Nature and Purpose of Financial Statement Analysis
As the name states Financial Statement analysis is the process of analyzing, reviewing and evaluating the financial statements of a company.A financial statement or a financial report is a record of the financial activities of a business. It includes balance sheet, income statement, statement of retained earnings and statement of cash flows.The analysis will consist of a thorough examination of the past and current financial data of the company. Financial statement analysis will compare the financial movements of a company of one year with that of the next or previous years and helps in recognizing the patterns in revenue and profits.The analysis are used by investors, shareholders executives, employees, creditors such as banks or other vendors, and any other person or institution that needs to know the financial position and the operational efficiency of a company. Some of the common methods used for financial statement analysis are trend analysis, and ratio analysis. Stickney, C., Brown, P., & Press, D. (1993) argues the current financial position of the firm can be assessed using financial statement analysis. We can estimate the types of assets owned by the company or firm and also the different liabilities due against them.A financial statement analysis is capable of yielding enough information which can be used by the management to project revenues and profits of the company for three to five years. These assessment and estimations are needed for decision making process. By evaluating the past and current financial statements we can estimate up to a certain level the future risks and potentials of a company. One of the most important purposes of analyzing financial statements are to drive clear of any risks which may come associated with making an investment on any business or company.Financial statement analysis also helps in predicting future profits and growth rates in earning which can be used by the creditors and investors of the company to compare alternatives and to judge the earning potential of a company and financial statement analysis will also help in predicting a bankruptcy and the probability of failure of a business of a company. Whenever a company is interested in investing in a small business, a financial analyst may be hired to analyze the risks of such business. Management wise, it helps to estimate how efficiently the operations of the company are carried out. Financial statement analysis compares the actual performance of the company with the standard performance which was set earlierto know the deviation (if any) to evaluate the efficiency of the company. The analysis can help a company to plan in advance for its equipment and material requirements and also helps take the initiative as and when it is needed. In general a financial statement analysis can give quality information regarding trends and relationships of a company. The quality of earnings by a company can be assessed. The weaknesses and strength of its financial position can also be summarized. Therefore a financial statement analysis can be viewed as a tool in achieving the goals and objectives of the company.
Stakeholders
Stakeholder is a person or a group affected by a business decision. There are two types of stakeholders. Internal and External. Internal stakeholders are employees, Business owners and management. External stakeholders includes government, debt holders and suppliers.
Shareholders: The most important stakeholders in any business is its shareholders. They worry a lot about a company financial performance than other stakeholders. Their focus is mainly on growth prospects and Earnings per share. Though dividend is the original return, they care less about it. They have two things in mind while analyzing a financial statement. They are how well their investment performed and scope for investing more. The earnings per share for 2014 is 43.44 cents. It’s two times higher than the previous financial year. So shareholders made good profit last year. They may still be interested in investing more or exit the holdings after cashing in on the profit
Brokerages and Investment banks: Investment banks and brokerage firms always try to find good investment opportunities. So they go through a financial statement inch by inch and see whether the firm will generate profit in the future or not. The information will be shared with their clients.
ASX: Security Exchange boards always look into the annual reports of a company to see if there is any violations. ASX will oversee the auditor’s report to confirm there is no violations. And It’s must to mention an auditors responsibility in an annual report
Descriptive Review
Australian market ASX 200 generated 36% return over the last 3 years .But Bega Cheese generated 168% since the inception. It outperformed its benchmark index by 4 times. The peers of Bega Cheese is Australian Agriculture co (AAC), Freedom Foods Group (FFG) and Warrnambool Cheese & Butter Factory. Freedom foods group is at top with 800% increase in share prices over past 3 years and Warrnambool Cheese & Butter Factory gained 85% over past 3 years. The current P/E ratio of Bega Cheese is at 21.6 it’s comparatively higher than both the market and industry. The market P/E is at 14.7 and the industry P/E is at 15.9. The P/E is growing at 10% per year for Bega cheese. Which is higher than industry (2.83%) and Market (1.1%). But the Price to Sales ratio is at .68%for berg Cheese which is way lesser than the market (2.8%) and industrial average (1.1%). Comparing the return on shares. The Price to book ratio is at 2.33 for Bega. It’s higher than market and sector. And the earnings is at .21 which is lesser than market average (.91) and Industrial average (.59). So it’s obvious that Bega Cheese share is overpriced and very likely to underperform in the upcoming days. It’s time to clear out the stocks from our portfolio and take short positions on this stock.
Review of Firm’s Financial Performance
Bega Cheese ltd. became a publically listed company in 28th August 2011.On the initial year their performance was subpar. But the firm posted stunning numbers in 2013 annual statements. In fact it made shareholders happy by paying the dividend payout ratio of 60% which is almost twice up from the previous year. But in 2014 their earnings fell short of expectations. Their revenue growth fell from 9% CAGR to 6%. Their cost of goods sold is increasing which is another negative factor. On the positive side The Asset turnover is improving along with the return on assets. Most importantly the EPS is expanding exponentially. Which is a good news from the perspective of investor. But from our previous analysis and backed by analyst’s prediction we can say that the share price is expected to see an adjustment in the near future. Analysts predict the Bega Cheese will go through a rough patch for at least next two years. One of the major limitations of this project is we only have access to last 3 year data. Though the company is over 100 years old. So it’s really hard to spot a trend.
References
Australian Industry Report 2014
Cornell, B., & Shapiro, A. C. (1987). Corporate stakeholders and corporate finance. Financial management, 5-14.
Lindblom, A., &Ohlsson, J. (2011). STAKEHOLDERS’INFLUENCE ON THE ENVIRONMENTAL STRATEGY OF THE FIRM: A Study of the Swedish Energy Intensive Industry.
Penman, S. H., & Penman, S. H. (2007). Financial statement analysis and security valuation (p. 476). New York: McGraw-Hill.
RE, F. R. R., & Reed, D. L. (1983). Stockholders and stakeholders: A new perspective in corporate governance. California management review, 25, 88-106.
Stickney, C., Brown, P., & Press, D. (1993). FINANCIAL STATEMENT ANALYSIS.
White, G. I., Sondhi, A. C., Fried, D., & Aiello, E. (2003). The analysis and use of financial statements.
Appendix
Auditors Report: Page no. 31 on the Annual report of berg Cheese.
Auditors Responsibility: Page 78-79 on the Annual report of berg Cheese.
Income statement
| Income Statement | 2012 | 2013 | 2014 |
| Revenue | 9,32,911 | 10,10,086 | 10,69,392 |
| Cost of sales | -8,17,545 | -8,74,961 | -9,51,117 |
| gross profit | 1,15,366 | 1,35,125 | 1,18,275 |
| Other income | 9,141 | 8,660 | 67,907 |
| distribution expense | -36,192 | -44,255 | -42,455 |
| marketing expense | -6,948 | -9,733 | -6,129 |
| Occupancy expense | -2,790 | -2,552 | -3,295 |
| administration expense | -42,294 | -43,449 | -43,679 |
| Finance costs | -9,204 | -8,447 | -6,392 |
| profit before income tax | 27,079 | 35,349 | 24,946 |
| income tax expense | -6,650 | -9,904 | -27,525 |
| profit for the year | 20,429 | 25,445 | 66,055 |
| Other comprehensive | |||
| items that may be reclassified to profit or loss | |||
| Cash flow hedges | -1,042 | -2,868 | 3,413 |
| Change in the fair value of other financial assets | -6,860 | 3,289 | -6,901 |
| total other comprehensive income | -7,902 | 421 | -3,488 |
| total comprehensive income for the year | 12,527 | 25,866 | 62,567 |
| Profit is attributable to: | |||
| equity holders of Bega Cheese Limited | 17,534 | 25,445 | 66,055 |
| Non-controlling interests – | 2,895 | 62,567 | |
| Total | 20,429 | 25,445 | 66,055 |
| total comprehensive income for the year is attributable to: | 62,567 | ||
| equity holders of Bega Cheese Limited | 9,794 | 25,866 | |
| Non-controlling interests – | 2,733 | ||
| Total | 12,527 | 25,866 | |
| 2012 | 2013 | 2014 (In Cents) | |
| EPS | 12.81 | 16.77 | 43.44 |
| Diluted EPS | 12.77 | 16.68 | 43.23 |
| P/E | 13.1 | 16.0 | 12.3 |
Balance Sheet
| ASSETS | |||
| Current assets | 2012 | 2013 | 2014 |
| Cash and cash equivalents | 24,235 | 22,698 | 28,630 |
| Trade and other receivables | 1,04,303 | 1,03,476 | 1,06,660 |
| Derivative financial instruments | – | – | 2,084 |
| Inventories | 1,63,277 | 1,63,027 | 1,84,167 |
| Total current assets | 2,91,815 | 2,89,201 | 3,21,541 |
| Non-current assets | |||
| Other financial assets | 39,028 | 39,028 | – |
| Property, plant and equipment | 2,09,892 | 2,09,123 | 2,13,567 |
| Deferred tax assets | 9,157 | 9,157 | 10,907 |
| Intangible assets | 1,580 | 1,580 | 1,481 |
| Investments accounted for using the equity method | 1,132 | 1,141 | |
| Total non-current assets | 2,59,657 | 2,60,020 | 2,27,096 |
| Total assets | 5,51,472 | 5,49,221 | 5,48,637 |
| LIABILITIES | |||
| Current liabilities | |||
| Trade and other payables | 1,44,940 | 1,42,689 | 1,64,152 |
| Derivative financial instruments | 15 601 | 7,191 | 15 232 |
| Borrowings | 7,191 | 601 | 588 |
| Current tax liabilities | 1,397 | 1,397 | 22,425 |
| Provisions | 22,893 | 22,893 | 24,773 |
| Total current liabilities | 1,77,022 | 1,74,771 | 2,12,170 |
| Non-current liabilities | |||
| Borrowings | – | 1,10,300 | 20,000 |
| Provisions | 1,10,300 | 2,198 | 2,079 |
| Total non-current liabilities | 2,198 | 1,12,498 | 22,079 |
| Total liabilities | 1,12,498 | 2,87,269 | 2,34,249 |
| Net assets | 2,89,520 | 2,61,952 | 3,14,388 |
| EQUITY | 2,61,952 | ||
| Contributed equity | 1,01,902 | 1,03,642 | |
| Reserves | 1,01,902 | 25,585 | 22,390 |
| Retained earnings | 25,585 | 1,34,465 | 1,88,356 |
| Capital and reserves attributable to owners of Bega Cheese Limited | 1,34,465 | 2,61,952 | 3,14,388 |
| Total equity | 2,61,952 | 2,61,952 | 3,14,388 |
Cash flow statement
| Cash flows from operating activities | 2012 | 2013 | 2014 |
| Receipts from customers inclusive of goods and services tax | 9,45,638 | 10,40,955 | 11,02,022 |
| Payments to suppliers and employees inclusive of goods and services tax | -9,44,365 | -9,66,921 | -10,49,082 |
| interest and other costs of financing paid | -8,772 | -8,115 | -5,327 |
| income taxes paid | -3,040 | -3,933 | (7, 139) |
| Net cash inflow/(outflow) from operating activities | -10,539 | 61,986 | 40,474 |
| Cash flows from investing activities | |||
| interest received | 388 | 224 | 370 |
| dividends received | 1,250 | 1,000 | |
| Payments for property, plant and equipment | -27,569 | -27,810 | -27,923 |
| Payments for shares in listed companies | -3,813 | -3,455 | 98,906 |
| expenses on merger with tatura milk | -570 | – | -506 |
| Proceeds from sale of property, plant and equipment | 80 | 770 | 507 |
| Proceeds from sale of shares in unlisted companies | 114 | 14 | 938 |
| Net cash (outflow) from investing activities | -30,120 | -29,257 | 67,935 |
| Cash flows from financing activities | |||
| Proceeds from borrowings | 38,213 | 86,612 | |
| Repayment of borrowings | -42,078 | -87,413 | -90,313 |
| Repayment of leases | -827 | – | |
| share capital subscribed by members | 35,000 | – | |
| expenses incurred in capital raising | -2,324 | – | |
| share capital purchased back from non-controlling interests | -58 | – | |
| dividends paid to members | -3,701 | -10,619 | -12,164 |
| dividends paid to non-controlling interests | -1,227 | – | |
| Net cash (outflow)/inflow from financing activities | 22,998 | -11,420 | -1,02,477 |
| Net increase/(decrease) in cash and cash equivalents | -17,661 | 21,309 | 5,932 |
| Cash and cash equivalents at the beginning of the year | 20,587 | 2,926 | 22,698 |
| Cash and cash equivalents at the end of the year | 2,926 | 24,235 | 28,630 |
Market Comparison
| Earnings | P/E Ratio | P/B Ratio | P/E Growth | P/S Ratio | |
| BGA | 0.21 | 21.6 | 2.33 | 10.00 | 0.68 |
| Market | 0.91 | 14.7 | 1.04 | 1.10 | 2.84 |
| Sector | 0.59 | 15.2 | 1.33 | 2.82 | 1.10 |
Source:
Share Performance
Source: Yahoo Finance
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