%

Gross profit

Gross profit

20.03%

Operating expenses

Operating expenses

 

Operating expenses

Sales, General and administrative

6.16%

Operating expenses

Other operating expenses

0.88%

Operating expenses

Total operating expenses

7.04%

Operating income

Operating income

12.99%

Interest Expense

Interest Expense

 
 

Other income (expense)

1.02%

Income before taxes

Income before taxes

14.01%

 

Provision for income taxes

4.26%

 

Net income from continuing operations

9.75%

Net income

Net income

9.75%

 

Net income available to common shareholders

9.75%

 

Standard Accounts

Balance Sheet

FY 2018

Assets

Assets

 

Assets

Current assets

 

Assets

Cash

 

Assets

Cash and cash equivalents

61.57%

Assets

Short-term investments

 

Assets

Total cash

61.57%

Assets

Receivables

27.45%

Assets

Prepaid expenses

0.32%

Assets

Other current assets

 

Assets

Total current assets

89.33%

Assets

Non-current assets

 

Assets

Property, plant and equipment

 

Assets

Gross property, plant and equipment

6.14%

Assets

Accumulated Depreciation

-3.56%

Assets

Net property, plant and equipment

2.59%

Assets

Equity and other investments

 

Assets

Intangible assets

0.04%

Assets

Deferred income taxes

0.86%

Assets

Other long-term assets

7.18%

Assets

Total non-current assets

10.67%

Assets

Total assets

100.00%

Liabilities

Liabilities and stockholders' equity

 

Liabilities

Liabilities

 

Liabilities

Current liabilities

 

Liabilities

Short-term debt

 

Liabilities

Accounts payable

2.68%

Liabilities

Deferred income taxes

5.19%

Liabilities

Deferred revenues

 

Liabilities

Other current liabilities

12.99%

Liabilities

Total current liabilities

20.86%

Liabilities

Non-current liabilities

 

Liabilities

Deferred taxes liabilities

 

Liabilities

Pensions and other benefits

1.31%

Liabilities

Total non-current liabilities

1.31%

Liabilities

Total liabilities

22.17%

Equity

Stockholders' equity

 

Equity

Common stock

39.25%

Equity

Other Equity

1.95%

Equity

Retained earnings

36.63%

Equity

Total stockholders' equity

77.83%

 

Total liabilities and stockholders' equity

100.00%

Equity

Common stock

49.94%

Equity

Other Equity

0.49%

Equity

Retained earnings

-4.54%

Equity

Total stockholders' equity

45.88%

Equity

Total liabilities and stockholders' equity

100.00%

6.0           CONCLUSION

The overall picture of HiTech Group of Australia is promising. With higher current ratio and net profit margin, the company has full potential to grow in future. However, with lower barriers to entry, higher bargaining power of buyers, moderate power of substitutes and higher rivalry amongst competitors, the industry has lower profitability potential and higher risk.

7.0    REFERENCES

CIMA Global. (2019). OnLine Case Study resource. Retrieved April 13, 2019, from http://www.cimaglobal.com/documents/importeddocuments/sugg_solution_2.pdf

Dobbs, M. E. (2014). Guidelines for applying Porter's five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), 32-45.

Future People. (2019). Recruitment Trends Report 2017/2018. Retrieved April 13, 2019, from https://futurepeople.com.au/recruitment-trends-report-20172018/

HiTech Group of Australia. (2018). Annual Report. Retrieved April 13, 2019, from http://hitechaust.com/uploads/pdf_file/15377744722018HiTechAnnualReportFinal.pdf

HiTech Group of Australia. (2019a). About Us. Retrieved April 13, 2019, from http://hitechaust.com/index/view/about_us

IBISWorld. (2019, January). Employment Placement and Recruitment Services - Australia Market Research Report. Retrieved April 13, 2019, from https://www.ibisworld.com.au/industry-trends/market-research-reports/administrative-support-services/employment-placement-recruitment-services.html

Kim, E., Nam, D.-i., & Stimpert, J. L. (2004). The applicability of Porter’s generic strategies in the digital age: assumptions, conjectures, and suggestions. Journal of management, 30(5), 569-589.

KPMG. (2016, August). The Australian Recruitment Industry. Retrieved April 13, 2019, from https://docs.jobs.gov.au/system/files/doc/other/the_australian_recruitment_industry_accessible_version_august_2016_final.pdf

Penman, S. H. (2007). Financial statement analysis and security valuation (Vol. 3). New York: McGraw-Hill.

Wilson, R. (2017, March 22). 85% of Australian recruitment professionals expect revenue growth in 2017. Retrieved April 13, 2019, from https://www.recruitment-international.com.au/blog/2017/03/85-percent-of-australian-recruitment-professionals-expect-revenue-growth-in-2017

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