Impact on The Financial Analysis

 

Question: Financial Analysis

Executive Summary

The company was recognized in 1930 by Mr Maurice Blackmore who had a dream and desire for naturopathy which gave the company its task. This English immigrant had ideas which were ahead of their times. Maurice Blackmore strong Confidence in health-giving properties of herbs and minerals gave path to the whole system of healthcare based on naturopathy principles. It’s been 80 years since Blackmore’s has been one of the industry leaders when it comes to healthcare. Blackmore’s Ltd. is one of the leading natural health brands.

OVERVIEW of AGL Limited

AGL is one of the leading integrated energy companies in Australia. It is one of the companies which do not simply concentrate on profit making. It has been seen over the years that the company has addressed its responsibility towards the society and the environment. The company while providing secure and affordable energy to its customer it is also taking action to dutifully reduce the Greenhouse gas emission which is occurred due to its business. AGL has been in the business since 175 years which makes it one of the most experienced and diversified integrated energy companies in Australia. AGL has got its business spread over eastern part of Australia. It not only serves its customer by providing their energy needs which includes gas, solar PV, electricity and related products and services. Over the years AGL has successfully managed to make a diverse power generation portfolio. AGL’s revised strategic objective and organisation structure is going to allow the company to remain in forefront which will allow the company to shape the market and respond effectively to government policies and manage the transition of new business model. (AGL, 2015)

Role of Income Statement, Balance Sheet & Cash Flow Statement in Shareholders Decision Making Process

Income Statement, Balance Sheet & Cash flow statement portrays the several parts of process in the organisation. Income Statement, Balance Sheet & Cash flow statement all statement is required to be analysed separately as well as jointly to make a decision on investment. By analysing only one statement, say ‘Statement of Financial Position’, then investor would just know about the information that is left after the operations of the business at certain period of time which is definitely not sufficient to make decision. (Singhal D K, 2015)
Cash Flow Statement provides the company with comprehensive cash movement. It provides the information about the financial strength of the company. The exhaustive analysis of cash flow statement is necessary for those investors who aim to invest in the company. The cash flow statement would let the investor if the company is running out of cash which generally is very difficult to spot is the company is showing huge profit figure in its income statement. Cash flow statement can also warn the existing investors of the company by highlighting the huge cash outflows made by the owners of the company. (Muhammad I, n.d.)
It’s the only place where the capital expenses are shown as the expense and hence the investors can gather knowledge about the company’s investment in capital assets. The cash flow statement can provide the existing investors with the information of change in working capital like if the company is building up the stock or letting the receivable grow or it’s making quick payment to its suppliers etc. The investors, both existing as well as proposed, can verify the finance activities of the company in the cash flow statement. By doing this, they can gather information about the company’s debt i.e. loan payment made, payment of interest on such loan. At what intervals and instalments the loans are repaid can also be understood by perusal of cash flow statement. (Tutor2u, n.d.)
The investor can gather valuable information by simply analysing Income Statement. The information recorded in the journals and ledgers can be seen directly impacting the Income Statement. Company’s sales, profitability, operating income retained earnings can all be known by going through the income statement of a given period. The two income statement of two different periods can also be analysed together so that the information can be compared. The numbers gathered by observing an income statement can help the investors to conclude whether the company is operating its business in a rational manner. The investors can compare the information and conclude if the company is growing in regard to sales, profitability, operating income etc. (Muhammad I, n.d.)
Balance Sheet of the company indicates what the company has and what the company owes. The balance sheet will let the investors know till what time the company will be able to retain its financial power. The difference between the total asset and total liability is nothing but Net Worth of the company. The owner’s equity can be thoroughly assessed so as to know the number of shares issued and the value of the stock. The information gathered in balance sheet about the company’s ability to finance its operations can be useful to underwriters also. The information gathered in balance sheet about the company’s ability to finance its operations can be useful to underwriters also. The credit worthiness of the company can be explained by balance sheet of the company. Thus the investors, before investing can verify the productivity and solvency of the company by analysing Income Statement, Balance Sheet & Cash flow statement. Thus Income Statement, Balance Sheet & Cash flow statement plays a very important role as a whole to make a decision with regard to invest by the existing as well as proposed investors. (Tutor2u, n.d.)

Key Assets, Liabilities, Equity Classes, Incomes, Expenses of AGL Ltd. and the Influence of underlying accounting conventions, concepts and managerial judgement on them

The Assets and Liabilities have the ability to influence the firms reported position and performances as assets represents possible future economic benefit controlled by an enterprise while liability of the company is obligations to other enterprises. For example, for knowing the liquidity of the company, current assets and current liability comes into picture. The liquidity ratio considers current assets and liabilities for demonstrating the financial liquidity of the company. The current assets of the AGL Company includes items like Sundry Debtor of $1,894 Million, Inventory of $396 million, and Cash of $259 etc. and current liability includes current tax liability of $86, creditors of $1,377, provision of $191which can be effortlessly prejudiced by the underlying accounting conventions. Say, even a trivial modification in method of calculating the inventory, say from LIFO to FIFO, can have a substantial consequence on inventory thus varying the current ratios of the company. The provisions involve management’s judgment thus it can influence without any difficulty the financial results of the company, being very subject, indirectly impacting the ratios. (Net MBA, n.d.)
Also the company’s fixed asset which includes Property, plant & equipment of $6,958 million, Oil and gas assets of $544 million, and Intangible assets of $3,266 million and Investment in joint venture of $91 million can impact the financial analysis. Any change in the accounting conventions and the concept used for fixed assets like the method of depreciation adopted or change in the same can have a considerable change in the ratios calculated. The company’s fixed assets are subject to impairment which is governed by the accounting standard. If the company doesn’t follow the impairment of assets rules then financial analysis will show misleading results. Further Intangible assets can also be influenced by the method of amortization that the company uses.  Thus in a way almost all the assets as well as liabilities play a vital role while calculating financial performance of the company. Thus the management has to be very prudent while making decisions about accounting convention and concepts. (Singhal D K, 2015)
The items that are shown in income statement are widely used to calculate the profitability of the company. The management has to also consistently apply their judgement from period to period. In accounting for income and expenditure two accounting concepts and conventions that are to be considered are accrual concept and matching concept. Thus this will call for management’s judgement. In income statement the item that accrue for the period are to be recorded which is further used by the analysts or investors to verify the company’s performance and position. All the operating expenditures are to be properly accounted for, any change in the expenditure due to accounting concepts and conventions can have a direct impact on the financial analysis. Thus accounting concepts and conventions can have an underlying effect on the key incomes and expenditure based on which financial decisions are made. The management have to carefully make judgement about the entire item that is going to form part income statement. (Net MBA, n.d.)
The shareholder’s capital form part of many ratios which are calculated for making investment decisions. Equity again is widely used in making financial decisions. The company’s share capital is of $ 8,815. Based on which the existing investor know where they stand and the proposed investor predicts whether to invest in the company. Any equity shares issued for inadequate consideration or for non-cash odes can distort the ratios calculated for the financial analysis. The equity and its classes have to be presented in a manner in financial statement as per accounting concepts and conventions. Thus any item of key items of income or expenditure, asset or liability if underestimated or overestimated can have an impact on financial position or performance of the company. The equity and its classes has to be interpreted and recognised in a manner as specified by the accounting standard thus it can be said that it will have an underlying effect on the financial decisions to be made and on the ratios which are plainly calculated for financial purposes. (Deloitte, n.d.)

Individual Component

Nature, Strategy & Prospects
For over 80 years Blackmore group has been into the industry of healthcare. In May 1985, the company got listed. The company had 170 ranges of products available in the market in 2015. The company has its business extended in many countries. As per the company’s Chairman, Mr Marcus Blackmore, The Blackmores Group’s strategic focus is:
?    Preserve market leadership in Australia
?    Spread the revenue stream by rising the market of Blackmores in Asia
?    Boost and diagnose the role of innovation and research through investing in BioCeuticals
?    To sustain unparalleled quality standard. 
?    Encouraging the staff by applying policies like profit share program whereby 10% of profit are shared by the staff. (Blackmores, 2016)
The company’s strategy and prospects are as follows:
?    Constant growth of Blackmores in Asian Market by founding Asian based regional management and operating structure. This would aid decision making and operating efficiency. 
?    Understanding the consumers in essential Australian Market. Improving Digital and E-Commerce. Invest significantly in Brand. (Blackmores, 2016)
?    Finance in and with their supply chain partners, which would ultimately help the company to improve their operational efficiency. Further leverage their Central Services business model. Enhancing their improved size into scale paybacks. 
?    Venture in Blackmores Institute which would help Blackmore to strengthen its position as a strong leader in the area of research and development. (Blackmores, 2016)

Analysis of Financial Performance and Position of the Blackmore’s.

The company has reported grand financial results in the year 2015. The company had continued to operate proficiently; as a result it manufactured 35 million units and shipped them to 25000 points of distribution in the year 2015.  The company’s operational efficiency can be observed in its current financial year’s Group Sales which stood at $471.6 million. As matched to financial year 2014, current year’s sales were up by 36%. The company reported profit after tax of $46.6 million which as compared to previous year had improved by drastic percentage of 83%. The company succeeded to decrease its debt by 87% in the current financial year. Now it stands at $7.1 million. The cash flow statement also voices for itself as the operating activities has folded from the last year’s cash flow performance from operating activities. The company’s asset per share for 2015 is $5.27 which has again improved by 38% from previous year. The company’s Earning per share is 270.7 cents which has amplified by 81.4% as compared to previous year. Last year the company paid total ordinary dividend of 127 cents per share (fully Franked) hence making it palpable that the dividend per share had increased by 60% which was impressive. In Australian market itself the company’s profitability grew by 88% which makes the company the utmost dependable company for healthcare in Australia. (Saiduzzaman S, n.d.) 
The management’s performance can be measured using variety of profitability ratio. If the company’s financial position is compared with its past year performance, it can be said that current year company has fared really well. The operating profit ratio has come up to 15.32% as compared to last year which was 11.47%. As the operating profit ratio rose consequently it can be seen that net profit ratio also have risen as compared to last two year’s performance. Net Profit ratio measures the overall performance of the company which is good in 2015 as it stands at 9.87% as compared to previous year which stood at 7.33% and 7.64% in 2014 and 2013 respectively. The competency of the company in deploying its assets is evident by Return on assets ratio. Presently the company ratio is 27.3% which better by approximately 10% from last year. The management is managing the assets of the company more efficiently then the ratio will be more. Return on equity shows an increasing trend from the last year thus investment in equity is being employed efficiently.  Return on equity is 35% for the current year which is really good as matched to past years. There is an increase in past three years performance as far as profit per share is concerned. The company which gives them the maximum return is normally preferred by investors. Current year’s earnings per share have increased by 82%. In term of cents it is 270 cents per share. (Saiduzzaman S, n.d.)
The company’s ability to generate sales using its assets can be measured by using Investment turnover Ratio. Investment turnover of the company is good in 2015 i.e. 1.6 times and it has enhanced as compared to last years which stood at 1.46 times and 1.41 times in 2014 and 2013 respectively. The current ratio helps in judging the company’s liquidity. The company’s current ratio is 1.63 times which is practical. Still the company is very much in the position to pay off its debt which a one year period, even though the current ratio has fallen from the last year’s which stood at 2.25 times. There has been a dramatic fall in debt to equity ratio since the company has paid off its major amount of debt in current financial year. Last year it stood at 52.19% now debt to equity ratio stands at 5.31% which makes the company literally debt free. It can be said that the company’s debt ratio too has experienced an extreme amendment. The debt ratio in 2015 is 2% which was 22% last year in 2014 and 29% in 2013. Thus the company doesn’t have a negative net worth. (Singhal D K, 2015)
One of the most used leverage ratio is Interest coverage. The company has been able to cope up with the interest payments. Increasing trends has been seen in the interest coverage which is a good indication. Enough profit has been generated by the company to cover its interest payments. In 2015, its ratio was 21 times as compared to 8 times in 2014 and which was almost same in 2013 too. However, gearing ratio is anticipated to be low. Sound financial stability of the company can be indicated by lower gearing ratio. The company’s gearing ratio in the financial year 2014 and 2013 was 34% and 41% respectively. The strong financial stability of the company can be evidently seen as the gearing ratio has fallen by %5 as compared to last year performance. The amount of dividend that the company pays to the investors may interest those investors who are particularly interest in the dividend that they get by the company. As compared to the last year the dividend pay-out is low but the dividend per share is increased as compared to the last year which is good. (Saiduzzaman S, n.d.)
On perusal of the company’s cash flow statement it can is evident that the company has progressed really well when comparison is made with the last year. For the financial year 2014 company’s cash and cash equivalent was $18599 thousand which rose to $36931 in the financial year 2015 that is nearly 98% up. On analysing individual activities the company’s cash flow from operating activities has risen by 88%. On analysing investing activities it can be seen that the investment in fixed assets has been made by the company in the current year. Further it has also repaid a significant amount of debt in the current year $29 million which explains it negative balance in finance activities. Overall strong liquidity position can be seen if cash flow statement is pictured as a whole which is good for the investors. Hence largely the company has given a classic performance in the current financial year. (Saiduzzaman S, n.d.)
Regardless of governing the Australian Market of nearly than 80 years, Blackmores Limited is still facing a ruthless competition from its competitor Swisse Wellness. Swisse Wellness overtook Blackmores Limited in 2014 which is expected to happen in 2015 with its retail value share of 16% while that of Blackmores is 15% which is very near. Both the companies are concentrating and have placed their target on is Asian Markets which the most sensitive area. There is substantial request for the uncontaminated Australian vitamins supplement in the Asian market as the Asians are fronting contamination issues with the domestically available vitamins supplements. Swisse Wellness is regarded as one of the top brands in Chinese Market, since it had made $49 million profit in just three months for Biostime International. Its revenue would be very close to the figure reported by the Blackmores if the three months revenue generated is extrapolated out to full twelve months revenue. It hasn’t managed to overtake its rival in Asian Markets even though the Blackmores Asian sales were up by 26% which is $ 84 million. Hence Blackmores, to see itself making substantial place in Asian market is clearly trying hard, which its rival has fruitfully achieved. (Saiduzzaman S, n.d.)
Limitation of Ratio Analysis from Investor’s Point of View
•    The ratios, at times, are regarded as unpredictable as based on which the ratios are calculated are all historic information. (Ugwu A, n.d.) 
•    The ratios at times confuse comparison because of prevailing different accounting concepts and conventions and management’s judgement.
•    It is a backup since one can’t always say that a particular ratio is good or bad hence it is not the only tool that is used for financial analysis. 
•    Since seasonal factors can distort the ratios calculated for a financial period. The ratios must be calculated after considering the seasonal factors which investors are not aware of.
•    Inflationary factors, another thing that investors fail to apply while doing ratio analysis. It may lead to inappropriate conclusions when the inflation is not considered while calculating the ratios 
•    If the company is Conglomerate Company then the data becomes unmatched which overthrows the only purpose of ratio analysis. Usually the reason for calculation of ratios is that the data of one company can be either compared with that of its rival or with the industry. 
•    The future prospects of management are not considered in Ratio analysis which is a draw back for investors. (Ugwu A, n.d.)
Usefulness of publicly available information contained in Annual Reports
The only source for the investors is financial Information which is available publicly. It shows thoroughly inside and outside of the company in which they intend to make investment in or of which they already are investors. The helpfulness is:
•    The investors can assess what is the company’s Vision and Mission in the statement given in the annual report. Company’s future prospects and strategic focus can be known by the investors. (Ugwu A, n.d.)
•    The company’s product summary and financial highpoints of past 5 to 10 years can be scrutinized in the annual report which otherwise is not possible to get access to. 
•    Whether the company has been able to achieve it strategic goals can be known by going through the director’s report, targeted revenue achieved or not. Whether the strategies followed have proven favourable to the company or not.
•    Management Discussions and Analysis i.e. MDA shows the past trends of the company to its investors. The swot analysis is also given of the company.
•    Verification of the company’s compliance with legal regulation and corporate governance can be seen in the annual report which indirectly decides the smooth future of the company.
•    Verification by investors about the authenticity of information presented in the annual report can be done by going through Auditor’s Report. (Ugwu A, n.d.)
•    Users and the investors can know the financial position of the company by going through the financial statement and its notes to accounts. It gives the consolidated financial information. It guarantees the companies obedience with the standards and helps the investors assess the company’s reliability in making decision and following rules. 

Conclusion

Annual reports are the only source of information which has to be made publically available to the investors. The investors not only know about the future prospects of the company but also can get the internal information that is necessary for them to know. The information made publicly available is of larger use to investors. The accounting concepts and conventions and the judgement made by the management can be seen in the annual report and its impact on financial analysis and the technique used to analyse the report can also be seen. (Deloitte, n.d.)

Reference:

•    AGL, 2015, Annual Report, [Online], Available at https://www.agl.com.au/-/media/AGL/About-AGL/Documents/Investor-Centre/150826_AnnualReport_1466512.pdf?la=en [Accessed on 25/08/2016]
•    Muhammad I, n.d., The impact of accounting concepts and conventions on business decisions, [Online], Available at http://www.academia.edu/20813318/The_impact_of_accounting_concepts_and_conventions_on_business_decisions [Accessed on 25/08/2016]
•    Tutor2u, n.d., Accounting Concepts and Conventions, [Online], Available at http://www.tutor2u.net/business/reference/accounting-concepts-and-conventions [Accessed on 25/08/2016]
•    Ugwu A, n.d., The Role Of Accounting Concepts And Convention In Financial Reporting, [Online], Available at https://afribary.com/read/3308/the-role-of-accounting-concepts-and-convention-in-financial-reporting-7374 [Accessed on 25/08/2016]
•    Saiduzzaman S, n.d., Ratio Analysis Theory,[Online], Available at http://www.academia.edu/5563190/Ratio_Analysis_Theory [Accessed on 25/08/2016]
•    Singhal D K, 2015, Financial Management, Available at [Offline], [Accessed on 25/08/2016]
•    Blackmores, 2016, Terms of Service, [Online], Available at https://www.blackmores.com.au/terms [Accessed on 25/08/2016]
•    Deloitte, n.d., Financial reporting framework in Australia,[Online]  Available at http://www.iasplus.com/en/jurisdictions/oceania/australia [Accessed on 25/08/2016]
•    Net MBA, n.d., Financial Ratio, [Online], Available at http://www.netmba.com/finance/financial/ratios/ [Accessed on 25/08/2016]

 

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