Introduction
This report provides an analysis of the ratios found in the appendix of Blackmores Pty Ltd (‘Blackmores’) from 2013 to 2016 in order to provide a holistic view of the company’s financial position. It looks to assess Blackmore’s previous performance and how their current position is suited for moving forward. The report provides an indication that Blackmores has performed well over the 4 year period. There are positive signs for the future of Blackmores but also areas of potential financial risk which should be observed.
Raito Analysis- Operations
Return on Equity (ROE)
Return on Equity is a reliable indication of profitability and for Blackmores their ROE has, despite a slight drop in the 2012-2013 financial year (<5.6%), continued to grow. 2016 saw a 63.61% return on equity for Blackmores. This indicates that for every $1 of equity invested is providing $0.6361 of earnings is being created. To put this in perspective, any ROE which surpasses 25% is considered “superior” (Freedom Investments, 2014). These promising figures from Blackmores correlate with their increase in Return on Net Operating Assets. This ratio has, again despite 2013, continued to increase in unison with ROE. The latter of the ratios is important for Blackmores to discern how their profitability compares with those in the Vitamins and food supplements industry.
Note: the dip in ROE and RNOA during 2013-2014 was due to in part, the large amount of inventory on hand as Blackmores was expending an excessive amount on the holding of inventory. There was also the significant weakening of the Australian dollar (Blackmores Limited, 2013).
Profit Margin (PM)
Between 2014 and 2016 Blackmores PM, their ability to create profit from each $1 of revenue, has followed a similar trend to ROE and RNOA by increasing at an annualised rate of 4.2%. This has largely been shaped by continued growth of Net Operating Profit after Tax (NOPAT). NOPAT is often used to determine economic value added to a firm and will display a more precise description of Blackmores operating efficiency. The reformatted financial
2014-15.81%
2015-28.91%
2016-48.91%
2014-23.94%
2015-42.78%
2016-63.61%
Figure 2- ROE
Figure 1- RNOA
3
statements in the appendix indicate that NOPAT is trending in a very positive direction with an annualised growth of $14,338.5m over the past 5 years. These ratios indicate that Blackmores have been performing extremely well in regards to profitability. The positive curve in all drivers of profitability (see figure 3) indicates that Blackmores should continue to see growth in such areas. The main driver of this surge in performance over the last 5 years is Blackmore’s expansion into the Chinese markets, taking group sales from $260.8M in 2012 to $717.2M in 2016 (Blackmore Limited, 2017).
Figure 3 (Smart Company, 2016)
Asset Turnover Ratio (ATO)
This ratio indicates the ability of Blackmores to generate revenue for a given asset base. There has been mixed outcomes depending on the asset base, with general strong showings. However, intangible assets such as receivables can be seen to have remained stagnant between 0.17-0.19. This indicates that Blackmores is increasing its efficiency through their continued revenue growth and a reduction in Net Operating Assets in accounts such as receivables. It is evident from figure 4 that revenue has indeed been rising at a quicker rate alongside investment (capital). This has subsequently led to the rising ATO, which means that Blackmores has been using their assets more efficiently to generate sales. Figure 4 (Smart company, 2016)
Financial
Liquidity
During the period from 2013-2016, Blackmores quick, cash and current ratios have all steadily declined (see appendix). This is a possible warning for investors that Blackmores has had issues in generating enough cash flows from their operations. This indicates that restrictions on cash flow could be impeding the company’s ability to meet their financial obligations. It could also mean that there is a lack of financing options to continue future growth. Although these figures may be a caution to some, it should be noted that Blackmores continues to operate at a significant profit within a highly competitive industry.
Solvency -During the 4 year period, Blackmores has incurred substantial leverage in order to support their rapid expansion throughout Asia. Despite this, their interest coverage ratios have remained positive with an average annualised increase of 12.398 (see appendix). This is indicative of the fact that Blackmores is in a comfortable position to service its debt. This stability of comfortable leverage puts Blackmores in a positive current financial position and allows for conclusive budgeting and forecasting of debt repayments. It is also noted that Blackmores has benefited from a stable Australian economy in maintaining healthy leverage ratios (Shamshur, 2009).
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