Background information
Formerly McGuigan Simeon Wines, Australian Vintage Limited is a leading producer of bulk and bottled wine. The company’s head offices are located at 275 Sir Donald Bradman Drive Cowandilla, Adelaide. However, it also operates a number of offices in various cities and regions such as Sydney, Barossa Valley, Hunter Valley and London, UK. It changed its name in 2008 after a decision by majority stakeholders (Vintage Limited 2012). Currently, the company has extended its business from traditional wine to cover other ventures such as a vineyard, bulk and boutique wine production. It is also involved in the packaging, marketing and distribution of its products in Australia. In Australia, the company accounts for about 10% of the total wine production every year. Some of the leading brands include McGuigan Wines, Nepenthe, Tempus Two, Yaldara, Miranda and Passion Pop. Apart from Australia, Vintage has also been exporting its products to Europe and Canada. In fact, McGuigan Brand is the eighth largest brand in the UK market and has an annual growth of about 15% (Vintage Limited 2012). In addition, the company has embarked on a marketing strategy that emphasizes on the distribution of its products in new and emerging markets such as China and other countries in South East Asia. In addition, the strategy has seen the company increase its presence in Europe and Canada.
The name of the Auditor. Give both the partner’s name and the name of the firm
In line with the Corporations Act 2001, Australian Vintage Limited has entered into a contract with Deloitte Touche Tohmatsu (Deloitte) that allows Deloitte to provide external auditing services to Vintage (Vintage Limited 2012).
Purpose statement
The purpose of this paper is to provide an in-depth company analysis for Australian Vintage. The paper will derive information from the company’s annual report for the financial year ended 30 June 2012. Areas of interest include the company’s profit and loss account and profit ratios.
Analysis of annual report for the year ended 30 June 2012
According to the 2012 annual report prepared and published by the company’s board of directors, Vintage Limited’s cost of sales for the year was $165,633,000, an increase by 3.66% from $159,780,000 recorded in the previous financial year. With a revenue of $227,962,000, the company’s gross profit for the year was $62,329,000. However, the gross profit recorded in the year experienced a decrease from $63,437,000 recorded in the previous year. The cost of inventory was recognized as an expense (cost of sales) in the company’s current inventories and recorded as $165.6 million in respect of continuing operations.
In 2012 financial year, the company’s profit before income tax amounted to 8,938,000. In the previous year, the company had recorded a pre-tax income worth 6,649, 000. This shows that the company’s profitability was increasing per year. For instance, the difference between the two values recorded was $2,289,000, which is an increase by 34% per annum. Noteworthy, this increase is significantly high and can be used to show evidence of the company’s profitability and financial health. In addition, it is an indication that the company’s initiatives, especially in terms of aggressive marketing policies both in Australia and abroad, are bearing fruits. For instance, the company’s distribution expenses increased from 11,456 million in 2011 to 12,269 in 2012, while sales and marketing expenses increased from 21,658 million to 22,349 million during the same period. This is an indication that the company has increased its efforts to reach out to additional markets, increase its products distributed to these markets and thus, improve its value of sales. As such, the aggressive marketing initiative can partly be used to explain why the company recorded a high rate of increase in its profit before tax within one year. In addition, it is worth noting that Vintage increased its gain on sales and other property, plants and equipment in the year. In fact, in 2011, the company had made a loss on sales and property, plant and equipment worth $173 million, but within one year, it recorded a gain of $218 million. This is also another reason that partly explains the company’s increase in profits before tax for the year ended 30 June 2012.
In line with the corporations Act 2011, Australian Vintage Limited submitted the report and paid an income tax worth $1,871 million to the national government. This was recorded as the income tax expense for the year. The amount of income tax expense also increased significantly from 85 million in the previous year to 1,871 million in 2012.
The company accounting policy requires the net accounts receivables include a number of receivable items for the year. For instance, in 2012, the company had its current tax assets and other tax receivables treated as current assets and liabilities. This value increased from 12 million in 2011 to 200 million in 2012. In addition, current trade and other receivables changed significantly during the year. For instance, trade receivables decreased from 41,666 million in 2011 to 39,573 million 2012. Other current trade receivables decreased from 2,580 million in 2011 to 88 million in 2012. This is an indication that the company had focused on reducing its current trade receivables, including loans in order to concentrate on other sources of funding. The company embarked on a strategy to reduce the amounts it owe other parties within the year as it focused on aggressive trade. It is also clear that the company’s policy did not charge any interest on outside trade receivables during the year. It also reports that the trade receivables had a balance of 24.4 million resulting from international supermarket groups and two other wine entities. These are the company’s customers who recently entered into a contract with Vintage. For instance, the international supermarket groups are located in Australia and Europe and are some of the company’s major outlets in these regions. In fact, these are the only customers who represent more than 5% of the total balance of trade receivables for the year. In addition, the Net Trade receivables include debtors balance that have a carrying amount of 1.6 million. This amount is past due at the date of reporting for the Group.
It is also worth noting that the company’s trade receivables is determined by considering any change in the credit quality of its trade receivable from the date in which the credit was granted for the first time to the date of reporting. In this way, the company’s executives reported that the company did not have further credit provision needed to deal with doubtable debts.
To deal with bad and doubtful debts, the company provides an allowance for these amounts as a part of current trade and other receivables. This allowance is subtracted from total trade receivables at the end of the fiscal year. For instance, in the year ended 30 June 2012, the value of bad and doubtful debts was 303 million. To settle this issue, this amount was subtracted from the trade receivables worth 39,573. Therefore, the new value of trade receivables was 39,270 million after the subtraction of the allowance of doubtful and bad debts. In the previous year, the allowance for doubtful and bad debts was 410 million, which means that the company’s allowance for bad and doubtful debts was reducing.
The policy also shows how the allowance for bad and doubtful debts is calculated. In this case, the company includes ageing of past due but not impaired in different categories ranging from 30 to 120 days. The balance of doubtful debts at the beginning of the fiscal year is determined. From this balance, the value of impairment reversals recognised as receivables as well as amounts written off as not collectable are subtracted. The total after this calculation is recognized as the allowance of bad and doubtful debts for the year.
The consolidated report further provides a list of the company’s property, plant and equipment as well as their depreciation values. First, vineyard improvements have been recorded as the company’s property and plant. The value of improvement for the year was 8,698 million, which was a decrease from 9318 million recorded in the previous year. In addition, freehold land, buildings, plant, and equipment under lease are included in the list. The value of freehold land was 13,726 at the end of 2012 fiscal year. Comparing this value to the previous year provides some evidence that the company did not obtain or dispose its freehold land because the value remained constant. This also applies to plants and equipment under lease because the report shows that this value did not change, but remained constant at 12,192 million within the two fiscal years. On the other hand, the value of buildings increased from 16,763 million in 2011 to 17,346 million in 2012. This is an indication that the company was improving its vineyard by improving or increasing its buildings. Thus, the total property plant and equipment for the year was 95,613 million, which was a decrease because Vinetage had 97,148 million worth of plant, property and equipment by the end of 2011 fiscal year.
These figures provide an insight into the performance of the company. For instance, it is evident that the company considers disposals, depreciations and transfers as important aspects when determining the value of property, plant and equipment at the end of a fiscal year. To show this is a report, the company includes a process of reconciliation in which it deals with all these items. In 2012, vineyard improvements experienced an additional of 78 million but there was no disposal. The asset depreciated by 698 million during the year. Freehold land owned by the company was not disposed or added, which means that only items appearing under freehold land reconciliation is depreciation. The company added buildings worth 583 million during the year. The buildings, however, depreciated by 375 million during the year. None of the buildings was disposed.
The company has also leased some of its plant and equipment. This set of assets is subject to depreciation. During the financial year, the value of leased plant and equipment amounts to 12,101 million, but depreciated by 366 million so that the new value is 11,735 million.
Initially, plant, equipment and property are measured at cost value. The value of cost must include expenditure that is directly attributed to the process of acquiring any item listed under this category.
The policy of depreciation adopted at the company is provided in the annual report. In 2012, the report shows that depreciation is provided on a number of assets such as property, equipment, plant and freehold buildings. However, land is not included. The company has adopted a straight-line process of depreciation for these assets, which is used to write off the net cost over the useful life expected for every asset. The estimated residual value is used in this method. The estimated useful life, residual value and depreciation method for all the assets are reviewed at the end of the fiscal year with the effect of all the changes in the estimates considered based on a prospective basis. In addition, depreciation for vineyard improvements is calculated using the lease period or estimated useful life and the straight-line method. For vineyard improvements, the estimated life, residual values as well as depreciation are calculated at the end of the reporting period, with the effect of all changes considered using a prospective basis. It is also worth noting that depreciation for production, wineries and some types of vineyards is normally capitalised into the inventory.
The company also accounts for depreciation of assets held under financial lease. A straight-line method is used to determine the depreciated value for these assets. The assets are depreciated over their anticipated useful lives or the term of relevant lease. This is the profit or loss on disposal or retirement of the item. Vintage Limited recognizes 50 years as the estimated useful life of all buildings. Vineyard improvements have a useful life of 15 t0 20 years, while plant and equipment are expected to last for 5 to 33 years depending on their nature. In addition, the useful life of plant and equipment under lease is between 5 and 15 years.
The company does not have many long-term liabilities. The report shows that non-current borrowings exist as long-term liabilities. In this case, non-current borrowings include secured at amortised cost and commercial bills. In 2012, the value of these liabilities was 122,000 after it decreased from 157,000 million in the previous year. Other liabilities include interest rate swap, which stood at 751 million in 2012.
In 2012, the company was not aware of any type of material contingent liability at the date of making the annual report.
The value of issued capital at the end of the 2012 fiscal year amounts to 402, 792 million and is part of the company’s equity. It increased by a significantly small margin from the 401,831 million reported in the previous year. Accumulated losses are also subtracted from the value of issued capital. In 2012, the value of accumulated losses subtracted from issued capital was 196,189 million, which had increased from 190,591 million recorded in the previous year. Issued capital includes fully paid ordinary shares amounting to 402,792 million.
Ratio analysis
Ratio analysis is a technique used an evaluation of the relationships among a number of items in corporations’ financial statements. These rations are important in the identification of growth trends for a company and in comparing a company’s performance from year to year or between one company and another. In accounts, financial statement ratio analysis emphasizes on three major aspects of an organization: profitability, liquidity and solvency.
In this case, we analyze the financial ratios for Vintage Limited for two consecutive years 2011 and 2012 in order to determine the company’s growth trends and predict its future performances.
Liquidity ratio for Vintage Limited
Current ratio is the ratio of current liabilities and current assets, and is used to measure the ability of the company to meet its current obligations using its current assets. In 2012, Vintage Limited’s total current assets stood at 51.09 compared to 51.56 in the previous year. Within the same financial period, the company’s current liabilities stood at 28.20 for the financial year 2011 and 26.89 for the financial year 2012. Therefore, by simple calculation, the company’s current ratios for the two financial periods are 1.83 and 1.90 respectively. This is an indication that the company is financially healthy because its ability to meet its current liabilities with its current assets is improving (Cottle Murray & Block 2008). In addition, it is an indication that the company is recovering from the recent decline it was facing due to the economic crisis in most countries it has its outlets.
Quick Ratio is the ratio of quick assets to current liabilities. In this case, quick assets include items such as cash, securities and accounts receivable, which can quickly be turned into cash that is easily accessible for the company (Arnold 2007). For the financial year 2011, Vintage Limited had a quick ratio of 1.17, but this dropped significantly by 0.03 to 1.14 in the financial year 2012.
In addition, the company’s financial advantage decreased from 1.68 in 2011 to 1.61 in 2012, while its debt to equity ration decreased from 0.13 to 0.11 in the same period.
Analysis of the financial health and structure for Vintage Limited
From this analysis, it is worth noting that Vintage is slowly recovering from its decline in the previous years, which had affected its profitability. For instance, the ability of the company’s financial advantage to remain unchanged between the two financial periods indicates that it has employed solid strategies for recovery. In addition, the debt to equity ratio remained strong for the two periods, which indicates that the company’s debt is recoverable with the current assets in form of equities. Despite this, the decrease in the company’s financial health between 2011 and 2012 must be used as a signal to warn the management of a possible decline in the company’s performance in the future.
Vintage’ financial health is excellent as shown by its performance in the last two financial years. The company’s ability to meet its debts and equity from its annual revenue is relatively high. The company’s debt to equity ratio remained significantly constant in the financial years 2011 and 2012, decreasing slightly by a small margin from 0.15 in 2010 to 0.11 in 2012. This is an indication that the company is aggressive in financing its growth over the years, with a significant amount of debt used to finance its shareholders’ equity. However, it is advisable that the company avoid being over aggressive in financing its operations by increasing the debt equity as this would result in a situation where the results are volatile due to increase in the interest expense rates. It is advisable that the company maintain a relatively constant debt to equity ratio in order to ensure that it effectively spreads the equity among the shareholders.
Vintages Corporation applies the Matrix organizational structure to manage the large organization, its thousands of employees and the large number of outlets it has made in more a number of nations in Europe and Asia-Pacific. Theoretically, the Matrix organizational structure combines both the functional and product based divisions. The company allows store managers to make their own decisions within the stores they manage, but they have to report to the company’s executives at in Adelaide. In addition, employees are allowed to report to their store managers, but are normally encouraged and empowered to make their own decisions based on the skills they are provided in their tenure at the company.
As a corporation Vintages has the responsibility of meeting the debtors and shareholder’s expectations. It has the liability to allocate funds from its cash flows to the creditors and at the same time, allocate the shareholders equity (Davis 2008). As such, the company employs a capital structure in which it includes the allocation of both the shareholders equity and the creditors due on its annual balance sheet. The debt to equity ratio is determined at the end of the balance sheet, and is used as one of the measures of the company’s financial health.
By using the capital structure, Vintages has the advantage of allowing its executives to make major decisions and control the company on behalf of the shareholders. In contrast to other structures such as equity financing, the managers at Vintages have the capacity to make key strategic decisions and to keep and reinvent profits for the company. In addition, the executives have a higher degree of financing freedom, where obligations for debts are limited only to the period for loan repayment, after which the creditors have no further claim on the corporation. This structure is important in ensuring that the company operate as a corporation, where managers have the right and freedom to make decisions free from the interference by stakeholders as well as creditors.
References
Arnold, G, 2007, Essentials of corporate financial management, London: Pearson Education, Ltd.
Cottle, S, Murray, R & Block, 2008, Graham and Dodd’s Security Analysis, New York: McGraw-Hill.
Davis, HA, 2008, Building Value with Capital-Structure Strategies, Morristown, NJ: Financial Executives Research Foundation Vintage Limited, 2012, Annual Report, Adelaide: Vintage.