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Financial Performance of Treasury Wine Estate and Metcash limited

HI5002: Finance for Business

Tasks This assessment task is a written report and analysis of the financial performance of two selected listed companies on the ASX in order to provide financial and investment advice to a wealthy investor. This assignment requires your group to undertake a comprehensive examination of corporate financial performance based on update financial statements of the chosen companies.

BACKGROUND 

You’re a group of investment analysts who work for a large investment consulting firm based in Australia. There’s one big institutional investor from overseas that is interested in investing in the Australian market. You’ve been asked to choose two large companies operating under the same industry in Australia (the industry you think will have the most promising future for investment) then evaluate and compare them. Finally make a recommendation through your Report to the investor which one is more superior fundamentally. Create your group’s “business name” under which your group will be providing the financial advisory services. Choose two listed companies that your group will investigate/analyse for the purposes of possible recommendation to your client. The group should obtain all information about the selected companies from this web site: www.asx.com.au.

Required: 

Obtain copies of Financial Statements including Income Statements, Balance Sheets, and Statement of Changes in Equity, Cash Flows Statements and Notes for three (3) financial year 2014-2015, 2015-2016 and 2016-2017. Your group can download these documents from the suggested web site using the firm’s code (example, BHP- for BHP  HI5002 Finance for Business Group Assignment T2 2018  3 Billiton Company, etc.).

STAGES TO BE COMPLETED 

1 Description of operation and comparative advantages of the two chosen companies. 

2 Calculation and comparison of performance ratios of the two companies 

3 Analysis of monthly share prices movements of the two companies within 3 years 

4 Identify any significant factors which may have influenced the share price of your chosen companies during the time frame. 

5 Calculation of Beta values and expected Rates of Return using the CAPM of the two chosen companies

 6 Identify and compare dividend policy of the two chosen companies 

7 Letter Recommendation

Answer

FINANCE FOR BUSINESS

Introduction 

In relation to gathering information on financial performance and market performance of business entities, valuation of financial statements is necessary. In addition to that, the involvement of share price movement in the financial market provides a critical study overgrowth and performance level of an organization in the market (Reguera-Alvarado, de Fuentes and Laffarga, 2017). In the assignment, the Australian business entities Treasury Wine Estate and Metcash limited has been taken to evaluate their financial and market performance through evaluating the financial ratio, stock market performance and expected market returns of the company in the marketplace. 

1. Description of operation and comparative advantages of the two chosen companies:

The Treasury Wine Estate or Treasury Wine is one of the leading Wine making companies of Australia that has been founded in the year of 2011. The company has been a division of Fosters Group which was one of the leading beers producing company. The organization has about 3400 or more employees working under it; the company has been able to generate sales revenue of AU$ 2.5 billion in the marketplace. As per the assessment, the company has been a division of Foster’s group since 1995. The company began its operations after the spin-off from Foster group and opes rating as an independent entity (Tweglobal.com. 2018a). Treasury Wine Estate produces beer and operates in the market of Australian, New Zealand and Europe, Middle East Africa, United States and Asian countries in the global marketplace. In the present by year of 20147, it has been claimed that the company has sold almost 36 million wine bottles in the operating market with 13000 hectares of properties and Vinery courtyards. On the other hand Metcash, Limited produces a wide range of products including groceries, Alcohol, Beverages, food groceries, liquored market, electronics and hardware and other consumer, goods. The company has the been founded in the year 2010. In the year 2012, the company has taken the majority of shares of Automotive Brand Group and its automotive product segments. Thus the company has expensed its product segmental by making certain acquisitions (metcash.com. 2018b).  

2. Calculation and comparison of performance ratios:

The ratio analysis and evaluation have been presented by business entities to observe graphical presentation of business positioning and financial and performance within the market. The graphical presentation of these ratios certainly helps the entities to make critical decision making as per situation and circumstance of the organization (Shahzad and Sharfman, 2017). In the case of Treasury Wine and Metcash Limited, the financial ratio evaluates both the organization has a growing pace of financial performance in the market. As per liquidity ratio of Treasury Wine, in the year of 2015 current ratio of the company has been evaluated 2.53 that has been decreased in the following of 2016 by 2.46 and 2.35 in the present year of 2017. It has been evaluated that the company capability to meet its short-term liabilities has been declined might be due to lack of cash resources and cash reserves. It has been evaluated that the quick ratio of the firm in 2015 has been analyst 1.05 that has increased in the year of 2016 by 1.09 (Financials.morningstar.com. 2018a). Thus in the year of 2016, the current assets of the company have been increased in comparison to the current liabilities. Although in comparison to 2016, present year quick ratio of the company has been reduced to 1.05. Thus, it evaluates that current assists such as cash and cash equivalent have been reduced might be due to investment has been made by the company in the present year.  

As per profitability ratio of the company, it has evaluated that Treasury Wine net profit margin has been analyzed 4.2 in the year of 2015 that has been increased in the following year of 2016 by 8.04. It has evaluated that the company has reduced its operating expenditures that has helped to increase its net profit in the year 2016 as well as in the present year of 2017. The present year net profit margin of the company has been increased by 11.2. (Financials.morningstar.com. 2018a). In relation to the gross profit ratio, in the year of 2015, it has been evacuated 26.5 that have been increased in the following year of 2016 valued 32, Treasury Wine has been able to create demand and sales that have increased gross profit of the company in the year of 2016. The gross profit margin again increased in the present ear of 2017 valued 34.7, which stated the sales volume of Treasury Wine had made a constant development and growth in the present year marketplace. On the other hand, it has been observed leverage ratio of the company has also increased in the past three years. The return on equity of company in 2015 evaluated 2.63 that have been increased by the year 2016 by 5.37. In the resent the year of 2017, the company return to equity evaluated 7.44, which states shareholders equity has been increased in comparison to the market debt of the company (Financials.morningstar.com. 2018a). The returns to shareholders investment have been enhanced in past three years that certainly help the company to boost its investments the financial leverage of company in 2015 evaluated 1.36 that has increased in 2016 by 1.48 and declined by 1.46 in the year of 2017. The market debt of Treasury Wine has reduced in the present year so that fund generation can be easily made in the present year.      


Treasury Wine Estate Ltd201520162017
Liquidity ratio
Current ratio 2.532.462.35
Quick ratio 1.051.091.05
Profitability ratio 
Net profit margin4.28.0411.2
Gross profit margin26.53234.7
Capital Structure or Leverage ratio 
Return on equity2.635.377.44
Financial leverage 1.361.481.46
MetCash Limited201520162017
Liquidity ratio 
Current ratio 1.131.121.2
Quick ratio 0.670.650.73
Profitability ratio 
Net profit margin-2.821.61.22
Gross profit margin9.38.38.8
Capital Structure or Leverage ratio 
Return on equity-28.0917.2511.5
Financial leverage 3.282.462.24


Table 1: Ratio analysis

According to Metcash Limited, liquidity ratio of the company evaluates the current ratio margin of the Company in 2015 evaluated 1.13, which has been decreased in 2016 by 1.12, assessing the company capability to meet its short-term liability has been decreased. However, in the present year of 2017, the company might have increase cash reserves that have helped to enhance its current ratio by 111.2 (Financials.morningstar.com. 2018b). As per quick ratio, in the year 2015, it has analyzed 0.67 that has decreased in 2016 by 0.65 and again made a rise in the present year 2017 by 0.73. The current assets of the company have been increased in comparison to the current liability of firm, which states the entity can meet its short-term borrowings and debts in the market effectively (Ozkan, Cakan and Kayacan, 2017). On the other hand, the net profit margin of the company in 2015 has been evaluated -2.82 that has been increased in 2016 by 1.6. In the present year, the company net profit margin has again declined to 1.22 in the marketplace. As per the observation, it has been stated that the operating expenditures of the company have been increased in the present year that has reduced the net profit of the company. There gross profit margin 2015 for Metcash evaluated 9.3 that has declined in 2016 by 8.3, although in the present year it has made an increase in its sales and revenue that lead to gross profit margin 8.8 (Financials.morningstar.com. 2018a). The return to equity of the company has been evaluated -28.09 that have increased in 2016 by 17.25. In the present year of 2017, compared to previous year shareholders returns on investment has been reduced to 11.5. The financial leverage of Metcash in 2015 has analyzed 3.28 that has been decreased to 2.46 in 2016 and 2.24 in 2017. Thus, the market debt of Metcash has been decreased in the past here years, which evaluates company has optometry to raise funds from the market for further investments. The ratio analysis of company states, comparatively Treasury Wine market and financial positioning is stable and strong in comparison to Metcash Limited (Financials.morningstar.com. 2018a).      


3. Analysis of monthly share prices movements:

Presentation of graphs of monthly share movements  

Monthly Share price movements of Treasure Wine Estate

Figure 1: Monthly Share price movements of Treasure Wine Estate

Monthly Share price of Metcash Limited

Figure 2: Monthly Share price of Metcash Limited



Share pricesTreasury WineMetcash Limited
Jan-154.8341.46
Apr-155.4731.325
Jul-155.5711.15
Oct-157.081.19
Jan-169.151.75
Apr-169.21.745
Jul-169.652.16
Oct-1610.61.99
Jan-1711.632.11
Apr-17122.215
Jul-1712.82.6
Oct-1715.452.65
Jan-1817.213.23

Table 2: Quarterly share price movements 

Share movement analysis- 

As per the Treasury Wine, the share price in January 2015 evaluated AU$ 4.834 that has increased in April 2015 by AU$ 5.591 might be due to an increase in the sales volume of the company. In July 2015 the share price made a fall by AU$ 4.913, that has increased in August 2015 AU$ 5.543. There has been a low decrease and increased in the share prices of Treasury Wine in the year 2015. In the month October the share price of the company has made rise by AU$ 7.18. It has evaluated that the company has been making a constant improvement in the marketplace (Asx.com.au. 2018b). At the end of 2015, share value estimated AU$ 8.300 that has been continually rising after a shortfall and the share price reached to AU$ 10.450 in the month of May 2016. It has evaluated that there has been a constant rise in share value of firm due to increasing financial revenue and financial equity of the firm in the market. The shareholder's value increased in the year of 2016, that has helped company share price rise in month of  August 2016 after a shortfall in the share price, it has been valued AU$ 11.230. In the same month of 2016, the share price of the company declined to AU$ 9.310. However, it has made an increase in its share value in the month of October 2016 by AU$ 11.450. At the end of December 2016, the share value of organization has been estimated at AU$ 10.680, that has decreased compared to previous share value pricing (Asx.com.au. 2018b). The beginning of 2017 the share price of Treasury Wine made the slight growth of AU$ 10.710, which has decreased in following 3 months, although in the month of May 2017 the share value of company increased to  AU$ 12.080. It has been evaluated that the month of April the share price of a business entity made a fall by the value of AU$ 11.810 and made the constant rise and fall for few months. As per the assessment, the share price of the company has increased in month of August 2017 by the value of AU$ 13.610. It has observed that share value of the company at the ending month of November evaluated AU$ 15.710, which has increased compared to the previous 2 years. In the current year of January 2018, the share price value of Treasury wine assessed AU$ 17.000. There has been a constant increase in the share price of a company with a minimal fall and rise of its value, which dictates the share value changing are less volatile for Treasury Wine (reuters.com 2018b).

Quarterly share price movements

Figure 3: Quarterly share price movements 

In the case of Metcash Limited, in the year 2015 share value of the company has been evaluated AU$ 1.460, that was declined after 2 months in March 2015 by AU$ 1.410. It has evaluated that the sales of the company might have decreased that has resulted in decrease in the share price of the company. In the month of June 2015, the share value of the company has again made a fall in share price by AU$ 1.080. The financial performance of the company has been decreased might be due to lack of prior investment and performance of its products in the marketplace (Asx.com.au. 2018a). As per the share price of October 2015, it has analyzed and an increase in its share value AU$ 1.200 that has again made a rise in share value at the end of December 2015 by AU$ 1.640. The share movement of Metcash in the month of March 2016 an increased share price valued AU$ 1.810. It has been observed that there has been a slow growth of the company in the month of 2016 as the share price has made an increase in its share price value in June 2016 AU$ 1.845. The share value of the company in October 2016 analyzed AU$ 1.975, which might have resulted due to investments in product growth and generation of sales by the company in the year of 2016. At the end of 2016, the share price of the company has been evaluated AU$ 2.280 in the month of December (Asx.com.au. 2018a). The year of 2017, the share price value of Metcash has increased by AU$ 2.330, which has again made a rise in its share value in the month of March 2017 by AU$ 2.430. As per the assessment, it has stated that the share value of the company in the month of June assessed AU$ 2.400, which has decreased as per previous month performances. The decline in share price of Metcash has been due to fewer demands in the marketplace. The Month of October 2017, the share value of company valued AU$ 2.650, which has increased at the end of December by AU$ 3.130. In January 2018, the share value of the company has been evaluated AU$ 3.230, that has made sit increase in comparison to the share value of the company at the end of 2017. As per the assessment, the share valuation of Metcash has been less volatile similar to Treasury Wine, although share value of Treasury Wine is far high in compare to Metcash in the share market (reuters.com 2018a)

4. Significant factors which may have influenced the share price: 

In the year 2016, Treasury Wine made the global launch of its new beer brand Trove that has introduced in the marketplace. The addition to Wine segment, the introduction of new product in the market has increased the opportunity of generating higher revenue. Thus effects share price in a positive manner. In the following year of 2017, the Treasury Wine two existing brands  Saltram and Wolf received awards for extraordinary market performances; it has observed that these two brands have made higher market positioning that assisted the company to grab some market shares (Tweglobal.com. 2018b). Thus, it certainly increases the share value of the company. In the case of Metcash, in the year of 2016, the company has made an acquisition of Home Tiber and Hardware group, which has enhanced the operational activities of the business. This certainly helped the company to increase its share value as the expansion of busies. In addition to it, in the year 2017, the sales revenue of the company knocked it made a growth of 5.4% and net profit has increased by 9.3% that effected in the rise of share value of the company as the company has been able to present a positive growth in terms of sales and market performance (metcash.com 2018a).    

5. Calculation of beta values and expected Rates of Return using the CAPM:

Calculation of beta (β)

As per the Reuters analysis, the beta assessment of Treasury Wine has been evaluated 0.88, which is considered lower in comparison to the beta evaluation of the company in current year assessed 1.27.  

Calculation of required rate of return

If the risk-free rate is 5% and the market risk premium is 6%, the calculated rate of return for Treasury Wine has valued 0.003987, which is higher in comparing the expected or required rate of return of Metcash Limited analyzed 0.003017 (reuters.com 2018b).

Capital Asset Pricing Model (CAPM) Treasury Wine EstateMetcash Limited
rf (risk free rate)0.050.05
b (beta)0.881.27
rm (return on market)-0.00229-0.00339
Expected rate of return0.0039870.003017
Starting price17.492.95
Ending price 17.452.94

Table 3: Expected rate of return using the Capital Asset Pricing Model (CAPM)

6. Dividend policies:

The dividend policies applied by business entities as per their current financial positioning and market performances. In the policy of dividend, the regular dividend policy includes the constant payment of dividend amount to its shareholders. The application of this policy helps business entities to increase shareholders base and confidence to make further investments by them in the marketplace (Zattoni et al. 2017). The residual dividend policy is another policy that is applied by the business entities while starting a new project or new product in the market. Irregular dividend policy is another policy in which the company make payment to its shareholders in a certain span of time, while the company does not seem able to hold the reliable amount of cash reserves.  In the case of Metcash Limited ad Treasury Wine, both Australian based leading wine producers apply regular dividend policies to make constant payment to its shareholders in the marketplace (Sila, 2018).  

7. Recommendation letter:

To 

The Investors,

I have observed that Treasury Wine has better financial performance and stability in the marketplace in comparison to the Metcash limited. I have analysed that the share value of Metcash is growing at a diminishing rate, on the other hand, the valuation of shares are comparatively low s per Treasury Wine. Thus I would recommend that the investment in Treasury Wine share would be profitable and valuable for the investors. I expect the investment in Treasury Wine will make a more stable return as share price movement is less volatile compared to the Metcash Limited. So I am adding Treasury Wine shares in investor’s Portfolio as a recommended share for investments.

Thanks and Regards    

Conclusion

The assignment is focused on the evolution of financial performance and market positioning of Australian Winemaking companies Treasury Wine and Metcash Limited. The ratio evaluation has stated that the financial stability and strength of Treasury Wine is better in comparison to Metcash Limited. The assignment also showcased share price valuation and movement of these two companies. It has observed that the performance of shares of these companies is profitable, although price value of Treasury Wine is significantly higher. As per the assessment, it has also analysed that both companies apply regular dividend policies as per the stable financial positioning.   

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