When I calculated financial ratios for my firm Immuron Ltd, I was not sure if these ratios making any sense. Immuron Limited is not making any profits and I can see the loss calculated in the financial statements and huge expense amounts separated as operating expense in restated financial statements. Most of the ratios are negative. Initially I was confused if I keep the ratios with negative sign or should I change the title of rows e.g. ‘net profit margin’ to ‘net loss margin’, ‘return on assets’ to ‘loss on assets’, ‘economic profit’ to ‘economic loss’ and so on. On the website stated below:
http://smallbusiness.chron.com/calculate-profit-margin-only-sales-net-loss-17406.html it is mentioned that it is irrelevant to calculate the profit margin calculations for loss making firms. On the other hand, we can find out the reasons for losses by looking at the ratio analysis.
Net Profit Margin
Net profit margin ratio shows how much of dollars earned for sales of each dollar. Both profitability ratios, for Immuron Ltd are negative and this negative percentage is larger in number. This clearly indicates that there are more expenses than revenue. In 2013, Net loss margin was the highest as the amount of sales was merely AUD149,755. Though, there is increase in sales from 2014 to 2016, the total losses too are increasing.
Comparison with Profit Margin
When Net profit margin is compared with Profit margin ratio both are showing similar trend from 2013 to 2106. Both ratios show increasing losses, though negative operating income was the highest in 2013 with minimal sales.
Return on Assets
Return on Assets ratio indicates how efficiently management using the assets of the firm. Total assets contain financial as well as operational assets. The cash in the banks is the key asset for Immuron. In 2014, Immuron Ltd bought Hadasit Medical Research and Development Centre as part of their intellectual property. In 2014, Immuron has better net profit margin and return on assets (though negative) as compared to other time periods.
Comparison with Return on Net Operating Assets
Return on Net Operating Assets:
RNOA is much larger and negative as compared to ROA. While calculating RNOA, financial assets like cash are separated. This is clear indication that Immuron’s operating activities are not generating any revenue. In 2013, Immuron is reporting Net operating Liabilities therefore, I am not sure RNOA for 2013 is reflecting any true picture of financial position. It is actually mathematical calculation where negative operating income divided by negative NOA resulting in positive RNOA which is totally unrealistic.
Efficiency (or Asset Management) Ratios
Days of Inventory
Days of Inventory ratio indicates for how many days the firm is holding inventory in hand before it gets sold. Inventory costs represents opportunity costs; therefore, inventory days indicate how good inventory is managed. In the case of Immuron here, inventory days are too high. For 2013 and 2016, days of inventory are almost more than 1000 days. In income statement of 2013, there is revenue by sales AUD149,755 which is very low and there was no cost for sales and marketing or freight charges. I was curious why days of inventory so high in 2013 and asset turnover ratio so low? I found the answer in Annual report 2013 as the company terminated the Nycomed license and distribution agreement which resulted in poor sales. In 2014, inventory performance is better because of company’s implementation of strategy of direct sales to wholesaler distribution and sales model.
Total Asset Turnover Ratio
Asset Turnover ratio indicates number of dollars generated by one dollar of asset. In 2013 and 2016, ATO ratio is very poor due to low sales. I don’t understand why Asset turnover ratio is too low in 2014 though there are better sales results and inventory days. Is this because of purchase of Hadasit Medical Research Centre? For this purchase, Immuron spent most of its cash assets and borrowed the funds with issuance of rights.
Comparison with Asset Turnover Ratio
Asset Turnover Ratio:
Asset Turnover ratio is moving in similar way as that of TATO ratio from 2013 to 2106. For 2013, there are no Net Operating assets but Net operating liabilities. There is better ATO in 2015, due to better sales though lesser Net Operating assets.
Here again, Current ratio is too high in 2014. From balance sheet of 2014, it can be noticed that there are no financial liabilities and cash asset is too high (AUD 6,141,789). And in the same year, Medical research centre form Israel was purchased by the company. The current ratio indicates that Immuron has enough assets to sell out to pay back its short-term liabilities.
Financial Structure Ratios:
When I looked at the figures of debt/equity ratio which indicates how much loan the firm is having as compared to owners’ equity, I got surprised to see 1642.7% of debt/equity in 2013. There are large amount of trade payable and financial liabilities while total equity is just 144,986 in 2013. Few key personnel and management members of Immuron resigned or got retired in 2013. This might be the reason for the lowest equity ratio in 2013. Debt ratio is also the highest in 2013.
With the appointment of new key personnel and issue of share rights, the equity ratio is almost 89% in 2014, representing more investment from the owners as equity investors. In 2014, the total number of issued ordinary shares are 2,995,662,120; the largest number of all. From the website: http://www.myaccountingcourse.com/financial-ratios/equity-ratio
Equity financing in general is much cheaper than debt financing because of the interest expenses related to debt financing. Companies with higher equity ratios should have less financing and debt service costs than companies with lower ratios.
This might be the reason Immuron is issuing more and more equities to the value of borrowings and most of the time issued rights’ price is much more than current market price.
Earning Per Price:
Dividends Per Share:
Price Earning p/e Ratio:
Earnings per share (EPS) shows net income per share. In the case of Immuron, it is loss per share as there is no income. for years 2016 and 2015, the calculations for loss per share are matching to that of financial reports of the company. On the other hand, for year 2013 and 2014, loss per share is different: (0.698 Cents) and (0.152 cents) respectively. When I checked the notes of annual reports, number of equity issued used for loss per calculation is different than the actual total issued capital (Note 18). I don’t understand why this adjustment is done. Share prices are too low in 2013 and 2014: AUD 0.004 and AUD0.005 respectively. There is huge movement in rights or equity issuance due to borrowings and resignation of key management staff in 2013.
Immuron is not paying any dividends.
Price to Earnings Ratio is negative and indicates the poor performance of the firm. Also shows the growing amount of losses from year 2013 to 2016 that means company is losing the money. Though Immuron’s share price is too low, it is risky to buy these shares since management is not doing good job in managing the company, i.e. no dividends and no income for many years.
Ratios based on Reformulated Financial Statements:
Return on Equity
Return on Equity ratio indicates how efficiently equity investors’ funds are utilised to generate the revenue. For Immuron Ltd, ROE is the lowest in 2013, with equity ratio just 5.7%. there are net losses reported by Immuron from 2013 to 2016, and cannot expect any positive return on equity.
Net Borrowing Costs
In my opinion, this ratio is not reflecting the real financial picture of Immuron’s borrowings or net liabilities. Immuron is holding larger amounts of cash as financial assets in banks. In restated financial statements, there are net Financial assets not financial obligations. In annual reports 2013, it is clearly stated that there are borrowings of AUD1.4M which may be converted into equity at higher price per share (AUD4.73) and interest is payable on borrowings at a fixed rate 10% per annum (note 16). NBC is not reflecting this info here. I guess, Immuron management would like to broadcast larger cash holdings as strong financial assets of the firm to attract more investment despite of ongoing losses.
Return on Net Operating Assets (RNOA)
Immuron is reporting losses so this ratio is loss on net operating assets as there is operating loss after tax, not operating income. negative percentage of RNOA indicates Immuron’s operating activities are not generating any profits to cover the expenses. In 2013, there are net operating liabilities rather than net operating assets. But it looks like Immuron is managing to lower the losses from 2014 to 2016.
This is my commentary for Immuron’s ratios. I am thankful to those who provided the constructive feedback. I tried to accommodate their suggestions.
The corresponding spreadsheet is:
Immuron Spreadsheet 2017Step3_1tax
If anyone has similar figures like large negative ratios, it will be great to hear from you. I am specially interested to hear if anyone having NFAs not NFOs and having Net Operating L abilities rather than NOAs.