Finance and Credibility of Little World Beverages - Essay Example

?Finance Table of Contents Introduction 3 Economic Environment 3 Financial Status 4 Recommendations 10 Conclusion 11 References 12 Bibliography 12 Introduction Little World Beverages is a group of companies based in Australia and indulging basically in the brewery, packaging and hospitality industry of the nation. The group consists of White Rabbit Brewery and White Rabbit beers as parts of its portfolio. Although Australia is where the group is based, it continues its brewery operations from UK, Singapore and New Zealand as well so as to meet overseas demands as well. In addition, the company operates its hospitality business from Fremantle, Healesville and Melbourne. The company has some subsidiaries as well such as Little Creatures Breweries Pvt. Ltd., which is a popular name in Australia. Another subsidiary assisting the group in its packaging and hospitality vertical is Fremantle Harbour Properties Pvt. Ltd., as recorded last on June 30, 2006 (Reuters, 2011). The present paper aims to assess the credibility of the company during 2009 and 2010, based on which it might be appraised to the position of a suitable borrower. Credibility of a company could be decided through an evaluation of its financial performance over the years. Financial evaluation on the other hand, could be made on the basis of the four groups of ratios namely, Liquidity, Efficiency, Activity and Profitability. In case that the company is found to fare well in terms of the above factors, it might be regarded as a suitable borrower. In addition, an assessment of the economic environment in which the bank is functioning also needs to be assessed for the purpose. Economic Environment Strengths The economic environment of Little World Beverages Group might be regarded as having improved from the records of financial year 2008 to that in the financial year 2009. It experienced growth in terms of total operating revenues as well as net profit ratios by 18% and 51% respectively over the years. These improvements had essentially been due to expansions in the company’s base of operations over the years. It had moved on to international frontiers as well so that the company started experiencing economies of large scale operations (Little World Beverages Limited, 2009-10). Weaknesses The company is recently found to have withdrawn much of its outstanding shares from the secondary market which has taken a toll over its financial leverage quotient. Moreover this very fact has proved to be quite taxing in its profitability aspect as well which is the reason why the company might be at the verge of losing its loyal base of investors. Financial Status As mentioned earlier, the financial evaluation of a company would be made on the basis of four groups of financial ratios each of which will be examining one particular aspect of the company’s profile. Information based on which these assessments are to be made will be available on the company annual reports. Liquidity Liquidity of a company decides the extent to which a company is capable to meet its short run obligations. In other words, how far a company is able to tackle its short run liabilities given its volume of assets is something that is conceptualized by the term short term solvency. It draws a comparison between the company liabilities and the volume of liquid assets possessed by the company. In case that the proportion of liquid assets is greater than the liabilities surmounting the company, it might be regarded as solvent over the short run (Wild, Subramanyam & Halsey, 2006). There are three ratios to determine short term solvency of a company, namely – Current Ratio – It decides the units of current asset that a company possesses in comparison with the current liabilities of the same. Ideally, current ratio must be greater than 1 in order to establish a company’s solvent position. In case that it is rising over time as well, short term liquidity of the company might be regarded as a robust one. Quick Ratio – It implies the ratio of quick assets to current liabilities. Quick assets are gross current assets minus those assets which are least likely to be converted into cash within the next 90 days. Normally, the volume of inventory is deducted as a part of those assets so that quick assets ultimately indicate current assets less the total amount of inventory with the company (Ross, Westerfield & Jaffe, 2005). In the present case, the liquidity position of the company has been tabulated. It shows current and quick ratios of the company to be falling over time. This obviously is a negative indicator of the company’s liquidity position which is also reflected through the graphical depiction alongside. The trend lines clearly depict a depreciating course over time which might not rate the company highly in terms of liquidity. Activity The firm’s activity ratios are indicative of the efficiency with which the company can manage its assets over time. The greater the activity or efficiency of a company is higher will be its turnover ratios over the years (Webster, 2003). Incidentally, there are three such ratios through which the company’s level of efficiency or activity could be adjudged, namely – Total Asset Turnover – It is the ratio of the company’s operating revenue to its total assets, which speaks about the units of operating revenue which could be associated with per unit of asset held by the company. Higher the value of this ratio is, better is the company’s image in terms of managing its assets. Receivables Turnover – It is the ratio of total operating revenue by the amount the company is supposed to receive by the end of a year, i.e., the volume of receivables turnover. Higher the value of this ratio is, more liberal will be the concerned company’s credit policy. This figure could be used up to calculate the average collection period, which is evaluated through dividing the number of working days with the receivables turnover. For an efficient company, this collection period must not be greater than 10 tentatively. In case that it is found to be greater than 10, the company’s policy might be considered as an inappropriate one. Inventory Turnover – It is the ratio of cost of goods sold by the company to total inventory acquired by the same. If this ratio is high, it indicates a lower shelf life of the goods produced by the company which might actually be a good indicator of the company’s position and popularity. Days in inventory could be calculated through dividing the number of working days with the inventory turnover ratio. Lower the numbers of days are, better will be the company’s position in terms of efficiency (Ross, Westerfield & Jaffe, 2005). The company’s position in terms of activity might not be considered as either appreciating or depreciating. The value of Total Asset Turnover over 2009 and 2010 is found to be deteriorating. However, Total Receivable Turnover ratio and Total Inventory Turnover ratio is found to be slightly improving over the years for the company. In addition, the average collection period for either of the two ratios is found to fall over the years which might be regarded as a positive indication about the company’s efficiency in handling its finances. The indecisive situation that the company is in terms of its efficiency or investment activity might be represented with the help of the following graph. Financial Leverage The financial leverage of a company evaluates the extent to which it compromises equity financing for debt financing. Higher the debt that a company relies upon higher will be the possibility of the company being incapable to meet its financial obligations, i.e., the firm’s liquidity position deteriorates (Gibson, 2008). Some ratios to assess the financial leverage of a company have been enlisted as follows. Debt Ratio – The ratio figures out the total volume of debt acquired by the company per unit of its total assets. Higher the debt ratio to a company is, greater will be the obligations of the same and thus, higher will be the possibility of the company’s assets being liquidated. Thus the company’s position is considered as improving in case that the corresponding debt ratio is depreciating over time. Debt-to-Equity Ratio – Debt-to-equity ratio is the ratio of total debt acquired by a company to the total amount of equity as a part of its total financing. Higher this ratio is, it indicates towards the company’s greater dependence upon debts compared to equity which naturally points towards its probability of being submerged under greater obligations over the long run. So, lower the ratio goes, better will be the company’s position be in terms of financial leverage. Equity Multiplier – Equity multiplier is the ratio of total assets to total equity possessed by a company. Higher the ratio be, it indicates towards the possibility of the company acquiring lower obligations over the long run. Interest Coverage – Interest coverage assesses a firm’s capability to handle its interest expenses. It is the ratio of the company’s total earnings before interest and taxes by the amount of interest expenditure it has to bear. Greater the interest coverage ratio is, it indicates towards the company’s improving financial leverage position (Ross, Westerfield & Jaffe, 2005). In the present situation, Little World Beverages is found to be deteriorating in terms of debt ratio, debt-to-equity ratio, equity multiplier and interest coverage. It shows the company’s increasing reliability on debt financing compared to equity financing for its projects. Moreover, the company’s ability to take care of its interest expenses is also receding over time so that its degree of financial leverage might be regarded as depreciating from 2009 to 2010. Profitability Profitability aspects of a company decide the extent to which it is capable of continuing to generate profits given its current methods of business operations (Nobes, 1997). Some ratios which assess this angle of a company have been illustrated and assessed in the context of Little World Beverages in the following paragraphs. Net return on Assets – It is the ratio of net profit earned by a company by its total assets thus indicating the effectiveness of the investments made by the company. More effective the investments are, greater will be the profits generated by the assets of a company and thus, higher will be the concerned ratio. Net return on equity – It is the ratio of net profit earned by a company by its total equity investment. Similar to the previous ratio, the present one examines the effectiveness of stockholder’s equity in the company’s investments (Ross, Westerfield & Jaffe, 2005). In the present case, profitability of the company is found to be deteriorating over time. Returns on Assets and Returns on Equity are both found to be depreciating for the company over time implying that the company is fast receding in its profitability front as well. The graphical depiction alongside reflects upon this very aspect. Hence, it might be said that neither the company is investing in fruitful assets and nor are its equity finances reaping fruits. However, as prominent from the financial leverage aspect of the company, it has chosen to lower its dependence on equity over time. Recommendations Little World Beverages has been experiencing deterioration in its financial status when a comparison had been drawn between its position in the year 2009 and that in the year 2010. Its position is worsening in terms of Liquidity, Financial Leverage and Profitability while there had been no significant change in its Activity aspects. Precisely, following its decision to expand, the company has removed its reliability from equity financing and chose debt financing instead. This decision had taken a toll upon its leverage aspects given that higher the volume of debt financing that a company relies upon, higher will be the obligations it will confront. Moreover, the company had not been faring outstandingly on its profitability aspects as well which throws a question upon the effectiveness of its investments. In short, its assets are not contributing highly in terms of profit generation as well as in terms of asset turnover. Thus it might not be said that the company is investing very wisely on its assets. Its poor state could also be reflected through the worsening Liquidity position of the company which reflects the fact that the company’s inability to meet its short term obligations is intensifying over time. This is logical given that the interest coverage of the company is deteriorating as well, thus emphasizing upon its growing inability to meet interest expenses. However, owing to the company’s decision to expand its operating base, the company is facing an increased demand, which is reflected through the reduced shelf life of inventories. In summary thus, it could be said that the company should shift its focus more upon equity financing rather than depending more on debts. Conclusion Little World Beverages based in Australia had primarily been operating in the beer and hospitality industry since almost a decade. After establishing its position with in its home country, the company set out for the international market first in 2006. However, with time the company has reduced its dependence on shareholder’s equity and concentrated more upon debt financing which over time has proved disadvantageous for the company. This trend is especially noted since the year 2009 when the company decided to expand its operating base. Although it is too early to draw any conclusion about the effectiveness of its strategies at this point, it might be said that the company must continue with its previous strategy of emphasizing more on equity financing. References Gibson, C. H. (2008). Financial Reporting and Analysis (11th ed.). USA: Cengage Learning. Little World Beverages Limited. (2009-10). ANNUAL REPORT 09/10 (ABN 25 081 128 225). Nobes, C. (1997). Introduction to financial accounting. USA: Cengage Learning. Reuters. (2011). Profile: Little World Beverages Ltd (LWB.AX). Retrieved May 20, 2011, from http://in.reuters.com/finance/stocks/companyProfile?symbol=LWB.AX Ross, S. A., Westerfield, R. W. & Jaffe, J. (2005). Corporate Finance (7th ed.). New York, USA: McGraw-Hill. Webster, W. H. (2003). Accounting for managers. New York, USA: McGraw-Hill. Wild, J. J., Subramanyam, K. R. & Halsey, R. F. (2006). Financial Statement Analysis (9th ed.). New York, USA: McGraw-Hill. Bibliography Bragg, S. M. (2010). Business Ratios and Formulas: A Comprehensive Guide. London, UK: Wiley. Brigham, E. F. & Ehrhardt, M. C. (2009). Financial Management: Theory and Practice (13th ed.). USA: Cengage Brain. Wolfson, M. H. (1994). Financial crises: understanding the postwar U.S. experience (2nd ed.). New York, USA: ME Sharpe. Read More