ACC-assignment-1 - Assignemnt, Assignemnt PDF

Preview

Summary

Assignemnt, Assignemnt...

Description

Financial Information for Decision Making (ACC 10007) Semester 1, Group Assignment Baby Bunting

Group Members: Nicholas Baltas, Nicholas Poole, Nicholas Gauci, Julian Kozulin and Sam Algeri

Executive Summary:

The company, Baby Bunting, is one that provides baby products to ensure that babies get the best upbringing. It produces a wide variety of products of baby products at quality prices that allows consumer satisfaction. Starting from a single store, Baby Bunting has evolved into a national entity that provides a one stop shop for parents of newborn to 3 year olds and allowing children to have a healthy start to life. This entity values quality products at reasonable prices for customers thus ensuring the organisation keeps functioning and producing such products as prams, car seats and carriers. As provided by the annual reports of the financial years of 2014 to 2016, Baby Bunting is seen to be on a constant rise in sales and gross profit margins which give a general idea that the entity is seeing customer satisfaction and therefore increasing sales. As sales increase for Baby Bunting, the quality of the product is able to remain the same, if not increase, therefore providing best quality products for newborns to 3 year olds, as is their target to whom the product will be bought for, clearly purchased by parents of such children (Baby Bunting ‘About Us’). As provided in the report, the entity is seen to be increasing in their main target area, sales which as stated has increased 31.4% since 2015. As will be mentioned throughout the report with the use of the calculations and ratios, there has been ebbs and flows, increases and decreases throughout the last 3 financial years. This will be evident through the analysis and investigation of the ratios and allowing the financials, provided by the annual report of 2014, 2015 and 2016, to determine the successfulness of the entity Baby Bunting.

Introduction and scope of the report: The aim of the report is to analyse and interpret the last 3 financial years of the organisations Baby Bunting. The aim is therefore to use accounting skills and knowledge to produce a report of the profitability, operating efficiency, liquidity, gearing and cash flows of the company. To ensure that this report is done effectively and to its maximum capacity, the relevant and specific ratios in order to support the analysis of Baby Bunting’s financial of the past 3 financial years, ending June 30th, 2014 to 2016. Within the report, the reader will gain knowledge on the financials of Baby Bunting and the way in which they operate to accumulate profits and potential losses throughout the organisation. Therefore, the scope of the report is to understand the financials of the company Baby Bunting as a large scale organisation. Company and Industry Background: Baby Bunting was established in Melbourne as a family-owned business more than 35 years ago, Baby Bunting is Australia’s largest nursery retailer and one-stop-baby shop. Beginning from a

single-store in Balwyn, the organisation now employs more than 700 people across its 41 National Superstores and 11,000 square metre warehouse in Melbourne. The organisation prides itself on providing its customers with excellence is service, expert advice, great quality and value. As a specialist retailer, they specifically cater to parents with children from newborn to about 3 years of age. They provide the greatest range in Prams, Car seats, Carriers, Furniture, Nursery, Safety, Babywear, Manchester, Toys, Changing, Feeding and much more. These great range of items are provided to the parents of the children. As stated by the organisation, it offers an ‘unrivalled choice across all the Best Brands including Bugaboo, Silvercross, Steelcraft, Britax Safe n Sound, Maxi Cosi, Infasecure, Ergobaby, Boori, Oricom, Medela, Bonds Huggies, Bright Starts and more! In regards to financial highlights for Baby Bunting, the financial year 2016 sales of $236.8 million produced an increase of 31.4% on the sales of financial year 2015 which came in at $180.2. Based on the sales of the past 3 financial years, Baby Bunting has been on a constant increase in sales (millions) from financial year of 2014 to 2016, as in 2014, sales were recorded at $150.2 and as stated earlier, the financial year of 2016 recorded $236.8 million. Furthermore, gross margin is another financial highlight of Baby Bunting as it supports the notion that the profits of the organisation are on an increase as from 2014, whereby the gross margin was at $49.9 million, to 2016, where gross margin was recorded at $81.2 million. Therefore there was an obvious increase in the organisations gross margin, increasing by $31.3 million over 3 financial years. Based on the increasing sales and gross margin, it is evident that there is an increase in the need for baby products and similar goods. Therefore this suggests that the industry that Baby Bunting is incorporated in is one that is thriving and will be on a progressive increase.

Business Structure: Starting out as a single shop in Balwyn, Baby Bunting has evolved into a national corporation which is still based in Melbourne. However, in order for that transition to be completed, there are multiple business structure and financial factors that come into play to ensure the company will remain successful in a larger and more competitive market. The entity when considering

changing its business structure would have to consider aspects such as ensuring there is enough employees to carry out tasks, thus allowing the entity to sell the goods and in turn make sales, such as $236.8 million, like at the end of the financial year in 2016. (Baby Bunting Annual Report, 2016) Thus as Baby Bunting now employs 700 people, sales and other financial aspects of the business, the reporting requirements are obviously thusly required to be of a larger scale due to the increased cash flow, in and out of the entity. Thus, after transitioning from a single store to a national entity, Baby Bunting required more employees, whilst taking into account the price of their goods to ensure a profit is made by the entity, therefore allowing the organisation to flourish.

Manual Calculation of Specific Ratios: Profitability 2014 ROE: 6.61% ROA: 7.82% NPM: 4.65% GPM: 49,937 / 150,158 x 100 = 33.26% 2015 ROE: 8.91% ROA: 9,028,000 / 12,902,000 x 100% = 69.97 % NPM: 5.46 % GPM: 61,861,000 / 180,175,000 x 100% = 34.33 % 2016 ROE: 10.12 ROA: 12,187,000 / (106,328,000 + 122,760,000 / 2 = 114,544,000) x 100 = 10.64% NPM: 5.41% GPM: 81,162,000 /236,840,000 x 100 = 34.27% Efficiency of operations 2014 ITP: (27,895,000 + 23,305,000 / 2 = 25,600,000) / 100,221,000 x 365 = 93.23 SPAR: (3,605,000 + 4,516,000 / 2 = 4,060,500) / 44,922,000 x 365 = 32.99 SPAP: (16,024,000 + 12,139,000 / 2 = 14,081,500) / 142,003,000 x 365 = 36.19 ATP: 85,087,000 + 93,426,000 / 2 = 89,256,500 / 150,158,000 x 365 = 216.96 2015

ITP: 35,492,000 / 118,314,000 x 365 = 109.5 SPAR: (5,834,000 + 4,516,000 / 2 = 5,175,000) /47,784,000 x 365 = 39.53 SPAP: 17,795,000 / 188,583,000 x 365 = 34.44 ATP: 99,877,000 / 180,175,000 x 365 = 202.33 2016 ITP: (35,492,000 + 41,042,000 / 2 = 38,267,000) / 155,678,000 x 365 = 89.72 SPAR: (8,135,000 + 5,834,000 / 2 = 6,984,000) / 258,418,000 x 365 = 9.86 SPAP: (23,824,000 + 19,566,000 / 2 = 21,695,000) / 242,851,000 x 365 = 32.61 ATP: (106,328,000 + 122,760,000 / 2 = 114,544,000) / 236,840,000 x 365 = 176.53 Liquidity 2014 CR: 36,049,000 / 27,561,000 = 1.3 QAR: 36,049,000 – (27,895,000 + 0) / 27,561,000 = 0.3 OCFR: 5,380,000 / (14,321,000 + 27,561,000 / 2 = 20,941,000) = 0.28 2015 CR: 45,175,000 / 23,717,000 = 1.9 QAR: 45,175,000 - (35,492,000 + 0) / 23,717,000 = 0.41 OCFR: 4,781,000 / 25,639,000 = 0.19 2016 CR: 57,311,000 / 27,074,000 = 2.12 QAR: 57,311,000 – (47, 042,000 + 0) / 27,074,000 = 0.38 OCFR: 7,087,000 / (27,074,000 + 23,717,000 = 25,395,500) = 0.28 Gearing 2014 GR: 2,336,000 / (2,336,000 + 53,538,000 + 76,000 = 55,950,000) x 100 = 4.18% DAR: 29,897,000 / 93,426,000 x 100 = 32% ICR: 6,446,000 / 1,106,000 = 5.83 2015 GR: 10,957/ (23,717 + 989 + 10,957 = 35,663) x 100% = 30.7% DAR: 34,314 / 106,328 x 100 = 32.27% ICR: 5,661,000 / 807,000 = 7.01 2016 GR: 65,449,000 / (84,420,000 + 132,000 + 65,449,000 = 150,001,000) x 100 = 43.63% DAR: (30,036,000 / 122,760,000 = 0.24) x 100 = 24.47% ICR: 12,187,000 / 420,000 = 29.02

Analysis & interpretation of financial statements, and market standing: Profitability: A measure of success in wealth creation. Return on Shareholders Equity (ROE): Compares the amount of profit for the period available to the owners with owners’ stake in the business 2014: 6.61% 2015: 8.91% 2016: 10.12%\ An investment of $1 returned $6.61 cents 8.91 cents 10.12 cents The return on shareholders equity increases every year at about 2% which means the business has made a 2% extra profit in the period which means they have increased their sales. Also, it means they can use the extra income to pay its short term debts and suppliers. Return on Assets(ROA): Compares the net profit generated by the business with the assets owned by the business. 2014: 7.82% 2015: 8.85% 2016: 10.64% As the years increase the ROA increases around 2% from 2015 to 2016 which means the business earned a higher net profit in 2016 to 2015 whereas in 2015 compared to 2014 there was only a 1% increases so net profit did not increases as much which also means sales were down. Also means that assets were not sold and the business had a some overstock. To ensure assets are sold the business my need to advertise and promote their business more to attract customers.

Net Profit Margin(NPM): Relates the net profit before interest and tax for the period to the sales during that period. 2014: 4.65% 2015: 5.46% 2016: 5.41%

Each $1 of sales generated 4.65 cents profit 5.46% 5.41% Net Profit has decreased due to a sales decrease in 2016 with 0.05% decrease which means the business may have not been buying appropriate stock that was not in season and therefore not purchased by customers. Also, the prices of stock may have been higher which customers wouldn't want to pay. The increase from 2014 (4.65%)to 2015 (5.46%) is a result of Sales increasing which may have been as a result of good promotion and the prices of stock are at a low enough price for majority of customers. Gross Profit Margin (GPM): Relates the gross profit for the period to the sales during that period. 2014: 33.26% 2015: 34.33% 2016: 34.27% Gross Profit is the revenue of the organisation and it has remained similar throughout the last 3 reporting periods. The Slight increase from 2014 to 2015 results in less expenses being incurred by the business and revenue has increased due to the number of sales. The increase in revenue is due to increase in sales and also a decrease in prices. The revenue and sales increased in 2016 however the GPM had decreased from 2015 which means the cost of sales which is the cost of purchasing the stock has increased. Efficiency: A measure of how effectively the business is utilising its resources (assets) Inventory turnover period(ITP): 2014: 93.23 days 2015:109.5 days 2016: 89.72 days It took the business 93 days to sell all its stock which is better than 2015 as it took 16 days less which means more sales occurred and the net profit would most likely be higher in 2014. In 2016 the business turnover period was the best for the last 3 reporting periods as it too 90 days which means they had number of sales increase which may have come at a cause of advertising and promotion of the organisation. Settlement Period for Accounts Receivable (Debtors): Calculates how long, credit customers take on average to pay amounts owed. 2014:32.99 days 2015:39.53 days

2016: 9.86 days in 2016 it takes debtors 9.86 days to pay their amount owed which will help the business pay its short terms debts as they are being payed every 10 days compared to 2014 and 2015 which is 33 and 40 days. Taking longer to get paid results in the business may wanting to change its debtors due to the amount of time it takes to be paid. The amount invested in inventory and receivables is earning a zero return. A business would generally want to minimise the amount of money tied up in inventory and receivables.

Settlement Period for Accounts Payable: Calculates, on average, how long the business takes to pay its suppliers. 2014: 36.19 days 2015: 34.44 days 2016: 32.61 days The longer it takes to pay you're creditors there is a chance they wont let you pay for stock on credit and you will build a bad reputation as a business. It has slowly decreased from 2014 to 2016 by around 2 days each year. This helps their reputation as a business as they are paying their creditors on time which results in them maintaining a good relationship with each other. Asset Turnover period: Examines how effectively the assets of the business are being employed to generate sales revenue. 2014:216.96 days 2015:202.33 days 2016: 176.53 days The less amount of days the better for the asset turnover. The change in total assets has decreased as the sales have increased. The business in 2016 was better at germinating more sales with less assets which is better as they don't need to waste money on purchasing extra assets when there is no need too.

Liquidity: Liquidity refers to the ability of the business to meet its short term obligations as they fall due. As the business has short term obligations it has been shown that in 2014, 2015 and 2016 that the business was able to meet these short term debts as they fall due. 2014 CR: 36,049,000 / 27,561,000 = 1.3

QAR: 36,049,000 – (27,895,000 + 0) / 27,561,000 = 0.3 OCFR: 5,380,000 / (14,321,000 + 27,561,000 / 2 = 20,941,000) = 0.28 2015 CR: 45,175,000 / 23,717,000 = 1.9 QAR: 45,175,000 - (35,492,000 + 0) / 23,717,000 = 0.41 OCFR: 4,781,000 / 25,639,000 = 0.19 2016 CR: 57,311,000 / 27,074,000 = 2.12 QAR: 57,311,000 – (47, 042,000 + 0) / 27,074,000 = 0.38 OCFR: 7,087,000 / (27,074,000 + 23,717,000 = 25,395,500) = 0.28 Through these ratios we are able to identify the businesses current asset with short term liability and we can see that baby bunting as a business were able to meet their short term debts as they fell due.

Gearing: Gearing ratio measures the contribution of long-term lenders to the long-term capital structure of the business. Gearing 2014 GR: 2,336,000 / (2,336,000 + 53,538,000 + 76,000 = 55,950,000) x 100 = 4.18% DAR: 29,897,000 / 93,426,000 x 100 = 32% ICR: 6,446,000 / 1,106,000 = 5.83 2015 GR: 10,957/ (23,717 + 989 + 10,957 = 35,663) x 100% = 30.7% DAR: 34,314 / 106,328 x 100 = 32.27% ICR: 5,661,000 / 807,000 = 7.01 2016 GR: 65,449,000 / (84,420,000 + 132,000 + 65,449,000 = 150,001,000) x 100 = 43.63% DAR: (30,036,000 / 122,760,000 = 0.24) x 100 = 24.47% ICR: 12,187,000 / 420,000 = 29.02

The gearing ratio displays the contribution of long term lenders to the long term capital structure of the business. As we can see below the company's non-current liabilities/share capital plus reserves plus non current liabilities x 100 percent gives us a percentage which demonstrates the long term capital structure. As we can see in 2014 the gearing ratio was 4.18%, in 2015 the gearing ratio was 30.7% and

finally in 2016 the gearing ratio was 43.63% this shows that the longer the business has been up and running the higher the gearing ratio is due to more capital structure in the business.

Cash flows including a review of its operating, investing and financing cash flows:

Assessment of other relevant information Baby Bunting is a part of a $4billion baby industry. But despite a host of recognisable retail names such as Babies Galore, Baby Bunting and Baby Kingdom, no retailer in Australia controls more than 5 per cent of the market. This is indicative of the challenging retail environment that Baby Bunting operates within as in addition, low barriers to entry have led to strong competition over recent years. But things have looked promising for the Victorian enterprise as there has been an ongoing baby boom. These first time parents are becoming increasingly older meaning they have had more time to accumulate wealth so they are able to spend more than ever on their newborns. And despite recent economic turmoil caused by a host of reason ranging from Islamic state terror attacks to Australia’s economic position Bunting has still continued to grow its profits as Net Profit margins increased from 4.65% in 2014 to 5.41% in 2016. A potential reason could be the historic low interest rates set by the Reserve Bank of Australia currently at 1.5%. This historic low aims to stimulate the economy by making it cheaper to borrow money so consumers borrow and spend instead of save. Another factor to the succeeding Baby Bunting is the downfall of competitors. An administrator's report shows Babies Galore was ''achieving trading losses'' for the two years before its sale and administration, ''as a result of dramatic decline in sales revenue and an incline in trading expenses''. The administrator found the increase in competition plagued the last years of Babies Galore while acknowledging it was a ''low-margin industry due to minimal barriers to entry''. Also Mothercare Australia's accounts show it has a long road ahead, recently reporting a ''challenging retail environment''.

Conclusion Having undergone all necessary analytical and interpretative investigation it is evident that baby bunting currently has a healthy financial situation. Since 2014 Baby Bunting has grown in all facets. From financial year of 2014 to 2016 the increase in sales was over $85 million, as in 2014, sales were recorded at $150.2 and the financial year of 2016 recorded $236.8 million. Another indicator of their growth is the increase of the gross margin where in 2014 the gross margin was at $49.9 million increase by $31.3

million by 2016 where gross margin was recorded at $81.2 million. Another positive sign for Baby Bunting is the increased efficiency it is working with. The increase in its Accounts receivable (Debtors) is staggering as in 3 financial years it has decreased the repayment of credit of its customers by 23.13 days as it was 32.99 days on 2014 and plummeted to 9.86 days in financial year 2016. Another telling statistic of Baby Buntings progress is its assets turnover period. This indicates how effectively assets are being employed to generate sales revenue and the lower the days the better. In financial year 2014 it was 216.96 days and it steadily dropped to 176.53 by financial year 2016.The business in 2016 was better at germinating more sales with less assets which is better as they don't need to waste money on purchasing extra assets when there is no need too. These financial numbers and statistics highlight how Baby Bunting is growing rapidly and should continue to steadily grow in the future.

A possible way for Baby Bunting it to acquire or merge with another leader in the industry. This could prove to be a game changer as there is no ''category killer'' dominates the Australian baby industry landscape like JB Hi-Fi in consumer electronics or Rebel Sport in sporting goods stores. No retailer in Australia controls more than 5 per cent of the market so if Baby Bunting managed to acquire or merge with another baby industry retailer along with its stock it can prove to be the move which allows Baby Bunting to increase market share significantly so it’ll be able to dominate the market with its newly found increased competitive advantage.

Bibloigraphy Reserve Bank of Australia. 2017. Statement by Philip Lowe, Governor. [ONLINE] Available at: http://www.rba.gov.au/media-releases/2017/mr-17-09.html. [Accessed 7 May 2017]. The Sydney Morning Herald. 2014. Nothing's too good for baby . [ONLINE] Available at: http://www.smh.com.au/business/nothings-too-good-for-baby-20110701-1guse.html. [Accessed 8 May 2017]. Intelligent Investor. 2015. Is it worth punting on Baby Bunting. [ONLINE] Available at: https://www.intelligentinvestor.com.au/punting-on-baby-bunting. [Accessed 6 May 2017].

Baby Bunting Group Limited, ANNUAL REPO...