Financial statement analysis is a financial process which is applied and followed by the financial manager, financial analyst, financial institutions, suppliers and the stockholders of the company in order to recognize the financial performance of the company. It is a process in which the financial statement, which includes income statement, balance sheet and cash flow statement of the company in order to make better decision about the investment into the stock of the company and deal with the company. It evaluates the overall financial health of the business (Rabin, 2013). Financial statement records the financial transaction and financial data of a business which must be measured through the financial statement analysis in order to become more useful for the managers, shareholders investors and other interested parties.
In order to evaluate the financial statement of the business, various approaches are available in the market which measures the financial statement of the business on different methods in order to reach over a conclusion.
Freedom food group limited:
Freedom food group limited is an Australian company which has been formed in the year of 1990. It operates its activities under the food processing industry. Company mainly engaged in the manufacturing, marketing, distributing and exporting the beverages and food products. The main divisions of the company are freedom food, speciality seafood and pactum Australia and pactum dairy group. Majority of the income is generated by the company through processing the food product in the Australian market. The company operates it business at the global level (Home, 2018).
The food processing industry of Australia has been improved. The report explains that the forecasted growth rate of the revenue of the industry is 0.4% and the business growth has been estimated 0.7% which is quite better and explains that the companies under the industry would be able to generate more profits from the market (IBIS World, 2018). In terms of evaluating the market position and performance of freedom food group limited, Bega cheese limited has been taken into concern.
Bega cheese limited:
Bega cheese limited is also an Australian company which also engages in the food processing industry of Australia. The company owns the dairy business and the food manufacturing businesses in the Australian market. It has been founded in the year of 1899 in Bega, New south Wales in Australia (Home, 2018). Since that time, various changes have been made in the operations of the business.
Reformulation of financial statement refers to make financial statement of an organization for a particular time period then change them and recognize the item in an accurate way in order to get the accurate and detailed information about the financial position of the company (Rose & Hudgins, 2012). The general financial statements are prepared by the businesses on the basis of generally accepted accounting principles but it does not offer the accurate information about the company’s performance and thus the accounts are reformulated by the companies.
In case of freedom foods group limited, reformatted financial statement has been created in order to get the better information about the financial statement of the company. The reformatted financial statement of Freedom foods depicts that the net income of the company is quite higher than the stated amount in the income statement of the company. Further, the balance sheet represents that the net financial obligation of the company, net operating assets and the closing equity of the company is quite different than the amount which has been shown in the actual balance sheet of the company (Madura, 2011). On the basis of the evaluation, it has been found that the financial position and financial performance of the company is quite better than the general statement of the company.
Further, the financial figures and reformatted financial statement of the company has been compared with the financial statement of Bega cheese limited and it has been found that the financial performance of Bega cheese is also different than the stated information in the financial statement of the company (Morningstar, 2018). Through comparing the statement of the company, it has been found that the overall performance of both the companies is improving day by day.
Profitability and growth analysis depict about the changes and the profit generation capabilities of an organization. It takes the concern on various related figures of the business to measure the overall profitability and performance level (Porcelli & Delgado, 2009). Through the calculation on Freedom foods group limited, it has been found that the ROCE, RNOA and PM of the company is 8.21%, 1.20% and 2.27% which is quite lower. If the calculations on Bega cheese are taken into concern than the ROCE, RNOA and PM of the company are 13.59%, -4.4% and -3.34% (Morningstar, 2018). It depicts that the performance of the company, Freedom foods group limited is lower in the market but it is better in the industry.
On the basis of comparison of both the companies, it has been recognized that the performance of the companies have been changed in last few years and the current performance of Freedom food group limited is way better in order to manage the generated profit and the earning of the company. The overall evaluation depicts about better performance and position of the company in the industry.
Common size and trend analysis are the part of financial statement analysis which evaluates the financial statement of the company of past few years in order to measure the changes in the financial performance and position of the company from the base year and in order to measure the share of particular items against the main financial item of the business (Higgins, 2012).
Through the calculation and analysis on the income statement and balance sheet of freedom foods group limited, common size and trend analysis has been done. In common size statement evaluation, it has been found that the net profit level of the company was higher in the year of 2015 because of the unexpected and abnormal performance of the company but by the end of the year, 2018 it has been lower again (Morningstar, 2018). The operating expense level has been controlled by the company in current years in order to manage the earnings of the business.
Further, the common sized balance sheet of the company depicts that the level of current assets is lower against the current liabilities of the company in the year of 2018 which has affected the liquidity ratio of the company (Koropp, Kellermanns, Grichnik & Stanley, 2014). Further, the overall financial position of the company is quite average and depict about average performance of the company.
Similarly, the trend analysis study has also been done on the income statement and balance sheet of the company and it has been recognized that the sales revenue of the company has been improved by 34.73% from last year and along with that, the profitability level have been improved by 85.71%. The reason behind these changes is better performance of the company in the market. The company has managed the operating expenses at better level which has improved the profitability level of the business. Further, the balance sheet indicates that the overall financial position of the company has been affected at great level from last year. the total resources of the company has been improved and in order to improve the level of resources, the debt and equity, both the sources have been used by the company.
The financial position and performance of the company has been compared with the Bega cheese limited as well and it has been found that the financial position and financial performance both has been lowered in the year of 2018 because of the lower market share and the internal changes in the company (Gibson, 2011). In comparison with both the companies, it has been realized that the position of Freedom food group limited is better and the company would offer better return to the investors.
Forecasting:
the forecasting process and the valuation process has been done further on Freedom foods group limited to measure the total worth of the business in the market and the future changes in the company. The forecasting process explains that the below changes would take place in the overall performance of the company in next 5 years:
|
|
2018A |
2019E |
2020E |
2021E |
2022E |
2023E |
|
Gross margin |
24.6% |
30.0% |
30.0% |
30.0% |
30.0% |
30.0% |
|
SG&A expense ratio |
27.0% |
20.0% |
20.0% |
20.0% |
20.0% |
20.0% |
|
Tax rate |
30.0% |
30.0% |
30.0% |
30.0% |
30.0% |
30.0% |
|
Sales growth |
34.7% |
10.0% |
10.0% |
10.0% |
10.0% |
10.0% |
|
|
2018A |
2019E |
2020E |
2021E |
2022E |
2023E |
|
Accounts receivable turnover |
55.00 |
50 |
50 |
50 |
50 |
50 |
|
Inventory turnover |
81.00 |
70 |
70 |
70 |
70 |
70 |
|
PPE turnover |
389.00 |
350.0 |
350 |
350 |
350 |
350 |
|
Other NOA/Sales |
-31.4% |
-10% |
-10% |
-10% |
-10% |
-10% |
(Fridson & Alvarez, 2011)
On the basis of the forecasting, it has been realized that the overall position of the company would be better in near future. Further, the intrinsic value of the company has been calculated to identify that whether the market price of the company is overvalued or undervalued (Chandra, 2011). Through the calculations on the company, it has been found that the cost of equity, cost of debt and cost of firm of the company is 6%, 8% and 7.95%. Further, it has been found that the value per share of the company should ne $ 12.30 whereas the market price of stock of the company is $ 5.46 which depicts that the market price of the company is undervalued and defines that this is the right time for the investors to invest in the stock and earn the higher profit from the market (Banes, 2007).
In case of Bega cheese limited, it has been found that the stock price of the company should be $ 28.51 whereas the market price of the company is $ 6 which also explains that the market price of the company is undervalued but the forecasting level and the financial analysis position describe that the performance of the company would be affected and lowered in near future (DemaMoreno, 2009).
On the basis of comparison on both the companies and the intrinsic stock prices, it has been found that the market price of the freedom foods is overvalued and defines that this is the right time for the investors to sell the stock and earn the higher profit from the market
Sensitivity analysis:
Sensitivity analysis study has been done further and it has been recognized that along with the changes in the cost of equity and WACC level of the company, the stock pried of the company would also be affected which defines that the stock price is variable and dependent in nature which get affected with every changes in the organization.
|
Cost of equity |
|
||||
|
Δ CAPM |
Cost of equity |
share price |
Δ share price change |
sensitive valuation |
|
|
Optimistic |
10% |
6.60% |
5.46 |
-9.00% |
30.000 |
|
6% |
6.36% |
6.21 |
3.50% |
||
|
|
0 |
6.00% |
6.52 |
8.67% |
|
|
Pessimistic |
-6% |
5.64% |
5.30 |
-11.67% |
|
|
-10% |
5.40% |
5.10 |
-15.00% |
||
|
Δ WACC |
Cost of equity(firm) |
share price |
Δ share price change |
sensitive valuation |
|
|
Optimistic |
9% |
7.58% |
5.46 |
-9.00% |
28.742 |
|
7% |
7.45% |
6.21 |
3.50% |
||
|
|
0 |
6.96% |
6.52 |
8.67% |
|
|
Pessimistic |
-7% |
6.47% |
5.30 |
-11.67% |
|
|
-9% |
6.33% |
5.10 |
-15.00% |
Through the study, it is recommended to the stockholders and the investors of the company that the future performance of the company would be quite better and currently he stock price of the company is undervalued and thus it is the best time for the investors to invest in the stock of the Freedom food groups limited to improve the return and the overall worth of the investment.
References:
Barnes, P. (2007), The Analysis and Use of Financial Ratios: A Review Article, Journal of Business Finance & Accounting, 14 (4), p. 449-461
Chandra, P. (2011). Financial management. Tata McGraw-Hill Education.
DemaMoreno, S. (2009). Behind the negotiations: Financial decision-making processes in Spanish dual-income couples. Feminist Economics, 15(1), 27-56.
Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: a practitioner’s guide (Vol. 597). John Wiley & Sons.
Gibson, C. H. (2011). Financial reporting and analysis. South-Western Cengage Learning.
Higgins, R. C. (2012). Analysis for marketing management. McGraw-Hill/Irwin.
Home. (2018). Bega Cheese limited. (online). Retrieved from: https://www.begacheese.com.au/
Home. (2018). Freedom Foods group limited. (online). Retrieved from: https://ffgl.com.au/our-business/
Ibis World. (2018). Australian industry trend. (online). Retrieved from: https://www.ibisworld.com.au/industry-trends/market-research-reports/manufacturing/food-product/
Koropp, C., Kellermanns, F. W., Grichnik, D., & Stanley, L. (2014). Financial decision making in family firms: An adaptation of the theory of planned behavior. Family Business Review, 27(4), 307-327.
Madura, J. (2011). International financial management. Cengage Learning.
Morningstar. (2018). Bega Cheese limited. (online). Retrieved from: https://www.morningstar.com/stocks/xasx/bga/quote.html
Morningstar. (2018). Freedom Foods group limited. (online). Retrieved from: https://financials.morningstar.com/cash-flow/cf.html?t=FNP®ion=aus&culture=en-US
Porcelli, A. J., & Delgado, M. R. (2009). Acute stress modulates risk taking in financial decision making. Psychological Science, 20(3), 278-283.
Rabin, M. (2013). Risk aversion and expected-utility theory: A calibration theorem. In Handbook of the Fundamentals of Financial Decision Making: Part I (pp. 241-252).
Rose, P. S., & Hudgins, S. C. (2012). Bank management & financial services. McGraw-Hill Education.
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