Bellamys Australia - Financial Statement Analysis - Assignment Example

Bellamy’s Australia Question 1 Bellammy’s Australia is an organic foods company, formerly Tasmanian Pure Foods Ltd, in lanceton Australia. The company is deals in the production, supply and marketing of baby and infant foods, mainly, its products include infant formulas, toddler milk, baby rice and pasta, fruit snacks, ready to eat baby meals. Currently, the company has 40 baby products in supply in their markets. The company started off as a family business in 2004 until 2007 when it was purchased by the Tasmanian pure foods. In 2014, the company now renamed Bellammy’s Australia was listed on the Australian securities exchange after the successful IPO in July of 2014 and trades under the foods, beverage and tobacco industry group ( ASX Official list). Since then the company has expanded its markets not only in other regions of Australia but also internationally. Currently, Bellammy’s markets include: Australia, china, Singapore, Bangkok, Vietnam, Malaysia and New Zealand. Furthermore, Bellammy’s Australia is the mother company to Bellamy’s organic Australia pty ltd, Bellammy’s kitchen pty ltd and Yum Mum Pty ltd (Reuters) Their distributional channels include supermarkets, pharmacies, and other stores on contracts such as the Woolworths, Costco and big W. however the company also makes distributions online through third party online stores, especially in china, and their online sales portal. Since these advancements and expansions, Bellammy’s has seen advanced growth in terms of sales and through their share prices. In the FY 2015/2016, the company reported a revenue growth of 331% in China alone while the sales revenue in Australia was growing at 67%. The company’s growth and sustainability is dependent on the management of risks that could affect its operations. These risks include foreign regulations, such that have resulted in a p plunged its share prices following in import regulations changes in China. The company is also likely to be affected by the foreign exchange rates mainly because its revenue sources ate form international markets. Since the company is also dealing with a sensitive product, baby food, rear risk management strategies have factored in the standard requirements of safety of the food and that the foods are certified as organic. Question 2 Financial statement analysis Bellamy’s financial reports are prepared every year for the financial year ending June 30th of each year. These results are then audited by PwC and presented according to the regulations of the Company Act and the Australian securities exchange. The financial report present the financial conditions of the company in terms of its profitability, liquidity, efficiency, market value and the capital structure of the company. Cumulatively, these indicators show if the company can be assumed as a going concern or if there need to be taken measures that bwull improve its position in the future years. In order to review the liquidity standings o the company the ratios that are most useful are the current ratio and quick acid test ratio. In the FY 2015/2016, Bellammy’s reported a current ratio of 2.4 a 23.73% drop from the previous year. This means that the company was more liquid in 2015 than it was in 2016. The quick acid test ratio stood at 1.2, also a drop from the previous year. Bellammy’s current assets can cover twice its current liabilities. A general drop in liquidity will indicate either the company is having a hard time moving its inventory or it’s making most of its sales through credit. Overall, the liquidity of Bellammy’s is acceptable though it’s a reduction from 205. The efficiency of Bellammy’s is reflected through the inventory turnover, asset turnover ratios and its average collection period. In the 2016 FY, Bellammy’s had an inventory turnover of 1.96, a 60% drop from 2015, a reduction in terms of the liquidity of the company’s inventory. In that year, the company turned its inventory into sales 1.96 times showing. In the same year, the company turned over its assets 1.7 times a year, about the same efficiency as the last financial year. This shows that Bellammy’s has not changes in its efficiency to turn its assets into sales in 2016. The collection efficiency of the company was an improvement from a collection period of 60 days to 50 days. It takes the company 50 days to turn its receivables into cash. The efficiency ratios show that the activity of the company was slower in 2016 than it was in 2015. This could be explained by the virtue of the company opening up to the online market reducing hoarding of inventory. The capital structure of a company is evident in its leverage decisions and the debt ratio in any particular year. The leverage shows how efficient and in what proportion the company uses external sources in order to generate profits. In 2015, Bellammy’s had a debt ratio of 0.32, which translates that 32% of the capital structure of the company is made up of debt. In 2016, this ratio had increased to 0.42: 42% of the company’s capital had been financed by debt instruments. The debt ratio show that the company had an increased leverage in 2016 than it did in 2015. In the financial year 2016, Bellammy’s reported an increase in revenue by 342% while revenues rose by 95% (Bellamy’s annual report 2016) which can be backed up by the profitability ratios. The gross profit margin in 2016 was 0.46, a 38.91% increase from the last financial year. The operating profit margin, which has a better accuracy in indicating profitability, was at 0.22 a 126% increase. The operating profit margin show that 22% of each dollar sale that remained for the company after all expenses and costs except taxes interest and dividends. The net profit margin was 0.15, meaning that for every dollar value of sale that was made in 2016, 0.15 was retained by Bellammy’s while in 2015, the company only kept 0.07 for each dollar sale. The company experienced a more than 100% increase in its return on asset ratio to stand at 0.3 in 2016. This shows that the Bellammy’s earned $0.3 for each dollar value of their assets they owned. The return on equity ratio of 0.46 showed that Bellammy’s earned $0.46 for each dollar value of the common equity stock held, a 148% increase from the last year. Cumulatively, the profitability ratios showed that Bellammy’s experienced an increase in their profitability levels as well as the revenue targets. This was facilitated by the great growth in sales revenue from China, at 331%. The market value of the company is reflected by the price earnings ratio of Bellammy’s stock. The P/E ratio was 11.5, a 75% drop, indicating that investors were willing to pay $11.5 for each dollar value of earnings in 2016. However, this compares low to the sector P/E ratio of 39.76 (Reuters 2017). However, currently, Bellammy’s shares have been suspended from trading at the securities exchange. Question 3 Financial weakness and strengths In the year ending June 2016, Bellamy recorded a more than 100% increase in their net profits all of which was categorized as statutory profits (Annual report 2016). The revenue for the year was 95% increase from the previous year’s revenue, which was evident from the expansion activities of the group, acquiring distribution channels as well as the setting up of the online portal and contract with other online stores. However, the crisis of the company is roote4d in the presumption of regulatory changes that occur in their international markets, specifically China (Robins 2016). At the height of tis crisis is the inability of Bellammy’s to negotiate with its suppliers on their ‘take or pay’ conditions. (Robins 2016) The hindrances to its performance are further propagated by the resignation of its directors and a law suit against the company. The financial statements presented by the group show the financial strengths and weakness of the company. The financial strength of the company is reflected in the liquidity position of the company, the various income sources (the high profitability). Its main source is income from its customers, especially form Australia (annual report 2016 pg. 59). There is also a possibility of turning their trade receivables into a financial strength given the great amount and the reduction in the collection rate. The leverage decisions of the company reveal that this could hinder the progress of the company in the future: most of its cash outflows aware dedicated to repaying its borrowings in the year. The financial ratio also show that the performance of its shares in the market present a financial weakness for Bellammy’s. Question 4 The contribution margin income statement for the year 2016 is illustrated in table 1. Table 1. Contribution margin income statement for Bellamy’s for the year 2016 Item   Amount ($) x 1000 Revenue (sales)   244,583 Variable costs       Cost of sales 132,855   Distribution costs 28,510 Total variable costs   161,365 Contribution margin   83,218   % Contribution margin 34 Fixed costs       Employee costs 10,433   Marketing and promotion costs 6,969   Administrative costs 11,725   Depreciation, amortisation 307 Total fixed costs   29,434 Net operating income   53,784 Since Bellamy’s is a large company international manufacturing and dealing with a wide range of foods and beverages, it was not possible to obtain unit items and their unit prices, neither was it possible to obtain the number of units sold by the company in a financial period of accounting. This means that these figures could not be obtained from the financial statements provided in the company’s annual report because they were not published. However, revenues were assumed to be made up of sales of the products from the company. Cost of goods sold was construed as being the cost of sales while distribution costs comprised of delivery charges. These made up the variable costs of the company. In addition, employee costs (salaries), marketing and promotion costs, administrative costs and depreciation constituted the fixed costs. The master budget for Bellamys is illustrated in table 2. In the making of this budget, it was assumed that the variable costs would change in the same rate as that indicated in the consolidated statements of the years 2016 and 2015. However, the fixed costs were assumed not to change and thus were maintained the same as those of 2016. Table 2. Master budget for Bellamys for the year 2017 Item   Amount ($) x 1000 Revenue (sales)   476,937 Variable costs       Cost of sales 209,911   Distribution costs 53,599 Total variable costs   263,510 Contribution margin   213,427   % Contribution margin 45 Fixed costs       Employee costs 10,433   Marketing and promotion costs 6,969   Administrative costs 11,725   Depreciation, amortisation 307 Total fixed costs   29,434 Net operating income   183,993 Income tax expense   56,670 net profit   127,323 Question 6f From the financial report, Bellamy’s Australia Limited did not have a budgetary system in operation. This was mainly indicated by the lack of financial information on a monthly or quarterly basis, which would help discern the trend of performance of a company more accurately and in turn, inform the budgeting process. Evidently, the annual report of the company focused more on the reporting of annual performances of the company. In addition, comparison of statements were done for only two years, namely, 2016 with was the current year of the statements and 2015, which was the previous financial year prior to the reporting year reflected in the annual report. Therefore, it was difficult to discern the performance trend even on an annual basis because the annual report lacked statements for at least four years prior to the reporting year. Question 6g The key elements driving the budgetary system for Bellamy’s Australia Limited would be linked to the cost of food ingredients from farmers, manufacturing costs, distribution costs and advertising costs. In addition, the company is undertaking an aggressive market expansion and internationalization strategy. Therefore, the costs of opening new markets as well as the costs of mergers and acquisitions are significant to the company’s budgetary system. From this perspective, a driver of the company’s budgetary system would be the changing market environment occasioned by changing customer preferences, and the regional differences in these preferences, which may be based on cultural underpinnings. In addition, diverse regulatory requirements for the different countries in which the company operated may be key the budgetary system of the company because it influences the cost of doing business for the company. Question 5 Management accounting information The basic job of a management accounting is to ensure that the resources of the company are used efficiently for the good of that company and in so doing the managers of the company can make informed decision in exercising their functions. This involves that the management accounting prepares report and provide such information and analysis of the information to the relevant management group. This information can range from the costs estimates to the revenue estimates as well as the performance aspect of the company’s human resources. The Bellammy’s group has had a successful year in terms of its profitability levels but has also reported a low liquidity as well as high debt ratios. Central to the success of Bellammy’s is the information that is presented and analyzed by the management accountant, which include: Customer profitability analysis. At the very heart of any business ifs the concern for increasing the profits of the company. In the FY 2016, the company reported 95% increase in its revenues from 2015. A report on the analysis of such a report will be instrumental in determining all the factors that contributed to the increase in profits. The analysis also includes an evaluation of the customer relationships and the value of this relationship s to the profitability levels of the company. The information includes the costs and revenues associated with any one customer under each kind of customer relationship. Cash flow analysis. In this kind of information, the management accounting presents all the sources and uses of cash the company could have in a given financial year. This will be mainly helpful to Bellammy’s given the low liquidity position experienced in 2016. An analysis of the financial statements of the company reveals that the tight liquidity is one of the sources of financial weakness of the company. The cash flow analysis includes a prioritization of the uses of the company’s funds since the main sources income have been established. Capital structure of the company: in the 2016 financial year, the debt ratio of the company was up by 30% and hence increasing Bellammy’s cash outflows. The income statements and the cash flow statements showed that though the short term borrowing increased, the actual amount paid out in serving the e borrowings did reduce. The financing mix between equity and debt should therefore be important in determining the progress of the company. The projected revenue forms the integral part of the profitability analysis. In light of the changing regulatory conditions especially in china and its international markets, the management will need to have an analysis of its projected revenues for the purposes of determining its marketing strategies. The cost analysis is the second most important part of the profitability analysis. This will include an analysis of all the cost that the Bellamy is likely to incur in the execution of its operations in the coming years. The cost analysis will therefore represent information on the projected costs, allocation of funds for covering these costs and the prioritization of such costs. The financial statement show that Bellammy’s costs burden is almost more than half rests on marketing, employment and distribution costs. A means of management of these costs is the kind of information that the management accountant will most likely to present to the management. In order to fulfill, its budgetary role in the decision making process, the management and the accounting officers will need to the previous years performance reports in order to benchmark on the next year’s budgeted estimated. Therefore the management accountant will provide the historical data of Bellamy which could be used to identify the gaps within the future performance of the company. The management accountant is also charged with the responsibility of controlling the activities of the company. In this regard, a variance analysis of the budgeted amount and the actual amounts of Bellamy would be helpful for the management in order to evaluate its performance and their ability to meet its budgeted estimates made in the previous year. This information improves the allocation decision of the company’s resources in fulfilling these objectives. The management accounting is also required to perform organisations role within the company. In the fulfillment of this role and consequently in the effective management of the company’s resources, it is imperative that Bellammy’s management be served with the framework of the responsibility allocation. This reduces the overlapping of roles, minimizes the resource misallocation within the company. In order to achieve its goals, the company will need to have a clear and coincides analysis of the economic environment in which they operate. This will determine the pricing decisions and the marketing strategy of the company. The management accountant could provide such analysis for the effective pricing and strategy decisions of the Bellamy management. Question 6 Annual report questions Question 6 a, b, c The income statement of Bellamy for the year 2016 showed all the cost that the company incurred during the year. The cost objects associated with the cost classification include: factor labor in determining employee costs and administrative costs; activities under which there is the distribution costs; services as in the marketing and promotional costs. Product costs on the other hand relate to all costs that were used in the production process of the product and cumulatively form the cost of sales. Bellamy Australia did not classify their costs under the product costs categorization; instead all production costs were included in the costs of sales for the year. Period costs refer all other costs other than those incurred in production process. Bellammy’s annual report reveal three kinds of period costs: advertising costs, depreciation and amortization, and administrative costs. They qualify as period costs because they have been incurred annually and only relate to that period in which they had been incurred. Question 6d The cost volume profit analysis is usually used in the determination of how income is affected by sales volume and costs. The CVP can only be sued under the assumptions that all costs can either be fixed or variable and the per unit sale price, variable cost and fixed costs are not changing as well as all production units are sold. The nature of the business cannot allow for these assumptions to prevail. Question 6e The segment report shows how the revenues were distributed in the major markets that Bellammy’s operated. The revenue report shows revenues from Australia, china/Hong Kong and south East Asia with the largest revenues being obtained from Australia in that year and a significant increase in the Chinese market. This is a reflection of the expansion in international markets. Referemces Annual report 2015/2016 Bellamy’s Australia Limited Robins Brian Dec 21 2016 Bellammy’s woes self-inflicted, say rivals Sydney Morning Herald [online] available from: www.smh.com.au/business/bellamys-keeps-hanging-in-the-balance-as-it-negotiates--with-suppluiers-20161219-gte4ot.html accessed 27/3/2017 Reuters Bellamy’s Australia Ltd [online] available from: www.reuters.com/finanace/stocks/overview?symbol=BAL.AX accessed 27/3/2017 Read More