Write about the Analysis of Financial Performance and Outlook of Graincorp Limited.
The report present financial analysis of one of the Australian ASX listed agribusiness firm financial performance and outlook over the past two years. The report starts with identification of the company as well as its brief overview. It is followed by presentation of its financial outlook. Finally, the report concludes with a detailed financial analysis of the company based on some of the major financial ratios to test its strength and weaknesses over the last two years. In other words, the report presents both a current financial assessment as well as financial outlook of the firm over the next one to two years. This is to assist in giving recommendation on whether whether the company is potentially worth investing.
GrainCorp Limited is the public listed form on ASX within Australia. Its core operations include storage and receivable of grains as well as related commodities. The company also offers logistics as well as markets such commodities. GrainCorp Limited was mostly established as New South Wales agribusiness company agency in 1917 (GrainCorp Limited 2017). Initially, the company used to transport grains from the local collection areas located within railways all through grain-producing areas across New South Wales. The company later changed to Grain Handling Authority and in 1992 it was privatised with most of its shared transferred to the grain growers (Clark 2018). Nonetheless, in 1998, GrainCorp Limited was listed on the ASX. Its operations have significantly extended to other Australian region through amalgamations with the other grain handling firms (GrainCorp Limited 2017). The company mainly focuses its main events on essential grains of barley, sorghum, wheat and canola where the firm has relative benefits through technical expertise, nearness to the growth markets as well as grain origination. The company has main operation in Europe, North America and Australia, with such regions jointly demonstrating more than 50% of the universal export trade in canola, barley and wheat. The company has three main operating segments, oils, grains and malt (GrainCorp Limited 2016). Under the malt segment, the company provides deep grain expertise as well as tailored relationships with the distilling and brewing clients across the globe. The oil segment is the leading producer of the edible oils across Australia. On the other hand, GrainCorp operates and own one of the largest grain logistic network and storage in the Eastern Australia.
GrainCorp is expected to experience challenging times in 2018 for its grains segment with significantly lower crop on the Eastern Australia resulting from prolonged dry weather in 2017 winter Clark 2018). This is expected to challenge its Australian competitiveness especially in the international market by the persistent low grain prices across the world, global oversupply of the grains as well as cheap ocean freight charges (Investing.com 2018). Nonetheless, GrainCorp expect constant strong financial performance from the Malt segment, with full year contribution from expanded malt plant across Pocatello, Idaho.
GrainCorp with its total market capitalization of around A$1.87 billion is considered popular for its explosive growth. Therefore investors need to be very careful which judging the company based on the balance sheet on whether the firm could survive the downturn. Therefore, understanding the organization’s financial performance is very crucial as poor capital management might mean bankruptcies that take place at relatively higher rate for such company as GrainCorp. As such, the company debt level is said to have decreased over the years from A$1,194.5 million in 2016 to A$1,090 million this comprised of both long and short-term debts. Besides, with this decrease in the total liabilities, cash and the short-run investment were at A$388.9 million (Clark 2018). Furthermore, over the years, Graincorp is found to have produced operating cash flows of approximate A$300.5 million which is said to have resulted in operating cash to the debt ratio of around 27.57%. This implies that GrainCorp debt was roughly covered by its operating cash. In addition, the ratio could be used in measuring efficiency as alternative to the ROA. Therefore, the figures means that the company could generate 0.28 times cash from the debt capital.
It sales over the last three years has been experiencing an increasing trend moving from 4,086 million in 2015 to 4,576 million in 2017 (GrainCorp Limited 2017). Such increase is projected in the next three years till 2020. Its operating profit before interest and tax also increased over the same period moving from 99.1 million in 2015 to 244 million in 2017. This trend is projected to remain in the next three years till 2020. For instance, the operating profit is projected to be 96.2 million in 2018 which is estimated to increase to 191 million by 2020. Its net income over the years increased from 32.1 million in 2015 to 125 million by 2017. Similar trend is projected in future where by the net income is projected to move from 58.3 million by 2018 to around 115 million by 2017 (GrainCorp Limited 2017).
Table 1: Profitability Ratios
|
Profitability Ratios |
2015 |
2016 |
2017 |
|
Gross Margin % |
19.2 |
17.9 |
19.7 |
|
Earnings Per Share AUD |
0.14 |
0.14 |
0.55 |
|
Return on Equity % |
1.8 |
1.73 |
6.95 |
|
Return on Assets % |
0.92 |
0.85 |
3.49 |
Source: Morningstar (2018)
Based on Table 1 above, it is evident that GrainCorp gross profit margin increased from 19.2% in 2015 to 19.7%. This is evident despite the decrease that was recorded in 2016. Therefore, it is evident that the company was profitable or efficient in generating profit through its sales.
As from the Table 1 above, it can be stated that GrainCorp ROA increased over the last two years with a greater margin being recorded in 2017. For instance, the ROA increased from 0.92 to 3.49 in 2017. This is a clear sign that the company has been efficient enough in utilizing its assets to produce net income.
The company ROE over the last three years is said to have experienced a significant increase. This is evidenced by the movement of the company’s ROE from 1.8 in 2015 to 6.95 in 2017. The increase in the company’s ROE is a clear sign that the company management has been utilizing its shareholders’ equity to produce income.
Based on Table 1 above, it is clear that GrainCorp’s EPS increased from 0.14 in 2015 to 0.55. The increase is as a result of increased net income over the same period. The company is said to have recorded increased sales in 2017 which could have been translated to increased net income.
Based on the profitability ratios analysis, it is evident that GrainCorp is financially stronger both in managing its resources such as assets and shareholders’ equity in producing income. Furthermore, given that the company is experiencing increased profit margin and EPS, it is evident that the company is financially healthy and is effective in utilizing its resources to generate better income.
Table 2: Liquidity ratios
|
Liquidity |
2015 |
2016 |
2017 |
|
Current Ratio |
1.72 |
1.56 |
1.87 |
|
Quick Ratio |
0.93 |
0.84 |
1 |
Source: Morningstar (2018)
Based on Table 2 above, it can be stated that Graincorp experienced an increased current ratio. The company current ratio increased from 1.72 in 2015 to 1.87.
It is also evident that the company’s quick ratio increased from 0.93 to 1 in 2017. This increasing trend is a clear sign that the company is increasing its efficiency in managing its financing issues.
Table 3: Indebtedness ratios
|
2015 |
2016 |
2017 |
|
|
Debt ratio |
2.02 |
2.05 |
1.94 |
|
Interest Coverage |
2.01 |
2.07 |
5.43 |
Source: Morningstar (2018)
Debt ratios,
Based on Table 3 above, it can be stated that the company debt ratio decreased from 2.02 to 1.94. This means that the company is improving in its financing over time.
The result shows that interest coverage increased over the last three years moving from 2.01 in 2015 to 5.43 in 2016. The increase is a crease a clear sign that the company is not struggling in settling its debts through increased cash flow generation.
GrainCorp high interest coverage implies that even though the debt levels are relatively high over time, the firm is capable of using its debts effectively in generating cash flows. Therefore, since there are no concerns on its liquidity ratios, this might be an optimal capital structure within the period.
Investor Analysis
Table 4: Dividend and earnings ratios
|
2015 |
2016 |
2017 |
|
|
Dividends per share |
10 |
11 |
30 |
|
Dividend yield |
1.10% |
1.4% |
3.68% |
Source: Morningstar (2018)
From the Table 4 above, dividend per share for GrainCorp increased over the last three years with a significant margin. This is evidenced by the fact that the company’s dividend per share moved from 10 in 2015 to 30 by 2017. Furthermore, from the analysis, it is evident that the company’s dividend yield increased of the last three years moving from 1.1% in 2015 to 3.68% in 2017.
Based on Figure 1 below, it can be concluded that GrainCorp share price over the last twelve months experienced a decreasing trend. Despite, the company registering relatively high share price by end of June 2017, the price has been decreasing over the year with February being the worst period for the company where the price was at its lowest (Marker Index 2018).
Figure 1: Historical stock price for GrainCorp tracked against All Ords Index
Source: Marker Index (2018).
As from the Table 5 below it is evident that GrainCorp dividends over the last few years has been experiencing asymmetric trend. This is evident by the fact that dividends payables decreased from 0.075 to 0.025 by 15th December 2015 (4 Traders 2018). This amount later increased to 0.075 by July 2016 by December 14th 2016, dividend payable decreased to 0.035. By July 17th 2017, dividend payable increased to 0.150 which has remained constant over the year (Marker Index 2018).
|
Amount |
Payable |
|
$0.150 |
14/12/2017 |
|
$0.150 |
17/07/2017 |
|
$0.035 |
14/12/2016 |
|
$0.075 |
15/07/2016 |
|
$0.025 |
15/12/2015 |
|
$0.075 |
17/07/2015 |
|
$0.050 |
16/12/2014 |
|
$0.150 |
18/07/2014 |
|
$0.200 |
16/12/2013 |
|
$0.250 |
19/07/2013 |
Source: Marker Index (2018).
Conclusion and Recommendations
In conclusion, the high debt ratios should not at any point scare away investors. The company operating cash flows is sufficient enough in settling its debt commitments which implies that its debts are place in good use. Moreover, the firm displays capacity to settle its short-run debts should an adverse event takes place. To build the conviction in stock, one needs to further assets the firms’ tract record. Given that the company is doing well financially which is evidenced by relatively attractive profitability, efficiency and liquidity ratios, the company seems to be worth to be considered for purchase or investment. In other words, GrainCorp is a good business for investment generating relatively good returns with reasonable prospects for the growth. Furthermore, given that GrainCorp had relatively high interest coverage it can be stated that that even though the debt levels are relatively high over time, GrainCorp is capable of using its debts effectively in generating cash flows. Therefore, since there are no concerns on its liquidity ratios, this might be an optimal capital structure within the period. Hence, any potential investor willing to invest in the company should do so. If I was to invest in this firm, the main concerns would be the high and increasing level in the company indebtedness level. This is based on the fact that the high indebtedness level represented by increased debt ratio means that the company is overlying on debt finance which is putting the company at risk.
References
4 Traders (2018), GrainCorp Limited (GNC): Available from: https://www.4-traders.com/GRAINCORP-LTD-6492522/charts-sector/ [Accessed at 25th May 2018]
Clark, S (2018), What does GrainCorp Limited’s (ASX:GNC) Balance Sheet Tell Us Abouts Its Future?: Available from: https://simplywall.st/stocks/au/food-beverage-tobacco/asx-gnc/graincorp-shares/news/what-does-graincorp-limiteds-asxgnc-balance-sheet-tell-us-abouts-its-future/ [Accessed at 25th May 2018]
GrainCorp Limited (2016), GrainCorp Limited 2016 annual report: Available from: https://www.graincorp.com.au/_literature_222196/2016_Annual_Report [Accessed at 25th May 2018]
GrainCorp Limited (2017), GrainCorp Limited 2017 annual report: Available from: https://www.graincorp.com.au/_literature_235571/2017_Annual_Report [Accessed at 25th May 2018]
Investing.com (2018), GrainCorp Ltd (GNC): Available from: https://www.investing.com/equities/graincorp-advanced-chart [Accessed at 25th May 2018]
Marker Index (2018), GrainCorp Limited class A: Available from: https://www.marketindex.com.au/asx/gnc [Accessed at 25th May 2018]
Morningstar (2018), GrainCorp Ltd Class A (GNC): Available from: https://financials.morningstar.com/ratios/r.html?t=GNC®ion=aus&culture=en-US [Accessed at 25th May 2018]
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