Agilysis financial health and competitive position analysis

Agilysis Ratio Analysis
The ratios for Agilysis and OMX Nasdaq are as follows. The competitor is OMX Nasdaq.

Agilysis
OMX Nasdaq

Profit Margin
n/a
10.71%

ROA
n/a
2.92%

ROE
n/a
8.41%

Receivables Turn
7.77
11.14

Avg Collection Period
46.97
32.8

Inventory Turn
31.49
n/a

Fixed Asset Turn
7.27
11.38

Total Asset Turn
0.81
0.27

Current Ratio
1.43
0.97

Quick Ratio
1.39
0.97

Debt to Assets
0.02
0.19

x Interest Earned
n/a
6.9

Fixed Charge Coverage
n/a
4.6

Based on these figures, Agilysis is not a healthy company. It is losing money, as evidenced by the net loss on the income statement – also the reason why net margin, return on assets and return on equity cannot be calculated for the company. Indeed, the company is running an operating loss, which means that its times interest earned and fixed charge coverage also cannot be calculated. Running an operating loss is typically a sign of a company in an unhealthy financial situation. This is especially true because this is a software company, and software normally has fairly high margins for established companies – to lose money in a mature software business is a sign of trouble, at least superficially.
The ethical climate of the company cannot be determined based on the information available. While there are negative reviews regarding ethics on Glassdoor, that is not necessarily a reliable source of information. There are no apparent public scandals regarding ethics, but that does not mean that the ethical climate is healthy – Enron looked ethical while committing massive fraud, up until the point when the fraud was actually revealed to the public. Without being inside the company to see first hand, it is not possible to make an evaluation of the ethics of the company.
Arguably, the company should be dealing with the fact that it is losing money. That seems like a fairly significant issue. The company markets hospitality management software. According to their annual report, their customer base is highly fragmented, which is not necessarily a bad thing, but they also face a competitive market, so it seems that competition is a major issue that the company faces.
The issues that the company faces seem to be fairly common. It operates in a mature industry, has competitors, and is working to develop products that the market finds to be compelling. The company’s lousy financial condition is probably something that several competitors do not need to deal with – that is a situation unique to this company. It seems that they made a shift a few years ago to focus on their current market, and have struggled to develop this business since then. While the company earned slightly more revenue last year than the year previous, its operating loss was much higher as well. The biggest issue is that the cost of goods sold increased at a faster rate than the revenues. This might be a cost control issue on their side, or it might be a reality that margins are being squeezed in the industry and while costs are rising quickly, they are unable to pass those increases on to their customers because of the competitive dynamics of the industry. Agilysis Accounting and Ethics A lot of business ethics problems show up on the accounting side. Even if the problem is not specifically accounting (i.e. cooking the books), the motivation for the ethical breach is often financial, and auditors typically use the financial statements to uncover fraud. This goes back to the fraud triangle, where there is perceived need and perceived opportunity (ACFE, 2019). A hypothetical example is an executive who needs money for personal reasons, commits a fraud, and then the fraud is detected by auditors through examination of financial data.
The typical financial statement, and the basic ratios, however, are not enough to determine if there is fraud taking place, and certainly not enough to determine other forms of unethical behavior. Ultimately, a trained fraud examiner, and detailed financial transaction records are required in order to determine unethical behavior. Even in a situation like this, where the company is losing money, there is no way to determine whether unethical behavior is taking place. Indeed, the financial statements submitted to the SEC are unlikely to admit outright any sort of unethical behavior – that would only come out later, following an investigation. Agilysis' Use of Fixed Costs and Debt to Influence EPS Debt is a means by which a company can increase or decrease the earnings per share. Essentially, the shares are a measure of the equity that the company has – a proxy at least, as the book value of the equity is publicly stated and a more accurate means of determining this. By increasing the debt, the company can increase the asset value of the firm. If the company takes on debt and then uses that money to conduct share buybacks, it will reduce the number of shares outstanding. That technique is perfectly legal and ethical, and it can be used in order to increase the earnings per share. In this case, the company is not making money anyway, so such an effort would not bear fruit.
Fixed costs are built into the operating profit, and also the earnings per share. The only way for fixed costs to influence operating profit is if they are not reported properly – for example, a cost accrued in one quarter that is deferred to another quarter. In most cases, deferring a fixed cost from one quarter to the next would increase the operating profit and EPS, but would also constitute a fraud. While it is certainly possible to commit fraud in this way, that is also a fairly easy fraud to detect. Usually, fraud of this nature is done on the earnings side. Financial Strengths and Weaknesses of Agilysis Financial ratios can shed some light onto the strengths and weaknesses of a business in a few ways. One is via trend analysis, where the trends in ratios can be used to determine whether the financial health, or lack thereof, is improving or worsening. For this company, the financial health is getting worse in general.
The ratio analysis can also highlight relative areas of strength and weakness. For example, our company here has a health current ratio. Solvency is not an issue, even though it is not earning profits. This is important because even after multiple years of losing money, the company has retained solvency, and has very little long-term debt. Rather, its retained earnings are decreasing, and most of its liabilities are current liabilities. In this situation, one can determine that if the majority of its liabilities are current, but neither solvency nor liquidity are issues, then there is time for management to resolve the profitability problems before any sort of crisis occurs. The company, if the losses continue, can simply borrow in order to maintain operations, and there is nothing wrong with that as long as there is some sort of pathway to profitability within the time frame in which the company can expect to maintain its health. The issue here is more that profitability is decreasing, and the company does not seem to have a pathway to becoming profitable. It’s not a worry in the short-run, but one would certainly have to believe in the company’s ability to turn its situation in the market around. Reflective Narrative for Agilysis Completing this project was valuable in terms of being able to reflect on what financial statements can and cannot do. For example, they can be used to evaluate the financial health of the firm. There are still, however, things that have to be known about the company and its business. For example, if we knew that this company has by far the best software on the market, we might be able to have more faith in management’s ability to bring about profitability, and in that sense be more comfortable with the losses, knowing that there are no solvency or liquidity issues. It was also interesting to think about the ethics question. There is really no way for these statements to put us inside the company to see its day-to-day behavior. While financial statements are part of the fraud detection process, this is usually a much more complex, detailed process and the sort of superficial analysis that a few ratios comprises cannot tell us one way or the other if the company is behaving in any ethical fashion. That is a limitation of this type of analysis that we have to be honest about.

References ACFE (2019) The fraud triangle. Association of Certified Fraud Examiners. Retrieved April 10, 2019 from https://www.acfe.com/fraud-triangle.aspx Agilysis Form 10-K for 2018. Retrieved April 10, 2019 from https://www.agilysys.com/-/media/agilysys/Files/Investor%20Relations/Annual%20Reports/AGYS%203-31-2018%2010-K.pdf Dizon, A. (2018) What is fixed charge coverage ratio: How to calculate and FCCR formula. Fit Small Business. Retrieved April 10, 2019 from https://fitsmallbusiness.com/what-is-fixed-charge-coverage-ratio-fccr/ Nasdaq OMX Form 10K for 2018. Retrieved April 10, 2019 from http://ir.nasdaq.com/static-files/d41f5f81-053f-4adb-a9f9-a08c36512aa0