Financial Analysis of Orora Limited
ANALYSIS OF ORORA’s FINANCIAL STATEMENT
With globalization and an increase in businesses all over the world, there has been a huge emphasis on performance of the business in market. From the customers to the shareholders, from the third parties to the management of the company, everyone wants to know the financial performance of the company in which they have invested their stakes. Financial statement Analysis of the company is of utmost importance in this regard.
Finance is the fuel for the business machine to run. Financial Analysis of a company presents all the relevant and significant aspects of the company’s financial statement in an elaborate manner. It also helps the user understand the causes and effects of a certain event that is taking place in the company. Through a financial analysis report, a person can understand the financial structure and the current financial position of the company very easily which otherwise is difficult to articulate just by looking at the figures of the balance sheet or of the Profit and Loss statement. It also helps the Key executives to understand the financial figures and take managerial decisions in a better way.
In this report, we are doing the financial analysis of ORORA LIMITED for the period July 2017- June 2018. Various techniques and tools have been used to perform such analysis like trend analysis, ratio analysis, comparative statement, etc., but in this report we have majorly relied on financial ratios to analyze different aspects of financial statements.
The purpose of this project is to identify the financial strengths and weaknesses of the company, analyze the key improvement areas and recommend steps of improvement, if required.
Orora Limited is a public listed company that manufactures and sales packaging products in Australasia and New Zealand. The company manufactures paper, fiber, aluminum, paper, plastic and glass based packaging containers. The company believes in delivering services as per the requirement of the customers, therefore it provides tailored and customized packaging products for its customers. The company believes in customizing and innovating packaging solution as per client client requirements through technology and design.
Orora Limited currently operates in 7 countries with a team of around 7000 employees. It has an existing base of about 54000 shareholders. The company calls main market lies in North America and Australasia.
To analyze the financials of any limited company, there are some important factors which needs to be considered and some important statements and items which needs to be analyzed properly, which are as follows-
- Financial Highlights (for 2-5 financial periods)
- Share Value of the company (in comparison with the past periods)
- Profit of the company before and after tax
- Cash position of the company
- Profitability of the company
- Liquidity analysis
- Solvency analysis
- Investment position of the company
We will include all the above mentioned techniques, as and where required, throughout the analysis report to come at a relevant and meaningful conclusion.
1. Analysis of Liquidity
Liquidity is the ability of the firm to meet its short term obligations. This analysis shows if the company has enough short term resources/ current assets, which can be readily converted into cash, to pay off its short term liabilities or borrowings.
a. Cash Ratio
There has been significant growth in company’s cash and cash equivalent items. There has been 50% increment in cash balance from the last year and 200% increment in cash balance from last 5 years.
Let’s calculate the Cash Ratio to understand how cash position affects the business.
Cash ratio = (cash + short-term marketable securities) ÷ current liabilities
= 97 / 1,099
It has to be noted that in cash ratio we are ignoring very other short term assets available to the firm and just taking cash and short term investments that are readily convertible into cash in concern while calculating the ratio to know if the company has enough immediate liquidity.
Cash ratio of a company should ideally range from 0.5 to 1. The cash ratio of the Orora Ltd. is 0.09 which is way low to what it should be. This shows that there are chances that the company can go out of cash anytime if there is an urgent payment requirement of substantial amount.
The company should definitely work towards improving its cash ratio to maintain better liquidity position for unforeseen circumstances.
b. Quick Ratio
Quick Ratio is also a liquidity ratio but it takes some other current assets apart from cash to calculate the ratio. This ratio shows the short term liquidity of the firm for less than a year to pay obligation which are due before the year end.
Quick Ratio = (cash + short-term marketable securities + accounts receivable) ÷ current liabilities
Quick ratio of a company should ideally be 1:1. The quick ratio of the Orora Ltd. is 0.69 which lower than what it should be. This shows that there are chances that the company might not be able to fulfill its shot term obligations due to lack of liquidity.
c. Current Ratio
Current Ratio is one of the most important liquidity ratios. It is calculated as follows-
Current Ratio = Current assets ÷ Current liabilities
Current ratio of a company should ideally be 2:1. The current ratio of the Orora Ltd. is 1.20 which lower than what it should be. This shows that there are chances that the company might not be able to fulfill its shot term obligations due to lack of liquidity.
2. Analysis of Activity/ Operations
Activity ratios assess the efficiency of operations of a business and find out how effectively the business is converting inventories into sales or sales into cash, or how it is utilizing its fixed assets and working capital, etc.
a. Debtor’s turnover Ratio
A debtors’ turnover ratio is calculated to evaluate the efficiency of collecting the money due for sales done on credit. A high ratio implies efficient credit and collection process. It is calculated as follows-
Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable
There isn’t an ideal debtor turnover ratio as such but the ratio should be in line with the frequency of credit sales made, so that there are least chances of bad debts losses. The debtors’ turnover ratio of the Orora Ltd. is 7.1, this indicates that the collection department takes an average of 7 days to collect the credit payment due from a creditor.
b. Inventory turnover ratio
This ratio represents the number of times inventory is sold and replaced. A high ratio indicates that the company is efficient in managing its inventories.
Inventory Turnover = Cost of Sales ÷ Average Inventory
= 3441/ 559
There isn’t an ideal inventory turnover ratio as such but the ratio should be in line with the frequency of inventory purchased and stocked, so that there are least chances of perishing or over-stocking. The debtors’ turnover ratio of the Orora Ltd. is 6.1, this indicates that the sales department takes an average of 6 days to convert the finished product into sales.
3. Analysis of Profitability
Every business operated to survive and grow in the market, both of these are possible only when the business is profitable. Profitability ratios measure the ability of a business to earn profit for its owners. It evaluates the financial performance of a business.
a. Net Profit Ratio
This ratio evaluated how much net profit is generated from sales. Net profit is Gross Profit less indirect expenses add indirect incomes. Most of the shareholders are interested in profitability of the business because nobody wants to invest in a business that making losses. This also effects the share prices of the company and its credit rating. The Net Profit Ratio is calculated as follows-
Net Profit Rate = Net Profit ÷ Net Sales
= 212 / 4248
= 0.049 or 5%
The Net Profit ratio of the Orora Ltd. is 5% which means that after deducting all the direct and indirect expenses, the company manages to earn 5% magin on sales.
The Net profit margin of ORORA LTD. is not too bad as per the industry trends but there is definitely a room for improvement. Although there has been growth in company’s sales and profits consistently for past 5 years
b. Gross Profit Ratio
This ratio evaluated how much gross profit is generated from sales. Gross profit is Sales less direct expenses. The Gross Profit Ratio is calculated as follows-
Gross Profit Rate = Gross Profit ÷ Net Sales
= 807 / 4248
= 0.189 or 19%
The Gross Profit ratio of the Orora Ltd. is 19% which means that after deducting all the direct expenses, the company manages to keep 19% magin on sales, from which it has to pay indirect expenses and then make profits for the shareholders.
Similar to Gross Profits, there has been growth in company’s gross profits as well for past 5 years.
c. Return of Investment/ Equity
This ratio calculates the percentage of income derived for every dollar of owners' equity invested in the business. It is calculated as-
Return on Stockholders' Equity = Net Income ÷ Average Stockholders' Equity = 212 / 1,631
= 0.129 or 13%
The Return on Equity of the Orora Ltd. is 13%. Since Profits of the company has grown over the years, there has been an increase in the shareholder’s equity as well as an effect of the prior. The trend of past 5 years is presented below-
4. Analysis of Dividend Policy/ Growth Ratios
Distribution of profit is of the same importance to that of earning profit. Earned profit can either be distributed or be retained for reinvestment and growth of the business.
a. Earnings Per Share
This ratio evaluates the rate of earnings per share of common stock. Preferred dividend is deducted from net income to get the earnings available to common stockholders. This also affects the share prices of the company and its credit rating. The EPS Ratio is calculated as follows-
EPS = (Net Income - Preferred Dividends) ÷ Average Common Shares Outstanding
There has been an increase of 11.5% from the past year in EPS, similar to the profits of the firm. ORORA LIMITED has seen a substantial growth in EPS for past 5 years. The trend has been shown below –
b. Dividend payout ratio
This ratio is used to determine the portion of earnings or the net profits that is distributed to owners. Not the entire income of the company should be distributed and a significant portion should be retained for the future year's operations, because without retention there wouldn’t be growth of firm. But at the same time, an adequate distribution is also necessary to keep the shareholders satisfied.
The DPR is calculated as follows-
Dividend Pay-out Ratio = Dividend per Share ÷ Earnings per Share
ORORA limited has been maintaining a payout ratio of 60-70% of the profits which is a little bit on the higher side as per the industry trends.
c. Analysis of Solvency
Solvency ratios assess the long-term financial viability of a business i.e. its ability to pay off its long-term obligations such as bank loans, bonds payable, etc. Information about solvency is critical for banks, employees, owners, bond holders, institutional investors, government, etc.
d. Debt to equity ratio
This ratio is used to calculate the portion of borrowings that the company owes to third parties or external borrowings of the company against its total liability. This also represents the capital structure of a company.
Debt-Equity Ratio = Total Liabilities ÷ Total Equity
= 2074 / 1631 = 1.28
D/E ratio of more than 1 implies that the company is a leveraged firm; less than 1 implies that it is a conservative one. Hence, ORORA LTD. needs to reduce their debt portion from their total borrowings as they are leveraging on debt more than what they ideally should.
6. Analysis of Investment
- The company has invested an additional $23M in Orora Global Innovation Initiative as a result of which the capital allocation has increased from $30M to $75M.
- The company has also taken initiatives to expand the glass warehouse through purchase and upgrade of 2 adjacent warehouses and has also committed to build further such warehouses in CY19 also.
- ORORA LTD. has acquired two small bolt in Australia, one of which is a specialist corrugated
box converter and another one is a distributor of consumable packaging.
The above mentioned investments has a very high chances to result in higher quality of product, expansion of market, low cost of production due to higher scale of operations and technological advantage over the competitors.
7. Other Relevant events and observation
- Change of Director’s Notice
One of the directors named Nigel David Garrard changed his stake in the company. Mr. Garrard is a Director and shareholder of the Trustee Company and a beneficiary of the trust.
He disposed and acquired some of his stakes in common stock, rights and options, the details of which can be found on the company’s website.
Although the external borrowings (debts) of the company are a little high, the management is able to use the debt in a right way. It is clearly used efficiently in its operations to create maximum cash flow. This might not be an optimal capital structure for ORORA Limited but the company is managing to fulfill its short-term commitments on time, in spite of not so great liquidity ratio.
In future, Orora Limited remains committed to creating assist shareholder value through a continuous effort on beneficial deals development, fetched control and productivity, ventures in innovations & advancement, the right allotment of cash flow to develop ventures that are anticipated to create expected returns.