Bega Cheese Limited: Financial Analysis And Ratios

Establishment and business overview

Discuss about the Customer Profitability Analysis & Customer Life.

Established in 1989, Bega Cheese Limited is the Australian company that carries on its operation mainly in Bega of New South Wales. However, the company was formed as the cooperative agricultural company and listed as public company during 2011. The company produces and delivers cheese products of high quality through more than 100 firms of dairy. The company’s main business products include cream cheese and powdered milk. Other products dealt by the company are various nutritional products like milk protein concentrate and Lactoferrin. The company supplies its products over more than 50 nations all over the world. The company belongs to the cheese manufacturing industry of Australia and holds almost 15.70% of the market. The growing trend of Australian cheese industry is increasing the investor’s interest in this industry. Main competitors of the company are Devondale Murray Goulburn, Fonterra Co-op Group, Lion Nathan National Foods and Warrnambool Cheese and Butter. About 27% of total revenues are generated from the major business of the company and 50% of revenue are generated from retail cheese and processed cheese (Bega Cheese, 2018). 

Ratio	Formula	2016 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2015	2014
Profitability ratio
Return on shareholder’s equity	Net income / shareholder’s equity	8.99	3.96	22.92
Return on total asset	Net income / total assets	5.05	2.25	12.03
Net profit margin	Net profit / Sales *100	2.41	1.12	6.18

The financial analysts and investors use the profitability ratios for measuring the ability of the entity to create income. Major profitability ratios included in this report for analysing the performance of Bega Cheese Limited are return on total assets, return on shareholder’s equity and net profit margin. Profitability ratio can be used efficiently to compare the performance of the company with the previous year (?ermák, 2015).

Return on the shareholder’s equity is used to measure the profit generated by the company using the shareholder’s investment. Looking into the above presented table it can be stated that the return earning capability of the company from the shareholder’s investment has been reduced significantly as the ratio reduced from 22.92% to 3.96% from the year 2014 to 2015. However, the company improves its position during 2016 as the ratio increased to 8.99% (Bega Cheese, 2018).

Return on total asset ratio focuses on the efficiency of the company in generating profit through utilizing the assets available with the company. Generally the company with higher return considered to be in better position in financial aspect (Heikal, Khaddafi & Ummah, 2014). Looking into the above presented table it can be stated that the return earning capability of the company from the available assets has been reduced significantly as the ratio reduced from 12.03% to 2.25% from the year 2014 to 2015. However, the company improves its position during 2016 as the ratio increased to 5.05% (Bega Cheese, 2018).

Profitability ratio

The net profit margin states the percentage of revenue available with the company after deducting all the operating, tax and finance expenses. Higher margin of net profit represents that company’s financial position is strong and it is able to meet all its expenses (Board & Skrzypacz, 2016). It can be identified from the above presented table it can be stated that net profit margin of company has been reduced significantly as the margin reduced from 6.18% to 1.12% from the year 2014 to 2015. However, the company improves its position during 2016 as the profit margin of the company increased to 2.41%.

Ratio	Formula	2016	2015	2014
Efficiency ratio
Inventory turnover	Cost of goods sold/ average inventory	5.38	5.23	5.48
Inventory turnover in days	365/inventory turnover	67.79	69.77	66.62
Settlement period for account receivable	Credit sales/ average receivables	9.09	9.84	10.18
Account receivable in days	365/Account receivable ratio	40.16	37.10	35.86
Asset turnover	Net sales/ Average total asset	2.10	2.02	1.95
Asset turnover in days	365/asset turnover ratio	173.82	180.60	187.36

Efficiency ratio measures the company’s efficiency in managing the liabilities and utilization of the assets. The major efficiency ratios used in this report to measure the efficiency of Bega Cheese Limited are the account receivable ratio, inventory turnover ratios and asset turnover ratio (Delen, Kuzey & Uyar, 2013).

Account receivable ratio is used to measure the number the days taken by the company to convert its credit sales into cash. In other words, it is the time taken by the company to receive the dues on account of credit sales. It can be identified from the above table that the account receivable ratio over the last 3 years period was in decreasing trend. It is signifying that the company’s efficiency has been decreased over the years. Further, the days taken by the company to recover its dues has been increased from 35.86 days to 37.10 days over the years from 2014 to 2015 and further increased to 40.16 days in 2017 (Bega Cheese, 2018).

It measures the number of days taken by the company to replace or sell the entire stock of inventories. The efficiency in selling or replacing the inventories has not been varied on large scale over the years from 2014 to 2016. The number of days taken by the company to sell or replace the inventories was 66 days to 70 days (Bega Cheese, 2018).

Asset turnover ratio measures the company’s ability to generate revenue through using the assets available with the company and the time taken to generate the income (Sunder, 2016). From the computation table it can be identified that the days taken by the company to generate income through utilization of assets has been reduced from 187.36 days to 173.82 days over the years from 2014 to 2016 (Bega Cheese, 2018).

Ratio	Formula	2016	2015	2014
Liquidity ratio
Current ratio	Current assets / current liabilities	1.65	1.83	1.52
Quick asset ratio	(Current assets-inventories) / current liabilities	0.74	0.75	0.65

Efficiency ratio

Liquidity ratios are used for measuring the liquidity position of the company that states the ability to pay off its short term obligations with the short-term assets available with the company. To measure the liquidity position of Bega Cheese Limited current ratio and quick ratio over the years from 2014 to 2016 has been computed (Drehmann & Nikolaou, 2013).

Current ratio measures the current assets of the company in proportion to its current liabilities. If the company’s current asset is more than current liabilities that is the current ratio is more than 1 the company will be efficient in paying off its short-term obligations (Grant, 2016). Analysing the calculation table it is observed that the current ratio of the company for all the 3 years under consideration is more than 1. Thus, the liquidity position Bega Cheese is strong enough to pat off the short term obligation.

Quick ratio is also used to measure the company’s short-term liquidity position.  However, the major difference of quick ratio with the current ratio is that the quick ratio does not considers the assets those take considerable time to be converted into cash like inventories (Luez & Wysocki 2016). The quick ratio of the company is increased from 0.65 to 0.74 over the years from 2014 to 2016. Therefore, the liquidity position of the company has been improved over the years.

Ratio	Formula	2016	2015	2014
Gearing ratio
Debt to asset ratio	Total debt/total assets	44.12	43.40	42.70
Gearing ratio	Non-current liabilities/ (non-current liabilities + Equity)*100	13.14	16.20	6.56

Gearing ratio measures the long-term obligations of entity as compared to capital employed by the company. It is further used to assess the leverage position of the company (Hill, Jones & Schilling, 2014).

Debt to assets ratio is a financial leverage metric and used to measure the proportion of assets obtained through debt, credit and liabilities. Generally the 40% proportion is considered better and it represents that the company’s financial health is stable (Prasetyorini, 2013). It is observed that the debt to assets ratio of the company is increased from 42.07% to 44.12% over the years from 2014 to 2016.

Gearing ratio is most used method for measuring the leverage position of the company. Higher gearing ratio states that the company is highly leveraged and is exposed to high financial risk (Jones & Kulish, 2013). It can be found out from the calculation table that the gearing ratio of the company has been significantly increased from 6.56% to 13.14%. Therefore, the company’s leverage level has been increased over the years from 2014 to 2016.

Conclusion

It can be concluded from the above analysis that the profitability ratios of the company have been decreased from the year 2014 to 2015 though it was able to improve the profitability position in the year 2016. Further, the company was efficient with regard to its efficiency ratios undertaken for analysing its efficiency. The liquid ratio of the company is representing that the company is capable in paying-off its short-term obligation. However, the gearing ratios of the company are revealing that the leverage position of the company is deteriorating.

References

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

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

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

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

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

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

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

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

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

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

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

Sunder, S., (2016). Rethinking financial reporting: st&ards, norms & institutions. Foundations management & Trends® in Accounting, 11(1–2), pp.1-118.