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ENTR901 Financial Performance Management

Report-Business report
Assessment 1
Maximum 2,000 words. Appendices and references are excluded from this word count.
In this assessment you will research one small capitalisation company listed on the ASX, relying upon the most recent three years of income statements and balance sheets. You will analyse the operating and financial performance, applying the ratio analyses covered in Chapter 5 of the subject text and use IBISWorld (or similar industry information) to contextualise the businesses.
Current and historical data for ASX listed firms can be collected from the ‘DatAnalysis Premium’ database on the UOW library website <https://uow.libguides.com/az.php?s=116122>.
Specifically you will cover the following:
 Compare the financial performance of your company to similar companies in the same industry.
 Discuss key events (firm-level, industry-level or market-level shocks) over the last three years which have impacted the financial performance of the company and the industry as a whole. From your full analysis draw particular highlights into tables and charts to support your findings.
 Based on your analysis draw conclusions on the financial performance of the company.
 Express a view on whether share investors are satisfied with their investment in the company.
 Include a full ratio, vertical and horizontal analysis as an appendix
 

Solution:

Financial Performance Management

(A Comparative Case Study of the A2 Milk Company Limited)

Introduction

Financial performance management is an administrative activity in which the monetary capabilities of an organization are quantitatively measured for a given fiscal year so that a corrective strategy might be deployed to gain an edge over rivals  (Block, et al., 2018). The financial performance of The A2 Milk Company Limited has evaluated with the support of ratio analysis and its outcome is eventually compared against the Australian companies dealing in a dairy nutritional product. Apart from it, the potential factors which have affected the performance of The A2 Milk Company Limited and respective Australian industry have evaluated and this has eventually used to conclude the study effectively.

Briefing about The A2 Milk Company Private Limited

The A2 Milk Company Limited is a leading dairy nutritional product manufacturing firm in Australia and it was founded in 2000 in the heart of Auckland (the A2 MIlk Company, 2022).

Figure 1: The A2 Milk Company Limited; Source: (the A2 MIlk Company, 2022)

The Australian milk nutritional company has successful in producing and selling chemical-free dairy products and this has eventually helped in capturing around 15% of the total market share of the respective industry (Financial Review, 2022). The A2 Milk Company Limited has successful in generating the revenue of $ 1.14 billion during 2020 and this is expected to be increased with the CAGR (Compound Annual Growth Rate) of 7.01% by 2025 (the A2 Milk Company, 2022).

Comparison of the Financial Performance of the A2 Milk Company Private Limited to Similar Companies

Ratio analysis is a financial tool with the usage of which the financial capabilities of an organization in terms of sales generation, cost minimization, receivables and payables management, etc  (Husna & Satria, 2019). As per contingency theory of financial management, the business head of an organization is required to optimize its receivables and operational expenses so that its current ratio and liabilities management related efficiency might be increased. The financial performance of the A2 Milk Company Limited has been compared as follows against the monetary capabilities of its rivals located in Australia using ratio analysis-

Total Assets and Net Profit Margin

As per cash conversion cycle theory of financial management, an organization is required to enhance its cash inflow rather than cash outflow to maximize its profit margin and total assets so that an edge might be got over rivals. The A2 Milk Company Ltd is successful in generating the total Assets of around $ 662 million and this has eventually increased by 43.29% during 2019 due to strategic usage of promotional activities (WSJ, 2022). Further, the hike of 42.99% has registered in the total assets of the Australian dairy company in 2020 than that of the financial year 2019. On the other hand, Alterra Limited and Australian Dairy Nutritionals Group have noticed with a progressive trend in total assets management between 2018, 2019, and 2020 but these have noticed less efficient than that of the A2 Milk Company Limited.

The A2 Milk Company Limited is around 90% less efficient than that of Alterra Limited in terms of profit margin management during 2018. On the other hand, the net profit margin of Australian Agricultural Company Limited and Australian Agricultural Projects Limited during 2018 has found with negative figures and this trend has found similar during 2019 and 2019 but with some positive improvement (australian-agricultural-company-ltd, 2022). Apart from it, during 2019 and 2020, Alterra Limited has found inefficient in managing its operational expenses due to which it has faced a negative profit margin trend during the given financial year. The A2 Milk Company Limited has been found more efficient than that of the considered rivals in minimizing its operational expenses during 2019 and 2020 and this has eventually helped in having a positive net profit margin during the fiscal year (the A2 Milk Company, 2022).

EBIT Margin

EBIT is an accounting tool that supports the management of an organization in understanding how efficient it is in generating revenue for clearing all its direct and indirect liabilities or expenses (Drury, 2018).

The A2 Milk Company Limited is successful in generating around 119% and 111.30% more EBIT than that of Australian Agricultural Company Limited and Australian Agricultural Projects Limited (the A2 Milk Company, 2022). Alterra Limited is found efficient in generating around 58.30% as EBIT. During 2019 and 2020, the A2 Milk Company limited has shown a declining trend in terms of management of EBIT margin but still, it has successful in keeping its positive trend figured throughout the fiscal year. On the other hand, Alterra Limited, Australian Agricultural Company Limited, and Australian Agricultural Projects Limited have shown declining performance in terms of EBIT margin with marginal improvement (Alterra, 2022).

ROA and ROE

ROA stands for return on assets and it supports the management of an organization to understand how much profit margin it has generated by employing a defined amount of assets (Brigham & Houston, 2021).

On the evaluation of the derived chart, it is found that the management of the A2 Company Limited has successful in keeping a positive trend in terms of generating a higher amount of return from employed capital. Apart from it, a declining trend has noticed between 2018 and 2019 within the ROA-related financial performance of A2 Company Limited but it has shown a hike of around 40% during the financial year 2020 (the A2 Milk Company, 2022). On the other hand, the financial performance of Alterra Limited, Australian Agricultural Company Limited, and Australian Agricultural Projects Limited has noticed with a negative trend during 2018 and 2019 but they have shown some improvement in 2020.

The A2 Company Limited has successful in showing the highest performance in terms of return on equity parameter in the comparison of all the considered rivals. With the strategic deployment of cost optimization strategy, the A2 Company Limited is found efficient in keeping positive ROE but it is found marginally inefficient in having increasing ROE between 2018, 2019, and 2020. Apart from it, Alterra Limited, Australian Agricultural Company Limited, and Australian Agricultural Projects Limited have found with declining and negative trends in terms of ROE generation between 2018 to 2020 (australian-agricultural-company-ltd, 2022). During 2020, the management of the considered rivals of the A2 Company Limited has shown some improvement in terms of generation of return on employed equity.

Current Ratio

A current ratio is an accounting tool that assists the administration of a firm in having an insight into its capability of clearing current liabilities using only current assets during a given financial period (Hanouna, 2019).

The A2 Company Limited has around 3 times less efficient than that of Alterra Limited and Australian Agricultural Company Limited in terms of paying current liabilities using its current assets only. During the financial year 2018, 2019, and 2020, the A2 Company Limited has shown a positive and progressive trend in terms of current ratio parameter but Alterra Limited and Australian Agricultural Company Limited have shown a declining trend during the fiscal year (the A2 Milk Company, 2022). On the other hand, the management of Australian Agricultural Projects Limited has shown the least performance during 2018 in terms of current ratio-related parameters but it has depicted a progressive trend while moving towards the financial year 2019 and 2020. It means that in terms of the current ratio, the A2 company limited has shown the highest performance during 2020 than that of all its rivals.

Days Receivables

Day receivables refer to the number of days within which outstanding amounts generated due to the sale of a particular kind of goods or services are received by an organization during a given financial period (Rizza & Ruggeri, 2018).

Based on the derived graph, it is noticed that the A2 Company Limited is less efficient than that of Australian Agricultural Company Limited in terms of receivables management but it is around 39 times better than that of Alterra Limited and Australian Agricultural Projects Limited during 2018. The A2 Company Limited has shown a positive and progressive trend in minimization of its credit period while moving from 2018 to 2019 and 2020 (the A2 Milk Company, 2022).

Horizontal and Vertical Analysis

Horizontal and Vertical analysis has used to compare the growth of each account available within the financials of the A2 Company Limited and its rivals for 2020 and its base period 2018 and it has attached in the appendix.

Evaluation of the Key Events which have affected the Financial Performance of the A2 Milk Company Private Limited and the respective Industry

Factors Affecting the Performance of the A2 Milk Company

On the evaluation of the financials of the A2 Milk Company Limited, it has figured out that the substantial usage of credit sale policy over cash one has affected its performance in terms of cash and cash-equivalent management.

Apart from it, the demand for organic dairy products has increased substantially within the market of Australia and this has eventually augmented the performance of the A2 Milk Company in terms of sales generation and customers’ footfall. Besides this, the behaviour of home delivery options has substantially increased within the buying pattern of Australian consumers and this has eventually empowered the A2 Company limited to reduce its inventory turnover days and day’s receivables (the A2 Milk Company, 2022).

Factors Affecting the Performance of Dairy Nutritional Industry of Australia

The key event which has affected the financial performance of the Australian dairy industry is an increase in the usage of organic kinds of milk products and this has eventually increased the demand for a non-chemical product within the market. The outcome of the substantial hike in the organic dairy product-related buying behaviour is that the sales and inventory clearance efficiency of the Australian dairy industry has increased effectively. Apart from it, in the current scenario, the paying ability of Australian dealers has decreased substantially due to the outbreak of Covid-19 due to which the major Australian dairy product manufacturing firms have chosen credit sale policy to increase their turnover (AU Gov, 2022). The outcome of the hike in the substantial credit sale pattern within the Australian dairy market is that their sales performance has increased substantially but their receivables management efficiency has decreased and this has eventually reduced its liabilities optimization capability.

Discussion about the Satisfaction Level of Share Investors of the A2 Milk Company Limited

On the evaluation of the ratio analysis-related outcome of the A2 Company Limited, it has found that its management is efficient in minimizing its days receivables by focussing more cash sale policy over credit one. The outcome of the substantial usage of cash sale policy is that the A2 Company Limited has successful in generating a higher amount of cash and cash equivalent and this has eventually helped in paying its investors on time. From 2018 to 2020, the management of the A2 Company limited has shown a progressive trend in terms of ROE and ROA and this has eventually helped in meeting the financial need of its investors effectively (the A2 Milk Company, 2022). It means that the satisfaction level of the share investors of the A2 Company Limited is comparatively higher than that of its rivals.

Conclusion

It has concluded that the financial performance of the A2 Company Limited increased from 2018 to 2020 in terms of sales generation, profitability, and liabilities management. The A2 Milk Company Limited is efficient in terms of generating revenue, profit margin management and cost optimization during the financial year 2018, 2019 and 2020. On the other hand, the A2 Company Limited has shown marginal inefficiency than that of its rival, Australian Agricultural Company Limited, in terms of clearing current liabilities using only cash.

Apart from it, the A2 Company Limited has shown marginal incompetence in increasing the sale of its dairy product with the help of cash sale policy over credit approach due to which it has faced difficulty in augmenting its current assets or cash or cash equivalent. The outcome of the cash sale related inefficiency of the management of the Australian dairy company is that it has been marginally unsuccessful in augmenting its current assets and this has eventually made it inefficient in clearing its current liabilities using only cash or cash equivalent. In short, the financial performance of the A2 Company Limited has been increased than that of its rivals during 2020 in terms of profit and revenue generation and this is expected to be hike substantially in upcoming fiscal year.

References

Alterra, 2022. Alterra-Annual-Report-Revised-Print-Version. [Online]
Available at: https://alterra.com.au/wp-content/uploads/2021/02/Alterra-Annual-Report-Revised-Print-Version-2-Feb-2021-.pdf

AU Gov, 2022. Australian dairy: financial performance of dairy farms. [Online]
Available at: https://www.awe.gov.au/abares/research-topics/surveys/dairy

australian-agricultural-company-ltd, 2022. annual report. [Online]
Available at: https://www.annualreports.com/Company/australian-agricultural-company-ltd

Block, S. B., Hirt, G. A. & Danielsen, B. R., 2018. Foundations of financial management. Oxford: McGraw-Hill Education; ISBN : 978-81-951301-4-6.

Brigham, E. F. & Houston, J. F., 2021. Fundamentals of financial management. London: Cengage Learning; ISBN : 978-93-5262-624-3.

Drury, C., 2018. Cost and management accounting. New York: cengage Learning.

Financial Review, 2022. It may be time to buy a2 Milk, analysts say. [Online]
Available at: https://www.afr.com/companies/manufacturing/a2-milk-no-use-crying-over-split-market-20210930-p58w3v#:~:text=A2%20Milk%20also%20has%20a,15%20per%20cent%20market%20share.
[Accessed 02 March 2022].

Hanouna, P., 2019. Multinational financial management. new york: John Wiley & Sons.

Husna, A. & Satria, I., 2019. Effects of return on asset, debt to asset ratio, current ratio, firm size, and dividend payout ratio on firm value. International Journal of Economics and Financial Issues, 12(1), pp. 22-29; DOI : 10.18502/kss.v3i10.3450.

Rizza, C. & Ruggeri, D., 2018. The institutionalization of management accounting tools in family firms: the relevance of multiple logics. Journal of Management Control, 12(2), pp. 503-528; doi :10.1007/s00187-018-0256-2.

the A2 MIlk Company, 2022. About. [Online]
Available at: https://thea2milkcompany.com/
[Accessed 02 March 2022].

the A2 Milk Company, 2022. Annual Report. [Online]
Available at: https://thea2milkcompany.com/results

WSJ, 2022. Financials of the A2 Company Limited. [Online]
Available at: https://www.wsj.com/market-data/quotes/AU/XASX/A2M/financials/annual/income-statement

Appendix

Company NameItem201820192020
The a2 Milk Company LimitedROA (%)29.18%26.73%66.70%
Alterra LimitedROA (%)-10.20%-20.97%-10.36%
Australian Agricultural Company LimitedROA (%)-7000.61%-11124.14%2118.88%
Australian Agricultural Projects LimitedROA (%)-6.29%-3.48%11.01%
Company NameItem201820192020
The a2 Milk Company LimitedROE (%)36.78%34.23%8.40%
Alterra LimitedROE (%)-14.15%-28.49%-20.91%
Australian Agricultural Company LimitedROE (%)-9289.76%-14012.84%2627.27%
Australian Agricultural Projects LimitedROE (%)-12.17%-7.17%15.60%
Company NameItem201820192020
The a2 Milk Company LimitedCurrent Ratio3.033.293.70
Alterra LimitedCurrent Ratio10.736.812.34
Australian Agricultural Company LimitedCurrent Ratio9.625.405.81
Australian Agricultural Projects LimitedCurrent Ratio0.510.590.56
Company NameItem201820192020
The a2 Milk Company LimitedDays Receivables241213
Alterra LimitedDays Receivables943114397
Australian Agricultural Company LimitedDays Receivables000
Australian Agricultural Projects LimitedDays Receivables8206361309
Horizontal Analysis for the A2 Company Limited
Particular20182020Change% change
Net IncomeAUD 1,96,000.00AUD 3,88,000.00AUD 1,92,000.0097.96%
Total AssetsAUD 7,17,000.00AUD 14,54,000.00AUD 7,37,000.00102.79%
Total LiabilitiesAUD 1,61,000.00AUD 3,20,000.00AUD 1,59,000.0098.76%
Total Shareholder’s EquityAUD 5,56,000.00AUD 11,34,000.00AUD 5,78,000.00103.96%
Vertical Analysis for the A2 Company Limited
Particular20202018
Amount%Amount%
Assets
Current AssetsAUD 11,29,000.0077.64787AUD 5,00,000.0069.73501
Fixed AssetsAUD 3,25,000.0022.35213AUD 2,17,000.0030.26499
Total AssetsAUD 14,54,000.00100AUD 7,17,000.00100
Liabilities
Current LiabilitiesAUD 3,05,000.0095.3125AUD 1,60,000.0049.84424
Non-Current LiabilitiesAUD 15,000.004.6875AUD 1,61,000.0050.15576
Total LiabilitiesAUD 3,20,000.00100AUD 3,21,000.00100
Total EquityAUD 11,34,000.00100AUD 3,96,000.00100
Total Liabilities +EquityAUD 14,54,000.00100AUD 7,17,000.00100
Horizontal Analysis for Alterra Limited
Particular20182020Change% change
Net Income-AUD 13,53,600.00-AUD 15,06,500.00-AUD 1,52,900.0011.30%
Total AssetsAUD 1,32,75,000.00AUD 1,45,35,100.00AUD 12,60,100.009.49%
Total LiabilitiesAUD 21,01,600.00AUD 77,08,500.00AUD 56,06,900.00266.79%
Total Shareholder’s EquityAUD 95,63,000.00AUD 72,04,500.00-AUD 23,58,500.00-24.66%
Vertical Analysis for Alterra Limited
Particular20202018
Amount%Amount%
Assets
Current AssetsAUD 51,35,600.0035.3324AUD 33,95,600.0025.57891
Fixed AssetsAUD 93,99,500.0064.6676AUD 98,79,400.0074.42109
Total AssetsAUD 1,45,35,100.00100AUD 1,32,75,000.00100
Liabilities
Current LiabilitiesAUD 21,95,000.0028.47506AUD 3,16,400.0015.0552
Non-Current LiabilitiesAUD 55,13,500.0071.52494AUD 17,85,200.0084.9448
Total LiabilitiesAUD 77,08,500.00100AUD 21,01,600.00100
Total EquityAUD 68,26,600.00100AUD 1,11,73,400.00100
Total Liabilities +EquityAUD 1,45,35,100.00100AUD 1,32,75,000.00100
Horizontal Analysis for Australian Agricultural Company Limited
Particular20182020Change% change
Net Income-AUD 10,25,59,000.00AUD 3,13,17,000.00AUD 13,38,76,000.00-130.54%
Total AssetsAUD 14,65,000.00AUD 14,78,000.00AUD 13,000.000.89%
Total LiabilitiesAUD 1,02,000.00AUD 1,59,600.00AUD 57,600.0056.47%
Total Shareholder’s EquityAUD 5,56,000.00AUD 11,34,000.00AUD 5,78,000.00103.96%
Vertical Analysis for Australian Agricultural Company Limited
Particular20202018
Amount%Amount%
Assets
Current AssetsAUD 2,44,000.0016.5088AUD 3,27,000.0022.32082
Fixed AssetsAUD 12,34,000.0083.4912AUD 11,38,000.0077.67918
Total AssetsAUD 14,78,000.00100AUD 14,65,000.00100
Liabilities
Current LiabilitiesAUD 42,000.0041.17647AUD 34,000.0033.33333
Non-Current LiabilitiesAUD 60,000.0058.82353AUD 68,000.0066.66667
Total LiabilitiesAUD 1,02,000.00100AUD 1,02,000.00100
Total EquityAUD 13,76,000.00100AUD 13,63,000.00100
Total Liabilities +EquityAUD 14,78,000.00100AUD 14,65,000.00100

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