Financial Analysis

Financial Assessment

Throughout this analysis, we will use Microsoft as a proxy for the SaaS industry, while still recognizing the difference in company size, market share, and life-cycle stage. In addition, we will also reference Black Knight, although not a SaaS industry leader, serves as a good alternative for Appraisal Vision. However, we recognize that Black Knight is a company much further in the life cycle than Appraisal Vision. Black Knight in 2020 posted a profit of $230 million and revenue of $1.197 billion. While Appraisal Vision has posted losses. Both Microsoft and Black Knight will help put the financial ratios in perspective.

AppraisalVision posted an 87.7% growth in revenue year over year in 2020. Meanwhile, their total expenses increased by 54.5%. This shows that even though their losses were bigger in 2020 than in 2019 their revenues are growing at a faster rate than their expenses; if this trend continues, they will be able to post profits. Their total expenses as a percent of their revenue decreased by 17.7%.

To better understand these big picture statistics, we needed to also determine their key drivers. One of the things that contributed to both their increase in revenue and expenses is the great increase in their marketing spending. From 2019 to 2020, marketing expenses increased by 3,288.2%. An investment that most likely led to an increase in clients and subsequently helped grow AppraisalVision’s revenue. Additionally, their depreciation and amortization decreased by 98% in 2020 which played a big role in limiting their expenses. Another notable increase is their payroll and administrative expenses- both increased by more than 100%. This increase means they had more employees which would then allow them to have the ability to scale up their operations to match a growing network. This was especially crucial when the markets saw a surprise increase in demand throughout 2020 as a result of the drop in interest rates.

The company has very good liquidity with a cash ratio of 2.9 and a current ratio of 3.29. The cash ratio means that they have 2.9 times as much cash and cash equivalents as they do total current liabilities. This means that in event that all their current liabilities come to collect now, AppraisalVision would be able to cover them 2.9 times over just with their cash and 3.29 times over if we include all their current assets. Current assets mean assets that can be liquidated within a year. This setup of their financials is in line with tech-industry standards. Most, if not all tech companies have current ratios over 1.0. For example, Microsoft has a cash ratio of 1.89 and a current ratio of 2.52 (Yahoo Finance, 2021). Back Knight also has a cash ratio of 0.12 and a current ratio of 0.99 (Yahoo Finance, 2021).

AppraisalVision’s return on equity is still negative because they still have yet to make a profit. However, their enterprise value (EV) grew by 54.6% year over year in 2020. Enterprise value is calculated as the value of equity plus debt minus cash. It is the net value of a firm if one were to buy it. Their EV to revenue in 2020 was 0.4x. This means that for every dollar in EV they make 40 cents of revenue. This is very low but acceptable for a very young company still entering its growth phase. Growth in revenue could help their enterprise value. They posted an impressive gross margin of 89.2%; for comparison, Microsoft has a gross profit margin of 68.3% (Yahoo Finance, 2021). Black Knight also has an operating margin of 25.6% (Yahoo Finance, 2021). As AppraisalVision grows and takes advantage of economies of scale, and spreads their overhead over a larger amount of unit sales they will be able to make a larger profit.

AppraisalVision’s debt-to-equity ratio is 0.17 and their debt-to-capital is 0.15. To put this in perspective Microsoft has a debt-to-equity ratio of 0.6 and a debt-to-capital ratio of 0.38 (Yahoo Finance, 2021). Black Knight’s debt-to-equity ratio is 0.808 and their debt-to-capital is 0.44 (Yahoo Finance, 2021). These two ratios show the capital structure of the company and how much of it is financed through debt. The debt portion of AppraisalVision’s capital is very small which lowers their credit risk. This makes the company safer to invest in as they have a lower probability of defaulting on their liabilities, that is especially with their high liquidity. However, this could also mean that there is an opportunity for them to grow through debt, but they are not taking advantage of it; this could be a bad signal to investors. This could result from a lack of access to debt or a belief that they will be unable to repay it.