Tatua Financial Analysis For The Dairy Cooperative: Findings And Analysis

Describe about the Tatua Financial Analysis for The Dairy Cooperative.

Tatua is an independent entity based out of New Zealand and calls for experience of more than 100 years in the field of dairy-cooperative. In the era when most of the companies in the industry has gone for amalgamation, the company has been able to stay independent. This is the prime reason why company has been able to create a strong identity and brand in the industry. The company’s factories are located in Tatuanui in the part of North Island. As required to evaluate the investment attractiveness of the company, we will conduct a detailed financial analysis of the company based on the last 3 year financials. We will use both horizontal and vertical analysis to make inferences. To establish critical industry approach we will also conduct a detailed ratio analysis and compare it with industry peer data (Lakshmi, 2016). This will provide us clear cut understanding of financials and coupled with some qualitative factors, we will try to conclude the investment attractiveness of Tatua.

In this section we will explore the findings of ratio and financial analysis of the company. The three parameters under which we will evaluate the company are profitability, financial stability including short term and long term financial stability & Asset utilization. Let us now have a look at each one of these parameters in details to evaluate the financial status of the company.

The objective of this section is to evaluate the profitability of the company based on certain parameters. Each of these parameters will throw in some information or the other.

This is calculated by dividing the net profit of the company vis-à-vis the total sales. This is indicative of the net margins with which the company is operating.

	2015	2014	2013
Net Profit %	6%	3%	2%

As we can see from the above table the net margin of the company has expanded in last three years. This is a good indicator for the company, as its net margin has increased from 2% in 2013 to 6% in 2015.

This is calculated by dividing the gross profit of the company vis-à-vis the total sales. This is indicative of the gross margins with which the company is operating (Damodaran, 2016). We have done it for the company as a whole and also for the segment in which the company operates. In this case the segments or the products which the company operates are Whipped Cream & Cheese Sauce.

	2015	2014	2013
Gross Profit %
Overall	43%	38%	37%
Whipped Cream	50%	43%	40%
Cheese Sauce	15%	26%	30%

Profitability

The overall gross profit % of the company has improved from 37% in 2013 to 43% in 2015. However when we see the segment wise gross margin, we can see that the gross margin for Whipped cream product has increased from 40% in 2013 to 50% in 2015, however the gross margin for the Cheese Sauce segment has declined sharply from 30% in 2013 to 15% in 2015. It can be seen that gross margin of the company are pulled down by Cheese Sauce segment of the company. This is a cause of worry and a potential red flag on the investment attractiveness of the company.

This is calculated by dividing the Net operating profit after tax of the company vis-à-vis the total assets which the company holds.

	2015	2014	2013
Return on Assets	15%	6%	5%

Return on Assets of the company has steadily improved from 5% in 2013 to 15% in 2015. The increase has been sharp from 6% in 2014 to 15% in 2015. This is a potential green flag on the investment attractiveness of the company.

This is calculated by dividing the Net operating profit after tax of the company vis-à-vis the owners’ equity (Shareholders Fund + Retained Earnings) which the company reports in its balance sheet.

	2015	2014	2013
Return on owner’s equity	27%	13%	12%

Return on owner’s equity of the company has steadily improved from 12% in 2013 to 27% in 2015. The increase has been sharp from 13% in 2014 to 27% in 2015. This is a potential green flag on the investment attractiveness of the company.

This is calculated based on simple increase that one notes in Net operating profit after tax figure of the company year over year.

	2015	2014
Increase in Net Operating Profit	143%	38%

As we can see from the table above, net operating profit after tax has increased by 38% in 2014 and in 2015 it has increased by 143%. This is a huge jump year on year and augments good news for the company.

This is calculated based on simple increase that one notes in total sales figure of the company year over year. We have done it for the company as a whole and also for the segment in which the company operates. In this case the segments or the products which the company operates are Whipped Cream & Cheese Sauce.

	2015	2014
Change in Sales
Overall	2%	2%
Whipped Cream	12%	5%
Cheese Sauce	-33%	-6%

The overall total sales of the company has increased by 2% in 2014 and 2% in 2015 in comparison to the previous period. The increase in sales has been driven by the Whipped cream segment which has seen sales jump of 12% in 2015 and 5% in 2014. However on the other segment, i.e. Cheese Sauce sales have been constantly declining over the last two years. The trend becomes alarming as drop in sales in 2015 has been as high as 33%. This is a cause of worry and a potential red flag on the investment attractiveness of the company.

Financial Stability

This is calculated by dividing the total Selling & Distribution expenses with the total operating expenses.

	2015	2014	2013
Selling and Distribution expenses as a % total operating expenses	70%	66%	67%
Selling and Distribution expenses as a % Total Sales	24%	23%	23%

There has been increase in Selling & Distribution expenses as percentage of total operating expenses (Damodaran, 2016). This might be one of the reason due to which increase in sales are happening, however to be cautioned this can also be one of the calls taken by management to increase the sales in Cheese Sauce segment. Higher Selling & Distribution expenses has been mainly driven by higher sales commission given by the company in 2015.

This is calculated by dividing the total Administration & General expenses with the total operating expenses.

	2015	2014	2013
Administration & General expenses as a % total operating expenses	25%	25%	23%
Administration & General expenses as a % Total Sales	8%	8%	8%

There has been increase in Administration & General expenses as percentage of total operating expenses. If seen in details it has been the office expenses which has been the prime reason on why the Administration & General expenses for the company has increased.

This is calculated by dividing the total financial expenses with the total operating expenses.

	2015	2014	2013
Financial expenses as % total operating expenses	5%	9%	10%
Financial expenses as % Total Sales	2%	3%	3%

Financial expenses as part of total operating expenses has reduced to 5% in 2015 from the high of 10% in 2013. This improvement has been due to lower expenses booked under bad debt and lower borrowing cost for the company. If seen in conjunction with the loan taken by the company from Bank of New Zealand, it can be seen that the total liability in this case has sharply declined in 2015.

The objective of this section is to evaluate the financial stability of the company based on certain parameters. Each of these parameters will throw in some information or the other.

This ratio is calculated based on dividing the total current assets with the total current liabilities. It indicates the working capital management efficiency of the company and higher is considered to be better.

	2015	2014	2013
Working Capital Ratio	1.95	1.92	1.50

As indicated by the data the company has been efficiently managing it working capital. The ratio has steadily improved from 1.50 in 2013 to 1.95 in 2015.

A better judge on liquidity availability than working capital ratio is the quick ratio which is also known as liquidity ratio. It is calculated as (Current Asset-Inventories)/Current Liabilities.

	2015	2014	2013
Liquidity Ratio	1.36	1.45	1.13

The liquidity ratio of the company has declined from 2013 to 2015. This is because of the higher inventory that the company has been holding in the year 2015.

Age of trade creditors is a measurement of how long does the company takes to pay of its invoices to the creditors. The longer the company has been able to pay its creditors, the longer the company will have cash in its hand and hence better for the company.

	2015	2014	2013
Age of Trade Creditors	63	86	105

Asset Utilization

Over the years this ratio has declined fast for Tatua Company. This is bad as now it has been paying back suppliers cash faster and hence it is more dependent on its own cash to run the business.

Equity ratio is indicative of how much the equity is part of the total capital that is used in the business.

	2015	2014	2013
Equity Ratio	87%	79%	74%

The equity ratio of the company has improved to 87% in 2015 compared to low of 74% in 2013.  This is because of the fact that Tatua Company has been able to pay a good portion of its long term debt in 2015.

This ratio determines the capability of the company in paying back its due interest. Higher the value better it is indicative of the company’s financial stability.

	2015	2014	2013
Interest Coverage	20.57	4.94	3.12

As company has paid back huge amount of its debt in 2015, the interest cost has reduced and this is one of the prime reason why its interest coverage ratio has drastically improved to 20.57 in 2015 compared to 3.12 in 2013.

The objective of this section is to evaluate the asset utilization of the company based on certain parameters. Each of these parameters will throw in some information or the other.

This is indicative of how well company has been able to churn or rotate its inventory. The low ratio is indicative of weakness in sales and larger holding period of inventory

	2015	2014	2013
Stock Turnover	13.0	15.5	16.7

As we can see that the ratio has declined to 13 in 2015 from 33.3 in 2013. This is indicative of the fact that company has seen rise in holding of inventory which is not good for the company.

This is indicative of how fast the company has been able to convert the invoices it raises against the debtors into cash. The lower it is better it is for the organization.

	2015	2014	2013
Age of debtors	39.6	51.7	54.8

The figures indicate improvement for the company in 2015 as ratio has lowered to 39.6 compared to 54.8 in 2013. If seen in conjunction with the Age of creditors, which we have already seen above, it can be said that it is an industry trend and company has still maintained a good enough cash cycle.

This is a proper utilization ratio which indicates how company has utilized its total asset. The higher the ratio better it is for the company and is indicative of good utilization.

	2015	2014	2013
Total Asset Turnover Ratio	2.5	2.5	2.7

This is a proper utilization ratio which indicates how company has utilized its current asset. The higher the ratio better it is for the company and is indicative of good utilization.

	2015	2014	2013
Current Asset Turnover Ratio	3.5	3.5	4.1

	Industry	Tatua
	2015	2014	2013	2015	2014	2013
Net profit %	6.50%	5%	4%	6%	3%	2%
Stock Turnover	11 times	13 times	11 times	12 times	16 times	16 times
Age of Trade Creditors	30 days	32 days	36 days	63 days	86 days	105 days
Age of Debtors	33 days	40 days	45 days	40 days	52 days	55 days
Selling & distribution expenses %	17%	18%	18%	24%	23%	23%
Admin and general expenses %	7%	6%	7%	8%	8%	8%
Equity %	50%	45%	40%	87%	79%	74%

The peer table and its comparison is indicative of a broader trend of where Tatua is going. The company has not been able to increase its stock turnover, inventory holding period is increasing. The company is paying of its creditors faster, but still better than the industry average. However the debtor period is on higher side compared to peers, which is not a good signal for the company. The selling & distribution expenses are high for the company and is not a good signal for the company.

Conclusion

Tatua is a very good company and most of the financials are in place but when one digs deep, it is clear that company is facing headwinds in certain sections which need orderly correction and urgent attention. The sales of Cheese sauce segment has been constantly falling and the margins of the company is also pulled down sharply by this segment. Operationally as around peers company has not been able to manage its cash cycle as efficiently as peers. There is a need to decrease debtor’s day sharply and increase rollover of the inventory. Company has been spending high on marketing and sales and even after that sales have not increased substantially. Tatua is a good company and among many green signals of its investor attractiveness, one can find some red flags too. The call on purchasing of the company should be a function of how an investor intend to turn around Cheese Sauce Segment.

References

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Damodaran, A. (2016). Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.

Lau, C. (2016). Financial Management.

Khan, M. N., & Khokhar, I. (2015). THE EFFECT OF SELECTED FINANCIAL RATIOS ON PROFITABILITY: AN EMPIRICAL ANALYSIS OF LISTED FIRMS OF CEMENT SECTOR IN SAUDI ARABIA. Quarterly Journal of Econometrics Research, 1(1), 1-12.

Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis. John Wiley & Sons.

Hoberg, G., & Maksimovic, V. (2015). Redefining financial constraints: a text-based analysis. Review of Financial Studies, 28(5), 1312-1352.