Financial Management for Agro Business - GrainCorp - Case Study Example

Financial management for agro business Table of Contents Introduction 3 Area Performance 3 Turnover/revenue sources 3 Profitability condition of GrainCorp 4 Earnings per share 5 Segment Performance 5 Activity ratio 6 Major strengths and areas of concern  6 Area 2 Stability and financial policy  6 Cash flow trends 6 Liquidity position of GrainCorp 7 Funding sources  7 Levels of indebtedness 8 Apparent risks related to previous area  8 Major strengths and areas of concern  8 Area 3 Investor Information  8 Investor analysis 8 Historical share price performance tracked against the All Ords Index and similar companies  9 Historical dividend performance  9 Major strengths and areas of concern  10 Conclusion 10 Appendices 12 Introduction The report aims at highlighting the financial analysis of GrainCorp, which provides an in-depth view into the financial performance of the company. The main significance of the paper is that it is prepared to increase the understanding of top management of the company and thus crucial review of the financial data is executed to maintain transparency and authenticity. The analysis depicts the cash balance of the company and also evaluates the liquidity, profitability and efficiency position during the period of 2011 -2013. The share price performance of GrainCorp is also shown in the paper so as to understand whether the investors are satisfied with the dividends and earnings per share. For the analysis part, annual reports and website of the company is used for gathering data and information regarding GrainCorp. The financial statements and directors’ notes in the annual reports are authentic sources for getting financial information of the company. Apart from the annual reports, authentic sites are considered for obtaining the historical share prices and dividends of the company as well as the overall performance of All Rods Index. The main limitation of analysis is that only 3 years are considered. The increase in number of years will improve the analysis; however, risk pertaining to calculation of the same also increases. Area 1: Performance Turnover/revenue sources GrainCorp is regarded as the leading agribusiness in Australia and its main revenue is generated from grain processing and handling assets in Australia as well as overseas. It has increased its business revenue by connecting the global and local consumers to the grain growers and plays a significant role in international grain supply chain (GrainCorp, 2014a; GrainCorp, 2014b). The three main grains that are received from the grain growers and sold to the consumers are barley, wheat and canola. Thus, sales of the three grains and maintaining three main grain activities such as Marketing, Storage and Logistics and Processing increases their income and helps in earning profit (GrainCorp, 2014b). In Appendix 1, it is observed that the value of sales revenue has increased over the years from 2011 to 2013. There has been 19% increase in revenue in 2012 from 2011 and about 34% in 2013. This reflects that there has been strong volume of sales of barley gains in malt across the group and through their expanded operation they have grown globally in marketing (GrainCorp, 2014a). Profitability condition of GrainCorp The profitability of GrainCorp is evaluated with the help of ratio analysis. Profit margin ratios, return on assets (ROA) and return on equity (ROE) are calculated to understand profit percentage of the company and whether the shareholders are receiving adequate return on their investments (Carmichael and Ray, 2007). From Appendix 2, the following deductions can be made: 1) The gross profit margin is observed to decrease over the years from 2011 to 2013 as the company has purchased more goods for resale purchase but the sale was not comparatively high. 2) Operating profit has decreased, which indicates the fact that the company has cut down its expenses to a great extent for improving the profit margin. 3) Return on equity over the years have also lowered, which signifies the fact that the company has encountered decrease in earnings from the shareholders’ investment. 4) Return on asset in 2013 is lower than that of 2012 and 2011, this is indicative of the fact that the asset base has failed to deliver improved value to the company over the years. The main reason can be portrayed as the increase in financial and expansion cost of the company. It can be concluded that the overall profitability situation of GrainCorp can be improved by concentrating on the right utilization of resources such as right purchase of resale goods and sell them at right price. However, from Appendix 3 it is evident that the overall outlook of GrainCorp has been positive towards growth; as a result it has given effort to satisfied investors by increasing the value of dividend; it will attract more shareholders to invest in company share and subsequently increase its ROE. Earnings per share In the Appendix 4, it is observed that the earnings per share have decreased over the year from 2012 to 2013. It implies the fact that the sales and profit of the company have affected the investment of the shareholders to expect better increased earnings. The basic earnings per share are examined with the help of profit and shareholders’ equity. It also excludes the cost of servicing the equity other than the ordinary shares and it is weighted by the average number of shares that are outstanding during the year. The decrease in EPS also indicates the fact that the shareholders investments ahs also decreased along with the profit. Segment Performance The different segments of GrainCorp are allied mills, oil, malt, marketing and storage and logistics. From Appendix 5 it can be stated that majority of EBITDA is generated from storage and logistics segment. The overall performances of the segments are noteworthy; however, the financial position of the company is quite challenging in the recent years. The crop or grain production in the recent years in eastern Australia have encountered sever challenge due to conflict with the crop growers. However, the business units have given full effort in capturing full benefit from the program of investment, which aims at delivering $110 million of the underlying EBITDA by the end of 2016. Activity ratio The activity ratio helps in measuring the ability of a company to convert different transactions into cash or sales. It gauges the relative efficiency of the company that is based on leverage, assets and other balance sheet items. It evaluates whether it is competent enough to generate revenue or cash (Johnson, 1991; Macintosh, 1995). The asset and stock turnover ratio of GrainCorp is calculated in order to understand whether the company is efficient enough to generate revenue. From Appendix 6 the efficiency of the company can be examined. It denotes that the efficiency has decreased over the three years through decrease in sales. The sale percentage in 2013 has decreased in comparison to 2011. This signifies that the company was encountering problem in generating revenue and cash. Major strengths and areas of concern  The main area of concern for GrainCorp is its inventory and decreasing sales over the three years. The efficiency of the company is considered to be weak as the management could not draw enough profit in 2013 as compared o 2012 as the sales revenue decreased. However, in order take care of the expectation of the shareholders the company has improved the dividend payments. Area 2 Stability and financial policy  Cash flow trends The cash flow trends of the company over the three years are quite noticeable as it has fluctuated to a great extent due to a number of reasons. The cash and cash equivalent at the end of the year in 2012 has increased in comparison to 2011 due to the increase in sales and decrease in operating expense. However, the cash and cash equivalent at the end of the year in 2013 has decreased in comparison to 2012 due to the increase in operating expense and decrease in sales (Appendix 6). The company has increased its expenses in expansion and financing activities, which could not be matched with the equity earning thereby the cash balance, is affected. Liquidity position of GrainCorp The liquidity position of GrainCorp can be measured with the help of current ratio and acid test ratio (Kaplan and Atkinson, 1998). This ratio helps in determining whether the company has the capability of the company to pay off its short term obligations without harming the inventory level. If the value of the ratio is lower than 2, it signifies that the company will encounter problem in paying off its liabilities at short and long run resembling weak liquidity position. The acid test and current ratio of GrainCorp is examined to understand the liquidity position of the company. From the table given in Appendix 7 it is evident that the liquidity position of GrainCorp is weak as compared to other companies in the same industries as the value of both current and acid test ratio is less than 2. It signifies that GrainCorp can encounter difficulty in paying back its current obligations such as payment to suppliers and other necessary payments. The suppliers do not accept extended credit period after a limit of time as a result the company can face uncertainty if it does not take appropriate steps in improving the asset base. In improving the current asset it will have more cash balance as compared to liability and it will help the company to maintain a stable working capital. Funding sources  The main source of funding for the company is its retained earnings that come in form of profit (Flynn and Koornhof, 2005). However, the profit is distributed among the shareholders to a great extent. Apart from the profit the company raises its capital from the equity investments by the shareholders and loans. It is observed that the total equity have decreased over the years, which signifies the fact that the shareholders are reluctant to invest in the company shares. To satisfy them the company has also increased the dividend payments. The long term loans help the company to expand and meet other expenses that are necessary for its operation. Levels of indebtedness The leverage position of the company can be calculated with the help of debt ratio and times earned interest (Brigham and Ehrhardt, 2011). Both signify whether the company is in a poor debt condition. From Appendix 8 it can be stated that though the company has strong leverage position as the value of debt is low as compared to assets. Apparent risks related to previous area  The main area of risk that is observed in the previous section is the liquidity position. GrainCorp has weak liquidity positions, which can affect the working capital at near future when the liability will increase over assets. Major strengths and areas of concern  The major strength of GrainCorp is its leverage position where the major area of concern is its weak liquidity condition. The company should take into account its liquid cash position so as to ensure smooth business operation; however, the positive outlook is also crucial for GrainCorp, which is its low debt level. Area 3 Investor Information  Investor analysis The dividend and earnings ratio of the three years of the company are given below. From the above figure it is evident that the EPS has increased over the years from 2011 to 2012 however it has decreased in 2013. The dividend has also decreased over the years signifying that the company has not performed as expected due to the decrease in sales and increase in expenses. Historical share price performance tracked against the All Ords Index and similar companies  The share price movement of GrainCorp signifies the fact it is much lower than that of the All Ords Index (Appendix 9). However, the fluctuations that are observed in the Index are higher than that of GrainCorp. Historical dividend performance  The following table highlights the dividend of the company over the years from 2011 to 2013 (Yahoo! Inc, 2014a; Yahoo! Inc, 2014b). Major strengths and areas of concern  The major area of concern is the interest of the shareholders, which may decrease if the share price performance and returns keeps on decreasing over the years. The sales of the company are a major weak point along with the increasing expense. Conclusion It can be concluded that the overall performance of GrainCorp has become weak over the three years mainly due to the decrease in sales and increase in operating expense. The profit has also slumped, which has direct impact on the shareholder’s return. The return is dependent on the profit and financial performance of the company, thus it can be stated that the investors are not satisfied with the return though it has made improvement in dividend. Reference List Brigham, E. and Ehrhardt, M., 2011. Financial management: Theory & practice. Connecticut: Cengage Learning. Carmichael, D. and Ray, O., 2007. Accountants handbook, financial accounting and general topic. New Jersey: John Wiley & Sons. Flynn, D. and Koornhof , C., 2005. Fundamental accounting. New York: Juta and Company Ltd. GrainCorp, 2014b. About Us. [online] Available at: < http://www.graincorp.com.au/about-graincorp/index.htm > > [Accessed 30 October 2014]. GrainCorp, 2014a. Annual Reports. [online] Available at: < http://www.graincorp.com.au/investors-and-media/presentation-and-events/annual-reports > [Accessed 30 October 2014]. Johnson, H. T., 1991. Relevance lost: the rise and fall of management accounting. New York: Harvard Business Press. Kaplan, R. S. and Atkinson, A. A., 1998. Advanced management accounting. New Jersey: Prentice Hall. Macintosh, N. B., 1995. Management accounting and control systems: Organisational and behavioural approach. New Jersey: John Wiley & Sons Inc. Yahoo! Inc, 2014a. Historical Price. [online] Available at: < https://au.finance.yahoo.com/q/hp?s=G3C.F&a=00&b=1&c=2011&d=11&e=31&f=2013&g=v > [Accessed 30 October 2014]. Yahoo! Inc, 2014b. Historical Price. [online] Available at: < https://au.finance.yahoo.com/q/hp?s=%5EAORD > [Accessed 30 October 2014]. Appendices Appendix 1: Sales revenue Appendix 2: Profitability ratio Appendix 3: Overall performance of GrainCorp Appendix 4: Earnings per share Appendix 5: segment information Appendix 6: Activity ratio Appendix 7: Cash Flow statement Appendix 7: Liquidity ratio Appendix 8: Leverage ratio Appendix 9: Share price Read More