Tamawood Ltd

Accounting analysis case study

Tamawood Limited (TWD) is an Australia-based company, with four business activities; project home

building, franchising, ready-to-occupy construction and sales, as well as a Renewable Energy Certificates

origination and trading desks. Dixon Homes, a home building group, is 100% owned by TWD. The

construction segment is involved in the home design, project management services and associated
activities including home contract construction activities in selected markets. The franchising segment

is engaged in franchising and licensing operations in Queensland, New South Wales and New Zealand.

The ready to occupy segment is involved in the construction and resale of "ready-to-occupy" homes and

sublease of various parts of a building owned by TWD. The renewable energy certificate segment is
involved in the trading and processing of RECs associated with solar products. The company has a

market capitalisation of $69million. The company does not have any analyst following the stock. 60% of
the shares are owned by the top 3 shareholders that are private entities with the CEO holding the
majority of the shares in the company.

The following is the segment information on Tamawood for 2012 financial year.
Results By Industry
Construction
Franchises
Ready-to-Occupy
Renewable Energy
Total

Revenue
(000)
Profit (000) Assets (000) Revenue B/Down ROS
ROA
60,616
3,745
17,567
46.20% 6.20% 21.30%
1,268
592
1,519
1.00% 46.70% 39.00%
39,259
5,719
6,655
29.90% 14.60% 85.90%
30,012
777
5,487
22.90% 2.60% 14.20%
8.30% 34.70%

Tamawood financial summary

Jun-07
EARNINGS SUMMARY
Trading Revenue
Expenses
EBITDA
EBIT
Net Interest Expense
Pre Tax Profit
Tax Expense
NPAT
EPS Adj (cents)
Dividends (cents)

BALANCE SHEET SUMMARY

Cash
Total Current Assets
PP&E
Total Assets
Written by: M. Garg

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

95,321,000 142,564,000 134,003,000 97,365,000 113,755,000 130,635,000

-113,364,000 -129,383,000 -121,603,000 -86,422,000 -119,434,000 -119,211,000
12,078,000 14,316,000 12,872,000 11,465,000
9,769,000 12,314,000
11,498,000 13,952,000 12,587,000 11,292,000
9,407,000 12,046,000
672,000
886,000
1,001,000
653,000
175,000
-178,000
12,170,000 14,838,000 13,588,000 11,945,000
9,582,000 11,868,000
-3,618,000 -4,441,000 -4,111,000 -3,631,000 -2,844,000 -3,471,000
8,529,000 10,119,000
9,195,000 10,464,000
6,738,000
8,259,000
23
26
23
22
17
21
20
21
21
40
21
21
11,173,000
28,293,000
12,252,000
44,717,000

9,297,000
43,091,000
12,587,000
58,869,000

12,718,000 7,497,000
42,335,000 34,819,000
10,921,000 10,510,000
53,162,000 45,278,000

7,891,000
51,862,000
9,523,000
58,978,000

1,641,000
22,733,000
992,000
23,307,000

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Total Current Liabilities

L/T Debt
Total Debt
Total Liabilities
Net Assets
NTA

CASH FLOW SUMMARY

Operating Cash Flow
Investment Cash Flow
Financing Cash Flow
Net Cash Increase
Tamawood key ratio
Profitability ratios
Net Profit Margin
EBIT Margin
EBITDA Margin
ROE
ROA
NOPLAT Margin

11,193,000
0
0
15,494,000
29,223,000
29,113,000

12,791,000
0
0
20,109,000
38,760,000
38,650,000

10,354,000 8,335,000
0
0
0
0
13,044,000 10,950,000
40,118,000 34,328,000
40,118,000 34,328,000

15,433,000
5,000,000
5,000,000
21,980,000
36,998,000
36,998,000

10,776,000
-316,000
-3,093,000
7,367,000

-1,009,000
2,054,000
-2,277,000
-1,232,000

7,454,000 7,626,000
593,000 -3,996,000
-4,626,000 -8,851,000
3,421,000 -5,221,000

-3,306,000
7,789,000
2,250,000
-284,000
1,450,000 -13,755,000
394,000 -6,250,000

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

8.95%
12.06%
12.67%
29.32%
19.13%
8.67%

7.10%
9.79%
10.04%
26.39%
17.31%
6.86%

6.86%
9.39%
9.61%
23.32%
17.52%
6.55%

8.54%
11.60%
11.78%
24.22%
18.36%
8.07%

5.92%
8.27%
8.59%
18.21%
11.51%
5.82%

6.32%
9.22%
9.43%
95.04%
36.64%
6.52%

12,592,000
0
0
14,395,000
8,912,000
8,912,000

Asset Management Ratios

Inventory Turnover
927.25% 662.26% 634.96% 444.16% 308.46% 827.38%
Asset Turnover
213.17% 242.17% 252.07% 215.04% 192.88% 560.50%
PPE Turnover
928.15% 1428.50% 1621.13% 1201.44% 1598.58% 22758.71%
Depreciation/PP&E
3.28%
2.89%
2.61%
1.65%
3.80%
27.02%
Depreciation/Revenue
0.42%
0.26%
0.21%
0.18%
0.32%
0.21%
Wkg Capital/Revenue
6.22% 14.73% 14.38% 19.50% 25.09%
6.51%
Working Cap Turnover
1608.25% 678.78% 695.65% 512.80% 398.61% 1536.88%

Cashflow Ratios
Inventory/Trading Rev.
10.78% 15.10% 15.75% 22.51% 32.42%
12.09%
Creditors/Op. Rev.
11.16%
8.67%
4.01%
6.11% 12.40%
8.53%
Days Inventory
39.36
55.11
57.48
82.18
118.33
44.12
Days Receivables
6.5
7.01
21.26
20.18
11.28
6.2
Days Payable
40.73
31.64
14.64
22.32
45.26
31.14
Your analysis of the above information should focus on 2011 and 2012 financial years.
Using the above information answer the following questions:
SUGGESTED ANSWERS:
1. How are the financials of a construction company different from other businesses?
Answer: A construction company recognises revenue on the basis of completion stage of
construction project. Therefore, without receiving any cash from customers, the company
may still make profit and recognise it in the income statement. Such companies have

Written by: M. Garg

Page 2

longer operating cycle. Moreover, the financials can differ every year in terms of tangible
assets held in hand end of the year.
2. Why is segment analysis an important part of accounting analysis for red flag detection?
Answer: Segment analysis is an important part of financial analysis as it helps understand
the movement in the financials driven by the nature of the business and condition of the
market of a particular segment. In the case of Tamawood, construction and ready to own
segments contribute to over 70% in revenue and 90% in profit. This means the issue
highlighted in question 1 (longer operating cycle) is important when conducting
accounting analysis.
3. Conduct operating cash flow and NPAT analysis and identify the key issues.
Answer:
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000

NPAT

2,000,000

Operating Cash Flow

0
-2,000,000
-4,000,000
-6,000,000

The above comparison of NPAT and operating cash flow over 6 years suggests the
company has very high accrual based income. The big difference between NPAT (accrual
income) and operating cash flow (cash income) suggests the companys accrual income
may be subject to manipulation requiring further analysis. The companys NPAT over 6
years is $53m but the CFO is only $29m. The shortfall of $24m requires further
investigation.
4. What can be the potential reasons for cash flow from operations being higher than NPAT on an
average over the last 6 years?
Answer: Normally cash flow from operations is higher than NPAT as a company has noncash expenses like provisions and depreciation which reduces the overall profit.
Therefore, the trend in Tamawood is unusual.
5. What other issues are of interest (red flags) requiring further investigation?
Answer: the company has low depreciation to PPE between 2007 and 2011. All of a
sudden the ratio has gone upto 27% in 2012. The PPE of the company in 2012 is very low
at only $992,000 (reduced by 90%). The significant fluctuation in the financials in 2012
requires further investigation. Between 2011 and 2012 the companys sales went up by
$17m but the expenses remained the same. Given that the condition of the construction is
not very good, such lowering of expenses and higher profit margin is questionable.
Therefore, analysis of individual revenue and expense items will be required.

Written by: M. Garg

Page 3