Financial Evaluation Based on Treasury Wine Estates Ltd - Case Study Example

Financial Evaluation Student’s Name: Instructor’s Name: Course Code: Date of Submission: Executive summary The purpose of this report is evaluating financial statements using ratios of Treasury Wine Estates with the financial information in the annual reports for 2012, 2013 and 2014 respectively. The results of the analysis are used to understand the financial performance of this company. In this report corporate social responsibility is also analyzed so that an understanding for non financial and financial can be obtained by different stakeholders that are interested in the company affairs. The analysis of this company revolves around profitability ratio, leverage ratio; activity ratio and liquidity ration to reveal the overall performance. These results will enable the investors to know if the company is able to produce high returns. Table of Contents Executive summary 2 1. Introduction 3 2. Financial analysis overview 4 3. Financial ratios analysis 6 3.1 Probability ratios 6 3.2 Efficiency ratio 8 3.3 Liquidity ratios 9 3.4 Financial gearing ratios 10 3.5 Investment ratios 10 Conclusion 11 Bibliography 12 1. Introduction The analysis of financial statements is very important as the management and other stakeholders use the result to predict future performance and also to obtain an understanding about the company performance. In this report, the financial reports of Treasury Wine Estates for the years ending 2012, 2013 and 2014 are being analyzed through ratio analysis to predict its future performance (Atkinson and Banker, 2001). This is a very unique company that is one of the international market leaders in wine and spirit industry (Watson and Head, 2012). This company produces 80 brands of which five brands are more recognized cross the globe and these brands have made it to gain an international recognition. All the stakeholders are delighted about the performance is determined to protect its brands from unfair competition. This company has a significance financial performance and the shareholders are excited about its financial growth. This positive growth has been influenced by the change of the organization structure and the reinforcement which has been put on the executive team (Dyson, 2007). The company has a strong focus on wine which gives it potential to streamline its decisions to ensure that there is cost saving and high efficiency in all its departments. The management has put a concerted effort on long term drivers which are seen to be relevant to its success and also increased its investment initiatives to increase annual revenues. 2. Financial analysis overview In 2012, this company has received amazing financial performance is a very exigent global economy. The EBITS for this year was $210.2 million showing a tremendous growth of 7.7% based on reported currency and 18.6% for constant currency (Watson and Head, 2012). There was also a very significant increase in EBITS margin by 2.3% and also a growth in non current inventory by 84%. In the same year, there is also an improvement in earnings per share by 14.8% with a final dividend of 0.7 cent per share which significantly resulted into 13.0 cent per share. In 2013, there is a decline in EBITS to $209.2 million. The company recorded earnings per share of 6.5 cents per share lower than that of the previous year with a final dividend of 0.7 cent per share while a full year dividend of 13 cent per share (Atkinson and Banker, 2001). In 2014, this company had EBITS of 184.6millions with a growth margin of 10.8%. There ids also an increase in final earning per share of 7 cents per share while full year dividend is 13cent per share. The financial performance of this company can be obtained by ratio analysis where the results are also used to compare annual financial performance. To effectively analyze the annual financial reports for this company, it is important to use ratio analysis formulas as shown in the table below. Table 1: Financial ratio a. Probability ratios ROSF/ROE=×100% Gross Profit margin = Gross profit/ revenue b. Efficiency ratios Inventories turnover period = c. Liquidity ratios Acid test ratio = d. Financial gearing ratios Interest cover ratio = ×100% e. Investment ratios Price/earning ratio=×100% 3. Financial ratios analysis The financial performance of the company can be understood by ratio analysis and the result of analysis can be used by different stakeholders to draw a valid conclusion. The user of financial information can use ratio analysis to develop financial future forecast and also to understand past performance which is useful in their decision making (Dyson, 2007). It is therefore not an exemption for Treasury Wine Estates to use ratio analysis as a very important tool to understand its financial performance over the three years. The results can also be used to compare the financial year which there is a good financial performance. 3.1 Probability ratios This is a very important ratio which shows the ability of this company to produce profit that can be shared to shareholders as dividend (Watson and Head, 2012). This ratio include gross profit margin, net profit margin, ROSE and return on asset. Gross Profit Margin Year 2014 2013 2012 Ratio 575.9/1815.3 = 33.8% 629.5/1879.4 = 34.9% 580.6/1,680.6= 35.4% There is a decline in financial performance in terms of gross profit margin. The decline has been declining over the years indicating that there is a decrease in sales revenues with an increase in cost of sales. This makes it difficult for the sales revenues to cover cost of sales efficiently for the years 2013 and 2014 respectively. Return on ordinary shareholders’ funds This is a ratio which show the rate of return which the shareholders are expected to receive from their equity. This ratio is also vital in showing the profitability for all public limited companies (Mick and John, 2003). The same rate is essential in giving an overview of the ability of shareholders fund to get net income that the individual shareholder is required to get at the end of every financial year. The higher rate shows that there is an expectation to receive high earnings attributed by the investment. Year 2014 2013 2012 Ratio 112.8/647.9 = 17.41% 141.7/647.2= 21.9% 119.8/647.2 =18.38% There is a fluctuating trend of ROE in Treasury Wine Estates. There is a decline in 2014 as compared to 2012 and 2013. This ratio shows that this company has used the shareholders fund effectively in 2013 to generate high returns than 2013 and 2014 (Watson and Head, 2012). It therefore means that the integrated management system is used effectively in 2013 that any other year under analysis. However, the shareholders can use past and current financial information to evaluate financial performance in their future decision making. It is vital for the shareholders to buy more shares from this company as it is able to generate high returns on their shares. This is because this company has high rate of ROE which rotates within a small margin (Atkinson and Banker, 2001). The use of this ratio will also give potential investors with an opportunity to understand the ability of this company before the purchase of shares. It is therefore able to stimulate new shareholders to buy shares of this company which is important in increasing its capital base. This ratio therefore support the decision making process of shareholders and determine whether to invest or not in the company. 3.2 Efficiency ratio This ratio is also called activity ratio and it is essential in measuring the way the company uses its assets to produce returns (Mick and John, 2003). It usually evaluates the time the company takes to receive cash from debtors and also the time to convert inventory into sales. It is mostly used by financial managers to enhance the company performance. This ratio has a reflection on the profitability as the company which has high efficiency is likely to produce high profit margins. Average inventories turnover period This is a ratio which shows the time the company takes to hold inventories by the business. It is therefore important in showing the average period that the company can take to convert inventories into sales revenues (Watson and Head, 2012). This helps the management to understand the succession of production, debt payment ability and also the liquidity position of the company. This ratio is very important in evaluating the efficiency of operating activities of this company. Year 2014 2013 2012 Ratio 707.1/1239.4= 0.57 714.5/1181.8= 0.61 711.5/1,100.0 = 0.64 In the computation of this ratio, there is a decrease in the reduction in the time this company takes to convert its inventories into sales (Mick and John, 2003). This is a sign of improvement in the company efficiency since the company is able to convert more finished goods into sales which are essential in increasing the profitability. It also shows that this company is reducing the time it takes to hold inventories in store and as a result there are low stock wastages and spillages (Watson and Head, 2012). The result of this ratio show that there is efficient purchases, production and selling of the products of this company. To improve the efficiency, it is important for the management of this company to identify these weaknesses so that appropriate action is taken to correct it. 3.3 Liquidity ratios This ratio is very important in showing the ability of the company to meet its short term financial obligations when they become due. It helps the management of the company to acquire financial credit which they are able to pay. Acid test ratio This ratio is also called quick ratio or liquidity ratio (Mick and John, 2003). It is meant to show the relationship between current asset and current liabilities. It is useful in measuring the ability of the company to pay current financial obligations using current assets which can easily be converted into cash. It is effective for this ratio to be more than 1 to ensure there is an optimal liquidity position. Year 2014 2013 2012 Ratio 466.9/451.2 =1.03 471.7/480 =0.98 476.2/464=1.03 This company is able to meet its financial obligations when they become due. There is too much current assets in the form of receivables and cash and therefore it should use the excess cash it has to buy other fixed assets to increase its profitability. It is therefore less risky to invest in this as its liquidity is high giving it ability to receive more credits and also pay creditors easily (Dyson, 2007). This gives this company to have high reputation as the potential investors will perceive this company to profitable to invest. The small decline in 2013 is as a result of the increase in current liabilities and also as a result of decline in cash in the organization. 3.4 Financial gearing ratios This is a ratio which measures the relationship between borrowed funds and shareholders fund. It is essential in measuring financial risk which the company is likely to face since high debt ratio is likely to case financial hardship. The company with high gearing ratio shows that it has higher debt to equity and vise versa. Year 2014 2013 2012 Ratio 321.8/647.9= 0.50 210.9/647.2= 0.33 34.4/647.2= 0.05 The company with high gearing ratio show that there is high leverage and it is a sign that there is high use of debt to finance current operations. In the case of this company, there is low leverage which indicates that there is high equity than debt in this company capital structure (Randolph & Jeffrey, 2003). The only problem is that it increases gradually from 2012 to 2014. Since this company has low debt to equity ratio it is therefore very easy for this company to meet its debt repayment schedule and also not easy to risk bankruptcy. The Creditors are concerned about this ratio since high ratio is able to risk their loans and therefore this company cannot face this problem (Mick and John, 2003). The only problem that this company is able to face is that it has a sign of high conservative financial management and also able to make it being allocated in a highly cyclical industry and therefore cannot afford to become overextended in the face of an inevitable downturn in sales and profits 3.5 Investment ratios The investment ratio is used to show the ability of the company to produce returns to shareholders. These ratios include price earning ratio which is used to measure the ability of the company share to produce returns (Dyson, 2007). This ratio is used because it has a close connection with market value per share and earnings per share. This ratio has a direct effect on the company investment. This is because a low ratio is an opportunity to the company to invest as it allows the shareholders to buy share cheaply. Year 2014 2013 2012 Ratio 1.33/ 0.174 = 7.64 times 1.24/0.219 = 5.7 times 1.07/0.209 = 5.11 time The price earnings ratio for this company increases gradually. It therefore that this company has a positive development prospect and as a result it is able to increase shareholders confidence (Mick and John, 2003). Since there is increase in this ratio in 2014, the shareholders will be able to get high dividend and as a result the shareholders will be more willing to invest more in this company. Conclusion Ratio analysis is a very important tool that different stakeholders can use to evaluate the performance of the company. It is easy to compute and also able to measure the performance in relation to profitability, liquidity and efficiency. Treasury Wine Estates has high performance since it is able to produce high investment returns and its liquidity is also high. This shows that it is able to meet its financial obligations when it become due and also ensure that it converts its finished goods into sales within a short time. Bibliography Atkinson, A. A and Banker, R.2001. Management Accounting, 3rd edition, Upper Saddle River, New Jersey. Dyson, R. (2007). Accounting for Non-Accounting Students.Financial Times/Prentice Hall. Mick, B. and John, C. 2003. Managing Financial Resources .A Butterworth- Heinemann; 2003, 3rd edition Randolph, W. Jeffrey, J. 2003. Modern Financial Management McGraw-Hill Higher Education; 8th edition. Watson, D. and Head, A. 2012. Corporate Finance Principles and Practice. 6th edition, Harlow: Pearson. Read More