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Summarize Perform Comparison Between Imax Corporation And Reald Finance Essay

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Date added: 17-06-26


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The purpose of this report is to summarize and perform a comparison between the financial information of IMAX Corporation and its expanding competitor RealD Incorporated by examining the most recent financial statements. Please note that more emphasis was given to the 9 month period income statements as the 3 month periods may not portray a true picture of the company operations. Financial performance Return on Equity (ROE) IMAX's ROE for the 9 month period ended September 30, 2010 is approximately 64.1% which looks solid compared to RealD's ROE of approximately -24.7%. RealD suffered a loss for the 9 month period ended December 24, 2010 which is why the ROE is negative. The total revenue for the 9 month period between 2009 and 2010 increased by 98.6%, during this time the cost of revenue also increased by 76.8%. The increase in revenue can be attributed to new licensing arrangements with its customers. The total operating expenses during these two 9 month periods increased by 80.8%, out of which the general and administrative expense increased by 155.3%. On July 21, 2010, RealD completed its initial public offering (IPO) which generated $81.9 million in net proceeds. Out of this amount, it repaid $25.1 million under its previous revolving credit facility. If the cash generated from the IPO is excluded from the calculation of ROE, the value would have been an even larger negative percentage. IMAX is profitable and effective in using the capital provided by the shareholders to generate net income. One possibility that the ROE for RealD is not as good as IMAX is because the company recently went public. If the company recently issued common shares that would make the equity part of the ratio larger, and since they just received financing, they have not had a chance to put the money to work yet to start earning revenue. Return on Assets (ROA) The ROA for the period 2010 for IMAX is 18.1% while that of RealD is -4.9%. The negative value for RealD is again because of the $11.1 million loss for the period. RealD is currently in a growth phase compared to IMAX as it just went public. Since the company purchased $63.9 million worth of new assets in 2010, the potential revenues that will be earned by these assets might be in the works. The revenue for IMAX increased by 53.4% between 2009 and 2010. The increase in revenue from rental and services (joint revenue sharing arrangements) was 135.9% and 68.8% respectively. Since the joint revenue sharing arrangements are non-cancellable for 7 to 10 years with provisions for renewals, IMAX will continue to enjoy similar revenues for the next few years. It should also be noted that the cost of revenues only increased by 23.5% during this time. Based on the above, it is evident that IMAX is efficiently able to use its assets to generate profits Earnings Per Share (EPS) IMAX's EPS showed a significant increase between the period 2009 and 2010. The EPS for 2009 was $0.02 while that for 2010 was $0.73 cents. RealD's EPS also rose from -$1.24 to -$0.43. The reason for RealD's increase can be attributed to the fact that during 2010, the number of outstanding shares increased by 58.2% due to the IPO. It should be noted that a negative EPS might be detrimental to a company like IMAX that is a more mature company, however for a new company like RealD it might be more acceptable as it is just went public. Profit Margin Percentage The profit margin percentage for IMAX for the two 9 month periods ending 2009 and 2010 are 0.8% and 26.0%, while that of RealD are -23.1% and -5.9%. IMAX's significant increase in net income caused the profit margin to increase during 2010. Similarly, RealD increase in net income also increased the profit margin. IMAX's profit margin percentage was 23.9% and 31.9% higher than RealD in 9 month period ending 2009 and 2010 respectively. Gross Margin Percentage The gross margin percentage for IMAX for the two 9 month periods ending 2009 and 2010 are 45.9% and 56.4%, while that of RealD are 10.3% and 20.2%. In both cases, the increase in gross margin percentage owes to the smaller increase in the cost of revenues compared to the large increase in revenues earned period over period. This may suggest improved management of costs. IMAX's gross margin percentage was 35.6% and 36.3% higher than RealD for the 9 month period of 2009 and 2010 respectively. Financial position Current & Quick Ratios IMAX's current ratio increased from 0.64 to 0.89 from 2009 to 2010 while that of RealD also increased from 0.7 to 1.28 during the same period. IMAX's increase in the current ratio can be attributed mainly to the 126.6% increase in cash and cash equivalents, 76.2% increase in inventories and a 56.3% reduction in bank debt year over year. RealD's increase in the current ratio is also due to the increase in total current assets such as a 170.1% increase in cash and cash equivalents and a 558.7% increase in inventory year after year. The increase in inventory for RealD, which is mainly 3D glasses, is due to the cancellation of the Harry Potter movie. Overall, the current ratio of RealD was superior compared to IMAX for the period ended 2010. The main reason for this is the extra cash flow from the IPO mentioned previously. If this extra cash from the IPO is ignored and the current ratio is calculated, it can be seen that the current ratio for 2010 is approximately the same as that of 2009. This means that RealD's ability to meet its current obligations would have been the same for both periods without the IPO. Since IMAX's cash is mostly generated from operating activities, it is most likely that it will perform better than RealD and improve its current ratio in the future periods. It can be inferred that RealD has adequate resources to meet its current obligations for the period ending 2010 since for every $1.00 of current liabilities it has $1.28 worth of current assets. For the same period, IMAX has $0.89 current assets for every $1.00 of current liability. If the inventories are ignored and the quick ratio is computed, it can be seen that IMAX's quick ratio increased from 0.59 to 0.79 from 2009 to 2010 while that of RealD also increased from 0.57 to 0.81 during the same period. The quick ratios for 2010 are comparable for IMAX and RealD. Average Collection Period of Accounts Receivables On average, IMAX was able to collect receivables in 154 days while it took RealD 81 days. On surface it appears that it took 73 more days for IMAX to collect its receivables compared to RealD. However, IMAX and RealD have different types of inventories. While RealD's inventory mainly consists of 3D glasses, IMAX's inventory is large theatre equipment that is either sold or leased to customers, therefore a comparison between the average collection period of account receivables & account payable and the cash lag may not be appropriate. On a side note, IMAX's cash lag (period of time it must self-finance its inventory and accounts receivable) is also significantly longer, because of the complex nature of its inventory. Average Collection Period of Accounts Payable Considering the nature of products that IMAX purchases from its suppliers, it would be expected that the accounts payable period to be significantly long than RealD. However, the average collection period of accounts payable for IMAX and RealD are comparable and are 67 and 70 days respectively. Average Number Of Days Inventory On Hand IMAX and Real had similar values of 49 and 46 days respectively. This suggests that the both companies are comparable with respect to being able to sell their inventories. Debt to Equity Ratio IMAX has significantly improved it debt to equity ratio from 4.50 to 1.84 between 2009 and 2010. This is mostly due to the $28.1 Million debt settlement. In addition, IMAX was able to decrease some other liabilities such as the $14.7 million lump sum payment to Mr. Wechsler, the CEO of the company in August, 2010. RealD's debt to equity ratio increased from an equity deficit (-4.87) in 2009 to 1.07 in 2010. This increase is again attributed to the IPO. RealD may have more flexibility to take over more debt for financing future growth opportunities. Long Term Debt to Equity Ratio IMAX has reduced its long term debt to equity from 1.29 to 0.72 between 2009 and 2010. The equity for IMAX has increased by 123.2% between 2009 and 2010. RealD's also reduced its long term debt to equity from -0.05 (equity deficit) to 0.004 between 2009 and 2010, by reducing its long term debt and also eliminating its equity deficit because of the proceeds from the IPO. Interest Coverage Ratio (Cash & Accrual Basis) The interest coverage ratios for IMAX significantly increased from 1.16 to 32.14 (accrual basis) and 2.15 to 35.40 (cash basis) between 2009 and 2010. This increase can be attributed to the 86.5% decrease in the interest expense period over period. IMAX now has a better ability to meet its fixed financing charges- interest payments. Furthermore, IMAX can even obtain more debt financing as it will not have trouble paying interest charges. On the other hand, since RealD had net losses for 2009 and 2010, its interest coverage ratio (accrual basis) has improved but is still negative. The accrual basis interest coverage ratios for RealD are far better, but overall IMAX outperforms RealD in the ability to meet its interest payments. Cash Flows In the case of RealD the net cash provided by operating activities increased by 412.5% during the 9 month periods 2009 and 2010. RealD went generating a negative cash flow in 2009 to generating a positive cash flow from by operations in 2010. As discussed previously, RealD's increase of 274.8% in cash flows from financing activities are attributed to the $81.9 Million IPO. RealD might be able use the cash flow from the IPO to increase its cash from operations in the future. There was an increase of 251.2% in cash out flow in investing activities for the purchase of cinema systems and related components for RealD, which indicates that it is expanding. During the same periods, IMAX experienced a 304.4% increase in the net cash from operations. Most of IMAX's net cash increase of $40.4 million is attributed to the large increase in the net income (4647.4%) between the 9 month periods ending 2009 and 2010 due to the Joint Revenue Sharing and the IMAX DMR arrangements. Since, IMAX paid back $28.1 Million as a one-time debt settlement during the period ended 2010; this reduced its cash by 52.5% but at the same time helped it reduce its debt by 56.3%. It should be noted that this type of cash outflow is not expected to happen in the future. Looking at the balance sheet for both companies, it can be observed that the cash and cash equivalents have increased year over year for the period ended. For IMAX the increase is 126.6% while that for RealD is 170.1%. IMAX can significantly increase its cash flows if it tries to clear its large and growing sales back log. Weaknesses RealD offers stock options to its employees, exhibitors and consultants. If the stock options are exercised it would mean that there are more common shares outstanding in the market. If RealD wants to issue common shares as a means of financing, the increased common shares that resulted from the stock options combined with the new common shares could significantly dilute the EPS and drive down the share price. IMAX can potentially purchase a significant amount of these outstanding common shares and take over RealD. In Canada, if a profitable company purchases a company that experiences a net loss, it can use the losses to offset the profits and reduce taxable income and therefore taxes paid. Assuming that the tax loss rules in the US are similar to those in Canada, IMAX can exploit this opportunity and reduce the taxes it pays until RealD ceases to incur losses. Additionally, since RealD has significant investments in research and development activities, IMAX can capitalize on this to improve its own products. Another area of weakness is the large backlog of RealD's inventory that has yet to be sold. If IMAX can out-compete RealD with new sales, RealD will have to hold its large inventory for a longer time, thereby causing it to depreciate.
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