Discuss about the Financial Analysis on Blackmore.
Overview of Firm and Strategy
The case study of this report is an Australian company named Blackmores. Blackmores has business in production of goods and services, which supply nutrients such as vitamins, minerals, herbs. The company use natural approach in production with the concern of people health. Blackmores has large product line with more than 500 products. The company has more than 1000 and has presence in various Asian countries such as China, Malayasia, Korea, Singapore, Taiwan, Hong Kong, Macau, Thailand and Cambodia. This company operates in Australia and New Zealand (blackmores.com.au, 2015). Main strategies of company are as follows:
(1) Meeting customer needs - This Company presently focuses on digital marketing for brand promotion and tries to increase the product lining.
(2) Growth of business in Asia - Growth of the company in Asian market is key driver of its business. Therefore, a regional management team has been employed in order to improve efficiency of the business performance of the company.
(3) Leadership in product development- The Company gives priority to the continuous innovation of production process and development of product range. Blackmores has leadership in market through providing superior branding in several segments.
(4) Effectiveness of operation – The aim of the company is to increase efficiency of the company by investing in supply chain management.
Company’s recent financial performance depicts that it has good prospect in future.
Financial ratios of Blackmores have been tabulated based on collected data from company’s financial statement of 2013, 2014 and 2015.
Profitability ratios are presented below:
Above table shows, that gross profit margin of the company has increased from 2013 to 2015 (Blackmores, 2015; 2014; 2013). Gross profit indicates company’s financial health during an accounting year. However, gross profit margin not always shows actual health of the company. Gross profit margin can be derived by dividing gross profit by revenue. Increasing gross profit margin indicates that company has successfully earned profit by improving its supply chain and enhancing operational efficiency. The company has experienced about 40% increase in sales in recent years. The net profit margin of the company is also rising, which indicates that Blackmores has succeeded to reduce its operating cost along with increasing revenue during these years. Return on assets has improved from 2013 to 2015 (Blackmores, 2015; 2014; 2013). This ratio indicates that the company has been able to employ its assets into productivity growth. Good quality assets help the company to develop infrastructure to increase production. Assets can be used in marketing, improving supply chain and logistics, which facilitates future growth of the company. Return equity is showing the same result. The above table shows that company’s profitability has improved in 2015 from 2014.
The above table shows that liquidity ratios, which indicates the asset base of the company in order to finance its liability. Current ratio indicates company’s ability to meet its liability using current assets in short term. Investors generally prefer the current ratio to be 2, which indicates that company’s current ratio is more than double (Brigham & Ehrhardt, 2013). The table shows that current ratio has fallen from 2013 to 2015. As the profitability ratio shows that return from asset has increased in 2015, it is likely that current ratio has been reduced due to increase in current liabilities. Trade payable in liability side has increased from $38.37 mn during 2013 to $94.91 mn during 2015. Another contributor of low current ratio is hike in tax liability from zero to $12.86 mn during 2015. Acid test ratio or quick ratio has fallen over the years. The reason behind low quick ratio is increase in inventory. Higher sales requires high amount of inventory purchase (Brealey, Myers & Allen, 2008). Higher amount of inventory reduces liquidity of the company. Net working capital shows the same result.
Leverage ratio shows company’s capital in comparison to its debt. Debt ratio shows percentage of its debt compared to its total assets (Parrino & Kidwell, 2011). Decrease in debt ratio is good sign for the company. The table shows that debt ratio has decreasing trend during three years, which indicate improving financial health of the company despite having falling current ratio. Equity ratio is the opposite of the debt ratio. It indicates how much proportion of total assets the shareholder of this company finances. Increasing value of this ratio is desirable for a company (Petty et al., 2015). Financial statement of Blackmores indicates slow growth however; increasing equity. Decreasing debt to equity is good for a company as it indicates improvement in capital structure of that company. Increasing value of time interest earned is desirable for the profitability of the company (Vogel, 2014). All the leverage ratios of the company indicates Blackmores has low debt load compared to its total assets. Blackmore’s leverage ratios show that the company’s shareholders hold greater assets compared to its creditors.
Management of Efficiency Ratios
Efficiency ratio of a company shows how efficiently a company can utilise its assets in order to generate income. Management, investors and creditors use these ratios to analyse company’s operational efficiency. Table shows that the receivable turnover ratio has decreased from 2013 to 2014 but increased in 2015. The inventory turnover ratio has dropped during 2014 and further increased significantly due to increase in cost of goods sold. Rise in cost is justified as the demand for company has increased overtime.
Payable turnover ratio has decreased for three years with the increase in available credit period. This factor may be attributed to the economies of scale. As the company gets economies of scale, it can able to operate at a low cost. Therefore, the chance of availing credit increases. A higher account payable turnover ratio is more favourable (Delen, Kuzey & Uyar, 2013). However, this ratio is decreasing for the company. This indicates that Blackmores pay off the supplier at a faster rate. Cash conversion cycle of a company measures the number of days required to receive money from investment in inventory. A low cash conversion cycle indicates greater liquidity of the company (Said, 2012). It indicates that the account receivable and payable period is shorter for the company. The data in the table shows that this ratio has drastically fallen from 2013 o 2015.
Market Performance Ratio
It is seen from the table that earning per share (EPS) of the company has increased overtime. However, this increase in 2015 is justified. As the sales have grown in 2015, net profit margin of the company has increased. Therefore, profitability of the company have increased in this period. High net profit margin induces investors to invest in the business more. Share value in the market increases as a result. Higher EPS indicates good performance in the market. Higher P/E ratio has put forward the company. A high P/E ratio indicates market expect the growth of the stock price (Schonbohm, 2013). Higher value implies market pays more price than its current market value. The P/E ratio of Blackmores indicates that the stock price of the company is likely to fall in future.
Divident payout ratio shows how much the company pays out of its profit in the form of shareholder’s dividend. The large company prefers a higher dividend payout ratio. However, financial data shows that the company pays lesser dividend compared to its EPS. Downward trend in dividend payout ratio is a concern for the company (Petty et al., 2015). Dividend yield ratio has a decreasing trend in this company during the three years, although dividend per share in 2015 was 75% more compared to that of 2013-14.
Limitation of Ratio Analysis
Investors and creditor use ratio analysis before financing the company. These ratios depict financial status of a company. These ratios give an insight about company’s liquidity, capital structure and profitability. However, as argued by Brealey, Myers & Allen (2008), these ratios do not provide the true features of the company. These ratios have some limitations, which are discussed below:
The ratio analysis is done using historical data of the company. It cannot determine future performance of the company. Some information in the income statement is presented at current cost. On the other hand, some elements in the balance sheet are presented at historical cost. Hence, this disparity in data cannot give desirable result of financial ration (Parrino & Kidwell, 2011). Therefore, prediction of the company’s performance may be inaccurate.
The calculation of the financial ratios does not include inflation effect on company’s financial statement. The inflation effect changes the value of money from one period to other. Hence, comparison of between two periods would be appropriate. Furthermore, the operational structure of the company may be changed after a certain period.
Moreover, the calculation method of different financial ratios varies across different company. Accounting policies may differ. In this case, comparison between two companies would be inappropriate. Financial ratios are accurate when the financial measure and financial report of this company is accurate. As financial ratios are dependent on financial statement such as income statement and balance sheet of the company, any flaws will false result about company’s performance (Brigham & Ehrhardt, 2013).
Usefulness of the Public Information Available
The publicly available information about Blackmores financial statement are useful while analysing company’s financial performance. The annual financial report of the company consists of income statement, balance sheet and ash flow statement. The financial statement provides information about company’s annual revenue, profit and direct and indirect costs. From these data, the analyst can get an idea about the liquidity position of the company. If the ratios and capital structure shows negative result, it is a matter of concern for the stakeholders and investors of the company. A good financial position impress an investors and therefore, chance of getting more finance increases in future (Vogel, 2014). Fund is always needed for a company for its future growth.
Creditor of the company prefers higher current ratio as this indicates greater liquidity of the company. Higher liquidity indicates that the company will be easily able to meet its short-term debt. Sometimes there may be such situation that the company needs immediate fund to purchase capital goods or to meet any unintended situation. Availability of liquid assets, credit helps to face the situation without having concern for fund. Financial statement gives a view of the performance of the company’s stock in the market.
The publicly available information in company’s annual report is a part of director’s report, where different segments of the business are discussed. An individual can get an idea about company’s current business environment, competiting environment. Company’s data can be available from different sources (Schonbohm, 2013). Company’s performance in the main product and in both regional and national market can be analysed using financial statement report. Various presentations by investors and conferences give the idea of company’s financial performance. From the present performance, investors and company’s management can predict the performance in future. From the viewpoint of an investor, it can be said that an extensive amount of information is available in the public domain.
The report has analysed the financial performance of Blackmores during 2013-15. The financial performance is measured using different ratios. Different financial ratios such as company’s profitability, efficiency and leverage ratios have been discussed. The performance of the company is promising. However, a few of the ratios has shown negative performance. The stock price of the company is seen to be over estimated by the market. Use of financial ratios has some limitations, which have been discussed in the report. Before investing in a company, an investors always need to analyse the financial positions. The financial ratios of Blackmores from 2013-15 have been discussed.
Brealey, R., Myers, S. & Allen, F. (2008), Principles of Corporate Finance (Global edition), New York: McGraw Hill Publications
Brigham, E.F. & Ehrhardt, M.C. (2013), Financial Management: Theory & Practice, New York: South-Western College Publications
Parrino, R. & Kidwell, D. (2011), Fundamentals of Corporate Finance, London: Wiley Publications
Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin J.D. & Burrow, M. (2015), Financial Management: Principles and Applications, Sydney: Pearson Australia
Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications,40(10), 3970-3983.
Said, D. (2012). Efficiency in Islamic banking during a financial crisis-an empirical analysis of forty-seven banks. Journal of Applied Finance & Banking, 2(3), 163-197.
Schonbohm, A. (2013). Performance measurement and management with financial ratios: the BASF SE case. Hochschule für Wirtschaft und Recht.
Blackmores 2013, Annual Report 2013, Retrieved from August 27, 2016 from https://www.blackmores.com.au/about-us/investor-centre/annual-and-half-year-reports
Blackmores 2014, Annual Report 2014, Retrieved from August 27, 2016 from https://www.blackmores.com.au/about-us/investor-centre/annual-and-half-year-reports
Blackmores 2015, Annual Report 2015, Retrieved from August 27, 2016 from https://www.blackmores.com.au/about-us/investor-centre/annual-and-half-year-reports