Hi, I’m looking at a transportation company (similar to a taxi company) for a case study project. Where I have to analyse and write an overview of how I interpret the businesses performance based on its income statement and balance sheet here are the highlights below:
Gross profit margin around 35-40%
EBITDA margin: 15-20%
EBIT margin: 5-10%
Total liabilities > total assets
Retained earnings: negative
Net assets/total equity: negative
Could someone who works in transportation offer an insight as to whether the income statement margins above are in line with what is expected for a transportation business or if not, what they should be around? And also with regards to the balance sheet, what it means for one to have negative net assets, does this mean the business is on the verge of bankruptcy? What are other possible explanations and what the outcome/effects of a negative net asset/total equity be on the business?
Thanks
Of course the company appears in negative conditions.
Negative retained earnings should mean that net income is currently negative or it was negative in the near past. Given such margins, maybe the company has recognized large assets impairment/recognition of extraordinary losses that, even with good margins, have driven the net income to very low levels. This could also explain negative net assets, caused by write-down of current assets/fixed assets/intangible impairments.
Does the income statment have some item like this after EBIT?
Retained earnings says it all: net income has been negative in the past. Could be due to one-offs like impairments on goodwill from acquisition or structural due to insufficient profitability in the past.
Depending on your goal I don't think net assets : total book value equity is a very meaningful metric anyways. Equity is book value, could be huge hidden reserves (Coca cola has not activated his brand on its B/S while it's their biggest asset).
Maybe give some context on the goal/assignment.
Would focus on return on invested capital (nopat : IC) and/or pay back time of the transportation assets (transport assets : EBITDA or transport assets : (EBITDA minus maintenance capex) --> is it worthwile investing in more units?
Or they have returned cash to shareholders (dividends/buybacks) in excess of retained earnings. It's possible they've been profitable every year they've operated, but paid out more than they've earned.
That's not to take away from your more important thesis, which is correct. Book value of assets and/or equity is not the same as market value and does not necessarily indicate a company's ability to meet its obligations. For this type of analysis, look at things like the current ratio, debt coverage, and free cash flow.
Please name 1 country that allows coporates to pay out dividends in excess of retained earnings
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