- Evergrande Group, a listed company, is facing financial troubles that could lead to bankruptcy.
- Analyzing the company’s audited financial statements can provide insights into its financial health.
- From 2016 to 2020, Evergrande’s revenue growth consistently declined, indicating trouble on the horizon.
- The company’s margins, including gross profit margin and net profit margin, also decreased during this period.
- Evergrande’s cash flows were volatile and showed a reliance on borrowing and delaying payments to suppliers.
- The company’s debt-to-equity ratio declined, but analysis of debt-to-CFO and debt-to-FCFF ratios revealed concerning trends.
- Evergrande’s Z-score, a measure of bankruptcy risk, was consistently below 1, indicating a high probability of bankruptcy.
- The analysis suggests that Evergrande’s financial troubles were not sudden but built up over time.
Evergrande Group is the latest listed company to unexpectedly teeter on the verge of bankruptcy. When businesses face financial troubles, analyzing their audited financial statements can provide insights into their financial health. Evergrande’s financial statements from 2016 to 2020 reveal troubling trends that could have signaled its current predicament.
Firstly, Evergrande’s revenue growth consistently declined during this period, falling from 59% in 2016 to 2% in 2019 before slightly recovering to 6% in 2020. Rapidly slowing growth can incentivize bad behavior, such as accounting tricks and risky business practices, to make the financial numbers appear more favorable. This decline in growth should have raised concerns.
In addition to revenue growth, Evergrande’s margins, including gross profit margin, EBITDA margin, operating profit margin, and net profit margin, all decreased between 2016 and 2020. The most significant decline was in gross profit margin, which fell by 12% in just three years. This decline was mainly due to sharp cuts in selling prices to boost property sales. Increasing selling and marketing expenses, as well as a deteriorating market for the firm’s properties, also contributed to the decline in margins.
Evergrande’s cash flows were volatile and showed a reliance on borrowing and delaying payments to suppliers. The company’s cash flow from operations and free cash flow swung from negative to positive and back to negative. This suggests that Evergrande was often unable to generate cash from its operations and relied on lenders to fund its operations. The company’s trade payables also increased, indicating a delay in payments to suppliers to bolster cash flows. However, this practice is not sustainable in the long run.
While Evergrande’s debt-to-equity ratio declined between 2016 and 2020, the analysis of debt-to-CFO and debt-to-FCFF ratios revealed concerning trends. Both ratios were volatile and negative in three of the five years, indicating a high level of debt relative to cash flows. This suggests that Evergrande’s debt problem was worsening, despite the declining debt-to-equity ratio.
Finally, Evergrande’s Z-score, a measure of bankruptcy risk, was consistently below 1 throughout the five-year period. A Z-score below 1 indicates a high probability of bankruptcy, while a score of 3 or above indicates the company is in the safe zone. Evergrande’s Z-score averaged 0.77 during the period, indicating a significant risk of bankruptcy.
In conclusion, analyzing Evergrande’s audited financial statements reveals a story of slowing growth, declining margins, shoddy quality of earnings, cash flow deficits, reliance on borrowing and delaying payments, and an increasing risk of bankruptcy. These warning signs were present in the company’s financial statements and should have raised concerns about its financial health.
