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FIN600/FINA6017 Financial Management

  • Explain what is revealed by the ratios and other calculations, in the context of the company’s profitability, asset efficiency, liquidity, capital structure, and market performance.
  • In particular, any important changes over the two financial years should be identified, discussed and, where possible, explained.
  • Provide an overall assessment of whether the company, over the recent financial year, has been better than the previous financial year, in the perspective of existing equity investors (shareholders).

Solution:

Financial Report- Bega Cheese

Executive Summary

The report will focus upon the financial aspects of the company and giving a financial performance analysis about how well the company is operating in comparison to the performance of the prior years and how the company is managing to operate in the current financial year. Bega cheese is an Australian dairy farm leader that is operating in the market efficiently and needs to have its business to go diversifying to multiple Nations so that they can explain their business and also can have a better financial position with enhanced Finance and increased level of revenues as well as sales. The company has the majority of its operations in the farm and farm-related products and the business is primarily categorized into the section only. The report will focus on giving a detailed analysis of the financial ratios. This report is prepared to show the position of finance and to give the analysis about how the financial ratios are helping the company to operate and in long run would it be beneficial for the investors to invest in the company and whether it be beneficial in the terms of returns and having the better liquidity position. As there are multiple options available for the investor so this report is provided to help the investors to analyze the financial position and to know that where the company’s ratios are performing in the industry so that the easy comparison can be made by the investors with any other business in which they are willing to invest so that they can choose the better option and can go for the better option of Returns.

Introduction – Background and Business                                                                               

Bega cheese is an Australian-based entity that has operations in diversifying food companies and is operating from multiple manufacturing units. 50% of its shares are within the hands of the Bega itself, while the rest 50% is traded among the public. In Australia, it is one of the leading entities operating in the sector of dairy business with a milk supply of nearly 800 million liters.

The company has a good financial position and the majority of its ratios are operating at a good scale.

As the business of the firm is diversifying into multiple product lines, so it holds the position of 17% share in the market. It offers multiple packaged food for the consumers and the revenue of the company is quite good and commendable (Bega Cheese, 2021). The operations of the company are so firm and the quality is so maintained that the company is having its export to nearly about 40 countries in the world and is available in almost every Supermarket Chain and the general store of Australia. The business serves the people with fresh and quality dairy products so that they can consume well and remain healthy. The company has globalized its operations with the increased quality and better services.

Investors can invest in the business by simply purchasing the stock level and making the exchange of funds. The company is offering a good level of returns in the market and also serving the higher-level business and returns to its investors (Bega Cheese, 2021). The companies performing solidly in the market and the standards of the company also raised ever since its operations started in the market. It was founded in the year 1899, and it has now a hundred plus Dairy farms operating under it. The company has 2000 employees and its main headquarters situated at the Bega in New South Wales. The company has a diversified range of products that has made it the leading brand of the industry. Bega Cheese is a contract packer of a variety of Cheese products and making them available to the nations worldwide.

Company Analysis – Current financial performance, Key financial highlights, Economic outlook

From the analysis of the annual report of the company of the year 2020, it can be observed that the position of Bega Cheese is very good in the market and it has primarily focused on making the effective study about the business finance and also giving the detailed study. The sales of the company have taken a hype of 2.12% as compared from the analysis as made for the previous year (Annual Report, 2020). The company is moving in an inclined way year by year, which is showing an increase in the level of its overall financial position and also resulting in having the increased revenues, that if managed properly then it can also enhance the overall profitability of Bega Cheese.

This revenue increase of the Bega Cheese has helped it in having a higher amount of profits that can help fulfill the overall expansion plans of the business. The company is listed on the Australian stock exchange that will help the company to attract a huge level of investors because of the constant increase in the share prices by 48%. The solid and efficient percentage increase in the share prices will result from the business in growth and also created its enhanced value of Bega Cheese in the market and amongst the investors (Bega Cheese, 2021). The record sales of $1.49 billion is been marked in the year 2020 that will make an increased level of dividends. Bega Cheese made a declaration of 5 cents dividend on every share and then additional 5 cents of dividends.

This dividend level resulted in making the higher trading of the shares of Bega Cheese and having the capital allocation with a better price for every raised share.

Ratio Analysis and Horizontal Analysis

Liquidity ratios

The liquidity ratios are computed in the company for making the analysis of the position of the company at the time of its liquid and the ability of the company to pay off its current or long-term liability. The liability of the company can be raised in the amount that what is the ability of current assets to pay off its current liabilities and also making the payment of the liabilities by the amount of its equity is and capital. This ratio is helpful in analyzing the situation that if the company has over to the position of liquidated then what capacity it has to pay off the amount that it only from the people and the outside market.         

The current ratio shows the capacity of the current assets of the business to pay off its current liabilities. The ideal ratio set by industry average for this is 3.3 times. The company Bega cheese is having the CR of 1.52 times in the FY 2019 while the present year shows the CR of 1.34 times. The performance of both the years is not up to the industry marked average (Albulescu, 2020). This can be simply assessed that the company’s net current assets are not operating at a good position to pay off the amount of its current liabilities.

The quick assets could be helpful in knowing the immediate payable capacity of the current assets to set off their current liabilities amount (Chan and Chong, 2017). The position of quick assets has improved in the previous two years, this shows that the company does not have much of the inventory in their business and this shows a good sign of the business. In accordance with the industry average, the company is not at a good position in terms of quick assets as the industry shows the average of 1.54 times but the company is having it at the position of .5 times that needs to be improved in context to the ascertained industry average (Albulescu, 2020).

The liquidity position is necessary to be ascertained so that the liabilities of the business are raised in the context and the ability of the company’s assets to pay them off (Akhtaruzzaman, et. al., 2021).

Profitability ratios

Profits are the primary concept for which the business is operating its operations at a user level and planning to expand. When the profits are enhanced that the business will focus on adopting better Strategies and also plan their expansion which will enhance the level of their income (Albulescu, 2020). (Albulescu, 2020).

The profitability level of the business is not quite similar to the situation and they shall focus on making the analysis about how the business will help, but the company is paying a good amount of its profits as dividend and also making the effective analysis in which they are expanding also. The returns Bega Cheese is offering on its equity is quite less in the year 2019, but the company has made sufficient efforts on earning higher net profit to offer a higher return to satisfy their stakeholders. As the industry average of returns is set at 3.27%, this might result in the stakeholders of Bega Cheese to go to some other business of this industry to have their investment to gain better returns.

The profitability margin in context with gross profit, net profit as well as operating profit has a negative industry margin, that depicts that the industry is having losses in their overall operations. Bega Cheese has outperformed from the competitive businesses and from the industry and has earned profits. The net profit as well as the operating profit has increased from the previous financial year that shows that company has made its operations more efficient by enhancing their operational working and ultimately having the business profits.

Bega cheese has a diversified portfolio and a good brand value this is the reason why company has earned slight profits in the situation where the industry has to bear huge losses.

Efficiency ratios

The inventory turnover ratio of the company shows a situation in which the inventory of the company has the capacity to have the days round for establishing their position and having the all-round business inventory. As compared to the industry average the inventory turnover of Bega Cheese is comparatively lesser. Days inventory as per the industry set average is higher, that shows a situation that Bega cheese requires more days for making the turnover. The industry average shows 66 days while the company is having 80 days and 77 days in 2020 and 2019 respectively. From the overall efficiency position of the company as ascertained form its efficiency ratios of the company shows a position that Bega Cheese has efficiency in its operations and is effectively managing the receivables and the payables of the business. The Bega cheese is constantly moving to improve its efficiency as the level of debtors has enhanced and also is performing at a good position in 2020 in comparison with the industry average.

Capital structure ratios

For having efficiency in the operation and to have ample of finance, business undergoes with the proper capital formation and for this the businesses focus on the combination of equity and debt in their capital structure and also having the best optimization so that the cost of capital is at its minimal.

Bega Cheese has the ratio of debt to equity of 38.78% in 2019 while the ratio has declined in the year 2020 to 31.39%. The industry average is at the position of 37.38%, this depicts that Bega Cheese is operating at a better position in comparison with the industry ascertained average of debt and equity. Debt and Equity ratios are also computed separately to shows their position in regards with the Total assets. The analysis have drawn that the debt ratio has declined in the year 2020 while the equity has enhanced.

Market performance ratios

From the overall analysis of the financial ratios of the company, it can be analyzed that the companies operating in a very good position as compared to are industry ratios in the majority of the factors. While some of the ratios depict a position in which industry is performing better but in the overall aspect, it can be noted that Bega Cheese is one of the efficient entities in the sector that is operating as a profitable entity and making its position to be as an effective one in the market (Bega Cheese, 2021).

The investor shall focus on investing in this business because of its profitability aspects and the payout ratio of the dividend that is giving to its stakeholders.  The dividend payouts are constantly rising year to year and the companies offering a higher rate of return to their equity holders and the other stakeholders attached with it (Le and Viviani, 2018).

It is a financially efficient company that has made the operations go on a level where the profitability is increased and also the business operations are enhanced not only in the nation but also on the globalized change (Kadim, et. al., 2020). At the time when the company has made its operations go on a better scale, then two it has made the dividend supplies to the stakeholders in a good position so that the expansion plans do not the motor with the investors to invest in the business and have a constant flow of dividend on the shares that they own.

The earnings per share has increased in the year 2002, where Bega Cheese is offering higher earnings to its stakeholders in comparison from the offering that they have in 2019. The EPS has increased in 2020 but the level of dividend has declined by 0.01 cents in the year 2020. Even after having higher profits, the dividends that were paid were comparatively lesser. Huge level of deviation is noted in the price earnings ratio.

The overall market of Bega Cheese is effective and is showing an enhanced position. The share values is enhancing and also the overall Bega Cheese portfolio has enhanced in the overall industry aspects.

Horizontal analysis  

Horizontal Analysis of Income Statement

Item20202019Change% change
Total Revenue1493.2191419.95273.2674.90%
Total gross profit289.048279.7469.3023.21%
EBIT31.0458.37922.66673%

There is no change observed in the level of gross profit in the business as it has remained in a similar position in both years. The total revenue has been increased by 4.90% and in contrast. Also , there is COGS has increased from 2.86% in 2017 to 5.61% in 2020 , however drop is being observed in interest exp of the company vs LY i.e. from 20 Mn in LY it has dropped to 11 Mn in current year.Also , the Selling and G&A cost has been increasing for Bega cheese Ltd with steady pace which has increased from 237 Mn in 2019 to 260 Mn in 2020 The EBIT of the company has taken a huge increase in the year 2020 and it has increased by 73% that shows that the company has enhanced its operations so that to earn the higher end profits to earn enhanced incomes and having the overall profitability rates.

Horizontal Analysis of Balance sheet

Item20202019Change% change
Total Assets14231501(78)-5.48%
Total Liabilities288236.451.617.91%
Shareholders’ Equity814825.9(11.9)-1.46%

There is a change observed in the decrease of total assets in comparison to that of last year and this change is negative that is showing a position the total assets of the company has declined that will also show a position in which the returns might also decline. The liabilities have depicted the increase and it might show a position that the company has increased its debts or might have made the change in the number of liabilities (Le and Viviani, 2018). Further more there has been decline in absolute cash and short-term investments from 29 Mn in 2019 to 23 Mn to 2020. Similar drop is being observed in inventory and receivable as well i.e. by from 273 Mn to 257 Mn in inventory and 170 Mn to 111 Mn in receivable. However increase is observed in payables from 195 Mn in 2019 to 202 Mn in 2020 while long term debts has dropped from 316 Mn in 2019 to 256 Mn in 2020.

Recommendations and overall assessment                                                   

1) Has the reporting year been better than the prior reporting year for the company?

Yes, the position of the current financial years has depicted a position that is better in comparison to the previous year’s financial performance. The company is improving its position with every passing year and is making an effective overall position so as to establish an improved financial position every year.

(2) Will the company succeed in the future?

As it is observed that the company’s financial position is going well in the following year at every aspect and is also depicting a high-end performance in the financial prospects. In the future, the company will succeed as per its financial aspects and also because of the value of the brand in the global market.

(3) The likelihood of a merger or acquisition of the company?

The company need not undergo mergers as it is already performing at a very efficient position in the global market. To enter the global market where it has potentially not discovered itself, then the business shall focus on making the acquisitions of the smaller firms to expand its brand value and also establishing itself as a successful brand in the market and making the overall improvement.

(4) Suggest what should the company be doing to help it succeeds

The trend of the market shall be developed in a more efficient way and the horizontal analysis shall constantly make their financial position stronger and then developing the financial trends and making the overall improvement so that the other firms can positively come to the brand for mergers and acquisitions and having the influential impact as an established brand in the market.

 (6) Would you invest in this company?

As an investor, I would be willingly investing in the company because of its good market reputation, its enhanced value and brand portfolio, and the level of dividends it is offering to the shareholders.

I would suggest making an investment in the company.

References                                                                                                    

  • Akhtaruzzaman, M., Boubaker, S. and Sensoy, A. (2021). Financial contagion during COVID–19 crisis. Finance Research Letters38, p.101604.
  • Albulescu, C. (2020). Coronavirus and financial volatility: 40 days of fasting and fear. arXiv preprint arXiv:2003.04005.
  • Annual Report, (2020). Bega Cheese. Retrieved from: https://www.begacheese.com.au/wp-content/uploads/2020/09/Bega-Cheese-Ltd-Annual-Report-2020-Interactive.pdf
  • Bega Cheese, (2021). Retrieved from: https://www.begacheese.com.au/
  • Broadstock, D.C., Chan, K., Cheng, L.T., and Wang, X. (2021). The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China. Finance research letters38, p.101716.
  • Chan, S.W. and Chong, M.W. (2017). Sentiment analysis in financial texts. Decision Support Systems94, pp.53-64.
  • Easton, P.D., McAnally, M.L., Sommers, G.A. and Zhang, X.J. (2018). Financial statement analysis & valuation. Boston, MA: Cambridge Business Publishers.
  • Kadim, A., Sunardi, N. and Husain, T. (2020). The modeling firm’s value is based on financial ratios, intellectual capital, and dividend policy. Accounting6(5), pp.859-870.
  • Le, H.H. and Viviani, J.L. (2018). Predicting bank failure: An improvement by implementing a machine-learning approach to classical financial ratios. Research in International Business and Finance44, pp.16-25.
  • Nugraha, N.M., Puspitasari, D.M. and Amalia, S. (2020). The Effect of Financial Ratio Factors on the Percentage of Income Increasing of Automotive Companies in Indonesia. International Journal of Psychosocial Rehabilitation24(2), pp.2539-2545.
  • Wild, J. (2019). Financial Accounting: Information for Decisions, 9e.

Appendices

Profitability and Market Ratios – BGA
  
 20202019Average for Industry
  
Return on EquityNet Profit / Average Equity 
 20.047/((573.57+561.593)/2)5.153/((573.571+473.76)/2) 
  
 3.53%0.98%3.27%
  
Return on AssetsNet Profit / Average Total Assets20.047/((1423.413+1501.177)/2)5.153/((1501.177+1216)/2) 
  
 1.37%0.38%2.47%
  
  
Gross Profit MarginGross Profit / Sales or Revenue289.048/1493.219279.746/1419.952 
  
 19.36%19.70%33.43%
  
  
Net Profit MarginNet Profit / Sales or Revenue20.047/1493.2195.153/1419.952 
  
 1.3%0.40%-36.31%
  
Operating Profit MarginEBIT / Sales or Revenue31.045/1493.2198.379/1419.952 
  
  2.1%0.60%-33.49%

Liquidity ratio

Liquidity Ratios – BGA
  
 20202019Average for Industry
  
Current RatioTotal Current Assets / Total Current Liabilities409.685/305.974321.24/203.22 
 1.341.52 
 1.34:1 times1.52:1 3.3:1
  
  
Quick Ratio(Total Current Assets – Inventory) / Total Current Liabilities(409.685-257.372)/305.974(321.24-272.625)/203.22 
 0.50.24 
  0.5:1 times0.24:1 times 1.84:1

Market Performances

Market Performance Ratio – BGA
  
 20202019Average for Industry
  
Earning Per ShareProfit After Tax/Number of Shares21.268 / 214.1634.447/207.222 
                           0.10                            0.02 
 0.10 per share0.02 per share0.11
  
  
Dividend per shareDividend/Number of Shares10,722/214,16311,755/207,222 
                           0.05                            0.06 
 0.05 per share0.06 per share61.92%
  
  
Price Earnings RatioMarket Price Per Share / EPS4.22 / 0.104.78/0.02 
                         42.29239 
  42.29                        239.0049.06

Efficiency Ratio

Efficiency Ratios – BGA
  
 20202019Average for Industry
  
  
  
Inventory Turnover RatioCOGS / Average Inventory1204.171/((257.372+272.625)/2)1140.206/((211+272.625)/2) 
  
 4.554.71                  5.29
  
  
Days Inventory365 /Inventory Turnover365/4.55365/4.71 
  
 80 Days77 Days 69 Days
  
Accounts Receivable Turnover RatioCredit Sales / Average Accounts Receivable1493.219/((117.419+179.910)/2)1419.952/((179.910+221.431)/2) 
  
 10.047                11.37
  
Days debtors365 /Debtor Turnover365/10.04365/7 
 36 Days52 Days 32 Days
  
  
  
  
  
Accounts Payable Turnover RatioCredit Purchase / Average Accounts Payable1204.171/((253.389+274.877)/21140.206/((274.877+225.910)/2) 
  
 4.564.55 
  
Days Payables365 /Payable Turnover365/4.56365/4.55 
 80 Days80 Days 
  
Cash Conversion CycleDays Receivable+Days Inventory-Days Payable36+80-8052+77-80 
  36 Days49  Days 

Capital Structure Ratio

Gearing Ratios – BGA
  
 20202019Average for Industry
  
Debt to EquityDebt / Equity255.550/ 814.039316.058 / 815.014 
                                    0.31390.387794565 
 31.39%38.78%37.38%
  
  
Debt ratioTotal Debts / Total Assets255.550/ 1423.413316.058/1501.177 
 0.1795332770.21054013 
 17.95%21.05% 
  
  
Equity RatioTotal Equity / Total Assets814.039 / 1423.413815.014 / 1501.177 
 0.5718923460.542916658 
 57.19%54.29% 
  
  
  
Interest coverage ratioEarning before interest but after tax / Interest Expense(31.045+11.280)/11.28(8.379+20.363)/20.363 
 3.7522163121.411481609 
  3.75 Times1.41 Times 

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