Recruitment Enterprises Equity and Finance Structure; SEEK Group Case Study

Executive summary

SEEK Limited has been operational in the industry since 1997, and its sole purpose is on helping people to fulfil their working experience in the industry. The company has created a world-class technology solution in which it matches the job seekers with the hirers across the globe. Over the past 12 months, SEEK has been successful in implementing long-term growth opportunities for the clients and ensuring that it facilitates social contribution in the daily business activities. As such, SEEK has been successful in attracting wide client base. In this report, the aim is on determining the investment decision on SEEK Limited. A detailed analysis of the non-financial components includes the vision statement, core activities, and competitive advantage for the company. It also provides financial analysis where share price movements, financial ratios, and capital structure ratios are assessed. From the analysis, SEEK Limited is a viable investment portfolio, and this will increase the profitability of the company in the long-run.

1.0 Introduction

SEEK is a group of companies that operates with the intention of people to live in a fulfilling and highly productive lives. The group has been essential in helping organizations to be successful through providing such companies with world-class product technologies that necessitates talent search for the companies, providing company reviews, and key recommendations to make them successful in the dynamic economy. In this report, the financial analysis of the company is provided, analysis of the movements in the companies’ share prices, and capital structure is provided with the intention of recommending to the investor on the feasibility of investing in SEEK Group.  

2.0 Overview of the company

SEEK Group is a leading recruitment agency in Australia that was founded in 1997. The company is focused on helping the job seekers with the information regarding the availability of the job opportunities in the region (SEEK GROUP, 2019). Its headquarters is in Melbourne, Australia and it is operating in over 10 countries including China, India, New Zealand, Nigeria, and Kenya among others.  The vision of the company is to be one of the best employment companies across the globe through matching the skills and knowledge of the people with the available job opportunities. Seek has positioned itself to solve complex, but important problems regarding employment, education, and human capital management.

SEEK Group’s principal activities for the year ending30 June 2018 was mainly on offering the candidates and the hirers with the online matching of career opportunities. It was also involved in placement and online sourcing of the clients to the respective roles. SEEK Group has experienced massive growth in its business initiatives and its evolution and expansion has been based on the four distinct phase. The first phase commenced in 1997 with the company focusing on Australia and New Zealand (ANZ) as the online employment marketplace, and second phase was reported in 2005 in which the group focused on international online employment. The third phase was reported in 2012 with talent sourcing and placement being the main role of the company, and the fourth phase was on human capital management initiatives.

The continuing competitive edge of the company is attributed to numerous aspects that have made the company to continue to be successful. SEEK Limited is acutely aware of the existence of competition, and it is always involved in conducting innovative strategies that will necessitate competitiveness in the industry. The company has strived to ensure that it always offers better products and services to the clients. Also, SEEK Limited focuses on being a trustworthy company and this is through reviewing the views of the clients regarding the growth in career and offers them advice on the related education for growth in career.  SEEK Limited is involved in growing the ‘network effect’ and this is through providing the clients with the best search and matching experience and this will be instrumental in achieving competitiveness in the industry (Guven & Islam, 2015). The needs of the customers are prioritized with the data being captured in different platforms as a way of delivering insights on the relevant candidates for the job.

3.0 Calculations and analysis of financial ratios

Liquidity ratios

Liquidity ratio of the company determines the ability of the company to offset its short-term obligations, and it determines the solvency of the company (Nadaraja et al., 2018). The common ratios used in assessing liquidity of the company are the current ratio and quick ratio, which are presented in the table below for SEEK Limited.

Liquidity ratios Formula 2018 2017
Current ratio Current assets / current liabilities 624.5 /763.6 =0.82 841.9 / 550.0 =1.53
Quick ratio (Current assets-inventories) / current liabilities (624.5 – 93.2) /763.6 =0.70 (841.9 – 78.2) / 550.0 =1.39

The current ratio of SEEK Limited shows that the ability of the company to meet its short-term obligations with the existing current assets decreased from 1.53 (2017) to 0.82 (2018). This can be attributed to the massive decrease in cash and cash equivalents for the company, which was reported at $652.0 million in 2017 to $361.7 million in 2017. Such a decline in liquid cash meant that its ability to repay short-term obligations decreased. Even though the ability to repay short-term loans decreased, the company made a positive step towards ensuring that it minimized the amount of cash that is idle through investing it in other profitable ventures (Mitrovic et al., 2015). Therefore, the ratio does not have a negative effect on the financial returns of the firm.

Quick ratio determines the ability to repay the short-term obligations with the available liquid assets (excluding inventories) for the company (Srinivasan & Britto, 2017). In the case of SEEK Limited, the quick ratio decreased from 1.39 (2017) to 0.70 (2018), and this was linked to the decline in the cash and cash equivalents for the company.

Profitability ratios

In the case of profitability ratios, it showcases the financial metrics that the company uses in assessing the ability of the company to generate earnings based on the prevailing expenses (Laitinen & Laitinen, 2018).  The main profitability ratios that are assessed in relation to SEEK limited are the net profit margin, return on assets (ROA), and return on equity (ROE).

Profitability ratios Formula 2018 2017
Net profit margin (%) Net income /Revenue 91 /1,310.2 =6.95% 362 / 1,052 =34.41%
Return on assets (%) Net Income /Total assets 91 /3,785.8 =2.41% 362 / 3,683 =9.83%
Return on Equity (%) Net Income/shareholders’ equity 91 /1,637.3 =5.56% 362 /2,039.9 =17.75%

The net profit margin of the company determined its ability of generating the earnings after taxes with the focus being on the prevailing revenue outlay of the company Sarri, 2018). The net profit margin reduced from 34.41% in 2017 to 6.95% in 2018, and this shows that the company’s ability to generate earnings has declined. The net profit margin assesses the income level that characterizes the organization, and the tax expense should be factored in with the intention of achieving competitive edge in the industry. Being an indication of the level of income for the firm, investors needed to see that it increased. The decline means that they will refrain from providing more finances for the firm. This is because they will expect that the firm will lead to a loss of their funds as seen from the deteriorating income levels.

Return on assets (ROA) determines the profitability of the company on the basis of the assets that are reported in the organization (Suardana et al., 2018). It demonstrates the effectiveness of SEEK Limited in asset deployment towards generating sales revenue. SEEK Limited has demonstrated a decline in ROA with ratio decreasing from 9.83% (2017) to 2.41% (2018). It shows that SEEK Limited’s asset deployment has not fully generated the desired revenue outlay.

Return on Equity (ROE) determines the ability of the company in measuring the returns based on the equity of the company. The contribution of the shareholders’ equity on the overall net income is essential in determining the value placed on the stakeholder’s investment (Israelov & Klein, 2016). It is also the returns that equity holders make per 1 unit of currency that they invest in the firm. SEEK Limited has reported a decline in ROE from 17.75% in 2017 to 5.56% in 2018 implying that the shareholders’ equity has less contribution to the net income of the company. The return on equity will not necessarily have a negative impact on the decisions that equity holders make in the long run. With the potential of growth in the market, it means that equity holders will perceive to generate more returns in the future.

Market value ratios

In the case of market value ratios, evaluates the company’s current share price based on the prevailing common stock of the company (Pandya, 2016). The ratios are utilized by the potential and current investors in determining whether the entity has under-priced or over-priced its shares. The earning per share (EPS) ratio of SEEK Limited will be used in assessing its market value.

Market value ratio Formula 2018 2017
EPS Profit attributed to owners /Outstanding shares $49.9m /352,639,453 shares =$0.141 or 14.1 cents $338.3m / 350,156,788 shares =$0.966 or 96.6 cents

In calculating the EPS of SEEK, the diluted earnings per share was utilized and it shows that the company has reported a decline in the EPS implying that the earnings generated from the outstanding shares is minimal as compared to the 2017 value (96.6 cents).

4.0 Graphs and comparison of share price movements

Figure: SEEK Stock Prices

From the two graphs provided, it is evident that the share prices of the company are moving in the same direction. The possibility of the economic or political factors impacting the share price of the company and industry can be the cause of the movement of the share price. In 2016, for instance, the reported share price was lower in All Ordinaries Index showcasing that the companies were struggling to stabilize the volatility reported in the share prices of the companies.  In December 2018, SEEK Limited reported a decline in the share price, but there was an increase in the share prices. There are numerous factors that cause volatility in the share price index for the stocks including the changes in the interest rates, demand and supply of the shares, economic changes, investors demand, and political climate (Ignatieva & Trück, 2016). All these factors can contribute to a downward or upward movement of the share price graph. Economic changes have the highest impact on whether the shares will have a high or low value. This is because an expected increase improvement of the performance will provide an environment for further returns (Apergis et al., 2017). A shock decline in economic performance decreases the ability of people to seek for opportunities leading to the demand for SEEK limited.

5.0 Calculation of Cost of Equity

The calculated beta (β) of SEEK Limited is 1.73

Risk free rate is 6%

Market risk premium is 7%

In calculating the required rate of return for the company’s shares, the Capital Asset Pricing Model (CAPM) using SML approach is undertaken (Campbell et al., 2018). The formula is given as:

            SML: E(Ri)     = Rf + βi (E(Rm) – Rf

                    Where;

                                        E(Ri)   = the expected return on security

Rf        = Risk-free rate (6%)

βi                = Beta coefficient (1.73)

(E(Rm) = the expected return on market portfolio (7%)

E(Ri)   = 0.06 + 1.73 (0.07 – 0.06)

            = 0.06 + 0.0173

            = 0.0773 or 7.73%

From the calculation of SEEK Limited required rate of return for the company shares, it is expected that the rate of return that is expected on each share of the stockholder is 7.73%.

6.0 Identify the Capital Structure

The capital structure of the company determines the financial health of the company with the focus being on determining the possibility of growth through financing of the company (Serfling, 2016). It provides an indication of the way in which the company can fund its operations with ease. In understanding the funding of the company, the debt-to-equity ratio is calculated for SEEK Limited as given below:

Capital Structure Ratio Formula 2018 2017
Debt/Equity ratio Total Debt / Total Equity 2,148.5 /1,637.3 =1.31 1,643.1 / 2,039.9 =0.81

From the capital structure ratio of SEEK Limited, the company has changed from over-depending on equity financing to debt financing; however, there is a balance between the two methods of financing the company. In 2017, the debt-to-equity ratio was given at 0.81 while in 2018 it was given at 1.31 implying that SEEK Limited has increased its debt financing in 2018 as compared to equity financing. Although forming an opinion using this information can be misguiding, it is important to provide a comparison between the two years to realize the strategy that the company can undertake in increasing competitive edge in the industry (Na and Subramanium, 2018).

With SEEK Limited relying on debt financing, it is worth noting that the company has the ability of leveraging the capital outlay prevailing in the organization with the intention of accelerating the rate of expansion (Huang et al., 2016). Debt financing ensures that SEEK Limited does not have funds that are held-up by the shareholders as they can increase debt financing without the control of the third parties. The relationship between the debtor and the owner of the company ends once the debt is fully repaid (Rakicevic et al., 2016). Also, it is through debt financing that the company can benefit from the tax deductible that is offered to loan interest, and this is essential in achieving competitive edge of the company in the industry. Debt financing necessitate predictability as the owners of SEEK Limited understands the trend in the principal and the interests that are charged on the debt or loan that is taken. Such information is vital when planning for the repayment of debt, and it is integral in minimizing unpredictability or volatility in the interest rates in the case of equity financing. However, SEEK Limited management is aware of the challenges that are faced in the industry, which includes fixed payments and the need for qualification through the acceptable credit ratings offered.

When looking at the equity financing, SEEK Limited has not fully implemented debt financing but it has included the equity financing of its operations. Equity financing is important as it is less risky as the company is not required to make monthly repayment of the loans as the return on investment to the company is dependent to the period in which the company can make profit (Martinez, 2018). The credit problems are also managed with the growth in finance required and this is essential in meeting the interest rate that is charged in the economy.

The cash flow of the company is considered when utilizing equity financing and this is integral when considering the long-term planning initiatives and the expected decision-making on the capital flow.  However, with this form of financing, the organization is subjected to the challenge of cost of equity in which the owners of the company should issue shares to the shareholders and they will be part of the ownership of the company. The company is subjected to the loss of control of the operations, and this can have an implication on the reported decision-making process, which can be slow. As such, through considering the pros and cons of these two methods of funding, SEEK Limited focused on striking a balance between equity and debt financing.

6.0 Recommendations and conclusion

From the analysis, it is recommended that the investing in SEEK Limited is a viable option. The non-financial analysis of the company shows that SEEK Group has been operational for over 20 years and it operates in more than 10 countries across the globe. SEEK Group targets the developed economies and this shows that the company can continue to be successful in the future. The principal activities for the company are clearly set and it is easy to understand that the company has strategized on positioning itself to be one of the leaders in the placement nd online recruitment. Although the company operates in one of the dynamic and highly volatile industries, the company has ensured that it offers the clients with quality services. The demand for job openings are increasing and the company can capitalize on the increasing need of the candidates to seek employment; hence, there is the possibility that the customer base for the SEEK Limited will increase.

One of the issues that impact the operation of the company is on the liquidity ratio, but this can be attributed to the reduction in cash and cash equivalent for the period ending 2018. Although the current situation regarding meeting the short-term obligations of the company is wanting, the expectation is that there will be improvement in the reported current and liquid assets of the company, and this will be instrumental increasing the liquidity of the company. Investors tend to assess the profitability ratio of the company, and it is evident that there has been a decline in all its profitability ratios; net profit margin, returns on assets, and return on equity. Such a sharp decline can indicate that they might be some financial issues or difficulties that the company is facing this can have an implication on the reported financial position of the company. The changes in the economy provide that there is the possibility of the company increasing its revenue outlay. 

The share price of the company is experiencing an upward trend and this implies that the return on investment for the shareholders will increase in the future. Investing in this investment portfolio provides a required rate of return of 7.73 per cent with the expectation that the value will increase annually. Also, SEEK Limited has not extensively relied on equity or debt financing as it has strike a balance between the two methods of financing, and this is integral for the investors as they understand the intention of the company in balancing between debt and equity funding. As such, based on this analysis, it can be concluded that the investment on the shares of SEEK Limited will yield positive returns in the future despite the reported decrease in the revenue outlay and profitability of the company.

7.0 References

Apergis, N., Fontini, F., & Inchauspe, J. (2017). Integration of regional electricity markets in Australia: A price convergence assessment. Energy Economics62, 411-418.

Campbell, J. Y., Giglio, S., Polk, C., & Turley, R. (2018). An intertemporal CAPM with stochastic volatility. Journal of Financial Economics128(2), pp.207-233.

Guven, C., & Islam, A. (2015). Age at migration, language proficiency, and socioeconomic outcomes: evidence from Australia. Demography52(2), pp.513-542.

Huang, R., Ritter, J. R., & Zhang, D. (2016). Private equity firms’ reputational concerns and the costs of debt financing. Journal of Financial and Quantitative Analysis51(1), pp. 29-54.

Ignatieva, K., & Trück, S. (2016). Modeling spot price dependence in Australian electricity markets with applications to risk management. Computers & Operations Research66, pp.415-433.

Israelov, R., & Klein, M. (2016). Risk and return of equity index collar strategies. Journal of Alternative Investments19(1), pp.41-54.

Market Index, M. (2019). All Ordinaries – Shares Prices & Charts. (Online) https://www.marketindex.com.au/all-ordinaries .

 Martinez, C. (2018). Construed Shared Expectations: Facilitating Access to Early-Stage Equity Financing Across Structural Holes. Available at SSRN 3241552.

Mitrovic, A., Knezevic, S., & Velickovic, M. (2015). Ratio analysis specifics of the family dairies’ financial statements. Ekonomika poljoprivrede62(4), pp.1061.

Na, H., & Subramaniam, V. (2018). Proprietary Information and the Choice of Debt Financing Source. New York: Emerald Group Publishing.

Nadarajah, S., Ali, S., Liu, B., & Huang, A. (2018). Stock liquidity, corporate governance and leverage: New panel evidence. Pacific-Basin Finance Journal50, pp.216-234.

Pandya, B. H. (2016). The Relationship between Operating Cycle Ratios and Market Value Added (MVA): An Empirical Analysis of Listed Companies of India.

Rakićević, A., Milošević, P., Petrović, B., & Radojević, D. G. (2016). DuPont financial ratio analysis using logical aggregation. In Soft Computing Applications (pp. 727-739). Springer, Cham.

Sari, R. K. M. (2018). Pengaruh Net Profit Margin (NPM) dan Return On Investment (ROI) terhadap Return Saham: Studi Pada Perusahaan Jasa Sub Sektor Properti dan Real Estate yang terdaftar di Bursa Efek Indonesia Tahun 2010-2015(Doctoral dissertation, UIN Sunan Gunung Djati Bandung).

Serfling, M. (2016). Firing costs and capital structure decisions. The Journal of Finance71(5), pp. 2239-2286.

Srinivasan, P., & Britto, J. (2017). Analysis of Financial Performance of Selected Commercial Banks in India. Theoretical Economics Letters7(07), pp.2134.

Suardana, I. B. R., Astawa, I. N. D., & Martini, L. K. B. (2018). Influential Factors towards Return On Assets and Profit Change. International Journal of Social Sciences and Humanities (IJSSH)2(1), pp.105-116.

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