A2 Milk Company: Stocks, Business Segments, Revenue, And Profitability In 2021 Essay.

Business Segments and Products Offered by A2 Milk Company

The a2 Milk Company Limited is based in New Zealand whose stocks are listed in two stock exchanges namely, NZX and ASX. The ticker symbol of the company is ‘A2M’ in Australian Stock Exchange. The products offered by the company include A2 Milk, diary and infant formula. A2 corporation commercializes the intellectual property that relates to the A1protein-free milk, which is sold under a2 brands. The company offers its products in different parts of the world including New Zealand, Australia, China and United States of America.

The business segments of a2 Milk Company Limited is based on the geographical locations in which the company operates its business. The three reportable segments of the company include Australia and New Zealand, China and Other Asia, and USA segment. Under the first segment, the business reports external revenue from the sale of infant nutrition, dairy products along with loyalty, rent and license fee income. The second segment represents revenue generated from the sale of milk, infant nutrition and the other dairy products in China and other parts of Asia. The last segment represents the sales revenue from license fees and the milk sales.

The company has removed the UK segments after ceasing its fresh milk trading operations at the end of the year 2019. The operating results of the company is monitored by the management separately for the purpose of decision making in resource allocation and the assessment of performance. The purpose of a2 Milk company is to harness the nutritional wonders of nature. The revenues of the business are segmented into three categories on the basis of products offered, namely, Liquid Milk, Infant Nutrition and other Nutrition. 

The a2 Milk company has experienced a downfall in revenue and growth during the covid-19 period. The Group revenue has declined by 30.3% to $1.21 billion during the year 2021. The financial performance of the Group was highly affected by volatility and the level of uncertainty caused by the pandemic during the year 2021. The EBITDA for the year 2021 was also reduced by 77.6% to $123.4 million (Annua Report, 2021). The Net profit after tax of the company has also reduced by 79.2% during the year the current financial year. The operating cash flow of the company was $89.4 million at the end of the year June 30, 2021. The company’s profitability position has deteriorated significantly due to the impact of Covid-19 on the business operation. The regional performance of the company indicates that China Label infant nutrition has increased by 15.4% and Australian milk sales by 10.8% whereas revenue in USA has declined by 3.7%. 

• The total revenue of the firm has declined by 30.3% due to the impact of Covid.
• The gross margin of the company has also reduced to 42.3%. It was impacted by the increased cost of goods sold which is driven by lower volumes and increase in raw milk prices.
• The revenue of $583.4 million in the China and Other Asia was down by 16.6% and the EBITDA was down by 66.4%.
• The Australian fresh milk revenue increased by 10.8% to $169 million during the year 2021. The company has able to achieve the record market share of 12.2% at the end of June 2021.
• In the North America, revenue from USA has decreased by 3.7% to $63.6 million. The EBITDA from this segment has reduced by 22.8%.
• The revenue segment of Australia and New Zealand was impacted by the covid in infant and other nutrition segment, which has resulted in the decline of revenue by 42%. The infant nutrition revenue has reduced by 52.1% during the year 2021.
• The Overall EBITDA of the Group was $123.4 million, with NPAT of $80.7 million.
• The total asset of the company has reduced from $1.45 billion to $1.37 billion during the year 2021.

• The Covid-19 has resulted in volatility and high level of uncertainty in business operations.
• The actions taken by the company during the covid-19 have given the stronger platform for the business.
• Due to the impact on daigou and reseller channel during Covid-19, it becomes important for the business to evolve its route. The company will perform brand marketing programmes and evolution of its route in parallel (Annual Report, 2021).
• The company has also realized a need to change its approach of marketing due to the change in the business environment and consumer behavior.
• Overall, the company’s future outlook is positive.
• The outlook assumes that there will be no material changes in macro-economic factors such as regulatory environment, cross border rate and the foreign exchange rate.
• In the FY22, the business expects decline in infant nutrition market due to lower number of child births in the current year and previous year.
• In China label infant nutrition, the business expects increase in sales revenue in FY22, while gaining the moderate market share.
• In English label infant nutrition, the business was under pressure during FY21 and therefore, it is focusing on stabilizing the category through strategy development and implementation.
• Furthermore, the Australian liquid milk is expected to grow in FY22 due to ease in covid-19 restrictions.
• In FY22, the revenue from USA Liquid milk category is expected to increase strongly as in-home consumption is expected to remain at current levels.
• The gross margin is expected to be at similar levels than FY21. It becomes difficult to predict EBITDA due to high level of volatility and uncertainty.
• The depreciation and amortization is expected to be $20 million approximately.

The profitability position of the company has been greatly affected by the covid-19 during the current year. Overall, profitability has been reduced by a significant margin during the year 2021 when compared to the financial year 2020. The profitability ratios that are used in understanding and evaluating the performance of the company include ROA, ROE, gross margin, Net profit margin, expense to income ratio, price-to earning-ratio and cash flow to sales ratio. The ROE indicates that the company’s ability to utilize the owner’s equity in generating profit has been reduced greatly from 40.15% in 2020 to 7.27% in 2021 (Asikin, et al., 2020). The industry average for the year was 20.22%, which means that the company was performing less than most of the companies in the industry.

Revenue of A2 Milk Company

Similarly, the ROA has reduced from 31.37% to 5.71%, gross margin from 55.96% to 42.30%, net profit margin from 22.29% to 6.69%, cash flow to sales from 24.70% to 7.42% whereas the expense ratio has increased from 68.02% to 90.10%. All these ratios indicates that the profitability position has been greatly reduced during the year 2021. The ROA of the company is favorable as the ratio of 5.71% is better than the industry average of 4.82%. It means that the company was able to utilize their total assets in a better way than most of the companies (Mutai, 2020). The company has been able to achieve the gross margin of 42.30% in the current year which is better than the industry’s average of 26.39%. The net profit margin is also favorable for the company as it is able to convert 6.69% of the total sales revenue into the actual profit of the company (lehmann, et al., 2020). It is better than the industry’s average of 3.40%.

The Net Interest Income is not valid for this company as it does not engage in financial services. The expense ratio is also unfavorable for the company as it has increased from 68.02% to 90.10%. It has increased due to increase in cost of raw materials and lower volume of purchase. The dividend-payout ratio of A2M company is calculated as 0% which is due to the fact that the company does not declare any dividend during the current year and previous year. The earnings per share of the company was 52.12 cents in 2020 which has been reduced to 10.86 cents in the year 2021. This shows that the company’s profitability per share has been reduced largely.

Efficiency ratios are the ratios that indicates the ability of the company to utilize the assets owned by the company for generating revenue for the firm (Tsiouni, et al., 2022). The Asset Turnover ratio is calculated by dividing the sales revenue by the average of total assets owned by the firm. The Asset turnover ratio of the company has reduced from 1.41 times in 2020 to 0.85 times in 2021, which is also much below than the industry average of 1.42 times. This shows that the company’s efficiency in utilizing the total assets have been reduced during the year (Monea, 2019). The business efficiency of the company has reduced largely due to the covid-19 restrictions all over the world. The change in ratio is mainly due to the reduction in the net sales revenue of the firm.

The Days inventory ratio shows the number of days taken by the company to convert it’s  inventory into sales. The ratio has increased from 61.25 days in 2020 to 68.12 days in 2021, which is unfavorable for the company. This is because it indicates that the company is taking more time in selling its inventory (Kourtis, Kourtis & Curtis, 2019). The ratio was affected due to the impact of covid-19 as the sales revenue decline during this period.

Profitability Position of A2 Milk Company

The days debtor ratio indicates the ability of the company to recover the amount of debt from its customers. The ratio has increased from 14.44 days to 20.59 days, which shows that the company’s ability to collect debt has also reduced during the period. It indicates that the company is taking more time than previous year to collect the debt payment from its customers (Das, et al., 2018).

Another ratio which is used to evaluate the efficiency of the company include Times inventory ratio. It is calculated by dividing the cost of sales by average inventory. The ratio has reduced from 5.96 times to 5.36 times, which means that the company has not been able to convert the inventory into cash as before (Zajmi & Paic 2018).

The times receivable turnover ratio has also reduced from the 25.28 times to 17.72 times in the year 2021. It shows that the company’s efficiency has been reduced in collecting debt funds from the customers. It may be due to bad credit policies and inadequate collection process. A higher receivable turnover ratio is considered to be favorable as it means that the company is taking less time in collecting debt amount and the customers are playing on time.

Overall, the company’s efficiency has been greatly reduced during the financial year 2021. It is mainly due to the decline in accounts receivable turnover, inventory turnover and the increase in days debtor and days inventory. The company should focus on improving the asset turnover ratio as it has reduced drastically from 1.41 times in 2020 to 0.85 times in 2021.

The liquidity ratio shows the ability of the company to pay the short-term debt obligations of the company using the current assets owned by the firm. The liquidity position is evaluated by short-term loan providers to assess the ability of the company to repay the short-term obligations. The current ratio of the company indicates the ability of the company to repay the current liabilities using the current assets of the firm. The current ratio of the company is calculated as 3.70:1 in 2020 and 3.99: 1 in 2021. The ratio has increased which is better for the company in general. However, the current ratio of A2 Milk Company is much higher than the actual need for repaying the current liabilities. The ideal current ratio for the business is considered to be 2:1 (Sestanj-Peric, Kozjak & Kovska, 2019). In this case, the current ratio is much higher which indicates that the company is not utilizing the available current assets efficiently. The current ratio of A2 Milk company is much better than the industry average of 0.82:1, which shows that most of companies in the industry is unable to pay the current liabilities using the current assets of the firm.

Similarly, the quick ratio has also increased from 3.21:1 in 2020 to 3.59:1 in 2021. It also reflects that the company’s quick assets are sufficient to pay the current liabilities of the company (Musallam, 2018). The cash flow ratio is calculated by dividing the cash flow from operations by the total current liabilities of the company. Overall, the liquidity ratios of the company shows that the company was able to pay the short-term obligations using the current assets of the firm. However, it also indicates that the company is not utilizing the available assets efficiently as large amount of current assets remain underutilized during the last two years.

Efficiency Ratios of A2 Milk Company

The gearing ratios indicates the financial leverage of the company by comparing the debt obligations with the owner’s equity or total assets owned by the firm. The most commonly used gearing ratio is debt-to-equity ratio. The debt-to-equity ratio has reduced from 28.15% in 2020 to 26.57% in 2021, which shows that the company’s debt is much lower than the shareholder’s equity. In addition, it is also much lower than the industry average of 67.76%. It indicates that the company is relying on equity capital for purchasing assets and financing its activities (Herwati & Fauzia, 2018). The debt ratio has also reduced from 21.97% to 20.99%, which indicates that the company would be able to repay its total debt obligations by selling around 21% of the total assets only. The industry average for debt ratio is 40.39%. This shows that the company is in better position than most of the entities in the industry.

The equity ratio of A2 Milk company is higher than the industry average of 59.61%, and has increased from 78.03% to 79.01%. The debt coverage is ascertained by comparing the non-current liabilities with the current cash flow from operations. The ratio has increased to 14.94% during the year 2021 when compared to 3.24% in the year 2020. The interest coverage ratio also shows that EBIT of the company was much stronger in the year 2020 (Banerjee & Hofmann, 2018).

Overall, the leverage position of the company is favorable as the company can easily acquire funds in the form of debt capital. The leverage position of the business is much better than the industry average. However, the business should focus on improving the interest coverage ratio through higher EBIT in the coming years.

From the above discussion and analysis, it has been found that, the financial performance of the company has deteriorated during the year 2021 when compared to the previous year.      

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

Overall, the company’s financial performance has been deteriorated during the current year when compared to prior reporting period. It is mainly due to the decline in profitability ratios such as net profit margin, return on equity, return on assets and increase in the expense to sales ratio. The profitability condition of the company is mainly affected due to the decline in revenue during the reporting year.

The downfall of performance is also reflected through the efficiency ratios such as asset turnover, days debtor, days inventory, inventory turnover, and accounts receivable turnover. The asset turnover ratio has drastically reduced from 1.41 times to 0.85 times, which shows that the A2 Milk Company has not utilized the total assets of the firm efficiently.

The leverage ratio of the company was better than the prior reporting year as debt-to-equity ratio and debt ratio of the company has reduced during the current year.

Will the company succeed in the future?

The financial statement ratio analysis of A2 Milk company shows that the company has the potential to improve and succeed in future. The company’s profitability and efficiency have been reduced in the current year mainly due to the impact of covid-19 and the disruptions caused in the normal operation of the business. The profitability ratios such as ROA, ROE, Gross Margin and the Net Profit Margin was much better than the industry average. It shows that the company have the potential to perform better in the The leverage ratios such as debt-to-equity ratio and interest coverage ratio shows that the company would be able to acquire debt fund for investment purposes, which may result in higher profitability of the business.

The likelihood of a merger or acquisition of the company?

The company’s liquidity ratios such as current ratio and quick ratio shows that the company is having large amount of additional fund in the form of current assets. The company has not been able to utilize the current assets efficiently in the last two years. It may be possible for the company to acquire existing businesses in China from the available cash and short-term deposits of the firm. However, the economic outlook does not show any information about future acquisition of the firm.

The A2 Milk Company’s liquidity position is very strong and it should focus on utilizing the current assets efficiently. 

Suggest what should the company be doing help it succeed 

The profitability ratios, efficiency ratios and liquidity ratios should be improved by the company. The profitability position is dependent on the sales revenue of the firm. Therefore, the business should focus on increasing the sales revenue so that gross margin, ROA, ROE, and net margin can be improved.

In addition, the company should utilize the current assets efficiently either, by paying off debt or making profitable capital investments using cash. The days receivable ratio can be improved by giving cash discounts and different payment options to the customers. 

The Chinese government have initiated a program to address the declining birth rate in China, which will have positive impact on the revenue and the profitability of the firm in the long-term. The political factors that impact the operation of business include quotas, tariffs, taxes, price controls and non-tariff barriers such as competition, consumer laws and product registrations. 

Yes, I would invest in this company but in the form of long-term bonds or debentures. It is mainly due to the fact the company has not paid any dividend in the last two years and the equity share price has reduced sharply. The leverage ratios shows that the company has the potential to pay interest and debt obligations easily. Therefore, being a risk-averse investor, I would invest long-term bonds of the company.

References/Bibliography 

Annual Report, 2020. The A2 Milk Company. 

Annual Report, 2021. The A2 Milk Company. 

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