ACC601 Financial Analysis And Comparison Of JB Hi-Fi, Metcash, And Blackmores Assessment Answer

Answer :

Financials 

Executive Summary

This report reveals the key understanding on the ratio of the different companies and results on various aspects ranging from the company’s position of liquidity, profitability, leverage, short-term management of assets and shareholder’s expectations. However, after assessing the financial performance of company, has been observed that JB Hi-Fi Company has been performing well in market as compared to other companies such as JB Hi-Fi, Metcash, Bellamy’s Organic Blackmore’s and retail Foods Company and API Company. Nonetheless, the profitability of the Blackmore’s is higher as compared to others. The share price of Blackmore’s is strengthen in market which is showing the high growth rate as compared to other and will give higher return to the shareholders. 

Introduction

This report reflects the financial analysis and comparison of the different companies named JB Hi-Fi, Metcash, and Blackmore’s and retail Foods Company and API. However, the financial analysis has been made on the basis of Bellamy’s Organic, JB Hi-Fi, Metcash, and Blackmore’s and retail Foods Company and API in its annual report for the financial year 2019, 2018 and 2017 the financial information related to the company’s position and performance during the year is obtained. On the basis of this information, the company’s financial ratios are computed for three consecutive financial years

Answer to question no-1Ratios for three recent financial years

Based upon the information profited by Bellamy’s Organic in its annual report for the financial year 2019, 2018 and 2017 the financial information related to the company’s position and performance during the year is obtained. On the basis of this information, the company’s financial ratios are computed for three consecutive financial years. These ratios provide results on various aspects ranging from the company’s position of liquidity, profitability, leverage, short-term management of assets and shareholder’s expectations. These ratios are shown as follows (Bellamy’s Organic, 2019).

(Bellamy’s Organic, 2019).

NOTE: - For other companies ratio please check the excel file attached

Answer to question no-2Impact of raising $200 million loans on return on equity and the net debt to equity ratios

Due to raising of $200 million of the loan in the financial year 2019, the following financial implications shall follow (Bellamy’s Organic, 2019).

• The total debt shall increase by $200 million for the financial year 2019.
• The net profits for the year shall remain unchanged for the financial year 2019 (Bellamy’s Organic, 2019).  This is because the company has taken a loan in the year-end and hence no interest expense is incurred for the financial year 2019. From the year 2020 onwards, the interest expense shall be incurred, because of which the net profits shall fall by the amount of interest but saved by the tax component of the net profit amount. 
• Impact upon return on equity: The overall impact on the return on equity shall be nil for the financial year 2019. This is so because the loan raised had no immediate effect upon the company’s net profits and the same is discussed as above. Hence, the return on equity for the financial year 2019 shall stick at 9.85% (Bellamy’s Organic, 2019).
• Impact upon net debt to equity ratio:  as a result of raising the new loan of $200 million, the company’s net debt shall increase. As a result, the solvency ratio shall increase. This could be demonstrated as follows:

Net debt after the loan is raised

Current net debt: ($77,369,000 - $112,355,000)

:  -$34,986,000

Add, $200,000,000 to this amount to get the new net debt, reaching $165,014,000.

Using the net debt to equity ratio formula: $165,014,000/ 219,827,000

 : 0.75 times

Hence, as a result of acquiring a new loan, the company’s net debt rose by $200 million because of which the net debt to equity ratio for the financial year 2019 for Bellamys Organic grew from -0.15 times to 0.75 times. The reason behind the rise in the company’s solvency is because the company’s positive net cash is now taken over by positive net debt. Earlier, the company had a cash balance which overweighed the company’s debt by a huge margin. But after the Bellamy’s Organic proposed to raise a new loan from outside the organization, it directly added to the company’s debt position. As a result, the company’s accumulated debt inclusive of the new loan amount rose and exceeded the cash available, i.e. net debt became positive and hence the solvency ratio did (Bellamy’s Organic, 2019).

Answer to question no-3Comparison and contrast of the financial performance and position over financial years 2017, 2018 and 2019

The financial performance of Bellamy’s organic can be compared for the three financial years using the different profitability ratios earlier computed which included the net profit margin, return on equity, return on total assets and earnings per share. The comparison is as follows (Ahmed, 2015).

• The net profit margin for Bellamy’s Organic seems to be very volatile over the three years. However, JB Hi Fi Limited has increased its profit by 13% which is way too low as compared to last three year data. In the financial year 2017, the Blackmores Company had shown a loss because of which the loss margin amounted to 0.35%.  in addition to this, API has also decreased its profit by 12% since last three years which is way too low as compared to other. The reasons behind the loss observed had been the decision of Bellamy’s to recognize significant items in the profit & loss statement which amounted to $41.4 million. Due to this recognition, the retail Food company’s normalized profits were overweighed and converted into losses (Bellamy’s Organic, 2019). The financial year 2018 and 2019 have shown good profitability because of no such recognition in Bellamy’s Organic. However, profitability declined in the year 2019 by the Bellamy’s Organic  due to its less turnover (Bhullar, Bhatnagar, and Gupta, 2018).
• The return on equity of Metcash Limited has shown the same trend as shown by the net profit margin which is higher as compared to other companies. The Metcash Limited had no dividends announced and hence, the after-tax net profits have been considered for this computation. The company’s equity has tripled over the three years which is higher as compared to other companies. The equity for the year 2019 has grown while the net profit has fallen of Metcash Limited. This has caused the return on equity to fall (Bloomberg.com. 2019).
• The return on assets, however, is showing the same movement, yet had been positive for the financial year 2017 as well of Bellamy’s Australia Limited. This is because of the consideration of before-tax net profits and adding back the finance expenses while computing this ratio. As a result, the numerator figure for the year 2017 became positive as the finance expenses in that year had been high (Bellamy’s Organic, 2019). Again, in the financial year 2019, the total assets leaped over 2018’s figure while the net profit fell. Hence, the return on assets also fell. 
• The EPS is directly impacted by the after-tax profits and hence is showing the same movement as was in the net profit margin. The EPS steeply fell from 37.19 cents in the year 2018 to 18.16 cents in 2019 (Bremberger, Cambini, Gugler, and Rondi, 2016).

Conclusively, Bellamy’s Australia Limited company’s financial performance has first improved in the financial year 2018, while again went down for the financial year 2019. Also, the revenue in the year 2019 fell which added to the falling performance of Bellamy’s Organic.

The financial position of Bellamy’s Organic can be traced from the rest of the ratios other than the discussed above and is analyzed as follows:

• Even when the margin of net profits fell in 2019, the company’s current ratio has improved significantly which is .2 average points higher than JB Hi-Fi, Metcash, Blackmore’s and retail Foods Company and API. The direct reason traced for the improvement is the high cash balance which Bellamy’s showed for the 2019 financial year. But this is actually not a good sign. It indicates that Bellamy’s is keeping a high amount of cash balance unused in its business, which at the same time is not adding to returns which have been taken as advantage by other companies JB Hi-Fi, Metcash, Blackmore’s and retail Foods Company and API to strengthen their financial performance (CHANDREN, AHMAD, and ALI, 2017).
• There is a noteworthy fall in both asset turnover and inventory turnover for Bellamy’s Organic. The inventory turnover has reduced down to 1.61 times in 2019 after gaining a good rise reaching 2.17 times in 2018 on the other hand, other companies, JB Hi-Fi, Metcash, Blackmore’s and retail Foods Company and API had blocked less amount of capital in its inventory to strengthen its return on capital employed. The reduction in this turnover shows a reduction in the number of selling inventory during the year. The reduction in the value of asset turnover of Bellamy’s Australia Limited shows a fall in the revenue produced by Bellamy’s for per dollar of current and non-current assets used in business. The fall in these two turnover ratios shows a fall in the efficiency and performance of the business. This fall is showing that Bellamy’s need to improve in its marketing campaign. This is so because the improved marketing campaign can improve the sales directly. Both these ratios are directly concerned with inventory and its sale. Hence improvement in the marketing campaign can help in achieving both the goals (Charitou, Elfani, and Lois, 2016).
• The leverage ratio computed for Bellamy’s Organic helps to understand the amount of debt which the organization has used to finance its total assets. The leverage ratio when equals to one states the organization is using no debt. When the leverage ratio exceeds 1, it is always a situation of an organization that uses debt capital. However, JB Hi-Fi, Metcash, Blackmore’s and retail Foods Company and API have kept leverage ratio below 50% average by keeping more than half equity capital in their business capital structure.  Any standard has not been prescribed yet, the ratio, when used for comparison, shows a higher ratio to mean the employment of higher debt in the business. For Bellamy’s the leverage ratio has dropped over these years. This fall is showing a fall in the amount of debt used by Bellamy’s to finance its total assets. The company’s total debt has however increased in value, but the equity has grown significantly during the same time (Council, et al. 2017).
• The same interpretation as realized from the leverage ratio can be attributed to the company’s solvency ratio. The solvency ratio dropped at a huge margin from 0.52 times in 2017 to -0.15 in 2019. The negative solvency ratio implies a positive amount of net cash in the business. In common language, this means that the business has a debt that is covered by the cash balance entirely and even the cash balance is in excess of the amount of net debt. This ratio, however, affirms the analysis made for the current ratio. The current ratio has increased and the reason was a lot of the cash balance kept with Bellamy’s. Both solvency and current ratio signify the presence of excess cash in the business (Kilroy, and Schneider, 2017).

Answer to question no-4

After assessing the annual reports of JB Hi-Fi, Metcash, Blackmore’s and retail Foods Company and API, it is fond that for Bellamy’s the leverage ratio has dropped over these years and the fall in the amount of debt used by Bellamy’s to finance its total assets. The company’s total debt has however increased in value, but the equity has grown significantly during the same time. Nonetheless, the net profits for the year shall remain unchanged for the financial year in 2019 and company has taken a loan in the year-end and hence no interest expense is incurred for the financial year 2019.  The differences in financial performance of the companies over the past 3 years  is thee differences in the Total Return to Shareholder between the companies over the past 3 years as the net profit margin for Bellamy’s Organic seems to be very volatile over the three years whereas others are keeping the stable profit earning capacity. In the financial year 2017, the company had shown a loss because of which the loss margin amounted to 0.35% on the other hand, JB Hi-Fi, Metcash, Blackmore’s and retail Foods Company and API has kept higher Total Return to Shareholder to their shareholder. All companies are offering more than 12% of its Total Return to Shareholder with a view to strengthen the overall brand image and share value in market. 

The EPS is directly impacted by the after-tax profits and hence is showing the same movement as was in the net profit margin of Total Return to Shareholder. The Bellamy’s Organic y’s equity has tripled over the three years. The equity for the year 2019 has grown while the net profit has fallen. This has caused the return on equity to fall. Nonetheless, other companies are showing the high blockage of the cash in its liquidity assets and resulted to the high loss of cost of capital. The high debt funding of the other competitors in market are one of the reason of keeping the low cost of capital (Lin, Chan, and Kwan, 2017). However, their high financial leverage would be the negative factor on the business sustainability in long run. 

Answer to question no-5Compare and contrast the current market value of each company

The current market value of the company could be computed by using the dividend growth mode. This method uses the growth rate, dividend proposed, cost of equity and last year share price of company (Statista., 2019).

Formula-

P1= D1/Ke-G

D0= 0.078

Growth rate= 10%

Cost of equity- 12%

P1= .0786

P1= .39 price per share

The share price of the Bellamy’s Organic is overvalued therefore, the investors should not invest their capital in this company for long run. However, for the short time, company is the good investment option. However, other companies selected by other members could be selected for the investment purpose as they are undervalued. Nonetheless, the Blackmore’s company have been overvalued due to its higher sales and increased brand image. therefore, it could be inferred that Bellamy’s Organic is overvalued so investors should not invest their capital in Bellamy’s Organic as it is overvalued but they should invest their capital in JB Hi-Fi company to have increased return on equity. 

Conclusion

After assessing the annual report, it has been found that JB Hi-Fi, Metcash, Blackmore’s and retail Foods Company and API have kept leverage ratio below 50% average by keeping more than half equity capital in their business capital structure. Nonetheless, the share price of Blackmore’s company have been overvalued due to its higher sales and increased brand image. if investors their capital in Bellamy’s Organic then they might face loss in their capital due to the overvaluation of the share price in market.