Answer :

Financial analysis 

 The current assignment is focused to undertake the financial analysis of the company listed on Australian Stock Exchange named Breville Group Limited. The financial analysis includes the analysis of the product information, liquidity position, capital structure, share price performance, non-current asset performance and the information about share issuance of company. Based upon the analysis, a recommendation letter is prepared on whether to add the share in investment portfolio or not. 

Breville group Limited is began business in year 1957 as homewares’ importer. Several acquisitions were made by the company over years. In year 2007, the company shifted towards electrical appliance business (Beran, et al. 2018). The growth of electrical business in year 2007 led to disposition of the housewares business. In the current scenario, the company is focused on its electrical business department alone and has grown business under many owned and co-owned brands.

Financial analysis of Breville Group Limited

1. Description of one key product or service provided by the company

In the Australian markets, the company sells the products offered under its company brands and also under other co-brands. The own brands of company include Kambrook, Ronson and Breville, and the co-brand with whom Breville had tied up includes Nestlé Nespresso. The current strategy of targeting market globally as well as in Australia is by sale of “premium kitchen products” by the company. Apart from this premium line, the company through its own brands sell a varied range of electrical appliances being, vacuums, irons, cooling products, heating products and etc. 

One main product sold by Breville in Australian markets is TOASTER. The toaster is a uniquely served product, as bread comes to be a staple food for almost everyone in the country. As bread is a necessity and hence, the toaster served by the company cannot be ignored by people. The types of toasters offered by the company are 13 in number. Every toaster is different from the in terms of the specifications provided by it and the kind of end results given. There are toasters sold by the company which can toast any kind of bread with multiple options. Upto 4 breads can be toasted maximum in many of the toasters offered (Liang, and Chen, 2018). 

The toasters offered by Breville Group have been considered to be amongst the best and most innovative in the similar products offered by other companies. Breville has occupied a competitive edge in the market because of this product’s innovative and efficient capabilities than just simple toasting the bread brown. The company has associated a strong customer base with its organisation because of the toaster range of the products offered by it. This product is one of the most important products offered by it which have helped the organisation to grow (Palmeto, Belli, and Giardini, 2016). 

2. Trend analysis with two groups of financial ratios, including liquidity and capital structure

The liquidity of the organisation is analysed with the help of the set of current assets and current liabilities of the company (Robinson, et al 2015). On, the other hand the analysis of the capital structure ratios is done by the help of the non-current assets, non-current liabilities and the shareholder’s equity of the company. 

The required information is as follows:

The computed ratios are as follows:

The company’s liquidity has been same for financial year 2017 and 2019. The company’s current assets were more than the required position in the year 2018. For year 2017 and 2019, the liquidity has been tried to bring down to the desired standards. The current ratio of 2.57 depicts current assets to be more than two and half times the current liabilities of the company (Crowther, 2018). This position could not be considered very well because it might show over stocking of inventory in company, and not actual current assets which can help in settling of current liabilities (Nambukara-Gamage, and Peries, 2020). 

The quick ratio too is more than 1, which shows availability of quick assets, i.e. the assets which can readily be converted into cash to be 1.5 times the current liabilities. Analysis current ratio and quick ratio together tells that the company’s liquidity is good enough. The ratios are high not because of overstocking, but because of readily cashable current asset components. The absolute liquidity ratio needs to be atleast 0.5, i.e. the absolute liquid assets need to be atleast half of current liabilities. Here, this ratio is 0.4, which is quite satisfactory.

The company’s capital structure ratios show that the company’s leverage position is not well equipped. The company is not utilising the advantage available on raising debt to generate higher profits. The company can take benefit from higher debt application by reducing the tax expense due to interest deduction. 

Also the company’s proprietary ratio has declined. But the decline is not alarming. The proprietary ratio is moving in the same line only. The company’s assets are financed by shareholder equity more than the external debt. 

The company’s interest coverage ratio has improved over the financial year 2017. This shows the improvement in company’s capabilities to finance its financing costs (Chandra, 2017). 

3. A non-current asset analysis

The non-current assets of the company Breville Group Limited are as follows:

The company’s non-current assets are growing from past three financial years to reach AUD 148,101 thousand in financial year 2019. The property, plant and equipment component of the non-current assets have risen, and so it the depreciation. 

Depreciation method used by the company is straight line method of depreciation. The useful life of the different assets of the company ranges between 2 to 10 years (Revelli, and Viviani, 2015). The depreciation charged by the company is as follows:

Treatment of depreciation in computation of operating cash flows of an investment project

During computation of operating cash flows only cash transactions are considered. Depreciation being a non-cash expense should hence be ideally ignored. However, income tax is a cash transaction. Depreciation although is a non-cash expense, yet tax deduction is allowed on the same. Hence, depreciation does not directly impact the annual cash flows of a project, but indirectly impact upon the income tax deducted to reach after tax cash flows (Easton, and Sommers, 2017).

Resultant, during computation of annual cash flows of an investment project, the tax deduction allowed on depreciation expense is added to the annual cash flows. This is done by computing the net income after tax normally and then the amount of depreciation is added back. This eventually leads to addition of the tax on depreciation to get the amount of annual cash flows (Souza, Gimenes, and Binotto, 2019). 

4. Scenario Analysis

The net present value generated by the investment proposal in three cases, i.e. the base case, the worst case and the best case are presented here.

The analysis clearly represent rise in net present value by 174 times in the best case scenario. The reasons of positive growth of NPV are rising sales price, reduced variable cost, reduced fixed cost and rising sales price. 

5. Latest share or bond issuance by the selected company

During the period of last 5 years, no new issue has been affected by the company in the market. Neither shares nor bonds have been issued by the company. Share capital of the company had been constant as far as common stock is considered at AUD 140050 thousands since financial year 2016 (Loughran,and McDonald, 2016). The number of shares outstanding too is the same at 130,095 thousands. 

The company felt no need to issue new shares because of profiteering phase the company is in. the profits are rising continuously from AUD 50,172 thousands in financial year 2016 to AUD 67,385 thousands in financial year 2019. Keeping the issue at a constant level has allowed the company to raise EPS of its share. The rise in EPS and correspondent shareholder reactions has led to an exponential rise in the share price of the company’s shareholders from last 4 financial years (Damodaran, 2016). The company is focusing expansion with the current number of shares and building growth in them. 

6. PE ratios and share price movement of the selected company through 3 years

The shareholders of Breville group limited are experiencing a continuous rise in the share price over the period of three financial years. The share price rose by 56% as on 30^th June 2019 as compared to the share price on 30^th June 2017. Along with the rising share price, the company’s price-earnings ratio too is rising (Shimeld, Williams, and Shimeld, 2017).

 The company’s shareholders have shown confidence in the risen profitability of the company. The profit is rising since these financial years and so is the company’s market performance (Williams, and Dobelman, 2017). The following chart shows the movement of company’s share price from financial year 2016 to 2019 along with the movement of price earnings ratio.

There is no divergence in the company’s share price movement and the movement of price earnings ratio. Both go hand in hand. Also the company’s share price is completely in line with the profitability. Every year the company’s profit is rising and so is the share price. 

Recommendation letter

The shares of Breville group Limited are on the top of their market performance currently. The share price has risen exponentially over the years and the performance is expected further rise in market. The liquidity of the organisation is analysed with the help of the set of current assets and current liabilities of the company which reveals that company needs to strengthen its current ratio by investing more funds in its current assets. Investing currently in the shares seems profitable as the share prices are in a bullish trend (Riley, et al. 2016). Share price today is less than what it would be tomorrow. Adding these shares in portfolio shall turn profitable as despite of market fluctuations, the share price of Breville has shown consistent growth and have managed to stay in rising trend. These shares on addition to the portfolio will lead to reduction in the entire risk of portfolio. The company is assumed to be on the bullish phase because of its strong financials. The strong liquidity position of the company has given a credible standing to the company in the market. 

Also even the company is not trading on equity well, but another perspective to look into this is the reduced risk in the form of lower debt and hence less external risk.

Conclusion

The financial analysis of Breville Group Limited has revealed the growth status of company over the different financial years. The company’s current strategy is growing the market of premium kitchen appliances. The net present value generated by the investment proposal in three cases which is used to identify the best results oriented outcomes in the given cases. The company’s liquidity position is strong, as well as the company is highly dependent upon its own money for financing the needs of business. The share price of company is rising in these financial years and the P/E ratio too is rising in the same line. Now in the end, it could be inferred that if company wants to sustain in the market then it will have to strengthen the liquidity position and debt structure in its financial.  The company is available as a good investment option for investors. Adding this share in the portfolio can provide with investors a good option of reducing overall risks of the portfolio. Therefore, company needs to increase the current assets and equity in order to build a strong viability in market.