Financial Analysis of Balckmores Ltd.

Question: Discuss about the Financial Analysis of Balckmores Ltd. Answer: Introduction The investors make decision about investment, lenders have to decide about lending, creditors decide to give material on credit, and the government levies taxes. Therefore, the information contained in the financial statements becomes crucial for all the stakeholders such as shareholders, lenders, creditors, and the government (Gibson, 2012). In the report presented here, the analysis of the financial performance of Blackmores Ltd has been carried with the use of information extracted from the financial statements. Overview of Blackmores: Firms Strategy and Prospects Blackmore, headquartered in Australia, is engaged in developing, marketing, and selling the health products in Australia and New Zealand and in many Asian countries since 1930 (Blackmore Limited, 2016). The companys mission is to improve peoples lives by delivering the best quality products and reaching to as many places it could. With this mission, the company has expanded its operations over the years and now has a presence in China, Thailand, Malaysia, and Singapore also. In order to produce highest quality of products, the company adopts the strategy to use the best quality raw materials (Annual Report of Blackmores, 2015). The company strives to achieve hundred percent customer satisfactions from the use of the products sold by the company. The companys growth prospects are high because of strong brand image and concentrating on the offshore expansion in the upcoming years. Financial Analysis of Blackmores The financial analysis is the process in which the companys profitability, stability, and future growth prospects are evaluated. In order to analyze, the financial performance, the information is extracted from the financial statements such as income statement, balance sheet, cash flow statement and notes forming part of the financial statements. Further, the information contained in the auditor report and the directors report is also crucial in analyzing the financial performance of a company (Nikolai, Bazley Jones, 2009). All these sources of information can be found at one place that is called annual report. The annual report of a company contains not only the financial information but also the auditors report and the directors report. The analysis of the financial performance and the position is carried by applying certain tools and techniques with the use of information collected from the financial statements. The most commonly used tools in evaluation of the financial performance are ratio analysis, and vertical and horizontal analysis. The ratio analysis helps to analyze the profitability and operational efficiency and the vertical and horizontal analysis assists in evaluating the trend (Weygandt, Kimmel, Kieso, 2009). The financial performance and position of Blackmores have been analyzed by applying these tools in the sections given below. In order to analyze the trend, horizontal analysis has been performed on the income statement and the balance sheet of the company as depicted in the appendix-1. In this analysis, the financial year 2013 has been taken as base for analyzing the performance of the financial year 2015. Figure 1: Revenue growth of Blackmores Figure 2: Growth in Net Profit of Blackmores The results of the analysis depict that the revenues of the company has grown by 44.34% over the period of three years. Further, the gross profits and net profits of the company have increased by 47.25% and 88.00% respectively (Appnedix-1). The growth in revenues and profitability achieved by the company in three years time period indicates high growth prospects in the upcoming years. Further, in respect of assets it has been observed that the total assets of the company are up by 26.84%, whereas, the total liabilities have gone up by 20.30% (Appnedix-1). The increment in the assets is greater than the increment in the liabilities, thus, it could inferred that the financial position of the company is good. Additionally, a 35.71% increase in the equity also signifies good financial position and performance of the company over the period of three years (Rich et al., 2012). In addition to the horizontal analysis, the ratio analysis has also been carried out to gauge the financial performance and position of Blackmores in more detail (Ehrhardt Brigham, 2016). The net profit margin, gross profit margin, and return on equity shows an increasing trend indicating good financial performance. The net profit margin was 7.65% in the year 2013, which increased to 9.96% in the year 2015. The gross profit ratio increased to 68.01% in the financial year 2015 from 66.67% in the year 2013 (Appnedix-2). The increment in the net profit margin and gross profit margins also indicate the operational efficiency due which the expenses have been saved. In regard to the liquidity position, current ratio shows a diminishing trend over the period of two years. The current ratio of 2013 was 2.76 times while that of 2015 was observed to be 1.63 times (Appnedix-2). The downfall in the current ratio indicates deterioration in the liquidity position (Ehrhardt Brigham, 2016). Further, to evaluate the solvency position of the company, debt to equity ratio has been computed (Ehrhardt Brigham, 2016). Debt to equity ratio also shows a downward trend, which shows reduction in the total debt as a proportion to the total equity. In the year 2013 the debt equity ratio was observed to be 1.36 times, which decreased to 1.20 times in the year 2015 (Appnedix-2). The decrease in the debt equity ratio indicates that the company is becoming self dependent for finance; however, very low debt ratio may affect the profitability of the company adversely due to low leverage (Ehrhardt Brigham, 2016). As regard operational efficiency, the inventory turnover, accounts receivable to turnover, and assets turnover ratios have been computed (Ehrhardt Brigham, 2016). The inventory turnover ratio was observed to be 8.18, 8.90, and 12.10 times for the financial years 2013, 2014, and 2015 respectively (Appnedix-2). The trend shows an increase in the inventory turnover ratio over the period of three years, which is indicative of good operational performance of the management. However, the accounts receivables days show increase as well, which is unfavorable for the business because the funds are blocked in receivables. In the financial year 2013, the accounts receivable days were observed to be 71 days, which increased to 83 days in the financial year 2015 (Appnedix-2). Further, the asset turnover ratio has also been observed to be increasing over the period of three years. In the financial year 2013, the asset turnover ratio was 1.42 times, while it increased to 1.61 times in the financia l year 2015. The increment in the assets turnover ratio indicates that the management has been able to utilize the assets more profitably in the year 2015 (Ehrhardt Brigham, 2016). Overall, based on the results of horizontal analysis and the ratio analysis, it can be articulated that the financial performance and position of the company has improved over the period of three years. Limitations of Ratio Analysis Although ratio analysis is a useful tool in evaluating the financial performance and position of the business but it has certain limitations (Grier, 2007). The ratio analysis is conducted based on the information and data gathered from the financial statements, which are prepared on historical cost basis. The historical cost basis adopted in preparation of the financial statements may not portray true picture of the business, thus, the results of the ratio analysis may be misleading in the certain cases. Further, the financial statement s are prepared using different accounting policies, thus, the figures in the financial statements may change just due to different accounting policy being adopted. In addition to this, the ratio analysis only provides quantitative analysis but the qualitative analysis is also crucial in assessing the financial performance of the business (Grier, 2007). Usefulness of the Annual Report and the information Contained Therein All the listed public companies in Australia are required to get the annual report prepared and submit that to the Australian Securities and Investment Commission for each year showing the particulars of business and other essential activities carried out by the company (Annual report of Blackmores, 2013). The annual report contains full financial information and highlights the achievements of the company, which is important for the investors to witness. Further, the investors require crucial information regarding the future prospects and the courses of action that the company is going to take in the upcoming years. This information can be taken from the directors report contained in the annual report of the company. Therefore, the information and data contained in the financial statements assist the investors in taking prudent investment decision (Sander Haley, 2011). Further, the reservations and comments of the auditors on the financial statements of the company are also importan t for the investors, which can be taken from the auditors report contained in the annual report. Conclusion From the discussion in this report, it can be concluded that the investment decision should be made by thoroughly analyzing the financial performance of the company. In order to analyze the financial performance, the information can be extracted from the financial statements and the annual report. The annual report is the most important source of information for the potential investors. References Gibson, H.C. (2012). Financial reporting and analysis. Cengage Learning. Blackmore Limited. (2016). Worldwide company profile. Retrieved August 24, 2016 from https://listofcompanies.co.in/blackmores-limited/ Nikolai, L.A., Bazley, J.D., Jones, J.P. (2009). Intermediate accounting update. Cengage Learning. Weygandt, J.J., Kimmel, P.D., Kieso, D.E. (2009). Managerial accounting: tools for business decision making. John Wiley Sons. Rich, J., Jones, J., Mowen, M., Hansen, D. (2012). Cornerstones of Financial Accounting. Cengage Learning. Ehrhardt, M.C. Brigham, E.F. (2016). Corporate Finance: A Focused Approach. Cengage Learning. Grier, W.A. (2007). Credit Analysis of Financial Institutions. Euromoney Books. Sander, P.J. Haley, J. (2011). Value Investing For Dummies. John Wiley Sons. Annual Report of Blackmores. (2015). Retrieved August 23, 2016 from https://flipflashpages.uniflip.com/2/41140/355972/pub/document.pdf Annual Report of Blackmores. (2013). Retrieved August 23, 2016 from file:///C:/Users/Abasus%20Solution/Downloads/Blackmores%20Annual%20Report%202013.pdf