HC2091 Financial Analysis Of A2 Milk Company Assessment 2 Answer

pages Pages: 4word Words: 890

Question :

Assessment Details and Submission Guidelines
Trimester
T1 2019
Unit Code
HC2091
Unit Title
Business Finance
Assessment Type
2
Assessment Title
Group Assignment
Purpose of the assessment (with ULO Mapping)
Students are required to form a group from 2 to 5 members to study, undertake research, analyse and conduct academic work within the areas of business finance covered in learning materials Topics 1 to 10 inclusive. The assignment should examine the main issues, including underlying theories, implement performance measures used and explain the firm financial performance. Your group is strongly advised to reference professional websites, journal articles and text books in this assignment (case study).
Weight
30 % of the total assessments
Total Marks
30
Word limit
Not more than 2500 words
Submission Guidelines
  • All work must be submitted on Blackboard by the due date along with a completed Assignment Cover Page. Please make sure that your group member’s name and surname, student ID, subject name, and code and lecture’s name are written on the cover sheet of the submitted assignment.
  • The assignment must be in MS Word format, no spacing, 12-pt Arial font and 2 cm margins on all four sides of your page with appropriate section headings and page numbers. When you submit your assignment electronically, please save the file as ‘Group Assignment- your group name .doc’. You are required to submit the assignment at Group Assignment Final Submission, which is under Group Assignment and Due Dates on Black Board.
  • Reference sources must be cited in the text of the report, and listed appropriately at the end in a reference list using Harvard referencing style. Submitted work should be your original work showing your creativity. Please ensure the self-check for plagiarism to be done before final submission (plagiarism check is not over 30% of similarity, except the cases where the similarity is reflected by using the same format of Holmes’ assignment, the same references or sources of data) in accordance with SafeAssign Student Guide in Black Board. Please note that it takes 48 hours for the self-check
report to be available for your viewing.

ASSIGNMENT TASK

Assignment Specifications

This assignment task is a written report and analysis of the financial performance of one selected listed company 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 a firm’s financial performance based on update financial statements of the selected company

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 a listed company in Australia (in the industry you think will have the most promising future for investment) then evaluate it and give your client financial advice on whether or not she/he should include the share of that company in her/his investment portfolio.

REQUIREMENTS

Create your group’s “business name” under which your group will be providing the financial advisory services. Choose one listed company that your group will investigate/analyse for the purposes of possible recommendation to your client. The group should obtain all information about the selected company from this web site:  www.asx.com .au.

Obtain a copy of the last two financial years (2016-2017 and 2017-2018) Financial Statements of the chosen company (annual reports are accessible via company websites). Your group can downloaded these documents from the suggested web site using the firm’s code (example, BHP- for BHP Billiton Company, etc.).

STAGES TO BE COMPLETED
1
Description of operation and comparative advantages of the selected company.
2
Identify and conduct a trend analyse with the two groups of financial ratios, including profitability and operating efficiency of the selected company
3
Analyse monthly share prices movements of the selected company within 2 years, compare the movement with the All-Ord-Index
4
Calculate cost of equity for the selected company
5
Identify capital structure and calculate WACC of the selected company
6
Recommendation Letter
7
Final Submission of Complete Assignment on Blackboard (Week 10)

ASSIGNMENT STRUCTURE

Assignment Structure should be as the following:

Abstract

(no more than 150 words)

INTRODUCTION

Briefly introduction of you work: the purpose of assignment, the selected company, your findings and structure of your assignment (not more than 200 words)

FINANCIAL ANALYSIS OF SELECTED COMPANY

Description of the company

Prepare a brief description of the selected company, outlining the core activities, competitive advantages, and the market in which it operates within and any factors in the company’s history which you consider help present a “picture” of your chosen company.

Calculation and analysis of financial ratios

Using financial data obtained from current financial statements of your selected company for the given 2 years to calculate the following ratios and present them in relevant charts or tables. As your client is especially interested in the profitability and operating efficiency of the company, provide analysis on the company performance and justify your opinions using the data:

  • Profitability ratios
  • Operating efficiency ratios

Graphs and comparison of share price movements

Using the information from the ASX website:  www.asx.com.au to prepare one or more graph displaying movements in the monthly share prices over the last two years for the chosen company that you are investigating. Data of share price movement of the company should be plotted against All Ordinaries Index.

Providing an analysis to compare the movements in the companies’ share prices to the All Ordinaries Index. For instance, whether your selected company price trend is more or less volatile compared to the index? How closely it is correlated with the All Ordinaries Index, above or below the index?

Do a research to identify the factors that affected the share price movements of the company within 2 years.

Calculation cost of equity

Based on the data of just paid dividend, current share price and assumption that the company will maintain a constant dividend growth rate of 4% from now on, calculate the cost of equity of your selected company, using constant dividend growth model.

Identify the capital structure

Identify and discuss the capital structure of the company by calculating the weights of debts and equity capital (ordinary shares and preferred shares if any). Assume that the current required rate of returns for

Show More

Answer :

Financial analysis A2 Milk

Abstract

The business efficiency of the A2 Milk Company has been improved and it shows that company will be having high amount of profitability.  The increased return on equity of company is way too higher which attract high number of the investors to invest their capital in its business capital. The share price movement of the company is less fluctuating and revealing good amount of return for the investors. Company has followed profit based dividend policy in which increased dividend is offered each year to shareholders with the increase in the turnover. 

1. Introduction 

This report reveals the key understanding on the financial performance of the A2 milk company. In this report, share price analysis and the profitability of the company has been assessed. In the starting of this report, performance ratio of the A2 milk company has been given. After that, the graphical presentation of the share price of the A2 Milk has been made. Afterward, the dividend policy and letter of the recommendation have been given on the basis of the share price changes, profitability, risk beta of company and other factors influencing the return on capital employed of company (A2 Milk Company, 2019).

2. Financial analysis of A2 Milk Company 

2.1 Description of the A2 Milk Company

The A2 Milk Corporation has incorporated its business in 2001 and having it’s headquarter in New Zealand.  This company have been indulged in offering dairy products to the clients in New Zealand and Australia.  This company works on the scheme of the cow milk production all free from the A 1 protein and accompanied with the A2 protein (Brigham, and Ehrhardt, M.C.2013)

Comparative advantage of A2 Milk Company 

 The A2 milk company has been serving in different countries such as Australia, China, New Zealand and United Kingdom. However, the comparative advantage of A2 milk in the market is based on its product differentiation strategy in which it offers it’s all the dairy products free from the A 1 protein and accompanied with the A2 protein. Nonetheless, the market share of a2 platinum dealing in the formula for infants is 32%  

2.2 Trend analysis with the two type of the financial ratio accompanied with the profitability and operating efficiency of A2 Milk Company

The ratio analysis of the profitability and efficiency ratio helps in evaluating the company’s working capacity and its sustainability in long run (Robinson, and Burnett,,2016).

Profitability ratio 

This ratio reveals company’s ability to earn profit in its business. It divulges how much return on capital which company has invested has been earned by company. 

Particular Formula of the ratio201820172016
a. Gross profit margin(gross profit/ total revenue) * 10050.36%48.00%42.88%
b. (Net) profit margin(net profit after tax/ total revenue) * 10021.21%16.50%8.63%
c. Return on equitynet income/ shareholder's equity35.21%37.54%22.87%
d. Return on assets rationet income/ total assets27.08%26.36%14.48%

Interpretation 

The gross profit margin of A2 Milk has increased to 50.36% in 2018 which is 8% higher as compared to last three year data. In addition to this, company has lower down its operating expenses.  The net profit margin has also increased to 21.21% which is 13% higher as compared to last three year data. The higher net profit of company have been found due to the increased turnover. The return on assets of company has also increased to 27.08% which is 14% higher since last three year. The return on equity has increased by 13% in 2018 since last three year and resulted to 35%. It shows the higher return availability to investors and attract more investors in market (Savytska, 2018).  


Efficiency ratio

Particular Formula of the ratio201820172016
a. days inventory(average inventory/cost of goods sold)*365375252
b. days debtors(average debtors/operating revenue)*365273944
c. days creditor(average creditor/purchases)*365375038
d. asset turnovertotal sales/ average total assets1.731.982.36

Interpretation 

The day’s inventory of A2 Milk has decreased to 37 days in 2018 which is 15 days lower as compared to last three year data. In addition to this, company has lower down its debtor’s days to reduce the overall cost of capital.  The day’s creditors has also decreased to 37 days which has negative impact on the cost of capital of business. The assets turnover of company has also decreased to 1.73 days which is 1 day lower as compared to last three year data. This shows that company has improved its business efficiency to earn profit from its deployed assets (Tahir, and Azhar, 2013). 

2.3 Graphical presentation of the share price movement of A2 Milk and comparison of the same with the share price movement of the all ordinary share price index

The share price movement of A2 Milk has been more return offering to its shareholders. However, in November, 2017, there was drastic loss in the share price movement due to the sluggish market condition. Afterward, company had good amount of increment in its share price due to its high profitability. As compared to the all ordinary share price index, the share price movement of A2 Milk is 20 to 50% higher in positive manner. The market premium of company is low as compared to the market index premium which reflects positive indicator for the shareholders to create value on their investment by investing their money in A2 Milk Company (Tappura, Sievänen, Heikkilä,  and Jussila,, 2015).

Announcements and factors that affected the share price movements of the company within 2 years.

  1. In 2017, company had increment in its debt funding, which resulted to the decrease in the share price of the company
  2. Company invested its AUD $ 5 million in technology and development which reduced its overall business profitability in 2017 and resulted to the higher negative fluctuation in the share price movement. 
  3. It had increased profitability with the increase in its sales which positively impacted the share price value in 2018 (Tran, 2017).

2.4 Calculation cost of equity

The computation of the cost of equity of company could be computed by the dividend growth model. 

The dividend growth model of the company focuses on analysing the current share price, dividend offered and growth rate with a view to compute the cost of equity of company.

The below given table shows that A2 milk would have 20.38% Cost of equity in its business. 

Computation of the Cost of equity of company
DO0.55
G4%
Ke20.38%
Current stock price-                                   0.03 


2.5 Identify the capital structure

The capital structure of the company is made of the equity and debt funding of the organization. In case of the A2 milk company, it has been keeping the 76% equity capital in its total capital. The higher total equity capital of company shows the higher cost of capital and it will lower down the return on capital employed as well. It is found that if company wants to increase its return on capital employed then it will have to set equilibrium in its debt and equity capital. The debt capital of the company should be increased to 40% of the total capital. Nonetheless, higher profitability of the company could easily bear the higher financial leverage of company. The higher financial leverage will deliver the benefit of the low cost of capital in business. The computation of the weighted average cost of capital of the company has been given as below (Vohs, Vohs, Kand Baumeister, 2016).

Weighted Average Cost of Capital (WACC)

Cost of equity (calculated above using Dividend growth model 

Cost of equity of the A2 milk computed by using the dividend growth model= -20.38%

Computation of the cost of debt

Interest expenses= $ 126.57 million 

Computation of cost of debts
Long term debt $                         166,869.00 
Interest payment  $                                 126.50 
Cost of debt 7.59%
Tax rate0%
KD after tax7.587%


WACC = Cost of debt computed after proportionate + cost of equity computed after proportionate

WACCCapital Amount Cost of capital % of portionWACC
Equity 555,70920.38%0.76906437815.68%
Debt166,8697.59%0.2309356221.75%
Total capital 722578WACC17.43%

(Yahoo finance, (2018).

Higher WACC and its impact on the business

It is analysed that A2 milk has been keeping the higher weighted average cost of capital.  However, it reveals the negative impact on the business growth of the business. The higher weighted average cost of capital has negative impact on the profitability of the business as higher cost of capital has negative impact on the return on capital employed. Nonetheless, the industry required rate of debt is 5% which is low as compared to the debt rate of return offered by A2 Milk Company. 

The higher weighted average cost of capital of A2 milk has been found due to the increased cost of equity. Nonetheless, company should focus on reducing the overall cost of equity by increasing the debt funding in its business functioning. 

2.6. Consulting Report 

Introduction 

There are several financial analysis tools which could be used by investors to assess the investment options. However, ratio analysis and capital structure assessment of the company helps investors to determine the sustainability, financial leverage and business growth of the company. A2 Milk Company has been keeping high profitability in its business and showing good amount of growth in long run. If investors invest their capital in A2 Milk Company then it will not only increase their return on capital employed but also save them from the negative impact of the time value of money. Nonetheless, the higher equity capital of the company shows that company has been paying high cost of capital which reveals that if company could reduce the overall equity capital then it will also increase the overall profitability of the business. There is good amount of chances that company will have increased profitability in the business. 

Financial analysis of the A2 Milk Company

It is analysed that A2 Milk Company has been keeping the high profitability in its business. The gross profit margin of A2 Milk has increased to 50.36% in 2018 which is 8% higher as compared to last three year data. This shows that company has kept higher profitability due to the increased overall turnover.  In addition to this, company has lower down its operating expenses by reducing the manual work process and setting up the automation in the procedural work.  The net profit margin has increased to 21.21% which is 13% higher as compared to last three year data. However, company could easily increase its overall net profit if it reduce its overall cost of capital by increasing the debt funding. The return on assets of company has also increased to 27.08% which is 14% higher since last three year. The increased return on equity of company also reveals that it attracts higher number of the investors. The higher return on capital employed available to investors is the good indicator to attract more investors to invest their capital in A2 Milk Company (Yahoo finance, 2019)

In case of the A2 milk company, it has been keeping the 76% equity capital in its total capital. The higher total equity capital of company shows the higher cost of capital and it will lower down the return on capital employed as well. The higher weighted average cost of capital of A2 milk has been found due to the increased cost of equity which could be reduced by issue of more debts in market. The business efficiency of the company is also effective which reveals that company has been good in deploying its assets and other resources in its business process. The increased business efficiency reveals the good amount of business growth of the A2 Milk in long run (Brigham. and Ehrhardt, 2013).

The share price movement of the company is revealing that A2 Milk has low fluctuation and giving good amount of incremental return to shareholders. However, in 2017, the share price of the company went down due to the sluggish market condition. Nonetheless, the share price movement of A2 milk is less fluctuated with the changes in the share price of the all ordinary index. This shows that company has more stable business in market.  Therefore, it could be inferred that if investors wants to create value on their invested capital then they should their capital in A 2 milk. The increased profitability and effective efficiency of the company shows the good amount of future growth of the invested capital of the investors (A2 Milk, 2019)  

Conclusion 

After assessing the details and financial factors of the A2 milk, it could be inferred that those investors who want to invest their capital in a company to create value on their investment then they should invest their capital in A2 Milk. Nonetheless, those investors who want to invest their capital in short run and wants to earn higher return on the invested capital in short run then they should invest their capital in other venture capital. Nonetheless, for the long term return earning motive, A2 milk is the best company for the investors. 

Recommendation 

  • Investors should invest their capital invested in A2 Milk for the long run if they wants to create value on their capital.
  • Short term investment in A2 milk would not give any good return to investors. 
  • Investors should not worry about the fluctuation in the share price in the short run as company has strong sustainability and profitability in its business.
  • Investors should wait for the time when equity capital is reduced the debt funding is increased in A2 Milk. This will increase the overall profitability of company. 

summary 

After assessing all the required details and given financial information, it is found that A2 milk has been operating its business effectively and strengthen its business outcomes. Investors who will invest their capital invested in A2 Milk Company in long run will be having high amount of return on earning. The increased dividend payment, profitability and increment in the share price of Company reveals that company has been offering good amount return to investors. It is advised that in terms of investment, A2 Milk Company is the best possible investment option for the investors.