T1_2015_MAF302_Group Writ - Article Example

Name of the students Name of the institution Date of Submission Bega Cheese Income Statement For the year ended 30 June 2014 2012 2013 2014 $(000) $(000) $(000) Revenue 926,752 1,004,387 1,069,392 Cost of Sales (811,386) (874,344) (951,117) Gross Profit 115,366 130,043 118,275 Other Income 9,141 9,048 76,309 Expenses (97,428) (105,308) (101,950) Share of net profit - 1,566 946 Profit before tax 27,079 35,349 93,580 Income tax expense (6,650) (9,904) (27,525) Profit for the year 20,429 25,445 66,055 Warrnambool Cheese and Butter Income Statement For the year ended 30 June 2014 2012 2013 2014 $(000) $(000) $(000) Revenue 497,800 496,504 608,995 Changes in inventory - (978) 4,987 Cost of Sales (462,300) (376,835.00) (465,279.00) EBITDA 35,500 118,691 148,703 Depreciation/Amortization (12,700) (11,798) (12,661) EBIT 22,800 106,893 136,042 Finance costs (3,100) (4,142) (3,658) Share of net profit - 1,688 3,863 Expenses - (94,848) (107,384) Profit before tax 19,700 9,591 28,863 Income tax expense (4,500) (2,101) (7,587) Profit for the year 15,200 7,490 21,276 Profitability It determines the company’s return on its investment, that is, the income realized after paying off all the costs and expenses incurred in producing the goods They include the following ratios Gross profit margin it involves comparison of the gross income to the net sales made during the period Gross profit margin=(Gross profit/Net sales)*100 Bega Cheese 2012 2013 2014 Gross Profit 115,366 130,043 118,275 Net sales 926,752 1,004,387 1,069,392 Gross profit margin 12.45% 12.95% 11.06% Warrnambool Cheese and Butter 2012 2013 2014 Gross Profit 35,500 118,691 148,703 Net sales 497,800 496,504 608,995 Gross profit margin 7.13% 23.91% 24.42% Analysis A higher ratio means a company sold its inventory at a higher profit percentage Bega Cheese, improved in performance in 2013 since it sold its dairy products at a higher profit of 12.95% in comparison to 2012 which was 12.45.Meanwhile, in 2014 it performed poorly since it sold its dairy products at a lower percentage profit of 11.06%, Warrnambool Cheese and Butter, in 2012 it was performing badly since it sold its products at a profit of 7.13% while there was improvement in 2013 since it sold its products at 23.91 % and likewise it performed very since its dairy products were sold at a high profit of 24.42% When we compare performance of the two companies in 2014, Warrnambool Cheese and Butter Performed better since it sold its dairy products at a high profit percentage of 24.42 % as opposed to Bega Cheese this had 11.06 %. Therefore, Bongrain should consider acquiring Warrnambool Cheese and Butter since they have a steady performance Pattern in comparison to Bega cheese. Net Profit Margin It measures the income earned after all the operating expenses have been paid off Net Profit Margin= (Net Profit/Net Sales)*100 Bega Cheese 2012 2013 2014 Net Profit 20,429 25,445 66,055 Net sales 926,752 1,004,387 1,069,392 Net profit margin 2.20% 2.53% 6.18% Warrnambool Cheese and Butter 2012 2013 2014 Gross Profit 15,200 7,490 21,276 Net sales 497,800 496,504 608,995 Net profit margin 3.05% 1.51% 3.49% Analysis The ratio indicates how a company manages its expenses relative to its sales. The higher ratio is more favorable. In 2012, Bega Cheese had a sold its dairy products at a net profit of 2.2%, the company improved in its performance since in 2013 it a sold its products at a higher net profit of 2.53%,the subsequent year was even better, it increased to 6.18% Warrnambool Cheese and Butter on the other hand, had a net margin of 3.05 in 2012, which declined in the subsequent year to 1.15%, the year 2014 improved again since it recorded a net margin of 3.49. Therefore, Bega Cheese generally performed better than Warrnambool Cheese and Butter since it recorded a higher net margin of 6.18% in 2014 compared to Warrnambool Cheese and Butter who reported 3.49 % thus Bongrain should acquire them instead In general, Bega Cheese seems to have a good management of its overhead expenses in comparison to their counterparts; therefore, Bongrain should consider venturing into business with them. Bega Cheese Balance Sheet For the year ended 30 June 2014 2012 2013 2014 $(000) $(000) $(000) Current Assets Cash & cash equivalents 6,053 22,698 28,630 Trade & other receivables 95,767 103,476 106,660 Other financial assets 318 - - Inventories 162,669 163,027 184,167 Derivative financial instruments - - 2,084 264,807 289,201 321,541 Fixed Assets Property, plant & equipment 204,596 209,123 213,567 Intangible assets 1,580 1,580 1,481 Other fixed assets 44,973 49,317 12,048 251,149 260,020 227,096 Total Assets 515,956 549,221 548,637 Current Liabilities 165,310 174,771 212,170 Long-term liabilities 104,206 112,498 22,079 269,516 287,269 234,249 Equity Contributed equity 101,279 101,902 103,642 Reserves 25,515 25,585 22,390 Retained earnings 119,646 134,465 188,356 Total Equity 246,440 261,952 314,388 Warrnambool Cheese and Butter Balance Sheet For the year ended 30 June 2014 2012 2013 2014 $(000) $(000) $(000) Current Assets Cash & cash equivalents - 3,794 2,414 Trade & other receivables 93,485 111,176 96,308 Inventories 71,782 70,804 75,791 165,267 185,774 174,513 Fixed Assets Property, plant & equipment 74,691 85,314 95,438 Other fixed assets 34,672 35,476 41,306 109,363 120,790 136,744 Total Assets 274,630 306,564 311,257 Current Liabilities 104,041 135,444 122,490 Long-term Liabilities 9,844 9,317 4,787 113,885 144,761 127,277 Equity Contributed equity 67,676 69,607 73,856 Reserves 11,859 9,507 12,236 Retained earnings 81,210 82,689 97,888 Total Equity 160,745 161,803 183,980 Liquidity According to Shen & Yeh (2009), it determines the ability of a company to meet its short-term obligations, that is, how a company is capable of offsetting its short term debts. It includes the following ratios Current Ratio-This is the ability of a company to pay off its current liabilities based on its available current assets. Current=Current Assets/Current Liabilities Bega Cheese 2012 2013 2014 Current Assets 264,807 289,201 321,541 Current Liabilities 165,310 174,771 212,170 Current Ratio 1.60 1.65 1.52 Warrnambool Cheese and Butter 2012 2013 2014 Current Assets 165,267 185,774 174,513 Current Liabilities 104,041 135,444 122,490 Current Ratio 1.59 1.37 1.42 Analysis The ratio helps shareholders and creditors understand the liquidity position of the company and its ability to settle its short term debts (Shen & Yeh 2009). A higher ratio is preferable because its shows that the company can easily settle its short term debt without having to sell some of its fixed assets (Shen & Yeh 2009). Bega Cheese It had 1.6 times more current assets compared to current liabilities in 2012; this implies it was able to pay off its short term debts with much ease. In 2013, the ability increased to 1.65 while in 2014, the company was able to settle its debts since it had 1.52 times current assets than current liabilities although compared to 2013 that ability had declined a little bit. Warrnambool Cheese and Butter In 2012, the company could easy settle its short term debts since it had 1.59 times more current assets than current liabilities. In 2013, the ability was still there though it had dropped to 1.37 and in 2014 the company’s ability to pay current liabilities increased to 1.42 times Therefore, Bega cheese seems to be performing better than Warrnambool Cheese and Butter in managing its debts, since across the three years it had a higher current ratio compared to their counter parts and this shows their stability hence Bongrain should consider acquiring them. Quick Ratio It indicates the ability of the company to pay off its short term debts using its most liquid assets, that is, the assets that can be easily converted into cash within a span of 90 days (Gombola 2003). Quick Ratio= (Cash & cash equivalents + short term investments + Account Receivables)/Current Liabilities Bega Cheese Quick Assets= Cash & cash equivalents + Trade & other receivables + other financial assets + Derivative financial instruments 2012 2013 2014 Quick Assets 102,138 126,174 137,374 Current Liabilities 165,310 174,771 212,170 Current Ratio 0.62 0.72 0.65 Warrnambool Cheese and Butter Quick Assets= Cash & cash equivalents + Trade & other receivables 2012 2013 2014 Quick Assets 93,485 114,970 98,722 Current Liabilities 165,310 174,771 212,170 Current Ratio 0.57 0.66 0.47 Analysis According to Lewellen (2004),it is the ability to pay off current liabilities using its quick assets will be a clear indication to investors that the company operations is making sufficient profits to enable it settle its short term debts. A higher ratio is preferable because it confirms that the company has more quick assets than current liabilities hence can easily pay off its debts Bega Cheese The company had 0.62 times more quick assets than current liabilities in 2012 hence was able to pay off its short term debts easily, the ability increased to 0.72 times in 2013 and finally dropping to 0.65 in 2014. Warrnambool Cheese and Butter In 2012 the company’s ability to settle its short term debt based on its quick assets was 0.57, in 2013 that ability increased to 0.66 times while in 2014, the ability dropped a little bit to 0.47 time. Generally, in comparison Bega Cheese seems to performing better in terms of managing its short term debt since its liquidity was over high compared to Warrnambool Cheese and Butter throughout the three years, hence Bongrain should definitely prefer them to Warrnambool Cheese and Butter. Capital Structure These are sources of fund through which a company finances its business operations. It includes the all the debts and equity invested in the business (Hays & Gilbert 2009). Bega Cheese Sources of Funds Debts 2012 2013 2014 Short-term debts 165,310 174,771 212,170 Long-term debts 104,206 129,498 22,079 Total debts 269,516 304,269 234,249 Equity Contributed equity 101,279 101,902 103,642 Retained earnings 119,646 134,465 188,356 Total equity 220,925 236.367 291,998 Debt to Equity Ratio 1.22 1.29 0.80 Warrnambool Cheese and Butter Sources of Funds Debts 2012 2013 2014 Short-term debts 104,041 135,444 122,490 Long-term debts 9,844 9,317 4,787 Total debts 113,885 144,761 127,277 Equity Contributed equity 67,676 69,607 73,856 Retained earnings 81,210 82,689 97,888 Total equity 148,886 152,296 171,744 Debt to Equity Ratio 0.76 0.95 0.43 Analysis A low debt to equity ratio is preferable because it indicates stability of the company since most of its operations are financed internally, that is using its own contribution. Bega Cheese In 2012 it relied so much on debt to finance its operations since debt contributed 1.22 times more than equity, In 2013 it continued relying on borrowings since debts was 1.29 times more compared to equity while in 2014, it improved in performance since debt usage reduced to 0.8 times Warrnambool Cheese and Butter It financed its operations mostly using its equity, in 2012 debt used was 0.76 times the equity invested, in 2013 the dependence on equity slightly increased to 0.95 times and eventually reducing to 0.43 times in 2014. In this case Warrnambool Cheese and Butter are performing better than Bega Cheese in terms of financing its operations since it relies mostly on its internal funds. Conclusion Having, analyzed the two companies, Bega Cheese seems to be the best option for Bongrain when it comes to managing its operations. Intrinsic Valuation Bega Cheese 2012 2013 2014 Profit after tax 20,429 25,445 66,055 Depreciation 12,700 11,798 12,661 Investment in fixed assets (5,100) (22,211) (22,972) Investment in working capital (2,508) (1,515) 4,703 Free cash flow 40,737 60,969 96,985 WACC=10% Present Value (FCF) = (40.7/1.1) + (60.969/1.1^2) + (96.985/1.1^3) Present Value (FCF) =$160.25m BIBLIOGRAPHY Gombola, M. J., & Ketz, J. E. (2003). A note on cash flow and classification patterns of financial ratios. Accounting Review, 105-114. Lewellen, J. (2004). Predicting returns with financial ratios. Journal of Financial Economics, 74(2), 209-235. Hays, F. H., De Lurgio, S. A., & Gilbert Jr, A. H. (2009). Efficiency ratios and community bank performance. Journal of Finance and Accountancy, 1(1), 1-15. Shen, C. H., Chen, Y. K., Kao, L. F., & Yeh, C. Y. (2009, June). Bank liquidity risk and performance. In 17th Conference on the Theories and Practices of Securities and Financial Markets, Hsi-Tze Bay, Kaohsiung, Taiwan. Read More