Financial Performance And Forecast Analysis Of Blackmores Limited

Financial Analysis and Forecast of Blackmores Limited

The managements of the business organizations have to deal with different types of business operations in order to ensure the smooth running of the companies and thus, they are needed to put equal attention to each dimensions of the business operations of the companies. One of such aspects or dimensions is the Accounting and Financial Operations of the companies. It needs to be mentioned that the success of the business organizations largely depends on the financial performance of the companies (Vogel 2014). In order to ensure the effective financial performamce of the business organizations, it is the prime responsibility of the upper level management to develop effective financial strategies by taking into consideration all the relevant financial as well as accounting aspects. This aspect indicates towards the vast responsibilities of the financial managers of the business organizations related to some of the crucial areas of accounting and finance. For this reason, the major considerable areas by the finance managers of the companies are the future financial performance of the companies, analysis as well as evaluation of the stock prices of the companies with the aim to evaluate the financial performance, valuation of different aspects of the business like asset valuation and recommendations with the aim to formulate effective financial strategies for the businesses’ sustainable growth (Cucchiella, D’Adamo and Gastaldi 2015). At the time of the analysis and evaluation of these important factors, the finance managers of the business organizations are needed to take into consideration certain factors like historical data related to the financial performance of the companies, the financial performance of the industries in which the companies are operating, economic environment of the countries in which the companies are operating, nature of the business, the style of strategic development of the managements of the companies and others; and all these aspects are used as basis of financial forecast as well as analysis of the financial performance of the companies (Trugman 2016).

This report focuses on the financial performance as well as financial forecast of one of the major Australian companies, Blackmores Limited (Blackmores). The main aim of this report is the analysis as well as evaluation of the future financial performance of Blakemores along with analyzing and evaluating the stock price, business valuation so that effective strategies can be recommended. In order to achieve this objective, this report takes into account aspects like historical financial data of Blakemores, present situation of the industry, economic development, nature of business and others. Blakemores is a major Australian health supplement company operates in the health supplement industry of Australia. The company was founded in the year of 1930 and it is headquartered at Sydney, Australia (blackmores.com.au 2018). Different parts of the report consider the financial analysis and forecast the company.   

Future Financial Performance of Blackmores Limited

It is an essential part of this report as this part of the report takes into consideration the prediction of the future financial performance of Blakemores and the main aim of this is the estimation of the value of the organizations with the use of various models for business valuation along with the sensitivity analysis. In order to achieve these objectives, this report takes into consideration the financial statements of the Blakemores from the year 2013 to 2018.

This part of the report takes into consideration the future financial performance of Blakemores by considering all the relevant aspects like historical data, industry condition, economic condition and others.

 Sales growth can be considered as a certain metric that helps in the measurement of the ability of the business organizations to increase their sales revenue over a fixed period of time; and there is not any exception of this fact in case of Blackmores. This section of the report takes into consideration the analysis of various financial factors of Blackmores such as historical financial performance of the company, orientation of the health supplement industry of Australia, the present economic situation of Australia, the nature of the business of Blackmores and others as all these aspects are required for forecasting the sales growth of Blackmores for the next five years (Wales, Parida and Patel 2013).

The above figure indicates towards the fact that the growth of the sales of Blackmores is steady at 2.5% from the year 2019 to 2023. Steadiness in sales growth can be considered as a good indicator for the sustainability of the company as it provides the motivation to the potential investors in invest in Blackmores in the presence of steady sales growth. It can be observed from the historical performance of Blackmores over the years that there have been some major fluctuations in the growth of the sales for the company. As per the above table, the year 2014 witnessed small growth on sales that is 6.17%, but the opposite situation can be seen in the year 2015 as the company registered huge growth in sales as compared to 2014 that is 36.01%. As per the same trend, Blackmores registered growth in sales in the year 2016 that is 52.08%. The presence of some major contributors to this growth can be seen in Blackmores like the expansion of the business of the company in China in the year 2015 as it has strengthen the opportunity for investment in the company (Delen, Kuzey and Uyar 2013).

Sales Growth of Blackmores Limited

In addition, in the sale year, Blackmores added 170 new products too their product portfolio in order to cater to the ever increasing demand of the customers. Apart from this, as a part of the strategy to decrease the number of competitors, Blackmores acquired some major companies in the same industry that led to the increase in sales. For example, Blackmores made the 100% acquisition of the shares of New Century Herbals Pty Ltd and Global Therapeutics in the year 2016 in order to increase the sales growth by increasing the amount of customers. Moreover, the nature of the product of Blackmores along with the nature of the market provides the company with the opportunity to increase the sales. In addition, expansion in China has majorly helped the company in increasing the sales due to the huge population of the country (Coad, Segarra and Teruel 2016).  

Profit margin is considered as another major indicator for the financial performance of the companies and there is not any exception of this fact in case of Blackmores (Heikal, Khaddafi and Ummah 2014). It is required to be mentioned that the management of the company considers Cost of Goods Sold (COGS) as one of the major costs of their business as it contributes towards more than 30% sales for Blackmores. For this reason, COGS has the uppermost impact on the profit margin of Blackmores. Economy Forecast Agency has indicated towards the fact that there will be minor drop in the exchange rate of AUD/CNY in the next five years and the effect of this will lead to the increase in COGS for Blackmores. From the point of view of the sales, the result of depreciation of AUD against CNY will cause in the increase in sales along with the increase in the other costs simultaneously (Delen, Kuzey and Uyar 2013). The fact is observable from the profit margin forecast in figure 2 that there will be decrease in the profit margin for Blackmores in the coming two years, but the profit margin will be steady after those two years.

Asset turnover ratio is regarded as another major metric to measure the financial performance of the business organizations and this is also applicable for the financial operations of Blackmores (Agha 2014). This particular ratio helps in measuring the value of the sales or revenue of the companies generated by using the assets of them and thus, this ratio is used to measure the financial efficiency of the business organizations. It can be observed from the above figure that there have been fluctuations in the asset turnover ratio of Blackmores over last years and the main reason behind this fluctuation is the increase in the investment by the company in the other markets like China and others. It is mentioned in the earlier part that there was major increase in the sales margin of the company in the year 2015 and 2016 due to the expansion in the markets like China; and this increase in revenue led to the increase in asset turnover ratio in the year 2015 and 2016 that is 1.78 and 1.97 respectively. It is observable from the above figure that the asset turnover ratio of Blackmores for the year 2018 is 1.37 and it implies that Blackmores has been able in generating revenue worth $1.37 for every dollar of their assets. It can also be observed from the forecasted part in figure 3 that the asset turnover ratio will be stable at 2.50 after the year 2018 (Muritala 2018).

Profit Margin of Blackmores Limited

Dividend payout ratio is considered as a major indicator for the financial performance of the business organizations and it is the fraction of the new income of the business organizations that they pay to their shareholders in dividend (Oladipupo and Okafor 2013). Thus, it is regarded as a major profitability ratio of the business organizations. On a more specific note, the dividend payout ratio assists in reflecting the percentage of earnings of the companies paid to their shareholders. The above figure shows the dividend payout by Blackmores. It is visible from the above figure that Blackmores paid the highest amount of dividend in the year 2017 as Blackmores allocated 100.93% of the profit to their shareholders. It indicates towards good profitability of the company in the year 2017. It can be seen on the overall basis that there has been major fluctuation in the dividend payout ratio of Blackmores over the years and it indicates towards the fluctuation in profitability in the business of Blackmores (Floyd, Li and Skinner 2015). However, based on the growth in the dividend payout ratio of Blackmores in the year 2017, it can be expected that this ratio will grow in the future as a result of large distribution of the products of Blackmores in the market. In the presence of all these aspects, it is assumed that the forecasted dividend payout ratio of Blackmores for the coming years will be 68%.

After tax cost of debt is considered as a rate of interest on the debts and it is a major financial indicator for understanding the debt position of the companies (Heider and Ljungqvist 2015). The above figure shows the cost of debt after tax of Blackmores on actual and forecasted basis. It can be observed from the above figure that the forecasted cost of debt after tax of Blackmores will be 3.50% from the year 2019 to 2022. It is also observable from the above figure that Blackmores registered highest cost of debt after tax in the year 2015 that is 6.12%. On the overall basis, it can be seen that there has been fluctuation in the cost of debt after tax of Blackmores from the year 2014 to 2018. In this context, it needs to be mentioned that the cash rate of RBA is expected to be remain unchanged in the coming years and interest rate for the corporate loans is 1.5% set by the banks of Australia.

Asset Turnover Ratio of Blackmores Limited

This section of the report involves in providing the estimation of the value of the business of Blackmores and its stock prices with the assistance of four specific valuation models and assumptions for cost of capital.

The use of cost of equity can be seen in the aspects of Capital Asset Pricing Model (CAPM) and it is based on the process of weighted average cost of capital (Frank and Shen 2016). It can be seen from the table 1 that the rating of risk free rate is done with the use of 1 year average 10 years and it is 2.5%. The measurement of beta of Blackmores is done at 0.34. 6% is considered as the average equity risk premium. 4.88% and 4.54% are the WACC and CAMP respectively for Blackmores.

Risk-Free Rate (Rrf)	2.50%
Risk Premium = RM – Rrf	6.00%
Cost of Capital for Equity (Re)	4.00%
Beta	0.34
WACC = NFO/(NFO+MVe)*Rd+MVe/(NFO+MVe)*Re	4.88%
CAPM = Rf + Beta * Risk Premium	4.54%
Outstanding Shares (000)	17,226.00
Share Price	131.29
Market Value	1,848,177.54

Table 1: CAMP and WACC

The valuation models are shown below:

Particular	Total Equity’s Value	Price of Stock
Divided Discount Model (DDM)	$1212299.54	$70.38
Residual Income Model (RIM)	$1435171.24	$83.31
Residual Operating Income Model (ROIM)	$1237463.17	$71.84
Discounted Cash Flow Model (DCM)	$1469542.17	$85.31

Table 2: Modes for Valuation

The reliability of this model can be seen on the share price valuation of the company with the use of the forecasted dividends; after that, it involves in discounting them back to the present value of the prices (Lazzati and Menichini 2015). For example, the companies overprice the stocks in case their value in DDM is less than the present stock price. Thus, there is a need for the use of CAPM for the calculation of stock price with the help of this model. In the presence of CAMP, the cost of equity (Re) value is equal to 4%. According to table 2, the generation of a stock price of $70.38 can be seen from DDM that is equal to $1212299.54 (Agosto and Moretto 2015).

The generation of residual income can be seen from the deduction of required rate of return on equity from net income. As per this model, the company will disclose the actual economic profit of the business in the presence of positive profit by them. Under the DDM model, the use of Capital Asset Pricing Model (CAPM) can be seen by RIM (Heinrichs et al. 2013). Under both DDM and RIM, the value of stock is the same, but RIM helps in providing the absolute value of the stocks. According to table 2, the generated RIM is equal to $83.31 and the total value of the equity is equal to $1435171.24.

This model puts main focus on the net financial obligations. Weighted Average Cost of Capital (WACC) determines the ROIM unlike the previous discussed models (Bauman 2014). According to table 2, the value of cost of capital (Rf) can be obtained from WACC for Blackmores and it is equal to 4.88%. The generated stock price from ROIM is $71.84 and equity total value is $1237463.17.

Dividend Payout Ratio of Blackmores Limited

It can be seen from the table 2 that the derived stock price with the use of DCM is $85.31 and the total value of equity under this model is $1469542.17. The use of forecasted free cash flow can be seen under this model and it discounts them with the aim to reach to the present value. Compatibility of this model can be seen with ROIM as both of them use WACC model (Mellichamp 2013).

Sensitivity Analysis:
		Current Values:	Sales Growth-Optimistic	Sales Pesimistic	PM-Optimistic	PM-Pesimistic	ATO-Optimistic	ATO-Pesimistic	Div. Payout-Optimistic	Div. Payout-Pesimistic	NBC-Optimistic	NBC-Pesimistic	WACC-Optimistic	WACC-Pesimistic
Sales Growth Rate		2.50%	3.50%	1.50%
PM		6.00%			7.00%	5.00%
ATO		2.50					2.55	2.45
Dividend Payout Ratio		68.00%							78.00%	58.00%
NBC		3.50%									5.00%	3.00%
WACC		3.992%											6.000%	4.000%
Discount Dividend Model (DDM)	Total Equity	1,151,084	1,159,531	1,142,636	307,631	115,543	84,008	322,469	1,175,054	1,127,114	1,151,084	1,151,084	1,151,084	1,151,084
Share Price	34.19	34.45	33.94	9.14	3.43	2.50	9.58	34.91	33.48	34.19	34.19	34.19	34.19
Discounted Residual Income Model (RIM)	Total Equity	2,901,503	3,155,548	2,678,957	222,946	5,332	2,377,762	3,786,721	-891,545	702,946	3,567,734	2,733,326	2,901,503	2,901,503
Share Price	86.19	93.74	79.58	6.62	0.16	70.63	112.49	-26.48	20.88	105.98	81.20	86.19	86.19
Discounted Residual Operating Income Model (ROIM)	Total Equity	1,710,894	1,728,425	1,693,363	141,603	-82,493	1,711,080	1,710,701	1,710,894	1,710,894	1,710,894	1,710,894	554,138	1,699,949
Share Price	50.82	51.34	50.30	4.21	-2.45	50.83	50.82	50.82	50.82	50.82	50.82	16.46	50.50
Discounted Free Cash Flow Model (DFCF)	Total Equity	2,151,897	2,169,616	2,134,178	375,353	86,768	42,499	399,443	2,151,897	2,151,897	2,151,897	2,151,897	986,214	2,140,884
Share Price	63.92	64.45	63.40	11.15	2.58	1.26	11.87	63.92	63.92	63.92	63.92	29.30	63.60

Figure 3: (Table Showing Sensitivity Analysis)

Source: (Created by the Author)

The above table shows application of sensitivity analysis for the purpose of analyzing the four methods which is used by the management of the company for the purpose of valuation. Sensitivity analysis is used by business to understand the impact of certain independent variable on the dependent variable of the business under specific conditions. The analysis which is shown in the table above considers certain assumptions on the basis of which results of the four different method of valuation is effectively shown by the business (Delen, Kuzey and Uyar 2013). The table also portrays that important sensitivity factors like sales growth, ATO, Dividend Payout Ratio and weighted average cost of capital of the business has significant impact on the valuation of share prices which is shown above. Therefore, the analysis of sensitivity which is conducted in the above figure effectively shows the impact of important independent variable such as WACC, ATO, sales growth on dependent variable of the business which is shown to be share price of the business (Pardalos, Siskos and Zopounidis 2013).

The sales growth as shown in the table above is an important factor which influences the share price of the business. In a sensitivity analysis, an optimistic position and a pessimistic position are considered. As per the optimistic sales growth which is shown to be 3.50% and due to which there has been significant increase in the share prices of the business (Imai and Yamamoto 2013). The increase in the sales of Blackmores Ltd is considered to be so high due to the opportunity which the business has in terms of expanding the operations of the business in Asia especially China. The annual report of Blackmores ltd for the year 2018 discusses the future potential which the company has in terms of generating revenue from Asia. The pessimistic sales growth is taken to be 1.50% which assumes that the demand for the products of Blackmores ltd will reach and a saturation point and thus the sales of the business will fall (Borgonovo and Plischke 2016). The maximum share price valuation is shown for the Discounted Residual Method of valuation as per the table which is shown above which is $ 93.74. On the basis of the pessimistic condition which is assumed for the situation, the share price is shown to have fallen considerably.

After-Tax Cost of Debt of Blackmores Limited

As per the annual report, the management of Blackmores ltd has acquired the business of Catalent Australia which is a medical supplement manufacturing site and the same is estimated to impact the profit generating ability of the business and contribute to the growth of the business. The increase in the profit margin of the business is shown to be 7% under optimistic situation and the same is shown to be 5% under pessimistic situation (Modarres 2016). The policies and activities of the business are aimed towards growth of the business which would also result in more profitability for the business.

The increase in the operating activities of the business in China has resulted in increase in the revenue generating capacity of the business and thereby also the profitability of the business has also increased. This shows the intent of the business to maximise the profits of the business and thereby in the optimistic situation the share prices are shown to be high.

The asset turnover of the business is also shown to be a determining factor which affects the shares price of the business as shown in the table above. As per the annual reports of 2018, the business has grown tremendously in the year and also generated appropriate assets of the business. The estimate is shown to be 2.55% under the optimistic position while on the other hand, the estimate is shown to be 2.45% under the pessimistic position of the business (Razafindrambinina and Anggreni 2017). The impact on the shares price of the business is shown in the above table. The annual reports of the business specify that the company has invested significant amount in the assets of the business for the year 2018.

The weighted average cost of capital of the business is also effectively demonstrated in the table which is shown above. The return on equity of the business can be identified as the main the influencing factor of cost of capital of the business (Frank and Shen 2016). As per the present situation which is stated in the annual reports of the business, the management has established an efficient risk management system which reduces the Beta and also market risk of the business and this in terms affects the WACC of the business as shown in the table above (Ortiz-Molina and Phillips 2014). The WACC also affects the valuation process which is followed by the management to value the shares of the business and the same is shown under both optimistic and pessimistic situation.

The analysis of the market conditions and also the valuations of the shares of the business for both optimistic and pessimistic situation reveals that the business has prospects of achieving greater growth in the years to come. As per the annual reports of the business, the management is in the process to further expand the business operations and take the company to the next level in terms of profit generation and sustainable growth of the business. This part of the assessment would be discussing about the opportunities which are available to the business of Blackmores ltd regarding expansion of the scale of operations of the business and also with respect to the competition which the business faces during the period. This part would also be including recommendations which are suggested by the business and how the same can bring about improvements in the operations of the business.

The annual reports of Blackmores ltd for the year 2018 clearly indicates the intention of the management of the business to expand and penetrate in the markets of Asia. The CEO’s letter indicates that the business has done exceedingly well in Asia especially in China where the medical products of Australia especially of Blackmores ltd have been extremely popular. This has resulted in increase in the sales of the business exponentially and the business has recorded the best ever sales of the products of the company in its history of 86 years of existence (Choi et al. 2015). This clearly indicates the expansion plan of the business and also the intention of the business to expand in different regions of the world (Kogan and Papanikolaou 2014). Therefore, it is clear that Blackmores ltd should continue to make investments in its brands in China as the product is very much profitable in the area and has scope of generating more revenues in future.

The annual reports of Blackmores ltd for the year 2018 also shows that the sales revenue which is collected by the business is shown to be highest in the history of the business. This can be attributed to the sales revenue which the business has been able to generate in parts of Asia especially China. The annual report specifies that the strong growth which is achieved by the business is due to the record sales which is achieved by the business (Lee et al. 2015). The annual reports show that the gross profit margin of the business has increased by 4.4%. The business has also been able to build a strong brand image for the products which are offered among the customers which has created brand loyalty for the business in the market and same also be counted as one of the factors which has created such high sales in the market (Malik et al. 2013). The brand is so popular in Australia that it secured most trusted brand recognition for a consecutive period of five years.

The annual report clearly sets out the objectives of the business for achieving sustainable growth and development for the business. In addition to this, the competitive pressures which are in place in the industry needs to be combated by the management of the company. In order to do so, the management focuses huge amount of resources on the development of new products and also on innovative practices which is to be followed in the operations of the business (Dadfar et al. 2013). As per the annual reports of the business, the management of the business uses herbal and natural ingredients for the purpose of making the products which are offered by the business. This is an opportunity for the business to develop new products and also combat the competitive pressures which are available in the market.

The focus is on the market of Australia as the major revenue which is generated by the business of Blackmores ltd is generated from this market. The management of the company is focusing on achieving growth in revenues of the business and therefore for the same purpose, the management also needs to focus on the revenue which is generated by the company within Australian market. The industry faces lot of competition from major medical companies providing similar health and vitamin products and therefore the investments in the market has slightly detoriated. The management of Blackmores ltd needs to formulate a strategic plan which would help the business to secure the desired level of revenue from the market and also needs to differentiate the products which are offered by the business. 

The competitive pressure which is faced by the business of Blackmores ltd is very high as per the market conditions. The company has been able to maintain the lead position in the market and is also a preferred choice for the customers but however the close competitors of the business such as Swiss, Thomson, Homart Spring leave and Healthcare are gaining up on the business with identical products which are offered. The management needs to focus on such competitive pressures and implement a strategy in order to combat the same. The adverse competitive pressure would affect the revenue of the business if the same are not kept under check by the management of the company.

The overall costs of the business have also increased as the sales and scale of operations of the business has increased over the years. As per the annual reports of Blackmores ltd for the year 2018, the costs of the business are shown to have increased in comparison to previous years which is a sign of concern for the business and the management of the company needs to take appropriate steps to rectify the situation. An increase in the costs of the business has resulted in the lowering of profits of the business which affects the interest of the business (Enqvist, Graham and Nikkinen 2014). The costs of the business not only represent increase amount of expenditures for the business but also shows ineffectiveness of the business to appropriately control the costs of the business on a day to day basis (Eriksson et al. 2015). Therefore, the management of the company needs to come up with strategies as to how the costs of the business can be controlled by the management of the company. In addition to this, a major portion of the costs of the business is incurred in product development and also innovation activities which is carried on by the management of the company.

The management of Blackmores ltd needs to come up with effective strategies for the purpose of combating the situation which is presented before the management of Blackmores ltd for the year 2018. Some of the measures which can be suggested to the management of Blackmores ltd are given below in details:

• The management of the company needs to make the products which are offered by the business to be different from the products which are offered by the competitors of the business. This can be achieved by effectively investing the resources of the business in R&D activities and bring about innovative products in the market.
• The management of the company needs to adopt an appropriate management accounting tool such as budgeting, standard costing or any other technique for the purpose of reducing the costs of the business and also needs to supervise the activities of the business in order to ensure that no unproductive costs are incurred by the business.
• The management of the business needs to formulate strategies which can improve the reputation of the business and also promote customer loyalty among the customers of the business.
• The management needs to invest more in the market of Asia as the same holds ore potential for the business for making more revenues from the same with the help of the products which are offered by the business.

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