Bega Cheese: A Leading Australian Dairy Company

Company Profile

Discuss about the Importance Of Financial Ratios In Predict Stock Price.

Bega Cheese is the Australian Dairy company that is based in Bega of New South Wales of Australia. The company was initially established as the agricultural cooperative company in the year 1989 that was owned by the dairy suppliers and it became the public company during the year 2011. Major business of the company includes core dairy products like powdered milk and cream cheese and various nutritional products produced under the brand name of Bega Bionutrients like Lactoferrin and milk protein concentrate. Through collected resources from more than 100 dairy firms of Bega Valley the company is able to distribute and produce cheese products that are of high quality and distribute it to more than 50 countries all over the world. Driving the challenges, embracing the challenges and building towards future is the mission statement of the company (Bega Cheese 2018).

Out of the total revenue of the company approximately 27% of the revenues are generated from these sources. The company has 25% holding for Capital Chilled Foods along with the multinational company Lion that has the controlling interest. Further, approximately half of the revenue of the company comes from the products related to processed cheese and retail cheese. The company holds near about 15.70% of the entire Australian cheese market. The company exports its product along with other retail business like Royal Victoria, Melbourne, Dairymont and Tatura (Bega Cheese 2018).  

The company is included in the cheese manufacturing industry and for last 5 years the industry is struggling due to varying demand in the export market. However, the positive trend is supported by the increasing interest of the investors in the cheese manufacturing industry. The major competitors of Bega Cheese Limited are Fonterra Co-op Group, Devondale Murray Goulburn, Warrnambool Cheese and Butter and Lion Nathan National Foods (Bega Cheese 2018).

 Profitability ratio

The profitability ratios are the financial metrics that is used by the analysts for measuring the profitability of the company with regard to creation of income. Various profitability ratios those are taken into consideration for measuring the profitability are the return on assets, return on shareholders and net profit margin (Board and Skrzypacz 2016). The higher ratio represents that the company is performing well through creation of revenues, returns and profits. The profitability ratios are useful while the performance of the company is analyzed and compared with the previous year’s performance.

• Return on shareholder’s equity – it is the profitability ratio that is used for measuring the company’s ability for profit generation from the investment made by the shareholders. In other words, it shows the dollar earned on each dollar of investment made by the shareholders (?ermák 2015). It can be identified from the annual report and calculation table that the return on shareholder’s equity for Bega Cheese Limited for the year 2014, 2015 and 2016 had no particular trend. From 21.01% in 2014 it significantly fell to 3.97% in 2015. However, the company was able to increase the ratio to 8.78% in 2016. The reason behind the fluctuation was the fluctuation in net income of the company over the 3 years period under consideration.
• Return on total asset – it provides the indication of the management efficiency with regard to utilization of the company’s assets for creating the profits. As the initial investor the investor’s main focus is purchasing the stock for lower than the stock’s intrinsic value. However, as the existing investor the investor’s main focus is analysing the value along with the quality (Delen, Kuzey and Uyar 2013). If the return of the company as compared to its asset is higher, the company will be considered as more efficient as compared to the company that has lower return on assets. Looking at the calculation it can be identified that the return on asset for the company for the year 2014, 2015 and 2016 had no particular trend. From 12.03% in 2014 it significantly fell to 2.25% in 2015. However, the company was able to increase the ratio to 5.05% in 2016. The reason behind the fluctuation was the fluctuation in net income of the company over the 3 years period under consideration
• Net profit margin – net profit margin of the company states the proportion of sales revenue are kept with the after paying all the operating expenses, finance expenses and tax expenses. Higher ratio signifies strong financial position of the company. On the other hand lower net profit margin signifies that the company is struggling to pay its expenses (Delen, Kuzey and Uyar 2013). As the net income of the company for the year 2014, 2015 and 2016 were significantly fluctuating the net profit margin of the company is also fluctuating. It can be observed that the net profit margin of the company has reduced to 1.12% in 2015 from 6.18% in 2014. However, the company was able to increase the net profit margin to 2.41% during the year 2016.

Core Products

The efficiency ratios are used for measuring the efficiency of the company with regard to the using its assets and managing the liabilities (Grant 2016). It calculates the receivable turnover, inventory turnover and asset turnover of the company and the time taken by the company to convert them in cash.

• Inventory turnover – it states the times a company are able to sell or replace its inventories within a specific period of time usually a year or the accounting period. The days in the period is then divided by the inventory turnover to measure the days taken by the company to sell or replace the inventories (Sunder 2016). Generally lower number of days represents that the company is more efficient. Looking into the ratio table of the company it can be observed that inventory turnover ratio and days sales in inventory for the company over the period of 2014, 2015 and 2016 have not experienced bigger changes. The inventory turnover over the periods from 2014 to 2016 was ranged between 5.23 and 5.48. On the other hand, the days required by the company for replacing or selling the inventories were ranged between 66 and 68 days.
• Account receivable turnover – this is an efficiency ratio that measures the efficiency of the company with regard to converting its receivables into cash. It is calculated through dividing the credit sales of the company for the period under concern by the average account receivables of the company (Arkan 2016). Further the days in the period is divided by the account receivable to calculate the days taken by the company to converts the receivables into cash. The receivable turnover over the periods from 2014 to 2016 was ranged between 5.23 and 5.48. On the other hand, the days required by the company for replacing or selling the inventories were ranged between 66 and 68 days.
• Asset turnover – this is the efficiency ratio used to measure the company’s efficiency with regard to generate the sales revenue from the assets of the company. Companies that have low profit margin is likely to have higher asset turnover ratio (Brooks 2015). On the other hand the companies with higher profit margin are likely to have high asset turnover. Looking into the ratio calculation table of the company it is identified that the asset turnover of the company were ranges between 1.95 and 2.10 whereas the company takes 173 to 187 days for generating sales from the assets.

Company computes the liquidity ratios to measure its ability to make the payment of its short-term obligations with the available marketable securities and cash of the company (Nobes 2014). If the current ratio of the company is equal to more than 1 it signifies that the current asset of the company is sufficient to meet the short-term obligation of the company. If the company has continuous issues to meet its short term obligations it signals that the company is heading towards bankruptcy (Drehmann and Nikolaou 2013).

• Current ratio – it is the liquid ratio that states the current assets of the company as compared to its current liabilities. This ratio is used as an indicator of the company’s liquidity position. If the current assets of the company are more than the current liability it provides an assurance that the short-term obligation of the company will be paid efficiently. Looking at the current ratio of the company over the period from 2014 to 2016 it is identified that for all the years the ratio of the company is more than 1. However, from 1.52 in 2014 it increased to 1.83 in 2015. However, during 2016 the current ratio of the company fell to 1.65
• Quick ratio – quick ratios are also the liquidity ratio used for measuring the liquidity of the company. The only difference between the current ratio and the quick asset ratio is that the current ratio takes all the current assets of the company whereas the quick asset ratio considers the asset which are readily available to convert into cash that is the assets like inventory and prepaid expenses are not taken into consideration as these assets take some time to get converted into cash (Luez and Wysocki 2016). From the calculation of quick asset ratio it is identified that the quick asset of the company has been increased from 0.65 to 0.75 over the Year from 2014 to 2015. However it has been reduced to 0.74 in the year 2016.

For business owners, accountants and potential investors information regarding the gearing ratio of the company play important role in taking various financial decisions like budget allocation and investment (Heikal, Khaddafi and Ummah 2014). For the investors the accurate assessment of the financial strengths of the company is made through the information regarding the strategies of the company.

• Debt to asset ratio – It represents the total debt of the company as compared to the total assets of the company. It further represents the proportion of the asset of the company financed through debt (Scott 2015). Generally, the debt asset ratio of 40% or less than that represents that the company’s financial health is good (Jones and Kulish 2013). Looking into the debt to asset ratio for the company over the years from 2014 to 2016 it has been identified that the debt to total asset ratio of the company is in increasing trend and it has been increased from 42.70% to 44.12% over the years from 2014 to 2016
• Gearing ratio – It is most popular method for analysing the financial fitness of the company. It measures the long term liabilities of the company as compared to the equity. If the company has a higher level of gearing ratio it represents that the debt portion of the company is high and it is highly leveraged (Hill, Jones and Schilling 2014). Looking into the calculation table it has been identified that the gearing ratio of the company for the year 2014 was 6.56. However during 2015 it has been significantly increased to 16.20 but the company was able to reduce the gearing ratio to 13.14 during the year 2016 (Prasetyorini 2013).

Conclusion

From the above discussion it is concluded that though the profitability position of the company has been deteriorated in 2015 as compared to the year 2014, the company was able to improve the profitability during the year 2016. If the efficiency ratios of the company are taken into consideration it can be identified that the company is quite efficient in converting is assets into cash. Looking into the liquidity ratio of the company it is identified that the current ratio as well as the quick asset ratio of the company representing that the company is efficient in paying its short term obligations with the available short term assets. Further, the gearing ratio represents that the company is lower leveraged which in turn ensures that the company is sustainable over the long-term period.

References

Arkan, T., 2016. The importance of financial ratios in predicting stock price trends: A case study in emerging markets. Finanse. Rynki Finansowe, Ubezpieczenia, (1), p.79.

Bega Cheese., 2018. Home – Bega Cheese. [online] Available at: https://www.begacheese.com.au/ [Accessed 17 May 2018].

Board, S., and Skrzypacz, A., 2016. Revenue management with forward-looking buyers. Journal of Political Economy, 124(4), 1046-1087.

Brooks, R., 2015. Financial management: core concepts. Pearson.

?ermák, P., 2015. Customer profitability analysis and customer life time value models: Portfolio analysis. Procedia Economics and Finance, 25, 14-25.

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Drehmann, M., and Nikolaou, K., 2013. Funding liquidity risk: definition and measurement. Journal of Banking and Finance, 37(7), 2173-2182.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley and Sons.

Heikal, M., Khaddafi, M., and Ummah, A., 2014. Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), 101.

Hill, C.W., Jones, G.R. and Schilling, M.A., 2014. Strategic management: theory: an integrated approach. Cengage Learning.

Jones, C., and Kulish, M., 2013. Long-term interest rates, risk premia and unconventional monetary policy. Journal of Economic Dynamics and Control, 37(12), 2547-2561.

Luez, C. and Wysocki, P., 2016. Economic Consequences of Financial Reporting and Disclosure Regulation: A Review and Suggestions for Future Research. J. Acct. and Econ., 50, p.525.

Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.

Prasetyorini, B. F. 2013. Pengaruh ukuran perusahaan, leverage, price earnings ratio dan profitabilitas terhadap nilai perusahaan. Jurnal Ilmu Manajemen, 1(1), 183-196.

Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Sunder, S., 2016. Rethinking financial reporting: standards, norms and institutions. Foundations and Trends® in accounting, 11(1–2), pp.1-118.

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