Financial statement Analysis A2 Milk PDF

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A2 Milk Company Ltd (ASX: A2M) (all the data used was retrieved from https://www.tradingview.com/)

Overview and position

- Trouble integrating/standardising work culture due to multiple acquisitions - High rental charges - New entrants - Devaluation of exchange rate for international market - higher fuel price, higher operating

Threats

- Strong Distribution network - Different consumer segments - Low-cost structure (competitive advantage) - New environmental policies - Decreased shipping costs - Lower inflation rate - New taxation policy

Weakne sses

sOpportuni Strengths

A2 Milk Company Limited is a leading firm in the Meat/Fish/Dairy industry. Founded in New Zealand by scientists, it was based on the knowledge that not all milk is the same. A2 became an exceptional business providing lactose intolerant people with a solution across a range of diverse and complex markets. Regardless of the growing competition, A2 maintained its market leader position and its strong brand name by reacting to consumer demands and needs. The growth trajectory it has achieved in China and the opportunities in this market offer a compelling long-term growth story The evaluation and of the external and internal business environment helped in shaping its growth direction and future strategy. Below is the Swot analysis to help understand its sustainable and maintained leadership position.

FIGURE 1: A2 MILK SWOT ANALYSIS

Especially in Australia the company have continued to lead in market of fresh milk and infant nutrition. As the company introduced new products such as A2 smart Nutrition which helped in catering the need of people who want infant nutrition (A2 Annual report, 2018).

Financial analysis Financial statement analysis helps us in determining whether investing in A2 milk company is profitable or not bearing in mind that the company reinvest its profits in the business and does not pay dividends. So, a current and three years’ financial statement analysis is conducted to determine profitability, liquidity, and credit worthiness of A2 milk. I compared ratios with one of the competitors known as Synlait milk as well as I did a comparison within the industry and checked historical movements of its stock price to get better insight of the industry hence I can make efficient decision of whether to invest in A2 milk shares or not. Findings are below:

Solvency ratios Investment ratios Leverage Liquidity ratios Profitability ratios

TABLE 1 : A2 MILK HISTORICAL FINANCIAL RATIOS Ratios Gross profit Margin Net profit Margin Return on Asset

Current 49.8 17.74

Current ratio

2020

2019

2018

55.96

54.84

50.11

22.43

22.65

21.22

31.72

29.24

27.30

3.69

3.15

3.12

Quick Ratio

4.48

3.21

2.65

2.72

Debt to equity ratio Debt to capitalisation Return on Equity P/E ratio

0.01

0.01

0

0

0.01

0.01

0

0

40.39

37.38

35.21

38.54

37.38

42.44

0.41 −17.29% 0.01

0.49 +30.39% 0.01

0.38 +51.84% 0

0.25 +104.73% 0

0

0

0

0

EPS Debt to Asset LT debt to Lt Assets

Solvency ratios Investment ratios Leverage Liquidity ratios Profitability ratios

TABLE 2: S YNLAIT MILK LTD HISTORICAL FINANCIAL RATIOS Ratios Gross profit Margin Net profit Margin

Current

2020

2019

2018

14.94

17.86

18.57

5.78

8.03

8.48

Return on Asset

5.69

7.07

9.59

Current ratio

1.00

0.76

1.01

Quick Ratio

0.30

0.32

0.40

Debt to equity ratio Debt to capitalisation Return on Equity P/E ratio

0.90

0.71

0.34

0.475055443

0.414880546

0.256309269

13.69

16.70

18.23

16.45

21.90

26.15

0.39 −11.34% 0.37

0.44 +15.34% 0.30

0.38 +77.77%

0.30

0.21

0.12

EPS Debt to Asset LT debt to Lt Assets

X

-

0.29 −26.31%

0.18

FIGURE 2: A2 M ILK COMPARED TO THE INDUSTRY AND MARKET

.

FIGURE 3: A2 MILK 5 YEARS PRICE MOVEMENT

A2 milk company has a significant gain in revenue and earnings in comparison with its competitors like Synlait milk Ltd. The company outperformed in all key segments and across all markets. As from the above table we can see that the gross profit margin for the company is very high in comparison with the competitor which is mainly because of high sales as the company introduced new products and started segmenting people who want high nutrition products. Sales for A2 have increased by 32% in comparison with last year which can show that company is growing and will enhance its market share in future. On the other side net profit margin for the company is high but net profit is not growing with the same pace at it used to grow from 2018 to 2019. Mainly because of increase in interest payment as the

company took loan for further enhancing their operations. Overall, I believe the results of profitability ratio favours A2 milk stock as the competitors are not performing and making high amount of profit in comparison with A2 milk. Now talking about the liquidity side of A2 milk current ratio is used to determine company ability to pay short term liabilities. Basically, it helps in understanding whether the company have enough short-term assets which can help in paying short term liabilities also known as current liabilities. As we can see from the above table that A2 milk current ratio is improving reaching 5.48 currently which means is considered very high in comparison to the benchmark of 1.1 ratio. This ratio tells us that company have enough money to pay back short-term liabilities and the probability for insolvency is low. On the other side the company had no debt until recently with a very small amount indicating that firm is investing more money from the equity side and not taking to much loans or long term debts which helps us in determining that company will not get insolvent in future. Return of asset have decreased in comparison with last year but this year the company invested in new venture so the total assets have enhanced accordingly and the investment in new assets shows that company is willing to do growth and expansion which will help the stakeholders positively as high growth helps in getting high sales ultimately value of company will increase. Compared to its industry, A2 milk holds the highest value with a market capital of 5.344B and a price of 7.47/share. (tradingview.com, 2021) Figure 2 explains that the growth seen by A2 is around 12% higher than the average industry growth.(simplywall.st, 2021) Despite the decrease notices currently in its EPS caused by the pandemic, china’s debt crisis and existing trade war, it appears that A2 milk’s, especially the baby formula, is and will highly regarded and will be immune in the long run to the vagaries of recurring spending routine. A simple observation of A2 stock price trend over the past 5 years shows that up until the beginning of 2021 the price was increasing. It is true that the price started to drop to a low 7.49$, but this is caused by systematic risks which hopefully will be lower after china’s situation gets better and the global economy re-boosts. Finally, the intrinsic value of A2 milk as calculated by simplywall.st stands at 36.08$ which is 78.2% lower than its current price of 7.44$. A2 milk is currently undervalued. In my opinion, putting the stock on the watchlist is the ultimate option. If the share price goes down or good news are heard about China’s situation, investing in this stock would be a definite gain. As for any held stock, my strategy would be holding on to the stocks or sells them and buy when the price goes lower.

Nearmap Ltd (ASX: NEA) Overview & position

- Not enough investment in technology compared to scale of expansion

- Value focused propositions - Lower shipping cost - Online channels

- Seasonable product lines - Shortage of skilled workforce in global markets

Threats

- Strong Free Cash Flow allowing new projects - Reliable and strong distribution

Weakne sses

sOpportuni Strengths

Founded in 2007 in Perth as a small online start-up business, Nearmap gain a leading position in the Australian market and became one of the ten largest aerial survey businesses in the electronic technology industry globally by yearly volume of collected data. Nearmap is a provider of high-resolution aerial imagery data and offers orthographic and oblique views as well as 3D models and analytics.(nearmap.com, 2021) Its solutions are used in many sectors such as construction, architecture, engineering, financial services, real estate, telecommunication, as well as government sector. While the firm has a robust presence in New Zealand and Australia covering 100 urban areas and 90% of the population, it is facing rough competition in the North American market. Nearmap Ltd preserves its noticeable place in market by carefully reviewing its SWOT analysis. Below is the company’s Swot Analysis:

FIGURE 4: NEARMAP LTD SWOT ANALYSIS

Financial analysis A Similar to A2 milk previous financial analysis will be presented to decide whether to sell or buy Nearmap stocks. I will start by ratio analysis to closest rival Aerometrex Ltd, then compare its performance to the industry average as well as observe its price trend and current intrinsic value.

TABLE 3: N EARMAP LTD HISTORICAL FINANCIAL RATIOS

Ratios Gross profit Margin Net profit Margin

Current

2020

2019

2018 8.37

6.00

LeverageLiquidity ratios Profitability ratios Solvency ratios Investment ratios

Return on Asset

-14.06

Current ratio

0.91

1.63

0.72

Quick Ratio

0.91

1.63

0.72

Debt to equity ratio

0.08

0.25

0.00

0.00

Debt to capitalisation Return on Equity P/E ratio

-

-

-

-

−25.19

−50.85

0.17

0.15

0.13

0.10

+26.54%

−137.32%

−20.77%

−101.42%

Debt to Asset

0.10

0.00

0.00

LT debt to Lt Assets

0.07

0.00

0.00

−33.34

EPS

Solvency ratios Investment ratios

LeverageLiquidity ratios Profitability ratios

TABLE 4 : AEROMETREX LTD HISTORICAL FINANCIAL RATIOS Ratios Gross profit Margin Net profit Margin Return on Asset

Current

2020

2019

2018

16.86

30.44

38.05

−1.46

15.90

13.98

−0.81

13.46

14.75

Current ratio

3.20

0.82

0.85

Quick Ratio

3.20

0.82

0.85

Debt to equity ratio

0.08

1.69

1.22

-

-

-

43.18

39.64

Debt to capitalisation Return on Equity P/E ratio

-

25.07

-

-

-

−0.03 −745.95%

−113.65%

0.03 +39.69%

0.02 —

Debt to Asset

0.06

0.52

0.45

LT debt to Lt Assets

0.05

0.14

0.22

EPS

FIGURE 5: N EARMAP COMPARED TO THE INDUSTRY AND MARKET

FIGURE 6: NEARMAP 5 YEARS PRICE MOVEMENT

Nearmap’s margin have been declining and highly negative recently. It is translated by negative profitability mainly negative profitability ratios in the observed years. This can be explained by the expansions and the mounting losses beared in the US market and by the shift in the company’s accounting policy, making it more conservative. Compared to its chosen competitor Aerometrex, Nearmap showed weak margins and ROA. Although Aeromertrex (AMX) has shown recent negative net margins and ROA of -1.46 and 0.81 respectively in 2020 compared to -37.96 and -23.92 for Neamap, yet-unlike Nearmap- it was performing well the previous years. Overall profitability ratios show high losses for NEA relative to its comprtitor.

NEA’s current and quick ratios ranged between 0.72 and 2.15 compared to 0.85 to 3.20 for AMX. It is true that liquidity ratios are improving yet they are still below the ones recorded by its studied competitor. While the ratios might appear acceptable currently over the 1.1 benchmark showing that NEA’s is liquid, the company is expected to break even on cash

within the coming 3 years and will require more cash driving these ratios to near 0. (finance.yahoo.com,2021) Both company have little debt to be repaid currently with previous 0 debts for NEA which indicated that earnings are spend on growth investments to expand and improve the future position of the company. ROE ratio for NEA reflects a very underperformance of the company and proves its accumulated unprofitability where it reached −50.85 in 2020. But this number can be further explained by the capital raise that happened in September same year.Compared to its AMX with a minimum ROE of -8.19 currently, it is well under-positioned. Compared to the industry and market, NEA is building up losses over the last 5 years at a pace of 41.9%/year.(simplywall.st, 2021) Its growth is below the industry average of 32.4% Despite the decrease notices currently in its EPS caused by the pandemic, china’s debt crisis and existing trade war, it appears that A2 milk’s, especially the baby formula, is and will highly regarded and will be immune in the long run to the vagaries of recurring spending routine. Observing Nearmap historical stock price for the past 5 years, it is obvious that it has reached a plateau and starting plunge reaching 2.36$ today and this is mainly caused by the acknowledgement of the legal proceedings filed against it by its main competitor EagleView Technologies. (fool.com.au, 2021) Lastly, NEA stock is considered to be more than 20% undervalued and that its intrinsic value stands at 5.9$ which is 60% lower than its current price of 2.36$. (simplywall.st, 2021) Based on the above Analysis, I highly recommend selling this stock since the company might be at risk of banckcrupcy.

Fama-French Three-factor Model Professors Eugene Fama and Kenneth French developed an extention of the Capital Asset Pricing Model (CAPM) and introduced the Fama-French. This new model describes stock returns through highlighting three major factors: (corporatefinanceinstitute.com, 2021) 

Market risk,



Size of the company: outperformance of small-cap vs large-cap companies



Value factor: outperformance of high book-to-market value vs low book-to-market value companies.

The logic behind the model is that: 

Small-cap and high value companies have a tendency to to regularly outperform the whole market.



Greater investments generally lead to better returns



Value companies outclass growth companies

Put into a formula we get:

The Fama-French three-factor model mathematical representation is:

Where: 

r = Expected rate of return



rf = Risk-free rate



ß = Factor’s coefficient (sensitivity)



(rm – rf) = Market risk premium



SMB (Small Minus Big) = Historic excess returns of small-cap companies over largecap companies



HML (High Minus Low) = Historic excess returns of value stocks (high book-to-price ratio) over growth stocks (low book-to-price ratio)



↋ = Risk

Based on the Fama-French the main factors driving the returns are:  Market Risk Premium: is the expected return of the market minus the risk-free rate. It is the excess return an investor expects to compensate for higher volatility.

 SMB (Small Minus Big): is the size effect depending on the company’s market capitalisation. It determines (β) based on historical excess return of smaller-cap companies over bigger-cap companies. In the long run, small-cap companies tend to achieve better returns.

 HML (High Minus Low): is the value premium. Like SMB, (β) is determined but this times based on the difference between excess high companies book-to-market value ratio and low companies book-to-market value ratio. HML reveals that in the long term, value stocks realize higher return than growth stocks. If any other average expected return happens, it is related to unpriced or unsystematic risk.

A study on factorinvestingtutorial.wordpress.com made in 2015 mimicked Fama & French study using hundreds of random portfolios and got same results where Fama-French model was able to explain 90%+ of returns in a diversified portfolio compared to CAPM that explained 70% of returns. (factorinvestingtutorial.wordpress.com, 2015) Given this ability to explain portfolio returns vs the whole market, investors can build a portfolio in which they obtain an average expected return based on the relative risks they are willing to undertake in their portfolios. According to Fama and French investors are required to handle extra volatility and periodic underperformance in the short run. Long term (10 years+) investors will be rewarded for short term losses with generous and persistent premiums. (Armstrong.F, 2013) When building their portfolios, investors are obliged to decide how much they are willing to hold of each of the three factors They must control the trade-offs between the factors depending on their own tolerance for various risks. Higher returns do not necessary translate into better investor performance under this model, it can be achieved by basing the investment choices on exposure to risk factors that historically proved persistence and positive premiums.

Ethical behaviour Founded on the equal exchange principle, the concept of ethics in trading can be traced back to the primary forms of bartering. The contemporary concept of ethics in business arose in the 1970’s after the spread of bribery scandals, false advertising, and many forms of business misconducts in the US market where business failed to act ethically leading to public attacking with anti-business protests and movements. (Richard T. De George,2020) According to an account by Norman Bowie, the first conference on business ethics was held in 1974 (Bowie.N, 1986) and the papers were published as Ethics, Free Enterprise and Public Policy. (De George an& Pichler, 1978) Although continuously developed, ethics concept has now matured and is no longer considered an ox...