Financial Management And Market Analysis Of Blackmores Limited

Debt Valuation

1. Long term and short term debt

Long term debt – Blackmores raise the long term borrowing under common term deed through the unsecured debt facility from 3 banks and the amount of debt for the closing of the year dated 30^th June 2017 amounted to $ 236,901 thousands, out of which amount of $ 78,968 being used for the businesses and $ 157,933 remained unused on the balance sheet date (Blackmores.com.au 2017).

Short term debt – the company generally raise the short-term debt through bank overdraft facility and the amount is payable at the call and are reviewed annually. For the closing of the year dated 30^th June 2017 amounted to $ 5,000 thousands and the entire amount remained unused on the balance sheet date

1. Debt structure

Total debt of the company for the year closed on 30^th June 2017 amounted to $ 241,901, out of which only $ 5,000 is raised through short-term borrowing and the remaining $ 236,901 raised through long-term borrowings.

1. Industry influence  

Generally the industries with high growth rate raise finance through long-term debt as they are quite sure that in future years also they will be able to generate profits and repay the loan. As Blackmores fall under the Australian retail industry that is rapidly growing since past few years, it is easier for the company to obtain long-term debt and use that for the long term purpose of the business. Therefore, the maximum portion of the debt of the company is of long term nature (Della Seta, Morellec and Zucchi 2015).

1. Cost of debt

For the financial year closed on 30^th June 2017, the debt cost for the company was 2.82%

1. Cost of equity of the company

Cost of equity (k_e) = R_{f +} β (R_m – R_f)

Where,

Β = Beta = 0.35

R_f  = Risk free rate = 2.82%

R_m = Market risk premium = 4.35%

Thus, k_e = 2.82 + 0.35 (4.35 – 2.82) = 3.36%

1. Analysis of the performance of Blackmores

Revenue – from the annual report of the company for the year ended 2016 as well as 2015, it is recognized that the revenue of the company on 30^th June 2017 was amounted to $ 692,790 thousand as compared to $ 717,211 thousand. Therefore, there is a 3.4% decrease in the revenue as compared to the previous year (Blackmores.com.au 2017).  

Earning – looking at the earning figures of the company, it is recognized that the earning of the company is decreasing trend and it reduced by 42% over the year from 2016 to 2017. The exact figure of earning for the year closed on 30^th June 2017 was $ 58,028 thousands whereas the earning figure for 30^th June 2016 was $ 100,020 thousand.

Share Valuation

EPS – as the earning of the company was in the decreasing trend, it is obvious that the EPS too of the company is in decreasing trend and it decreased by 41% over the year from 2016 to 2017. The EPS for the year closed on 30^th June 2017 was 342.6 cents whereas the EPS for 30^th June 2016 was 580.6 cents (Blackmores.com.au 2017).

Dividend – the dividend payment of the company reduced by 34.1% during the year ended 2017 as compared to 2016. The dividend paid by the company for the year closed on 30^th June 2017 was 270 cents per share whereas the same for the year ended on 30^th June 2016 was 410 cents.

Growth expectation – the company is committed towards the superior performance of the business. The strategic direction of the company is focussed on providing continuous improvements and growth for maintain the leading position of the company in industry and achieving the ongoing success for the shareholders, people and the company.

1. Stock valuation of the company

Comparable approach – under comparable approach the valuation of the company’s stock is compared with its competitors. The objective of this approach is comparing the stock value of the company with its peers.

• P/E approach – most common approach to make the valuation is the P/E approach where the price earnings ratio is used for the comparable valuation. Generally, the NTM (next twelve month) is considered to be the most appropriate approach for comparing. The below shown table are revealing the comparison of Blackmores with its competitors –

From the above table it can be recognized that the NTM P/E of Blackmores is way ahead of the competitors like Asleo Care. Moreover, Blackmores last years’ P/E ratio is also way ahead of the competitor (InvestSMART 2017).

• Dividend growth model – as per this approach, the dividend yield of the company is compared with the competitors. The below shown table are revealing the comparison of Blackmores with its competitors –

From the above table it can be recognized that the NTM divident yield of Blackmores is comparatively low as compared to its competitors Asleo Care. However, the company’s dividend yield is better than BWX (InvestSMART 2017).

1. From the comparison through P/E approach and dividend growth model, the P/E approach is more suitable s it represents the profitability position of the company. on the other hand payment of the dividend is on the sole discretion of the company. it does not reveal the profitability position of the company.
2. Along with the dividend growth and P/E ratio, the net profit, market capital, growth rate, EPS, DPS can also be considered as crucial information for the purpose of stock valuation.

1. Calculation of WACC

Net debt = 44,717

Shareholder’s equity = 177,541

Weight of debt = 20%

Weight of equity = 80%

WACC after tax –

WACC = w_d (cost of debt after tax) + w_e (cost of equity)

= [(1-0.293)*(0.2*2.82)] + (0.8*3.36)

= 3.09%

1. Effective tax rate of Blackmores for the purpose of calculation of weighted average cost of capital is 29.3%
2. Difference among the cost of debt and equity

Equity capital is raised from investors through issuing the shares of the company. The investors are known as the shareholders of the company. Based on the performance and profitability of the company, the shareholders get their payment on the shares. On the other hand, the debts can be borrowed from various sources like banks and financial institutions in exchange of interest which is to paid periodically along with the original amount (Valta 2016). The interest rate is called as the cost of capital and it is deductible expenses for the purpose of tax. Therefore, the cost of debt and equity is different.

1. Current liabilities are the deductible expenses for the purpose of tax and therefore, are included for the computation of capital cost. However, the current liabilities carry risk element and therefore, including the current liabilities in the capital structure will enhance the level of risk.
2. Major element in the WACC computation of Blackmores is the equity component as it includes 80% of the total capital structure of the company. Lower component of debt represents that the company is lower leveraged and the business of the company is stable and strong. The higher debt component is treated as more risky by the investors. Thus, the capital structure of the company will attract the investors to invest in Blackmores.
3. Two major investment decision taken by the company recently are – (i) undertaken new campaign for the market and (ii) increased the company’s plant capacity
4. The proportion of 1:2 is considered as the ideal debt – equity proportion for any company. Blackmores capital structure includes 80% equity and 20% debt and the net amount of debt is $ 44,717 thousand whereas, the amount of equity is $ 177,541 thousands. Therefore, the company still has the scope of raising capital through debt instead of equity (De Fiore and Uhlig 2015).
5. The debt – equity ratio at which the any company can maximise its return and minimise its payment burden is regarded as the optimal capital structure. The optimal structure creates a balance among the debt and equity component under the capital structure. More debt will make the company highly leveraged and will expose to more risk.

1. Financial performance of the company

As published by The Wall Street Journal in Australia, the return on assets of the company is 2o.2%, basic EPS is 3.42 and the P/E ratio is 39. As per their view, the company is stable and a good consideration for the purpose of investment.

1. Report of the financial analyst

As stated by the financial analyst regarding the financial performance of the company, Blackmores has the strong financial background with the lower level of leverage and good aspect of visibility, growth and profitability.  Further, it has higher return margin that creates value for the shareholders. However, the short term investment strategies of the company are considered as having poor fundamentals. Moreover, the Blackmores is not so generous with the shareholder’s compensation aspect like payment of dividend.

Yes, I am agree with the report of the financial analyst as all the facts can be supported and analysed by going through and analysing the annual report of the company.

1. Any other item that must be mentioned here in the report is that the cash conversion ratio of the company is 100.7% that is regarded as significantly good.

Reference 

Blackmores.com.au. 2017. Blackmores vitamins and supplements- Australia’s most trusted. [online] Available at: https://www.blackmores.com.au/ [Accessed 19 Oct. 2017].

De Fiore, F. and Uhlig, H., 2015. Corporate debt structure and the financial crisis. Journal of Money, credit and Banking, 47(8), pp.1571-1598.

Della Seta, M., Morellec, E. and Zucchi, F., 2015. Debt structure, rollover traps, and default risk. Working Paper.

InvestSMART. 2017. Blackmores Limited. [online] Available at: https://www.investsmart.com.au/shares/asx-bkl/blackmores-limited [Accessed 19 Oct. 2017].

Valta, P., 2016. Strategic default, debt structure, and stock returns. Journal of Financial and Quantitative Analysis, 51(1), pp.197-229.

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