Financial Statement Analysis Oz Assignments

Financial Statement Analysis Oz Assignments

Financial Statement Analysis Oz Assignments

Introduction

According to Laitinen (2002) financial analysis is the process of assessing the financial position of a company by analyzing its stability, viability and profitability. One of the primary objectives of financial analysis is to recognize changes in financial trends, to help measure the progress made by an enterprise and identify a relationship to draw a logical conclusion on the performance of the company. Another major aspect of a financial analysis is comparing the performance of the company with its competitors. According to Maggina (2008) financial ratios drawn from annual financial reports have been used extensively in prior research for various purposes such as corporate predictions, acquisitions, liquidations, rating decisions. According to Gibson (2013) the principal financial statement of a corporation is income statement (profit and loss) and balance sheet can be prepared directly from the adjusted accounts. Helfert (2003) explains the balance sheet is static like snapshot, reflects conditions on specific date of its preparation, records the categories and amounts of assets employed by the business analysis and offsetting the liabilities incurred to lenders and owners, it is also called statement of financial condition and it must always balance.

According to Bodie et al.,(2009) financial statements serve three important economic functions: (i) they provide information to the owners and creditors of the firm about the company’s current status and past financial performance, although rarely provide enough information; (ii) financial statements provide a convenient way for owners and creditors to set performance targets and to impose restrictions on the managers of the firm; and, (iii) they provide convenient templates for financial planning, managers can check the overall consistency of separate plans made on a project-by-project basis and estimate the firms total financing requirements.

Company overview and its operations

Operational review

Bellamy’s ltd is a leading infant nutrition brand in the Australian market and Chinese market. Following a tough 2017 year, the company has experienced a major turn around and has delivered tangible results in terms of the growth of revenue, profitability, and cashflow. Bellamy’s remains confident in its application of the technical merit and further prospects for registration specifically in the Chinese market. The Chinese label product sold all round channels including off line and it contributed to 6% of sales revenue of the company. This current financial year 2018 has ensured that there is restructuring of overheads, the distribution channels and the value chain of the supply end. The company raised funds to fund the restructure and acquire the Chinese license in one of the manufacturing facilities during the opening period of the current year.

The company adopted a business model that was sustainable, and it improved the profit structure which is now established under various changes that the company implemented over the financial year. For instance the growth of the portfolio was initiated that included an establishment of a food business unit that was waiting for full registration, the company further venture into new markets like the Vietnam market and the new product development has been so far good., looking at the value chain supply the integral part is in the acquisition of the Camperdown facility ,the company procurement has been diversified to ensure there is a competitive capacity that can be able to support growth, the processing channels too have experienced improved manufacturing and production decisions that have ensured a greater flexibility and reduced inventory position. Furthermore, the sales have improved and leading to stable pricing, the overall marketing strategy of the firm has been more effective and increased materially.

All these initiatives have driven profitability, improved growth and strength in the company portfolio. The revenue growth has increased by 37% from the previous year the margin profit has also increased by 39% this shows that over rally the firm’s operations normalized financial year 2017 to year 2018. The important factor that helped the turnaround is through the rigorous rebranding, enhanced and extended product portfolio and the SAMR product in China on approval.

Financial Review

The company achieved a Profit after tax of $38.3 M in the year 2018 u from a loss of ($0.8M) in the financial year 2017. The revenue achieved was $328.7M in 2018 up from $240.2M in 2017 this was predominantly volume driven and included contribution from the outlets in China that also contributed to it.

Revenue and profitability

In general, the Bellamy’s group revenue grew by 37% up from the year 2017. This can be attributed to the contribution from the subsidiary open in Camperdown China, through the support of the brand it has seen the price of products stabilize, excluding the expansion in Camperdown the revenue growth standards at 33.2% compared to the 24% in the previous year.

Corporate social and environmental reporting analysis

According to Schmidheiny (1992) in recent years there has been increased community attention towards the identification of approaches to deal more effectively with environmental concerns. This has resulted to calls for industry to become more responsive and to manage its impact on the environment better.

Analysis of the firm

Table no.1

 

2018

2017

2016

Revenue

328,704.00

240,182.00

244,583.00

Cost of sales

199,830.00

148,661.00

132,855.00

gross profit

128,874.00

91,521.00

111,728.00

 

 

 

 

net profit or loss

42,816.00

(807.00)

38,328.00

 

 

 

 

profit margin %

13%

-0.3%

16%

gross profit margin %

39%

38%

46%

Return on Total Asset

0.196

(0.005)

0.355

return on equity

0.206

(0.009)

0.461

inventory turnover ratio

2.17

1.84

3.13

accounts receivable ratio

7.611

6.771

8.934

equity ratio

74%

58%

58%

 

 

 

 

capital employed

207,403.00

91,288.00

83,385.00

PBT

61196

-677

54894

ROCE

0.29505841

-0.00741609

0.65831984

 

   

current ratio

3.13521503

2.3007054

2.31539025

acid test ratio

1.90

0.87

1.19

Revenues are from the sale of organic baby food and products. The revenues increased for a combined 37% from January 2016 to January 2018 primarily because of the healthy economy, the health of any economy is critical for the survival if the company. This is explained through the decline in revenues in the 2017 fiscal year through to 2018 (a -2% drop compared to the previous year). The increase in 2018 is also due to the changes in the business strategy of Bellamy Australia Ltd and the growth of its enterprise outside Australia to other outside countries which has changed the revenue stream for the company. (Bellamy Ltd ,2018)

Cost of goods sold, and services have been relatively stable though it has increased from 54% in 2016 to 62% in 2017 and 61% in 2018. Other expenses such as marketing and promotion cost, employee cost and depreciation and amortization have relatively been constant in the last three years. However, the direct cost has been reducing significantly over the last three years. This shows that the firm has been sourcing for less expensive materials, equipment’s and labor and through the revenue embedded disciplines has played a key role in reduction of the direct costs. The company has done a good job in keeping their cost as stable as possible as a percentage of the revenues.

The net income of the company has been excellent for the fiscal year 2018 with a 13% increase up from the previous year. The big increase in net income resulted in a 13% increase in the profit margin and a 20% growth in ROTA (return on total assets). The higher revenues and good cost contributed to these growths. The other reason for the growth in net incomes is the changes in the business operations of the company. Its product market is expanding and have a lower cost on manufacturing the products. The fiscal year 2017 had an advance decrease in net income of -0.34% mainly due to the drop-in revenue and increase in administrative costs of $41.4 M, where $6.8 M inventory provision and write-offs, $27.5M in payments made to Fonterra as part of boarder supply chain reset and $6.8M other cost relating to acquisition of Camperdown Powder. Bellamy Ltd is expanding on major aspects of their business, which will help the firm in the long run.

Current assets account of the firm increased to $230M from the previous year, from $153M in the year 2017 to $230M, however the ratios shows a significant decrease from 96% to 82% this is a result of major acquisition of property, plant and equipment and also increased investment in intangible assets. Also, the company recognizes all highly liquid investments this is inclusive receivables due from the debtors, the rise is explained by the increase in revenues so cash and provided for the operations. There was also an increase in cash for investing this is explained by the rise of the Acquisition of PPE and Intangible assets all increased up as compared to the previous financial year.

In general, the company had a good fiscal year. It improved its ability to generate profit. All the main profit ratios (profit margin, return on assets and return on equity) have increased from the previous years. It means that the company is using its resources more efficiently. The profit margin improved to 13% in fiscal year 2018 up from -0.34% in 2017, also the return on assets improved significantly to 0.2 (20%) up from (-0.01) in the previous period. Furthermore, the returns on equity also improved from a low of 0.0088 to 0.2064 in the fiscal year 2018.

The property, plant and equipment (PPE) account is up high in the fiscal year 2018 because of acquiring Camperdown, the firm used cash to acquire the property Bellamy’s is also planning to acquire the remaining 10% of Camperdown conditional on the success of the SAMR application. The structure of the transaction provides that the vendor with continued financial exposure to the success of Bellamy’s. the strategic rationale behind the acquisition was to provide a pathway to sell to stores in China Post 1 January 2018. Another strong aspect about the firm on its operations is its liquidity. As the current assets increased the current liabilities decreased, both the quick ratio and the current ratio increased significantly 0.87 and 2.3 in fiscal year 2017 to 1.90 and 3.13 respectively. Due to the increase in total assets, current liabilities decreased from 42% to 26% from the previous year. This helps Bellamy’s to be more liquid which an advantage to the company.

The company generally borrows on a long-term basis this exposes Bellamy’s to the impact of interest rate changes and forex fluctuations in the market. The fair value of its debt obligation in 2017 totaled $25M compared to $0.0062M in 2018. The net decrease in debt in the fiscal year 2018 was primarily due to the injection of $120.9 M in equity capital budgeting up from $53M in the previous fiscal year, this shows that the firm was reliant more on internal financing as compared to external financing. This give the firm a lot of room to breathe and focus more on its expansions across other global markets.

The stockholder’s equity went up to $207M in the fiscal year 2018 compared to $91M in the previous fiscal year 2017. This increase is due to an increase in the retained profits, as the net income increased more than the stockholder’s equity, the ROE (return on equity) went from -1% in the fiscal year 2017 to 21% in the fiscal year 2018. The equity ratio also went up from 58% in fiscal year 2017 to 74% in the fiscal year 2018 this shows that Bellamy’s have a better long term solvency position and thus the company has to pay less in terms of interest thus having a better more free cash on hand for future expansions, growth and dividends.

Profitability

According to Gibson (2013), profitability ratios measures the income or operation success of a company for a given period of time, income or the lack of it, affects the companies ability to obtain debt and equity financing, it also affects the liquidity position and the company’s ability to grow. Consequently, both creditors and investors are interested in evaluating earning power- profitability.

Profit margin

According to Weygandt et al., (2009) it is a measure of percentage of each dollar of sales that results net income. It indicates the profitability generated from revenue and hence is an important operating performance measure. As it stands, there was an increase in the profit margin from the fiscal year 2017 at -0.3% to 13% in the fiscal year 2018 this implies that the Bellamy’s was more profitable in the current financial period which is a turnaround from the previous losses made in the previous year.

Return on Total Assets

According to Weygandt et al., (2009) it measures how well a firm resource are being used to generate income. it is the ratio of net profit after tax dividend by total assets and is the most popular ratio for measuring the relative performance of the firm. The return on total assets increased from -1% to 20% in the fiscal year 2018 from 2017 this implies that Bellamy’s that the firm can use its assets effectively.

Return on Equity

According to Gibson (2013) is the measurement of profits per unit of capital and specifically used for computing the return on shareholder’s equity. Looking at Bellamy’s the return on equity also increased from -1% to 21% in the fiscal year 2018, this implies that the company can generate cash internally and therefore its less dependent on debt financing. It’s a good indicator for an investor to buy stock of the company.

Efficiency

According to Lasher (1997) asset management ratios address the fundamental efficiency with which a company is run. The accounts receivable ratio of Bellamy’s Ltd increased from 6.771 times to 7.611 times in the fiscal year 2018, the higher the turnover the better for the company as it shows the company is not having any difficulties in collection and granting the credits. The ratio further measures how quickly a company to collects bills from its creditors through its policies.

According to Dansby et al (2008) inventory turnover measures the number of times in which the average inventory is sold in a given period. The inventory turnover ratio also increased from 1.84 in the fiscal year 2017 to 2.17 in the fiscal year 2018, this indicates that the inventory of the firm does not remain on the shelves but rather it turns over rapidly and faster

Short-term solvency

According Dansby et al. (2000) liquidity is the ability of a business to meet its short-term obligations as they fall due. Needles et al. (1996) defines liquidity as a company’s ability to pay bills when they are due and to meet unexpected needs of cash.

Another strong aspect about the firm on its operations is its liquidity. As the current assets increased the current liabilities decreased, both the quick ratio and the current ratio increased significantly 0.87 and 2.3 in fiscal year 2017 to 1.90 and 3.13 respectively. Due to the increase in total assets, current liabilities decreased from 42% to 26% from the previous year. This helps Bellamy’s to be more liquid which an advantage to the company.

Long-term solvency

According to Lasher (1997) debt ratio measure the relationship between total debt and equity in supporting assets of a business. Looking at Bellamy’s debt ratio in has reduced significantly over the financial period given from 0.4 in 2017 to 0.2 in 2018 this is because of the firms shift to equity as a source of financing for the business. Besides, the debt to equity ratio too reduced from 0.2 to 0.002 this is as effect of Bellamy’s inducing more funds from stockholders.

Market-based ratio

There has been a great increase on the earnings per share of the firm’s stock from a low of -0.80 in the fiscal year 2017 to 39.20 in the year 2018 this an indicator of the firm’s ability to payout dividends to the stockholders, it also shows that the company is creating value for its investors.

Otheranalyses

Profitability and Measurement of Performance

The performancemeasure work best when applied to a total business entity, where, investments, operations and financially controlled and managed by a team. it is possible to derive both the return on equity and return on the capital employed. According to Helfert (2003) financial analysis is largely based on financial statements and accounting data because the task of analyzing, judging and guiding a firm’s activities are far broader and more complex than the mere manipulation of reported financial data. Ultimately the performance and value of any business must be judged in economic terms which is expressed in both cashflows and future flows expected.

Conclusions

The study presents the model for the financial statement analysis of Bellamy’s Australia Ltd period from 2016 to 2018 on profitability that traced the measurement of performance. From the analysis its revealed that the profitability of the firm improved significantly. In conclusion its ROCE (return on capital employed) has increased over the past three years and its above the benchmarks this makes the company a potential attractive stock that can achieve a solid return on investment. Further more as we look in the next fiscal year 2019 , Bellamy’s expects more sales growth and expects a more difficult trade environment this is inclusive of the new market like the China market however the company expects to realize a 10% growth on comparative revenue this will be acquired through full acquisition of Camperdown and increase its revenue through the long term premium brand and volume growth and margin expansions going forward.

Recommendations

Bellamy’s 30% ROCE (return on capital employed) means that for every A$100 invested, the company creates A$30 for the investor, the strong ROCE is tied to the movement of two factors that change over time which are earnings and capital requirements. Now Bellamy’s Australia Ltd is operating at a favorable position. looking back in the three years Bellamy’s stocks hit a rock bottom in the year 2017 this was a result of losses that were made however the firm managed to turn around the situation, and it is expected that the company will continue in the solid returns. The ROCE has increased from -1% to 30% and with this the current earnings improved from -A$0.8M to A$42M, and the capital employed also grew significantly that further suggest that due to a growth in earnings which is relative to capital requirements.

Limitations

The study suffers from several limiting factors (1) its exclusively depends on the published financial data, so its is subject to all limitations that are inherent in the condensed published financial statements. (ii) competitive nature of the organization avoids revaluation of a confidential details. (iii) inter firm comparison is not possible because the study focuses on one organization.

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