ACC10007 Assignment 3 Bega Cheese Report PDF

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Assignment 3 Company Analysis Report HD Grade (within 80-100%)...

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Financial Ratio Analysis Report Prepared for Bega Cheese Limited Prepared by Linna Neak

Financial Ratio Analysis Report 

Executive Summary This financial ratio analysis report has been prepared for the shareholders of Bega Cheese Limited. The purpose of this report is to provide an insight into the company’s performance between 2010 and 2013 using the profitability, efficiency, liquidity and financial gearing ratios. After analysing the business’s performance and reviewing the financially statements from the years 2014 to 2016, there have been certain trends that need to be re-evaluated and altered in order for the business to move forward with its success and growth. The global dairy commodity crisis during the years of 2013 and onwards had negatively affected the trading of almost all dairy companies in Australia. Bega was fortunate to be able to come back from low figures and losses in 2015. After analysing the information, there were some negative trends that needed to be address and a few recommendations have been made: • Review the settlement period for accounts receivable and try to reduce the time frame for when money needs to be repaid so that there are more assets in the bank at all given times. • Increase the amount of inventory produced according to what is in high demand as the inventory turnover period has decreased over the years, leading us to believe that consumers are purchasing more than what is produced in previous years. • Decrease the amount of borrowings and liabilities that the company has in order to make sure that it will be able to repay debts if the market was to go into another crisis.

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Financial Ratio Analysis Report 

Contents Executive Summary............................................................................................................................ 1 Introduction..................................................................................................................................... 7 Company and Industry Background.........................................................................................8 Analysis and interpretation........................................................................................................... 10 Profitability Ratios............................................................................................................................. 10 Return on Shareholder’s equity..................................................................................................... 10 Return on Total Assets................................................................................................................... 11 Net profit margin........................................................................................................................... 13 Efficiency Ratio................................................................................................................................. 14 Inventory Turnover Ratio............................................................................................................... 14 Settlement Period for Accounts Receivable................................................................................... 15 Asset Turnover Ratio..................................................................................................................... 16 Liquidity Ratio.................................................................................................................................. 17 Current ratio.................................................................................................................................. 17 Quick Asset Ratio/Acid Test........................................................................................................... 18 Financial Gearing Ratio..................................................................................................................... 19 Gearing Ratio................................................................................................................................ 19 Debt to Asset Ratio....................................................................................................................... 20 Conclusion/Recommendations.......................................................................................................... 21 Appendices....................................................................................................................................... 22 References........................................................................................................................................ 28

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Bega Cheese Limited is a large organisation specialising in producing cheese in Australia. Ratio Analysis Report The purpose of this report is to analyseFinancial the annual reports during the period of    30 June 2014 to 30 June 2016, and account the changes in profitability, efficiency, liquidity and financial stability within the business. Using these reports, any existing or potential issues will be identified and solutions to these issues will be discussed. This report was created to identify any existing or future potential issues that Introduction have or may arise within the Bega Cheese Limited. This report will be a mixture of different ratio analysis including profitability, efficiency, liquidity and gearing ratios, to determine the course of action Bega Cheese Limited is required to take in reaction to the following 3-year period. The report is set out in different sections including ratio analysis, figures and calculations Bega Cheese that Limited are included started and off infound 1899,inwhen the appendices. their first butter factory was established in a small rural town called Bega, New South Wales, Australia. The factory was officially opened in 1900 and since then has expanded to include different dairy products, this report however is focused solely on Bega Cheese Limited. The company has grown exponentially since 1998 from employing merely 80 people to 500 people within a small timeframe of 3 years; and now has currently 1,700 under their employment.

Background

Bega Cheese is classified as an agriculture cooperative (also known as farmer’s coop) and is owned by their dairy suppliers. Since 19th August 2011 it has been listed on the Australian Securities Exchange as a public listed company and is owned by shareholders. It is known as an Australian made product that is aimed at the domestic market and within the past financial year, Bega has helped the Australian economy by selling approximately $113 million worth of exports during the 2017 Financial year. Bega Cheese operates within the dairy industry, and currently holds “15.7% of the Australian retail cheese market”. (Wikipedia 2018) They provide products to the retail and food markets within Australian and overseas. The dairy industry is one of Australia’s most important agricultural industries, generating up to $13.7 billion and employing approximately 38,000 people – either through dairy farms or manufacturing. Exports are valued to around $2.7 billion a year and 40% of national milk production. The main countries Australia export to are Japan, China, South East Asia and the Middle East. Since being listed, Bega Cheese has obtained 25% stake of Capital Chilled Foods (Australia) Pty Ltd, is distributed and advertised by New Zealand dairy giant Fonterra under a Product Supply agreement that was put in place since 2001 but signed on 15th November 2012. With the most recent and extensive expansion for Bega Cheese was on 19th January 2017, when Bega Cheese agreed to purchase most of US food giant Mondelez International’s Australia and New Zealand grocery and cheese business for $460 million. This deal saw that Vegemite, Bonox, Dairylea, Snackabouts and Kraft branded cheese & peanut butter return under Australian ownership. Bega produces several different products, however under their Cheese section, they specialise in cheddars, mozzarella and other cheese products. Bega Cheese also produce milk powders/infant formulas/Whey protein products. The following are Bega Bionutrients, Bellamy’s Australia Limited and Blackmores. 3

Financial Ratio Analysis Report  The major competitors for Bega Cheese are: Fonterra Co-operative Group Limited, Devondale Murray Goulburn Co-operative Co Limited, Lion National Foods (now known as Lions Pty Ltd), Warrnambool Cheese and Butter Factory Company Holdings Limited and newcomer to the Australian market Saputo Inc. New competitors to Bega Cheese are Bellamy’s Organic, Bemore (partnered with Blackmores) and a2 Milk Company.

Figure 1 [Image sourced from IBISWorld 2018]

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Financial Ratio Analysis Report 

Analysis and interpretation Profitability Ratios

Profitability Ratios 22.92% 18.21%

9.35%

8.99% 7.68% 3.96%3.65%

3.66%

Return on shareholder's equity Net profit margin

Return on assets

Graph 1.1: Profitability Ratios Comparison 2014 - 2015

Return on Shareholder’s equity Return on shareholder's equity Return on shareholders equity %

25.00%

22.92%

20.00% 15.00%

8.99%

10.00%

3.96%

5.00% 0.00% 2014

2015

2016

Graph 1.2: Return on Equity (ROE) (%)

ReturnOn Equity=

Net Profit after Tax ×100 % Average Shareholders ' Equity

An investment of $1 returned 3.96% in 2015 compared to 22.92% in 2014. The drop of 18.96% was significant since the dairy commodity was globally in crisis, however due to partnerships with other major brands and focus on reworking the milk powder division in the company, the percentage has increased to 8.99% in 2016. As shown in figure 2.3, the Sale of Warrnambool Cheese and butter factory company, impacted cash flows for 2015 which was a loss of $18,336,000. With the drop being so large for shareholders in 2015, the company had to look over ways to increase the return that shareholders were receiving or else risk losing them.

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Financial Ratio Analysis Report 

2014-2015 22.92% →3.96% = - 18.96%

Increase/Decrease

2015-2016 3.96%→8.99% = + 5.03%

Figure 2.1 Yearly Increase/Decrease on Return on Equity (ROE) (%)

Return on Total Assets

RETURN ON ASSETS (%)

Return on Assets 20.00% 18.21% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00%

7.68%

3.65%

4.00% 2.00% 0.00% 2014

2015

2016

Graph 1.3: Return on Total Assets (%)

ReturnOn Assets=

Net Profit before Interest ∧Tax × 100 % Average Total Assets

The return on assets ratio in 2014 was 18.21% Showing a good return to the organization. However, this dropped in 2015 to 3.65% due to “significant reductions in global commodity prices…including skim milk powders.” (Irvin 2015, pp. 4) There was a decline in revenue from commodities of $29 million in FY2015, resulting in a reduction in dairy commodity prices being approximately down 35% in FY2014. Having a higher return on assets is considered good as that means the company is earning more money and using less of its investments. Due to the global dairy crash in 2015, and a demand for milk products over cheeses and other processed cheese products, Bega Cheese had a difficult time making the needed profits and returns in comparison to 2014. This Crash largely impacted their annual report for 2015. Overall, demand and supply for products to be exported has decreased with Japan, one of the largest and most established cheese market, therefore the company are turning to China and South Korea as the next exports.

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Financial Ratio Analysis Report 

Figure 2.2 [Image sourced from ASX BGA 2015]

Figure 2.3 [Image sourced from ASX BGA 2015]

Figure 2.4 [Image sourced from ASX BGA 2015]

Shown in Figure 2.2; it is noted by Barry Irvin that the FY2014 figures included the “benefit of the sale of our Warrnambool Cheese and Butter shares, which made a significant contribution to the bottom line last year.” (Becker 2015) The sale impacted cash flows for 2014 by $94,043,000 and they gained a profit on the sale of $66,055,000. These figures are shown in Figure 2.3 and 2.4 respectively. In 2016 the return on assets ratio had increased by 4.08%. This may have been due to the company opening its new Lagoon Street bio-nutrient facility in Bega. This facility was focused on using its latest state-of-the-art technology to extract whey proteins from its existing products. This boosted the company’s ability to create profit by expanding its product range.

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Financial Ratio Analysis Report 

Increase/Decrease

2014-2015 18.21% →3.65% = - 14.56%

2015-2016 3.65%→7.68% = + 4.08%

Figure 2.5 Yearly Increase/Decrease on Return on Total Assets (%)

Net profit margin Net profit margin

NET PROFIT MARGIN (%)

10.00% 9.35% 9.00% 8.00% 7.00% 6.00% 5.00% 3.66%

4.00% 3.00%

1.80%

2.00% 1.00% 0.00% 2014

2015

2016

Graph 1.4: Net Profit Margin (%)

NPM=

Net Profit before Interest ∧Tax × 100 % Sales

The net profit margin decreased by 7.55% in 2015. This may have been due to the dairy commodity prices affecting the sales of the company’s products and the cost of producing the final goods for sale. Even though overall the profit in 2015 was significantly lower than in 2014, the overall outlook for dairy commodities is mainly positive due to the overwhelming demand for whey and milk powders by China (Binsted 2014). Even amid the dairy global slump the company has managed to bounce back due to its relationships with Blackmores and Bellamy’s Organic helping to expose Bega’s products in the booming infant formula market. By the 2016 financial year, the company’s net profit margin had more than doubled by 1.86%. This can be explicated due to the joint arrangement called the Bemore Partnership set up with Blackmores Limited. This therefore bringing in an additional gross profit of $1,309,000 to the bottom line in 2016. “Bega Cheese's net profit tax rose 132 per cent to $28.8 million in the year to June 30.” (ABC Rural, 2016) Increase/Decrease

2014-2015 9.35 % →1.80% = - 7.55%

2015-2016 1.80%→3.66% = + 1.86%

Figure 2.6 Yearly Increase/Decrease on Net Profit Margin (%)

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Financial Ratio Analysis Report 

Efficiency Ratio

Efficiency Ratio 187.36

180.60

69.77

66.62

173.82

67.79

Inventory turnover period (days) Settlement period for Accounts Receivable (days) Asset Turnover Period (days) Graph 2.1: Efficiency Ratios Comparison 2014 - 2016

Inventory Turnover Ratio Inventory turnover (times)

Invent ory Tur nove r P eriod (t im es ) 5.50 5.48 5.48 5.46 5.44 5.42 5.40 5.38 5.36 5.34 5.32 2014

5.47

5.38

2015

2016

Inventory Turnover Period Inventory Turnover (days)

71.00 70.00

69.77

69.00 67.79

68.00 66.62 67.00 66.00 65.00 2014

2015

2016

Graph 2.2 & 2.3: Inventory Turnover Ratios

ITP=

Average Inventory ×365 days Cost of Sales 9

Financial Ratio Analysis Report  The Inventory turnover has barely changed significantly from 2014 to 2016. Inventory may have been held for longer during 2015 at 69.77 days, due to the instable market and high demand for milk products instead of cheese and other cheese related products. Shown in the figure 3.1, cost of raw materials was lower at $116,028,000 at 2016 then in 2015 at $125,954,000. Overall, the inventory turnover period has reduced as Bega Cheese branches out to other food products and gaining a good turnover to these goods.

Figure 3.1 [Image sourced from ASX BGA 2016]

Increase/Decrease

2014-2015 5.48 →5.47 = - 0.01times

2015-2016 5.47→5.38 = - 0.09 times

Figure 3.2 Yearly Increase/Decrease on Inventory Turnover (times)

Settlement Period for Accounts Receivable

Settlment period for AR (times)

Settlem ent Period f or A ccou nts R eceivable (tim es) 10.40 10.18 10.20 10.00 9.80 9.60 9.40 9.20 9.00 8.80 8.60 8.40 20 14

9.84

9.09

201 5

20 1 6

Settlement period (Days)

Settlement Period for Accounts Receivable 41.00 40.00 39.00 38.00

40.16

37.10

37.00 35.86 36.00 35.00 34.00 33.00 2014

2015

2016

Graph 2.4 & 2.5: Settlement Period for Accounts Receivables

Average Settlement Period for Accounts Receivable= 10

Average Accounts Receivable ×365 days Credit Sales

Financial Ratio Analysis Report  Settlement period for Accounts receivable dropped slightly in 2015 to 9.84 times per annum in comparison to 10.14 in 2014, and a further 0.75 times in 2016. It is noted that the interest charged on vat loans reduced from 5.5% in 2014 to 5.45% in 2015 and may contribute to the shorter time period for debtors to pay back the company. It is expected that debtors repay their loans within 30 day, however no interest is charged for any overdue payments. Even though advances to suppliers for milk prepayments had dropped to 7.32% in 2015 (it was 7.8% in 2014) with a maximum repayment term of 6 months, the high demand for milk products would have influenced the final figures reducing the advance payments made by $615,000 in 2015 compared to 2014. With a further reduction to advances to suppliers for prepayment of milk going down a further 0.06%, suppliers would rather purchase products in the short term than applying for a vat loan to help store milk because of the uncertainty of the dairy industry at the time. Vat loans had dropped by $231,000 by the time it was 2015. Fluctuations between yearly figures are to be expected as Bega does not charge any interest for overdue debts.

2014-2015 10.18 →9.84 = - 0.34 times

Increase/Decrease

2015-2016 9.84→9.09 = - 0.75 times

Figure 3.3 Yearly Increase/Decrease on Settlement Period for Accounts Receivables (times)

Asset Turnover Ratio As se t Turnover P eriod (t im es )

190.00 187.36 185.00 180.60 180.00 173.82

175.00 170.00 165.00 2014

2015

2016

Asset turnover (times)

ASSET TURNOVER (DAYS)

Asset Turnover Period

2.15 2.10

2.10 2.05

2.02

2.00 1.95 1.95 1.90 1.85 2014

2015

2016

Graph 2.6 & 2.7: Asset Turnover Ratios

Asset Turnover Ratio=

Average Total Assets ×365 days Sales

Asset turnover for Bega during the period of 2014 to 2015 declined by 6.76 days and a further 6.78 days by 2016. Due to Bega Cheese being able to gradually increase their assets and sales over the years, they had been able to maintain an increasing asset turnover ratio figure. Their total assets averaging to be approximately $562,576,666 over the years from 2014 to 2016. These increases made it possible for Bega Cheese to turnover their inventory 2.10 times by 2016 despite the commodity crisis.

Increase/Decrease

2014-2015 1.95 →2.02

2015-2016 2.02→2.10 11

Financial Ratio Analysis Report  = + 0.01 times

= + 0.09 times

Figure 3.4 Yearly Increase/Decrease on Asset Turnover Ratio (times)

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