With regards to financing at the end of FY2016, the following observations can be made (Blackmores, 2016).
Total shareholders’ equity = $ 178.26 million
Out of the above, 75% of the equity is on account of retained earnings which have risen rapidly in the recent years owing to exemplary performance of the company (Blackmores, 2016).
Long term debt = $55.45 million
Further, there is no short term debt present for the company and thus, the total debt on the books of the company amount to $ 55.45 million
Hence, debt to equity ratio = (55.45/178.26) = 0.31
Further, only 23.72% of the total financing is derived from debt and the remaining is derived by way of equity.
The break up for the company’s long term debt for FY2016 and FY2015 is indicated below (Blackmores, 2016).
![]()
The break up for the company’s equity for FY2016 and FY2015 is indicated below (Blackmores, 2016).
![]()
It is apparent from the above that the company has a very low leverage since the overall contribution to debt continues to remain small as a proportion of the overall equity and the total finances. One of the main advantages of the low leverage which is used by Blackmores is that there are reduced solvency risks going ahead specially in wake of the any adverse economic scenario. Besides, based on strong internal accruals the company seems well poised to expand the footprint in more geographies without affecting the financial health of the company which is critical as it allows the company to remain less leveraged (Damodaran, 2010). Besides, this would also provide sufficient scope for the company to borrow money ahead if required for research and innovation which is the key to maintain competitive advantage in the given industry along with adequate spending on marketing and promotion (Titman et. al., 2016).
However, this strategy of keeping low leverage and relying on long term financing has its replications as well. The first aspect deals with the relative cost of debt and equity. Considering that equity has higher risk associated in comparison with debt and as a result, the cost of equity is significantly greater than that of debt and hence considering the current mix of debt and equity, the overall weight average cost of capital for the various projects undertaken by the company would be high thus resulting in a higher hurdle rate for the project, leading to being very selective about the projects and hence missing out on potential opportunities (Brealey, Myers and Allen, 2012). Additionally, one of the key advantages of high proportion of debt financing is that tax deductions can be claimed for the interest payments which help in realizing tax savings which would be critical for Blackmores also (Damodaran 2010).
Hence, considering the respective pros and cons of the current financing strategy of Blackmores, it makes sense for the company to aim at an optimal balance in this regards which lead to the lowest possible cost of capital for the firm thus enabling it to maximum the underlying value. Currently, it seems that the financing strategy is skewed against debt but going ahead the proportion of debt should be increased in a manner that returns are positively impacted (Titman et. al., 2016).
References
Blackmores (2016), Annual Report FY2016, Blackmores Website, [Online] Available at https://www.blackmores.com.au/about-us/investor-centre/annual-and-half-year-reports [Accessed at May 03, 2017]
Brealey, R.A., Myers, S.C. and Allen, F. (2012) Principles of corporate finance. 2nd edn. New York: McGraw-Hill Inc
Damodaran, A. (2010) Applied corporate finance: A user’s manual. 3rd edn. New York: Wiley, John & Sons.
Titman, S, Martin, T, Keown, AJ & Martin, JD (2016), Financial management: principles and applications, 7th edn, Victoria: Pearson Australia,
