Financial Analysis of Capilano Honey Limited - Case Study Example

Financial Analysis of Capilano Honey Limited of the of the Table of Contents Table of Contents 2 Financial Analysis ofCapilano Honey Limited 3 Analyzing Existing Investments 3 Assessing Competitive Strengths of Capilano Honey Limited 3 Evaluating Sustainability of Competitive Strengths 5 Assessing Current Financing 5 Trade-off on Debt versus Equity 5 Costs of Debt 6 Conclusion 6 Appendices 8 Appendix 1 8 Appendix 2 8 Appendix 3 8 Appendix 4 9 Financial Analysis of Capilano Honey Limited Capilano Honey Limited (CZZ), founded in 1953, is an Australian-based organization. The company is involved in packing of honey especially for export and domestic sales (Capilano, 2015). It is regarded as one of the leading supplier of honey, thereby enjoying reputation for superior quality honey, product innovation and best practices. It has the capability to process more than 45,000 tons of honey every year and supplies it to over 30 countries around the world (Capilano, 2011). Analysis of required ratios has been done for the year 2014 and 2013. Analyzing Existing Investments The Accounting Rate of Return (ARR) of Capilano Honey Limited is 3.40 for the year 2013 and it has increased to 4.05 in 2014 (Refer to Appendix 1). The increasing rate of return signifies that it is a good company to make investment as it demonstrates an increasing ARR. The Economic Value Added (EVA) of the company is negative for both the year but it has improved as compared to previous year (Refer to Appendix 2). The ARR shows that the existing investment of Capilano Honey Limited is good as it is resulting in increasing ARR, but the EVA shows that the performance of the company is not good. The current ratio of Capilano Honey Limited comes at 2.73 for the year 2013 but it has decreased to some extent and arrives at 2.26 (Refer to Appendix 3). The slight decrease in the ratio shows that the organization will face little difficulty in paying off their obligation (Bhimani, Datar & Foster, 2002). Further, it reflects that they will face problem in meeting their short term monetary liabilities. The net profit was 4.78% in 2013 and has increased to 5.37% in 2014 (Refer to Appendix 3). It shows that it is less risky company to make investment and it also indicates the good profitability position of Capilano Honey Limited. It also indicates that they will be able to utilize total amount of cash to pay off their creditors. The debt to equity ratio was 0.55 in 2013 and has decreased to 0.26 in the year 2014 (Refer to Appendix 3). The lower ratio of Capilano Honey Limited signifies the greater security and protection to their capital. Assessing Competitive Strengths of Capilano Honey Limited The main competitor of Capilano Honey Limited is Bega Cheese Limited, which is engaged in producing both natural and processed cheese products. Bega Cheese Limited deals in dairy products, kids snacking and nutritional powders (Bega Cheese, 2014). The components which are necessary to assess the competitive strengths of a company are revenue, EBITDA (earnings before interest, tax, depreciation and amortization), profit before and after tax, net assets and earnings per share. The revenue of Capilano Honey Limited for the year 2014 was $86,003 only (Capilano, 2014), whereas Bega Cheese Limited provides revenue of $1,069,392 in 2014. The increased revenue of the competitor indicates that Bega Cheese Limited is efficiently managing its business operation and because of that, they are able to generate more revenue than Capilano Honey Limited. The EBITDA of Capilano Honey Limited was $9,054 and that of Bega Cheese Limited was $122,506 in 2014 (Bega Cheese, 2014). EBITDA provides an idea of core profitability position of an organization. As EBITDA of CZZ is less than Bega Cheese Limited, it reflects that the operating profitability of the company is not as good as its competitor (Kaplan & Atkinson, 2015). Therefore, CZZ needs to improve its operating profitability position to maintain its position in the market. Comparing the profit before tax (PBT) and profit after tax (PAT) of both the companies, it has been analyzed that the PBT of CZZ was $6,490 and that of Bega Cheese Limited was $93,580 in 2014 (Bega Cheese, 2014). The PAT of CZZ was $4,619 in 2014 (Capilano, 2014), which was very less than its competitor. Bega Cheese Limited reported a PAT of $66,055. The less amount of profits of Capilano Honey Limited than its competitor reflects that the investors will find it in terms of risky company to make investment (Saunders, Cornett & McGraw, 2006). The net asset of Capilano Honey Limited was $28,583 in 2014 and that of its competitor was $314,388. Net asset signifies the value of a particular company. High net asset of Bega Cheese Limited shows that their value is more than Capilano Honey Limited. CZZ has reported earnings per share of 54.2 and its competitor has provided an EPS of 43.44 (Bega Cheese, 2014). The result of Capilano Honey Limited is very confusing because it has resulted a lower EBITDA, PAT and PBT, but its EPS is more than its competitor, which tells that it is a profitable company and has enough profits to allocate to their shareholders. The result signifies that CZZ lags Bega Cheese Limited in several areas so; the company needs to pay attention to its profitability position in order to stay ahead of its competitor. However, the share price of CZZ is much more than its competitor, which signifies its competitive strength (ASX, 2015a). Both the companies are exposed to various risks such as foreign exchange risk, credit risk, market risk, liquidity risk and interest rate risk. The executives of Capilano Honey Limited manage their foreign exchange risk by setting a meeting on daily basis in order to scrutinize the currency exposure. They also evaluate the strategies of treasury management in relation to the current economic conditions (Capilano, 2013). Bega Cheese Limited is exposed towards foreign exchange risks due to their export of dairy products. They measure the risk by making use of sensitivity analysis as well as forward contracts are also used in order to handle this risk (Bega Cheese, 2014). Evaluating Sustainability of Competitive Strengths Capilano Honey Limited is voted as number one in terms of favorite honey of Australia (Refer to Appendix 4) (Capilano, 2015). It signifies their competitive strength over their competitors. The current share price of CZZ is 23.05 (ASX, 2015a), whereas Bega Cheese Limited reported a share price of only 4.60 (ASX, 2015b). The high share price of CZZ indicates that investors will show more interest in this company in order to make investment. The net assets of this company was less, so, in order to maintain more net assets, Capilano Honey Limited can sell off their assets to generate more cash and to keep their net assets more than their competitor. Bega Cheese Limited can catch up with CZZ on its strengths because it has also maintained a good profitability position. Assessing Current Financing Capilano Honey Limited currently raises equity through commercial bills and bank loans. They also raise capital by borrowing money from the angel investors (Capilano, 2013). They have used commercial bills of $6,664,000 in 2014 and bank loans of $6,040,783 in 2013 (Capilano, 2014). The company raises capital through equity because they are not prepared for IPO. The equity deals will assist Capilano Honey Limited to have a contact with business experts by means of investors. Financing by investors helps the organization to grow. Trade-off on Debt versus Equity The marginal tax rate is defined as the proportion of tax pertained or applied to the net income for every tax bracket. It includes local income, state and federal taxes and also the self-employment and federal payroll taxes. Capilano Honey Limited faces a marginal tax rate of 30% (Capilano, 2014). The company has tax deduction in terms of depreciation on the fixed assets like building, plant and equipment and motor vehicles. The standard rates of depreciation used are 2.5% to 20% on buildings, 5% to 40% on plant on equipment and 12.50% on motor vehicles (Capilano, 2014). It is charged in order to depreciate the net cost of every item of the fixed assets. The total depreciation charged on property and plant is $1,820,051 in 2013 and $1,873,956 in 2014 (Capilano, 2014). Capilano Honey Limited has high free cash flows like firm value and EBITDA. The high share price of the company represents its high firm value. The EBITDA is also more than its competitor, which shows that they are efficiently managing their profitability position and it is expected that they will continue to maintain it in the future also. Costs of Debt The operating cash flow of the company increased substantially because they acquired net gains in the insurance claims. Incoming cash flows of Capilano Honey Limited are used to lessen borrowings thereby leading to a decrease in debt. The company includes large cash flow which will be useful in paying off their debt. Their operating cash flow has shown a continuous increase from $1,457 in 2012 to $11,801 in 2014. At the same time, their net debt has decreased from $13,425 in 2012 to $7,593 in 2014. The assets of Capilano Honey Limited are largely intangible. As stated in the financial statement, the intangible assets were $64,823 in 2013 and $24,467 in the year 2017. The consolidated units assess the values of their intangible assets in order to find out whether there is any sign that those intangible assets were impaired. Conclusion The paper has presented a financial analysis of Capilano Honey Limited. It has been analyzed that the company has resulted an increasing accounting return, which signifies that it is a good company to make investment. The net profit ratio has also augmented as compared to previous year which indicates the good profitability position of Capilano Honey Limited. The share price and EBITDA is also more than its competitor, which signifies their competitive strength. The company can forecast their future investment opportunities by expanding their product portfolio and by making acquisition of smaller companies. They can also expand their geographical location and provide their products to other regions. It will help the company to make more sales and earn more revenue. References ASX. (2015a) CZZ: Capilano Honey Limited Retrieved from http://www.asx.com.au/asx/research/company.do#!/CZZ. ASX. (2015b) BGA: Bega Cheese Limited Retrieved from http://www.asx.com.au/asx/research/company.do#!/BGA. Bega Cheese. (2014) 2014 Annual Report: Bega Cheese Limited. Retrieved from http://www.begacheese.com.au/wp-content/uploads/2014/08/Annual-Report-June- 2014-final-signed.pdf Bhimani, A., Datar, S. M. & Foster, G. (2002). Management and cost accounting. Harlow: Financial Times/Prentice Hall. Capilano. (2011) Capilano Honey Limited: Annual Report 2012. Retrieved from http://capilano.com.au/wp-content/uploads/Annual_Report-2011.pdf. Capilano. (2013) Capilano Honey Limited: Annual Report 2013. Retrieved from https://capilano.com.au/wp-content/uploads/Annual-Report-Concise-Financial- Report-30-June-2013.pdf. Capilano. (2014) Capilano Honey Limited: Annual Report 2014. Retrieved from http://capilano.com.au/wp-content/uploads/Annual_Report-2014.pdf. Capilano. (2015) Capilano: Capilano Story. Retrieved from http://capilano.com.au/capilano- story/. Kaplan, R. S. & Atkinson, A. A. (2015). Advanced management accounting. New Delhi: PHI Learning. Saunders, A., Cornett, M. M. & McGraw, P. A. (2006). Financial institutions management: A risk management approach. London: McGraw-Hill. Appendices Appendix 1 Formula 2014 2013 Revenue 86003491 72160396 Operating expenses 6490123 4994810 Depreciation 0 0 Fixed assets 19634969 19744122 Incremental accounting income Revenue - (Operating expenses+depreciation) 79513368 67165586 Initial Investment Fixed assets + Authorised capital 19634969 19744122 Accounting rate of return (Incremental accounting income/initial investment) 4.05 3.40 Appendix 2 2014 2013 Net Income 4619011 3446604 Net Investment 19634969 19744122 Economic Value Added Net income - net investment -15015958 -16297518 Appendix 3 2014 2013 Current assets 30024365 34085455 Current liabilities 13283147 12475851 Current ratio Current assets/current liabilities 2.26 2.73 Net profit 4619011 3446604 Sales 86003491 72160396 Net profit ratio (net profit/sales) *100 5.37 4.78 Long term debt 7404958 14937644 Equity 28583915 26946974 Debt to Equity ratio long term debt/equity 0.26 0.55 Appendix 4 (Source: Capilano, 2015) Read More