Part A

(a-i)
EBIT Performance is sensitive to external factors
FY09 and FY11 had the lowest EBIT.
FY09s low EBIT is due to the drop in sales by 32% caused by the GFC.
FY11s low EBIT is due to the heavy discounting to attract customers during adverse weather conditions. This
is reflected by the lowest GP as a % of Sales for FY11.
10,000,000

26%

8,000,000

25%
24%

6,000,000

23%
4,000,000

22%

2,000,000

21%

20%
FY07

FY08

FY09

Sales (net of commissions) ($)

FY10

FY11

FY12

Gross profit ($)

Gross Profit as a % of Sales (%)

FY07

FY08

FY09

FY10

FY11

8,039,991

9,328,547

6,325,386

6,378,732

6,857,692

2,022,967
25%

2,336,275
25%

1,617,855
26%

1,483,614
23%

1,521,698
22%

Sales (net of commissions) ($)

Gross profit ($)
Gross Profit as a % of Sales (%)

10,000,000

400,000

9,000,000
200,000

8,000,000
7,000,000

6,000,000
5,000,000

-200,000

4,000,000
-400,000

3,000,000
2,000,000

-600,000

1,000,000
-

-800,000
FY07

FY08

FY09

Sales (net of commissions)

FY10

FY11

FY12

Operating profit/(loss) [EBIT]

Profit/(loss) before income tax

Sales (net of commissions)

Operating profit/(loss) [EBIT]
Profit/(loss) before income tax

FY07

FY08

FY09

FY10

FY11

8,039,991
154,244
146,843

9,328,547
291,270
235,395

6,325,386
573,723
717,512

6,378,732
315,084
487,460

6,857,692
477,706
673,844

Declining Working Capital Ratio (Current Ratio) below 1 since FY08

The current ratio has been in decline during FY08 to FY10
Lowest current ratio of 0.21 during FY10
Consistent with the rising liabilities and declining assets between FY08 and FY10
Reflects XXs inability to meet current obligations
7,000,000

1.0000
0.9000
0.8000
0.7000

6,000,000
5,000,000

0.6000
0.5000
0.4000

4,000,000
3,000,000

0.3000
0.2000

2,000,000
1,000,000

0.1000
0.0000

FY07

FY08

FY09

FY10

FY11

FY12

Total current assets

Total current liabilities
Working Capital Ratio (Current Assets/Current Liabilities)

Total current assets

Total current liabilities
Current Ratio

FY07

FY08

FY09

FY10

FY11

3,215,392
3,567,840
0.9012

1,805,073
4,345,188
0.4154

1,633,167
5,023,114
0.3251

1,180,907
5,500,970
0.2147

1,552,692
5,912,087
0.2626

Negative EBIT since GFC

XX has been generating an operating loss annually between FY09 and FY11, totalling $1,878,816.
400,000
300,000
200,000
100,000
-100,000

FY07

FY08

FY09

FY10

FY11

-200,000
-300,000
-400,000
-500,000
-600,000
-700,000
Operating profit/(loss) [EBIT]

Operating profit/(loss) [EBIT]

FY07

FY08

154,244

291,270

FY09
-

573,723

FY10
-

315,084

FY11
-

477,706

Steady increase in sales between FY09 to FY11

The rise in sales for FY10 and FY11 is supported by the strong performance of international sales to offset the decline
in hostel and domestic tour sales.
10,000,000
9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
FY07

FY08

FY09

FY10

FY11

FY12

Sales (net of commissions) ($)

FY07

FY08

FY09

FY10

FY11

8,039,991

9,328,547

6,325,386

6,378,732

6,857,692

Sales (net of commissions)

(a-ii)
17% rise in Sales
The approximately $1.2million forecasted rise in sales forecast is supported by the growing consumer confidence, new
hostel upgrade and the growing success of the 4WD business.
FY11
Sales (net of commissions) ($)

FY12

6,857,692

8,050,000

Change

Change

17%

1,192,308

Return to profitability
FY12 is forecasted to be the first instance of a positive EBIT since FY08. It is a $600,000 forecasted increase from
FY11s performance.

Operating profit/(loss) [EBIT]

FY11

FY12

Change

Change

- 477,706

122,000

126%

599,706

20% reduction in total assets to improve ROA

In FY12 XX is forecasted to use the $1million Cash at Bank to pay back liabilities as it was not used well to generate
profits in FY11. This causes ROA to increase by 27% to become almost neutral in FY12.
FY11
Net Profit/(loss)
Total assets
Return on Assets
Cash at bank

- 673,844
6,082,105
-27.67%
1,145,154

FY12

Change

Change

28,000
4,871,428
-0.51%
90,515

96%
-20%
98%
-92%

645,844
- 1,210,677
27%
- 1,054,639

Steady Marketing Expense despite new operation

Marketing expense is forecasted to remain steady (a $7,179 drop) despite the new day tour operation. This is due to
the past experience with the inefficiency of marketing (in FY09 and FY11).
FY11
Marketing expense - salaries and wages
Marketing expense - other
Total Marketing Expense

- 145,000
- 962,179
- 1,107,179

FY12

Change

150,000
950,000
1,100,000

3%
-1%
-1%

Change
-

5,000
12,179
7,179

(a-iii)
The key risk that might jeopardise XX achieving the forecast FY12 result is budget risk. Tour revenue for FY12 April
YTD is ahead of FY11 but forward bookings for May and June is below expectations. May and June is part of the busy
season for XX. The forecast $1,192,308 (17%) increase in sales from FY11 is the main factor of the strong FY12
forecast, and there is a risk that FY12 sales will not meet this budget.

(b-i)
Current Position: High debt position. Possible inability to meet current obligations with a current ratio of 0.26.

XX has relied on debt compared to equity for funding between FY07 and FY11.
o Total liabilities increased by $3,106,679
o Total equity decreased by $1,643,421
Steady decline of Current Ratio between FY07 and FY10 with a slight increase in FY11. This shows low
liquidity.
o Total assets decreased by $1,662,700.
o Total liabilities increased by $2,344,247.
Steady shift from current assets to non-current assets.
Increase in both current and non-current liabilities.
Reliance on short term debt during tourism off-seasons.
Issued shares remained the same from FY07 to FY11. All funding came from debt.
Bank bills payables were introduced in FY09 and remains above $1million annually.
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
(1,000,000)
(2,000,000)

FY07

FY08

Total liabilities

Total liabilities
Total equity
Debt to Equity Ratio

FY09

Total equity

FY10

FY11

1000.00
900.00
800.00
700.00
600.00
500.00
400.00
300.00
200.00
100.00
0.00
-100.00

Debt to Equity Ratio

FY07

FY08

FY09

FY10

FY11

3,642,634
976,213
3.73

4,625,761
1,211,608
3.82

5,364,886
494,096
10.86

5,714,208
6,636
861.09

6,749,313
- 667,208
-10.12

7,000,000

1.0000

6,000,000

0.8000

5,000,000
4,000,000

0.6000

3,000,000

0.4000

2,000,000
0.2000

1,000,000
-

0.0000
FY07

FY08

Total current assets

FY09

FY10

FY11

Total current liabilities

Current Ratio

FY07

FY08

FY09

FY10

FY11

3,215,392

1,805,073

1,633,167

1,180,907

1,552,692

3,567,840
0.9012

4,345,188
0.4154

5,023,114
0.3251

5,500,970
0.2147

5,912,087
0.2626

Total current assets

Total current liabilities
Current Ratio
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
FY07

FY08

FY09

FY10

FY11

Total current assets

Total non-current assets

Total current liabilities

Total non-current liabilities

Total current assets

Total non-current assets
Total current liabilities
Total non-current liabilities

FY07

FY08

FY09

FY10

FY11

3,215,392
1,403,455
3,567,840
74,794

1,805,073
4,032,296
4,345,188
280,573

1,633,167
4,225,815
5,023,114
341,772

1,180,907
4,539,937
5,500,970
213,238

1,552,692
4,529,413
5,912,087
837,226

(b-ii)
Forecast funding position: Very low liquidity. XX has a going concern issue.

Current asset balance of $455,515 is the lowest XX has had since FY07.
Current ratio of 0.10. The key risk is whether XX can meet all their current obligations (going concern).
Debt to equity ratio of 506.97 shows high debt reliance.
First increase in issued share capital (of $704,798) since FY07 due to the unsecured loan from a shareholder
being reclassified as share holding.
Total liabilities in FY12 decreased by $1,887,475 due to the above loan reclassification and the $1million
Cash at Bank from FY11 being used as repayment.
7,000,000

1.0000
0.9000

6,000,000

0.8000
5,000,000

0.7000
0.6000

4,000,000

0.5000
3,000,000

0.4000
0.3000

2,000,000

0.2000
1,000,000

0.1000

0.0000
FY07

FY08

Total current assets

Total current assets

Total current liabilities
Current Ratio

FY09

FY10

FY11

Total current liabilities

FY12
Current Ratio

FY07

FY08

FY09

FY10

FY11

FY12

3,215,392
3,567,840
0.9012

1,805,073
4,345,188
0.4154

1,633,167
5,023,114
0.3251

1,180,907
5,500,970
0.2147

1,552,692
5,912,087
0.2626

455,515
4,732,335
0.0963

(b-iii)
Likely Implications:
XX has a going concern threat they do not have enough liquidity to meet all current obligations.
TIE Ratio
o Breach of the debt covenant (1.6) between FY08 and FY09 implies that it may be hard for XX to
source its funding from the bank. The breach resulted in the bank cutting back XXs facilities the year
after.
o Interest rate may increase for XXs debt with the bank for breaching the covenant, further putting a
strain on profitability.
Debt Ratio
o High debt ratio close to 1 from FY09 onwards will cause difficulty for XX when they want to source
funding from the bank.
Debt to Equity Ratio
o High debt to equity ratio of 506.97 shows XX has been funding its operations heavily through debt.
o In the case of liquidation, the shareholders might not receive any compensation as the total liabilities
sit at $4,861,838.

25.00
20.00
15.00
10.00
5.00
0.00
2007

2008

2009

2010

2011

2012

-5.00
-10.00
Times interest earned

Times interest earned

Debt covenant

Debt covenant

2007

2008

2009

2010

2011

2012

20.84
1.6

5.21
1.6

-3.99
1.6

-1.83
1.6

-2.44
1.6

0.81
1.6

8,000,000

1.2000

7,000,000

1.0000

6,000,000
0.8000

5,000,000
4,000,000

0.6000

3,000,000

0.4000

2,000,000
0.2000

1,000,000
-

0.0000
FY07

FY08

FY09

Total liabilities

Total liabilities
Total assets
Debt Ratio

FY10

Total assets

FY11

FY12

Debt Ratio

FY07

FY08

FY09

FY10

FY11

FY12

3,642,634
4,618,847
0.7886

4,625,761
5,837,369
0.7924

5,364,886
5,858,982
0.9157

5,714,208
5,720,844
0.9988

6,749,313
6,082,105
1.1097

4,861,838
4,871,428
0.9980

8,000,000

1000.00

7,000,000

900.00

6,000,000

800.00
700.00

5,000,000

600.00

4,000,000

500.00
3,000,000
400.00
2,000,000

300.00

1,000,000

200.00

FY07

FY08

FY09

FY10

FY11

FY12

100.00

(1,000,000)

0.00

(2,000,000)

-100.00
Total liabilities

Total liabilities
Total equity
Debt to Equity Ratio

Total equity

Debt to Equity Ratio

FY07

FY08

FY09

FY10

FY11

FY12

3,642,634
976,213
3.73

4,625,761
1,211,608
3.82

5,364,886
494,096
10.86

5,714,208
6,636
861.09

6,749,313
- 667,208
-10.12

4,861,838
9,590
506.97

(b-iv)
From b-iii, XX has exhausted its bank facilities. Two feasible actions are:
1. Raise funds through Venture Capitalists for the Day Tour new operation.
a. XX needs short term funding for liquidity.
b. This will not give up ownership, and will not add onto the liability with the bank.
2. Utilise operational leases rather than buying assets and depreciating them.
a. This will reduce the need for large amounts of cash for purchases.
b. This will go straight onto the P&L.

(c)
Opening Cash & Deposits as at 01/07/2011

1,152,034

Cash Receipts from Sales

8,052,541

Other Incom e
Interest
Add
FY12 Advance Deposits
Less FY11 Advance Deposits
Total Cash receipts

1,752,614
- 1,524,012
8,284,143
9,436,177

Marketing expense - salaries and w ages

Marketing expense - other
Administration expense - salaries and w ages
Administration expense - other
COGS

150,000
950,000
645,000
35,000
6,037,500

Total expenses

7,817,500
-

25,022
3,331
154,003
2,935
39,786

Total Cash Disbursements

7,950,473

Opening Cash as at 01/07/2011

Add
Cash Receipts
Less
Cash Disbursements
Cash Excess/(Deficiency)

1,152,034

Financing Effects
Borrow ing/Repayments
Interest expense
Total Financing Impact
Cash & Deposits after borrow ings

8,050,000
52,541
50,000
8,052,541

3,000

Total Cash Available

Change in Trade Payables

Change in Inventory
Change in Non-Trade Payables
Change in Provisions
Change in Prepayments

Cash Receipts
Sales
Plus Trade Rec FY11
Less Trade Rec FY12
Cash Receipts from Sales

8,284,143
7,950,473
1,485,704

1,235,189
150,000
1,385,189
100,515

Change in Trade Payables

FY12 Trade Payables
Less FY11 Trade Payables

875,022
850,000
25,022

Change in Accruals and Sundry Payables

FY11 Accruals and Sundry Payables
Less FY12 Accruals and Sundry Payables

954,003
800,000
154,003

Change in Inventory
FY11 Inventories
FY12 Inventories

88,331
85,000
3,331

Change in Prepayments
FY11 Prepayments
FY12 Prepayments

259,786
220,000
39,786

Change in Provisions
FY11 Provisions
FY12 Provisions
Borrowing/Repayments
FY11 Debt Liabilities
FY12 Debt Liabilities

97,833
100,768
2,935

2,482,189
1,247,000
1,235,189

(d)
Financial risk

Exposure

Strategy to manage or mitigate

1.

Significant interest rate exposure based on the

high debt ratio. Bank bills have a variable interest
rate of 7.9% currently.

Interest rate swap (floating to fixed)

arrangement with another counterparty.

2.

Low credit risk exposure as customers must pay

in full before the tour.

Follow up by calling the customers who paid

their deposits to make their payments.

3.

Medium exposure to international (PNG Kina)

currency fluctuations due to international
operations.

Futures contract to secure a fixed exchange

rate.

4.

Medium exposure to rising fuel costs.

Forward contract with fuel supplier to secure a

fixed fuel price.