An Analysis of the Financial Health and Management Practises of Bega Cheese Ltd - Case Study Example

An Analysis of the Financial Health and Management Practises of Bega Cheese Ltd By Student’s Name Course + Course Name Professor’s Name University Name City, State Date Introduction Bega Cheese Company is a top 200 ASX listed company which has been a dominant brand in the Australian market for over 40 years in both processed and natural cheddar cheese products. The major business of Bega cheese has covered Australia, China and other Asian countries. This company is passionate in producing cream cheese and nutritional dairy products (Bega cheese Limited, 2013).In this report, five financial ratios of the company in last 3 financial years will be analyzed, which are return on capital employed, gearing ratio, dividend payout ratio, dividend yield ratio and price earnings ratio. Furthermore, the key information provided in the 2013 Annual report and other sources will be discussed with respect to the financial health of Bega cheese. 1. Return on capital employed 2011 2012 2013 =(22,090+9,505)/[(205,475+177,616)+(94,300 +68,659))]/2 x100 =31,595/(383,091+162,959)/2 x100 =31,595/273,025 x 100 =11.57% =(27,079 + 9,204)/ [((246,440 + 205,475) + (102,013+ 94,300))]/2 x100 =36,283/(451,915+196,313)/2 x 100 = 36,283/324,114 x 100 =11.19% =(35,349+8,447)/[(( 261,952+246,440)+ (110,300+102,013))]/2x100 =43,796/(508,392+ 212,313)/2 x 100 =43796/360,353 x 100 =12.15% The return on capital employed (ROCE) is an important measure of a company's performance. It compares inputs (capital invested) with outputs (profit). It measures the profitability of a company by expressing its net profit before interest and taxation as a percentage of its average shareholder’s equity and average long-term loans. The reason of why we use the net profit before interest and taxation here as numerator in the fraction is excluding the effects of the various tax rates and interest , measure of the company’s ability to profit and cross-company comparisons are more fair. It is clearly to see from the table above, the return on capital employed during the financial year ended December 31, 2011 was higher than that of its counterpart of 2012 were 11.57% and 11.19% respectively. A higher value of return on capital employed is favorable indicating that the company generates more earnings per dollar of capital employed. A lower value of ROCE indicates lower profitability. In other words, compared with 2011, there were more capital invested to Bega in 2012,capital employed over $5.1 million while the net profit before interest and taxation grew by $4688,000, funds that have been deployed during the financial year ended December 31,2011 are much more effectively than the financial year of 2012. However, by the year of 2013, the return on capital employed (ROCE) increased to 12.15%, Bega had achieved the highest value of return on capital employed and the most effective on capital employed returning during the past three years, that was largely because the company added over $3.6 million as employed capital and relative net profit before interest and taxation increased by $7,513,000. 2. Gearing ratio 2010/11 2011/12 2012/13 ((94,300 +68,659)/2) / )/[(205,475+177,616)+(94,300 +68,659))]/2 x100 = 81479.5 / 273,025 x 100 =29.84% ((102,013+ 94,300)/2) / [((246,440 + 205,475) + (102,013+ 94,300))]/2 x100 =98157 / 324,114 x 100 =30.28% ((110,300+102,013)/2) / [(( 261,952+246,440) + (110,300+102,013))]/2x100 = 106157 / 360,353 x 100 = 29.46% Gearing ratio (also called leverage ratio) is used to assess risk of business in financial statement analysis. It is calculated by taking the company’s long-term liability and dividing it by its equity added to its long-term debt. In other words, Gearing ratio measures the degree of assets invested in a company that are financed by long-term liability. Generally, the higher gearing a company has, the riskier that company may be because it has more debts and less capital. A company with high gearing is more vulnerable to downturns in the business cycle because it must continue to service its debt regardless of how bad the sales are. According to the data shown in the table above, the gearing ratio at 31 December 2011 was 29.84%, a reduction from 30.28% a year later, which means that the financial condition of Bega in 2012 was more risky than it was in 2011, that mainly because a considerable part of the long-term loan was repaid during 2012, or the interest charges generated by the debt was relatively higher and the profit created by the business was relatively lesser. Nevertheless, there was a significant decline of gearing ratio at 31 December 2013,which was decreased to 29.46%, become the lowest gearing ratio during the past three years, that would indicate that the capital structure of the business is pretty safe and cautious and the business declined its risk of becoming insolvent. 3. Dividend payout ratio 2010/11 2011/12 2012/13 6381/ 21693 x 100 = 29.42% 4521/20,429 x 100 =22.13% 10640/ 25,445 x 100 = 41.82% The dividend payout ratio measures the proportion of a company's net profit after taxation that is given to shareholders in the form of dividends. It is a closely-watched financial measure for those who relating to investments that produce interest (also called income-oriented investors) as it suggests how much money they can earn from investing in the share market. Dividend payout ratios reveal a company’s policy of dividend and a lower dividend payout ratio can be a sigh of weakness.  There has been a moderate decrease of about 7% in the dividend payout ratio of Bega in 2012 compared to the previous year. This was mainly due to a decrease in the proportion of earnings distributed to equity shareholders. In general, the payout ratio for both the financial year of 2011 and 2012 are quiet low that is, less than a third of incomes available for dividends were being distributed and more than 70% of the company’s earnings plow back into its business. However, the dividend payout ratio has increased from 29.42% in 2011 to 41.82% in 2013, which means that Bega has distributed more payment to equity shareholders via dividends to attract long term investors and reduce speculation activities as well as undulation of its share price. In fact, for the sake of the company, Bega could probably afford to raise its dividend payment significantly. 4. Dividend yield 2010/11 2011/12 2012/13 0.0125 /(1-0.3)x 100 1.62** = 0.1014/0.72 x 100 = 1.10% 0.065/(1-0.3)x 100 1.5 = 0.1286/1.00x 100 = 6.19% 0.075/(1-0.3) x 100 2.51 =4.27% The dividend yield ratio is a measure of what proportion an investor is earning from per dollar in the form of dividends, so many investors view it as an ‘interest rate’ of an investment. In terms of investors, the dividend yield is used to assess the amount of cash flow return on an investment or increase in asset value by stock appreciation. It is beneficial for investors if the dividend yield ratio increased as high as possible. The dividend yield ratio has improved significantly in 2012 financial year, increased by over 5%, this was mainly caused by the increase of dividend per share from 0.0125 per share of 2011 to 0.065 per share of 2012, and the market price per share in 2012 had decreased by 0.12 per share. This means that the shareholders are getting higher compensated for their investment from Bega cheese, it is good news for investors, but may have a negative result on the business. Although a higher dividend yield ratio would make a company loose too much cash flow, a company that maintains a low dividend yield ratio may also have a detrimentally impact on the development, like the dividend yield ratio of Bega cheese was 1.10% in 2011 which with a high price of stock and low dividends attracted less investors to put their money into the business. However, the dividend yield ratio of Bega cheese in 2013 in a security level was 4.27%. An appropriate amount of dividend yield ratio is a sign of the stability of a company and often supports a firm’s share price. 5. Price /earnings ratio Price earnings ratio = Market price per share*   Earnings per share 2010/11 2011/12 2012/13 1.62** /0.1565 = 10.35 times 1.5*/0.1281 =11.71 times 2.51*/0.1676 = 14.98 times P/E ratio is a controversial ratio; it is quite difficult to interpret. It can be extremely informative in some situations, while at other times it is next to meaningless. For the right circumstance, such as comparing P/E ratio of one company to another in the same industry, or comparison among the company’s own historical P/E ratios, P/E ratio is an essential measure of market confidence in the future of a company. There has been a steady increase of the P/E ratio of Bega cheese from the financial year of 2011 to the financial year of 2013. The P/E ratio of the financial year of 2013 was 14.98 times, which was the highest of that during the past three years. Apart from that, the capital value of the share and its current level of earning were higher than that of its counterparts of the previous two years. It means that the market has higher confidence on the Bega’s future earning power and has more expectation for the future business performance of the Bega cheese. The P/E ratio increasing year by year also means Bega cheese will eventually have to live up to the high rating by substantially increasing its earning. Although the P/E ratio in the financial year of 2012 was higher than that of 2011, its market value of a share and earnings per share were lower than the other two years. Analysis of other information in 2013 Annual Report Bega’s Chief Executive Officer’s Report on the review of operations and activities Based on Bega’s Chief Executive Officer’s Report on the review of operations and activities, it can be ascertained that in the face of internal change and global volatility, the company’s business model has indeed generated a robust business performance while at the same time ensuring that farmers, who are milk suppliers are provided with leading price milk. According to the Report, the Financial Year for the year 2013 was faced with numerous challenges which arose from agriculture’s cyclical nature and the effects on the world dairy production like drought in New Zealand, the high costs of feeds in the USA, the cold weather that was prevalent in the Northern Europe and other weather events which affected Australia’s dairy industry. From the accounting point of view, the natural disasters would cause considerable losses of the company’s economic, especially like Bega cheese such a company dominant by dairy products. As a result, a fall in the prices of dairy commodity happened. However, increased steadily during the second half of the same year while on the other hand; the Australian currency reached strong levels before it significantly retreated towards the end of the 2013 financial year. The year 2013 led to remarkable levels of the company’s internal reorganization especially after the full merge of “Tatura Milk” with Bega Cheese which happened during the end of the year 2011. The emerging structure enabled the business to be able to invest not only resources but also the capital in its major business platforms like in the Cheese contract processing and subsequent packaging, in nutritional products and in the manufacture of vital dairy ingredients. Despite the fact that the high value associated with the Australian currency has a great impact on he export returns in the FY2013, the company was still able to gain a year on year growth of 8% in Sales Revenue to complete the year 2013 with a total revenue of $1010 million. From the accounting point of view, currencies play a very important role in the performance of multi-national business. This increase of approximately $77 million as compared to the previous year was quite acceptable given the fact that the volatile prices of the commodities and the high exchange rates had a significant impact on international returns. The BEGA Group is therefore focused on the establishment of a dairy food business which was strong and underpinned a milk production resource which was viable. This has therefore made it possible for the Group to lead in making payments to the farmers supplying milk to it. Why the Bega Cheese Group was capable of achieving strong operational and financial outcomes? The company was able to achieve a strong operational and financial result because of its continuing emphasis on a well defined strategy that involved the movement of the company product mix to a higher value and to dairy products which were technically sophisticated. The FY2013 saw BEGA’s growth in its key contract manufacturing business which focused on both processed and natural Cheese products for the Food Service and Retail segments both locally and in the Group’s Markets located in the Middle East and in Asia. There was also a significant growth in other company products like the infant nutritional powers and Cream Cheese. The company’s Net profit after taxation stood at $25 million and indeed, this can be regarded as being a strong result owing to the organizational development and internal restructuring that were implemented during the year. The Bega Cheese Group recorded strong controls in debt management and an enhanced banking arrangement. A decline in interest charges during the previous year was depicted in the changes in the base of the Reserve bank which happened recently (Fleming, 2004). According to the Group, safety is regarded as a core value and therefore its aspiration is to actually operate in a zero harm environment. It therefore strongly believes that its employees’ safety is their highest operating priority. From the management point of view, a company with a strong recognition of safety experiences low-accident rate, low turn-over, few at-risk behaviors and high productivity. This policy has seen the company achieve a 32% reduction in its “Lost Time Injury Frequency Rate” since the previous year. Despite making some significant progress in the Group’s management processes and systems, it still recognizes that they have a long way to go in ensuring there is zero harm in the company. In order to raise awareness and commitment towards safety and provide strong visibility for unit managers, the group initiated a safety observation programme which calls for all the senior staff in the Group to undergo regular safety observations. Due to a cash management system which was highly focused coupled with the strong business performance, the Group was able to reduce its net debt at 30th June 2013 to $87 million and it was also able to enhance the balance sheet and increase its net assets by 6 per cent to about $262 million. Some other major elements of Cash flows that were marked in the year 2013 include the capital that was spent on plant, equipment and property which totalled to $28 million, the dividends which were paid to members which totalled to $11 million and an additional purchase of the WCB shares which totalled to $3 million. For Bega such a agriculture technology intensive based company, investing largely on plant and equipment is important. It is the foundation of long term sustainable development of companies and it also help to increase the profit rate by creating more quality products. After the merging of the Tatura Milk and Bega Cheese businesses and the structural reorganization of the Group, it has now developed and implemented one set of core values meant to depict its people’s behavioral expectations. This has been done through ensuring that safety is always practiced, valuing of the supplier, thinking of the customer, taking of ownership, being supportive to each other, being agile and right first time. These six values were actually developed by a team which was compiled from all areas of the Group’s operation in consultation with the business. The group has continue to establish its business strategies based on long term agreements on the operating platforms of packaging and the consumer cheese product among others. The Group’s objective is aimed at investing in such platforms in order for it to continue enhancing value for its own productive outcomes while also ensuring that it generates a milk supply base which is not only viable but sustainable as well. Director’s report Based on the Director’s Report, it is indicted that that the main activity of the Group (Bega Cheese Group) in the FY2013 was dealing in the receiving, manufacturing, processing and distribution of dairy and its associated products. The interim ordinary dividends which were paid out at 3.5 cents per share for year that ended on the 30th of June 2013 stood at $5325. It seems that Bega cheese do not pay too much attention on promotion activities. It is not a wise decision if a company only focuses on the process of manufacturing and ignores the marketing. However, with the tough retail environment of Australia, Bega should put more additional investment in marketing with the purpose of supporting its large stable of brand and business operating successfully. During the Financial Year 2013, Bega Cheese Group actually paid a premium which was in respect of a contract that insured not only the Directors of the Group but also the Executive Officers as well against any liability that was incurred as permitted by the law. As a result, each of the Directors in the Group entered in a “Deed of Access and Indemnity” with Group that indemnified them for any losses that were incurred. In addition to that, the company or the Group also agreed to indemnify the Secretaries and some of the Senior Executives for any liabilities which may arise from their position out of good faith (Henderson, 2011). Environmental sustainability and Regulations The Group has continued its sustainability journey in the year 2013 through striving towards the achievement of manufacturing processes which were fully sustainable through the management of challenges associated with the carbon impact and the environment and also through the minimization of the resource intensity. In addition to that, the Bega Cheese Group is also working with all the stakeholders in the industry with an aim of developing a strategic framework which will be used in the dairy industry that will influence Bega’s general sustainability strategy (Planet, 2008). The Group’s Environmental Performance The group is always subject towards both State and federal environmental regulations for all the sites. Indeed, 4 of the group’s site have been licensed under the State Environment regulations which stipulate the performance standards for all the emissions emanating from the site and the frequency or method of assessments regarding the emissions. During the FY2013, all the results from the environment monitoring were posted on the website of the company in order to comply with the requirements of the EPA. Discussion of other available information from the public sources about the financial health of the company Recently, the significant information has release that some shareholders are opposed to Bega’s FY2013 Report. Some of the Group’s shareholders are opposed to the FY2013 report because they claim that it was concluded by an independent expert that Bega’s offer was neither reasonable nor fair. This is due to the fact that according to the independent Expert, the WCB shares were valued at $6.96 to $7.49 per share based on a 100 per cent controlling interest. The WCB therefore continued to recommend that the shareholders of WCB reject Bega’s offer because it was inadequate (Warrnambool, 2013). According to the WCB, they highly believe that based on the Report by the Independent Expert, this was clear confirmation of the Board’s view that indeed, the offer made by Bega was highly opportunistic and therefore, it does not even reflect the positive impact on the earnings which were expected from the recent enhanced market conditions and business initiatives. The WCB therefore engaged the Independent Expert with an aim of preparing the report in response to the offer made by Bega expressing their views on whether or not it was fair and reasonable to the WCB shareholders (Graetz, 2012). The Independent Expert finally concluded that Bega’s offer was neither fair nor reasonable and that indeed, the offer was 17.1 per cent to 18.1 percent, which was lower than it was initially assessed. Based on the Independent Expert, it was assessed that WCB’s value based on a 100 per cent controlling interest basis was supposed to fall in the range of about $6.96 to about $7.49 for each WCB Share. In addition, Bega cheese has expanded its business to China. According to ABC Rural Bega has signed a contract to supply Chinese retail group Chongqing General Trading Group UHT milk. The deal is expected to generate revenues of approximately A$ 100m over five years. This enable Bega to build further on the partnership and help Bega capitalize on the growing demand for dairy products in China. The main problem to be considered by Bega is how to find more milk supplier to meet the expected demand with the existing number of suppliers. However, a high tariff of around 15 per cent is levied on Australian dairy products may cause a high price of products which would lead Bega to a disadvantage position in the severe market competition (Cavanagh, 2014). Conclusion It can be genuinely asserted that Bega Cheese Company is doing well and therefore it is wise for any willing investors to invest in it. This can be ascertained basing on the Company FY2013 Report and from other sources as indicated. However, the company should put in more effort to ensure that it becomes more profitable and please the shareholders and other shareholders as well. References Cavanagh, M 2014, ‘Bega Cheese milks a $100m deal with a major Chinese supermarket chain’, ABC Rural, 22 September, viewed 24 September 014, Bega, 2013. BEGA-FY13-Annual-Report-FINAL, Australia. Fleming, L2004, Excel HSC business studies, New York, Pascal Press. Graetz, F, 2012, Managing organizational change, John Wiley & Sons, New York. Henderson, L, 2011, Bega bypass, RTA, New York Planet, L, 2008, East Coast Australia, New York, Review. Warrnambool Cheese & Butter Factory Company Holdings Ltd, 2013, Release of Target’s Statement in Respect of Bega’s Offer, Australia. Read More