Background
The company selected for the annual report analysis is Bega Cheese Limited. Bega Cheese Limited has its principal registered office located at 23-45 Ridge Street, Bega NSW 2550 (2013 Annual Report Bega Cheese Limited 2014, p.84).
The company is operating in the dairy industry. It started its journey as The Bega operative Creamery Company in the year 1989. It manufactures cheddar cheese and processed cheddar (Bega Cheese Ltd 2014). The company’s major sales are located in Australia. Currently, it is selling more than 60 million packs per year. Its major exports are directed at Asia-Pacific and Middle East countries. The company is a public listed one and its common shares are listed on the ASX. Barry Irvin is the Executive Chairman, and he is also a member of the nominations and human resources committee. The company’s board of directors has 7 directors. The Chief Executive Officer of the company is Aidan Coleman who was appointed to the position in May 2011. The company has established strong corporate governance policies and practices to ensure that all risks can be managed efficiently. The company’s financial year-end is on 30 June. The company prepares financial statements on a consolidated basis. Bega Cheese Limited has a number of subsidiaries that support its core business.
The company’s mission statement states, “Bega Cheese – working together to deliver dairy products to the world” (Investors 2014, para 1). Moreover, the company’s vision is “to be an Australian dairy industry icon; valuing our heritage, people, customers and community. Embracing challenge. Driving change, building for the future” (Investors 2014, para 2).
The company’s products are sold through retailers and distributors across Australia. Its exports reached the mark of $100 million in the last year. The company has installed the latest automation and mechanization technologies at its factory to reduce human involvement in the production process. It has a strong distribution network that ensures the availability of its products in stores. The company has also made arrangements with Fonterra Brands for branding and distribution of its products (2013 Annual Report Bega Cheese Limited 2014, p.6).
The company has nine different brands of cheddar cheese and processed cheddar cheese. All ingredients of its products are acquired from suppliers based in Australia. The company has its own research and development center that is engaged in formulating new products for the domestic Australian market. The company ensures that its products are healthy and safe for consumption. Its manufacturing takes into consideration the tastes of different regions where it sells its products (Student Resources 2014, para 7).
The company has high levels of quality assurance. It ensures that food safety standards are fully complied with at its factory. Its factory has been graded as a “pharmaceutical” grade as a result of its strict compliance with food safety standards and HACCP quality assurance program (Student Resources 2014, para 9). The company also ensures that product contamination complaints are traced to the point where the contamination took place and steps are taken by the company to remove all problems. Furthermore, the company recalls its products from distributors and retailers if any complaint has been made.
The company has implemented a CRM system to collect consumers’ views and information related to market trends. The company acts as a socially responsible entity and contributes to the development of communities that are affected by its business (2013 Annual Report Bega Cheese Limited 2014, p.5).
The company has a staff of more than 700 employees. It is considered as the largest employer in New South Wales, Australia (Student Resources 2014, para 17).
The company’s auditor is PricewaterhouseCoopers. The audit firm has its office located at Darling Park Tower 2, 201 Sussex Street, Sydney NSW 1171 (2013 Annual Report Bega Cheese Limited 2014, p.84). The name of the audit firm’s partner is PJ Carney (2013 Annual Report Bega Cheese Limited 2014, p.81). The auditor’s opinion was provided in the independent auditor’s report included in the annual provided. It states
“the financial report of Bega Cheese Limited is in accordance with the Corporations Act 2001, including:
giving a true and fair view of the consolidated entity’s financial position as at 30 June 2013 and of its performance for the year ended on that date; and
complying with Australian accounting standards (including the Australian accounting interpretations) and the Corporations Regulations 2001; and
the financial report and notes also comply with International Financial Reporting Standards as disclosed in Note 1” (2013 Annual Report Bega Cheese Limited 2014, p.81).
Financial Information
- The company’s cost of sales in the year ending June 30, 2013, was $874,961,000 as compared to $817,545,000 in the year ending June 30, 2012 (2013 Annual Report Bega Cheese Limited 2014, p.34). It could be indicated that there was an increase of 7.02% in the company’s cost of sales in 2013.
- The company’s profit before income tax was $35,349,000 in the year ending June 30, 2013, as compared to $27,079,000 in the year ending June 30, 2012 (2013 Annual Report Bega Cheese Limited 2014, p.34). On the basis of this comparison, it could be indicated that there was an increase of 3.05% in the company’s profit before income tax. The increase in profit before income tax was mainly due to an increase in the company’s sales. Moreover, the company reduced its finance costs in 2013 as compared to 2012 which contributed positively to the company’s profit before income tax.
- The company incurred an income tax expense of $9,904,000 in the year ending June 30, 2013. In the year ending June 30, 2012, the company incurred an income tax expense of $6,650,000. There was a significant increase of 48.9% in the amount of income tax expense paid in 2013 due to a reduction in a deferred tax benefit and adjustments related to a current tax of prior years (Note 7) (2013 Annual Report Bega Cheese Limited 2014, p.58).
- The company recorded trade and other receivables of $104,303,000 as of June 30, 2013, as compared to $95,767,000 as of June 30, 2012. It could be indicated that there was an increase of 8.91% in 2013. The company allowed an average of 30 days of credit to its customers. It does not charge any interest on overdue amounts. However, it charges interest of 6% on vat loans provided to suppliers for purchasing on-farm milk storage tanks as per Note 8 (2013 Annual Report Bega Cheese Limited 2014, p.60). The amounts of each item of trade and other receivables for 2012 and 2013 are given in the following table.
Source: Note 8 (2013 Annual Report Bega Cheese Limited 2014, p.60).
The table given above highlights that the amount of trade and other receivables reported in the consolidated balance sheet mainly constituted of trade receivables in both years. The table also indicates that the company provided advances to its suppliers for sustainable business operations.
- The company provided a provision of bad debts (unrecoverable amount of trade receivables). To estimate unrecoverable amounts, the company reviewed debtors that were outside their trading terms (Note 8) (2013 Annual Report Bega Cheese Limited 2014, p.60). The company recorded a write-back of bad and doubtful debts in the year ending June 30, 2013. The amount of this write back was $2,000. However, in the year ending June 30, 2013, the company recorded an increase of $20,000 in bad and doubtful debts (Note 6) (2013 Annual Report Bega Cheese Limited 2014, p.57).
- The netbook value of property, plant and equipment as of June 30, 2013, was $209,892,000. Moreover, it was $204,596,000 as of June 30, 2012 (2013 Annual Report Bega Cheese Limited 2014, p.35). It could be indicated that there was an increase of 2.59% in 2013. The following table provides book value and accumulated depreciation of each item of property, plant and equipment.
Source: Note 12 (2013 Annual Report Bega Cheese Limited 2014, p.61).
The company recorded its property, plant and equipment at their historical cost less accumulated depreciation. The company did not depreciate land. All other items of property, plant and equipment were depreciated using the straight-line method by allocating “cost or revalued amounts, net of their residual values, over their estimated useful lives” (2013 Annual Report Bega Cheese Limited 2014, p.43). The company reviews residual values and useful lives of each item of property, plant and equipment on an annual basis. In the case of the recoverable amount of any item is less than its carrying value, the company immediately writes down its carrying value to the recoverable amount (2013 Annual Report Bega Cheese Limited 2014, p.43).
- The company’s long-term liabilities were $112,498,000 as of June 30, 2013. Similarly, they were $104,206,000 as of June 30, 2012. It indicated an increase of 7.95% in 2013. The breakdown of the company’s total liabilities is provided in the following table.
Source: Note 18, Note 19, Note 20 (2013 Annual Report Bega Cheese Limited 2014, p.64).
- There were no contingent liabilities of the parent company (Note 33) (2013 Annual Report Bega Cheese Limited 2014, p.77).
- The company’s capital and reserves attributable to owners of Bega Cheese Limited included contributed equity of $101,902,000 as of June 30, 2013 (2013 Annual Report Bega Cheese Limited 2014, p.35). The contributed equity is comprised of ordinary shares fully paid (Note 21a). In 2013, the company issued shares under the employee share scheme and dividend reinvestment plan, which added $623,000 to its contributed equity (2013 Annual Report Bega Cheese Limited 2014, p.65). In total, the company had 151,866,000 ordinary shares on the issue on 30 June 2013 (2013 Annual Report Bega Cheese Limited 2014, p.66).
Financial Ratios Analysis
In this section, the liquidity position of the company is evaluated on the basis of consolidated figures reported by the company for the last two years.
The current ratio is a measure of a company’s short-term liquidity position. Lenders of a company may be interested in the value of this ratio for evaluating its ability to meet current interest obligations (Bragg, 2002). It is calculated by dividing a company’s current assets book value by the book value of its current liabilities. From the table provided above, it can be noted that the company’s current ratio improved from 1.60 in 2012 to 1.65 in 2013. As the value of the current ratio was greater than one in both years, it could be inferred that the company was unlikely to face any major issues in the short term to meet its debt obligations. The change in the ratio value was due to a significant increase in the company’s current assets. The cash and cash equivalents and trade receivables improved in the last year due to an increase in the company’s revenues and cash flow from operating activities.
However, the current asset value used for calculating the current ratio included the value of closing inventory (2013: $163,277,000; 2012: $ 162,669,000) (2013 Annual Report Bega Cheese Limited 2014, p.35), which is considered a less liquid asset. A company cannot sell its inventories immediately to pay its interest or principal obligations. Therefore, the quick ratio is considered appropriate for evaluating a company’s liquidity position. The values obtained for this ratio were 0.73 and 0.62 in 2013 and 2012 respectively. The difference between values of the current ratio and quick ratio indicated that the company held large inventories in both years. The company’s inventory largely constituted of perishable items including raw material and finished goods (Note 10) (2013 Annual Report Bega Cheese Limited 2014, p.60). The company faced major risks related to its inventory. It could incur heavy losses resulting from quick expiration or contamination of its inventory. From Note 6 of the company’s annual report, it could be noted that the company incurred significant expenses related to an increase in inventory provisions. The increase was recorded at $2,020,000 and $2,240,000 in 2012 and 2013 respectively (2013 Annual Report Bega Cheese Limited 2014, p.60). The company must take steps to reduce its inventory level, which could further improve its current cash position. Also, the company must regularly review its food safety equipment and processes to ensure that its stock is not wasted.
The accounts receivables turnover ratio helps stakeholders to evaluate a company’s ability to convert its sales into cash. It is a common practice for companies to sell more on credit to their customers in order to boost their sales. However, this strategy could become a major problem for any business if debtors fail to repay their amounts (Bragg, 2002). In the case of Bega Cheese Ltd., it could be noted that revenues and trade and other receivables increased in the last year (2013 Annual Report Bega Cheese Limited 2014, p.57). It could be considered as a positive sign of business improvement by shareholders, but it could create problems for the company that aimed to expand its production and storage facilities. Money stuck in credit sales required the company to record high provisions for bad debts. The values of accounts receivables turnover ratio obtained were 9.68 and 9.74 in 2013 and 2012 respectively. The decline in the ratio value implied that, in 2013, the company took more time to realize cash for its trade receivables. From the table above, it could be indicated that the company was taking 37 days on average to receive cash from its debtors. Keeping in view, the company’s stated policy of allowing 30 days credit to its customers, a longer receivables period implied that the company lost time value on its sales as the company did not charge any interest on overdue amounts.
The inventory turnover ratio is a measure of the company’s ability to convert its inventory into sales. High inventory turnover is considered a positive sign by shareholders as they expect the company to generate more revenues and earnings from its sales (Bragg, 2002). The values obtained for inventory turnover ratio were 5.36 and 5.03 in 2013 and 2012 respectively. It suggested weak inventory management by the company. The company was slow in converting its inventory into sales. The slow movement was due to the company holding a large volume of mature cheddar cheese in its stock. This stock was mainly held to meet the requirements of the company’s major customer i.e. Coles supermarkets (2013 Annual Report Bega Cheese Limited 2014, p.57). Low inventory turnover also suggested that the company was taking a longer period to convert its inventory into sales. In 2012, the company took more than 72 days to convert its inventory into sales whereas, in 2013, it took more than 68 days. By considering the values of accounts receivables turnover and inventory turnover, it could be stated that the company faced operational inefficiencies.
Another key financial ratio that assists in evaluating the operational efficiency of a company is payables turnover. A company should pay its suppliers within the shortest time frame to improve its relationship with them and also, to receive better prices for inputs (Bragg, 2002). In the case of Bega Cheese Ltd., the payables’ turnover ratio indicated a weakness of the company in terms of delays in suppliers’ payments. The values of payables’ turnover were 6.04 and 6.27 in 2013 and 2012 respectively. The decline in the ratio value was recorded mainly due to a significant increase in the company’s sales and trade payables (Note 14) (2013 Annual Report Bega Cheese Limited 2014, p.63). The company received a 30-day credit from its suppliers. However, from the ratio analysis, it could be noted that the company required much more time to pay its suppliers. It took almost 60 days in 2013 and 58 days in 2012 to pay its suppliers. It suggested a major operational inefficiency that could affect the company’s business.
In order to conclude the annual report analysis of Bega Cheese Ltd., it could be stated that the company has a strong position in its markets and it is making the right strategic choices to expand internationally. However, there are certain weaknesses highlighted on the basis of the financial analysis carried out in this report. Firstly, the company had borrowed aggressively from lenders. The company’s long-term liabilities had increased in the last year, which could become an issue for the company in the case of any disruptions in business operations or failure in any of its current markets. Secondly, the company held a large number of inventories and trade receivables that could hinder its ability to expand its business operations. In particular, large inventory held by the company affected its liquidity position determined by the quick ratio. Thirdly, the company was slow in paying its suppliers. In order to increase exports, the company is recommended to take initiatives that could help it improve its operational efficiency and liquidity position. The company can charge interest on overdue debtors’ amounts to improve its cash position.
List of References
2013 Annual Report Bega Cheese Limited 2014, Web.
Bega Cheese Ltd 2014, Web.
Bragg, SM 2002, Accounting reference desktop, John Wiley & Sons, New York.
Investors2014, Web.
Student Resources 2014, Web.