Write a Report on Financial Analysis of Balckmores Ltd.
The analysis of the financial statements of a company provides evaluation of the company’s profitability, liquidity, solvency, and efficiency which are four crucial aspects of the business (Gibson, 2012). This analysis has impact on the investor’s decision, lender’s decisions and the government’s revenue policies. In this context, this report has been prepared to provide financial performance analysis of Blackmores for the year 2015.
Overview of Blackmores
Blackmore limited is listed on the Australian Stock Exchange having headquarters in Australia. The company was incorporated way back in 1930 and since then it has grown magnificently standing with $471.62 million revenues in 2015 (Blackmore Limited, 2015). Blackmore operates in the consumer goods industry with the main products being produced for human and animal healthcare. The company’s mission is to expand the business operations outside Australia and increase its reach to a large part of population. For the achievement of the mission, the company is working with the strategy of delivering quality products. The focus of the company is on improving the quality of products, which will push the demand upside. Further, the company is also considering expanding the business to the Asian countries namely China and Malaysia (Blackmore Limited, 2015). The company is running with the goal of satisfying the customers to the hundred percent. It believes that customer satisfaction is necessary for the achievement of the company’s mission and vision.
Financial Analysis of Blackmores
In order to analyze the financial performance, it is crucial to extract the information from various sources which mainly comprise the financial statements, annual report, and board’s report. The financial statements of a company comprise of three main components such as income statement, balance sheet, and the cash flow statement. The different piece of information is provided by these different components of the financial statements. Further, the companies listed on the stock exchange are required to prepare the annual reports that contain essential information about the company’s business. The board’s report provides information about the company’s future plans and prospects.
The information collected from the above discussed resources is analyzed by applying the financial evaluation tools. The ratio analysis is the most commonly used financial evaluation tool (Tracy, 2012). However, the other evaluation tools such as vertical analysis and horizontal analysis are also used in assessing the financial performance of a company. The ratio analysis covers all crucial aspects of the business such as profitability, liquidity, solvency, and efficiency. The ratios not only provide analysis into the trend but these also facilitates the comparison of the company with its peers (Tracy, 2012).
The horizontal analysis on the financial statements of Blackmores Limited is presented in the appendix-1.
Figure 1: Revenue growth of Blackmores
It is depicted from the chart shown above that the revenues of the company has grown significantly in the year 2015 as compared to 2013. The revenues of 2015 are up by 44.34% as compared to the year 2013 (appendix-1). The primary reason for increase in the revenues over the two years appears to be the expansion that company has carried out.
Figure 2: Growth in Net Profit of Blackmores
Further, there could be observed a huge improvement in the net profits over two years time period. The amount of net profit increased from $25 million in 2013 to $47 million in 2015 registering an increase of 88%. Further, the gross profit was also seen been to be increasing by 47.25% (Appnedix-1). The positive growth in the gross profit and net profit is not only the result of increased revenues but the reduced costs and expenses have also contributed in that.
As regards financial position, the total assets of the company have increased by 26.84% over the period from 2013 to 2015. Further, the total liabilities increased by 20.30% (Appendix-1). It could be observed that increase in total liabilities has been more than the increase in total assets which depicts improvements in the net worth. The improvement in the net worth indicates good solvency condition of the company. However, the company has been less concentrated on its liquidity position. The increase in current liabilities has been more than the increase in current assets indicating deterioration in the liquidity (Tracy, 2012).
Further, the financial performance and position of Blackmores Limited has been analyzed in detail employing the ratio analysis. The financial performance of the company has improved as depicted from the net profit margin, gross profit margin, and return on equity. The net margin increased from 7.65% in 2013 to 9.96% in 2015. The gross margin increased from 66.67% in 2013 to 68.01% in 2015. The improvements in the net margin and gross margin depicts that the company has been able to save costs and expenses over the period. Further, the return on equity has increased from 25.51% in 2013 to 35.34% in 2015 (Appendix-2). The increase in the return on equity shows that the company has been able to provide good return to its investors.
Though the financial performance of the company has improved but the liquidity has gone weaker over the period. The decrease in the current ratio shows deterioration in the liquidity position. The current ratio has reduced from 2.76 times in 2013 to 1.63 times in 2015 (Appendix-2). Further, the debt ratio has reduced from 1.36 times in 2013 to 1.20 times in 2015. The reduction in debt ratio shows improvement in the solvency position (Tracy, 2012).
The assets turnover ratio has increased from 1.42 times in 2013 to 1.61 times in 2015 which indicates that the management has been efficient in utilizing the resources. Further, the inventory turnover ratio has also increased from 8.18 times to 12.10 times (Appendix-2). However, the analysis of receivables days shows that the company has been liberal on its credit policy. The receivables days increased from 71 days in 2013 to 83 days in 2015.
As regards market performance, the PE ratio and dividend payout ratio both have decreased over the period from 2013 to 2015. The PE ratio of the company was 16.77 times in 2013 which decreased to 14.29 times in 2015. The decrease in PE ratio indicates adverse performance of the stock in market. Further, the dividend payout ratio has also decreased from 85.90% in 2013 to 75% in 2015.
Limitations of Ratio Analysis
The ratio analysis is a highly useful tool being applied in analyzing the financial performance of a company but there are certain limitations that the analyst should take into accounting (Grier, 2007). The first limitation of the ratio analysis is the use of historical cost in the preparation of the financial statements. The financial statements are prepared according the provisions financial reporting framework which requires the use of historical cost. The use of historical cost limits the use of ratios for analyzing what has happened in past. The ratio analysis does not provide a view of future. Further, the data used in the ratio analysis comes from the financial statements which are prepared using different policies and methods. The accounting rules permit the use of different accounting methods which could lead differences in the accounting figures of two companies. Therefore, the comparison based on the ratios would become less effective in such a case. Apart from that the ratio analysis does not cover other aspects of the business such as quality improvement, customer satisfaction and employee satisfaction (Grier, 2007).
Information in the Annual Report and its Use
It is the requirements of the legal provisions for the listed public companies to prepare and submit the annual report to the Australian Securities and Investment Commission. Therefore, listed companies prepare the annual report each year (Friedlob & Welton, 2008). Generally, the content of the annual report is divided into three major parts such as business overview, director’s report, and auditor’s report. The business overview section provides summary of the financial performance over the period of 3 to 5 years. This information is useful to have a quick look on the company’s financial worth from the investor’s perspective. Further, the director’s report contains information on the company’s current and future prospects. The commitment of management for the future expansion and the strategic direction of the company could be observed from the director’s report.
The auditor’s report section covers the opinion of the auditor on financial statements of the company and the certified extract of financial statements. This section of the annual report provides the most important information for the use of all the stakeholders. The company’s income statement, balance sheet, and cash flow statement are presented under this section, which provide the information required for the financial analysis. Further, the annual report also provides information on the corporate social responsibility of the company (Ehrhardt & Brigham, 2016).
From the discussion carried out in this report, it can be concluded that the financial statements of the company contains the useful information required for financial analysis of the business. Further, the financial evaluation tools such as ratio analysis, horizontal analysis, and vertical analysis are applied to evaluate the financial performance of the company.
Annual Report of Blackmores. (2013). Retrieved August 18, 2017 from https://www.blackmores.com.au/about-us/investor-centre/annual-and-half-year-reports
Annual Report of Blackmores. (2015). Retrieved August 18, 2017 from https://flipflashpages.uniflip.com/2/41140/355972/pub/document.pdf
Ehrhardt, M.C. & Brigham, E.F. (2016). Corporate Finance: A Focused Approach. Cengage Learning.
Friedlob, G.T. & Welton, R.E. 2008. Keys to Reading an Annual Report. Barron's Educational Series.
Gibson, H.C. (2012). Financial reporting and analysis. Cengage Learning.
Grier, W.A. (2007). Credit Analysis of Financial Institutions. Euromoney Books.
Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net