Ratio Analysis of Blackmores Limited (BKL)

Blackmores is a public limited company that develops, markets, and sells a wide range of ordinary health goods for animals and humans. Blackmores employs about 1,000 people and has subsidiaries in Australia, Asia, and New Zealand where its head office is located in Warriewood, New South Wales (Investopedia 2010). Blackmores trades on Australian Securities Exchange (ASX) under the code BKL. The major commodities which are developed by Blackmores are vitamins, nutritional, and herbal supplements.

Ratio Analysis

A ratio analysis refers to the quantitative analysis of data collected from a firm’s financial statements. Ratios are used to examine various elements of a corporation’s financial performance such as solvency, liquidity, profitability, and efficiency (Wolpin 2014, p.11). This report, however, evaluates ratios such as NBC, FLEV, PM, RNOA, and ROE of Blackmores Company for the financial year 204 to 2018.

Discussion

Return on Equity (ROE) and Net Borrowing Cost (NBC) (Refer to figure 1)

The return on equity (ROE) is one of the profitability ratios that asses the ability of the company to generate returns from the shareholder’s expenditures (McClure 2012, p.33). In short, this ratio indicates the amount of profit gained from ordinary shareholder’s equity (Trout 2015, p.9). Notably, ROE shows the efficiency of the management by using the investor’s capital to finance operations and expand the firm. For example, Blackmores had the ROE of 19.42, 36.24%, 59.03%, 29.13%, and 38.24% for fiscal 2014 to 2018 respectively. From the analysis, it is clear that the return on investors was fluctuating up and down throughout the period. Regardless of the fluctuations, all the returns were positive indicating that investors have been making profits from their invested funds. However, it is important to note that the company stands at a high risk of producing negative returns for the investors given the fluctuations.

Most importantly, the ROE at the beginning and the end is what matters most, and it indicates whether the business is making losses or profits (Patrick 2015, p.88). Since the ROE at the end of the fifth year 2018 is 38.24 percent higher than at the begging of 2014 which as 19.42 percent, we affirm that Blackmores is a profitable organization regardless of the fluctuations. The increase in the return on equity at Blackmores could have been driven by higher leverage where the debt and equity are high (Pratt 2012, p.8). For example, the higher ROE in 2016 is much higher than other periods since the liability of the company in that respective year was $ 192,279 higher than $ 58,040, $114,998,$143,041, and $174,467 in the fiscal year 2014, 2015, 2017, and 2018 respectively. The net borrowing has been decreasing across the years signaling that the company is becoming financially independent by avoiding debts (Anderson 2014). For instance, the debt ration ratio has been declining from 14.8, 11.9, 8.67, and 5.98 percent respectively from the fiscal year 2014 to 2018. The reduction in debt ratio indicates that the company is making efforts to finance its activities from equity finance instead of loans and other forms of debt. In doing so, the level of risk, also known as financial leverage, is decreasing.

Profit Margin (PM) and Return on Operating Income (RNOA) (Refer to figure 1)

The profit margin (PM) is also referred to as return on sales, and it assesses the amount of net profit gained from every dollar of sales revenues by comparing sales to and income. The ratio indicates the profit margin percentage which is remaining after the business has paid all the expenses (Pratt 2014, p.55). PM is a critical ratio since the investors and creditors rely on it to measure the efficiency of a firm in at converting sales into profit (Pratt 2014, p.61). For instance, the creditors will finance the profitable company while the investors will also invest in the same company (Brining 2011, p.301). For example, Blackmores generated the profit margin of 0.58 0.09, 0.13, 0.08, and 0.10 for the fiscal year 2014 to 2018 respectively. The margin has been increasing across the years, and this reflects the commitment of the management at generating profit from the shareholder’s funds (Koomey 2013, p.444). Undoubtedly, Blackmores is a profitable company. For instance, the company’s profit margin has increased by a 5.78 percent for the last financial years. Moreover, the operating income has also been rising from 19.50, 32. 91, 50.27, 31.10, and 38.96 percent. Accordingly, Blackmores can attract more investors and access more credit facilities to expand its operations from creditors because of the final years they have consistently posted for the last five fiscal years.

The ROE and PM are projected to increase for the coming years as the company is expanding its Asian market to countries such as China and Mainland. The large population in China is likely to drive the sales which will result in high sales revenue. Additionally, Blackmore has introduced the online retail stores and adopted a modern supply chain network. This move will attract more sales to the company that will eventually increase the sales turnover by increasing the profitability of the firm which will increase the return on shareholder’s investment. The profits are also likely to be driven by the introduction of the new products on the market. Further, Blackmores has implemented the modern business systems which help to solve issues concerning the retailers, suppliers, ingredient, and regulators.

The Australian Medical Associated (AMA) has expressed support for the pharmacy industry. In this regard, the agency has revoked the licenses for the Pan Pharmaceutical commodities. Positively, Blackmore is not affected by this policy and the demand for their products has increased since the items of their competitors have removed from the market. Notably, the sales revenues have risen dramatically and therefore, increasing the profit margin for the company.

Analysis of PM and ATO Ratio

The profit margin has been increasing across the period. For instance, in 2014 the profit was 5.80 percent, 9.30, 12.66, 8.0, and 10.06 percent for the financial years 2015, 2016, 2017, and 2018. Blackmores Limited has been reducing the research and development expenses and repairs and maintenance. For instance, the R&D expenses for the financial years 2014 to 2017 were $ 9,162, $ 8,972, $10,200, $ 3,892, and $ 2,035. Indeed, the company has cut down its expenses, and the resultant effect has been a steady increase in the profit margin across the last five fiscal years. Conversely, the profit has been restricted to grow by the increase in the marketing and selling expenses. For instance, the costs for the promotion and advertisement has been $ 28, 779, $ 34,779, $ 49,177, $ 51, 141, and $ 59,229. The progressive increase in the expenses has reduced the revenue growth for Blackmores, and it reckoned the company should reduce them to increase their profit margin.

Significant Assets or Liabilities that Have Contributed to the Overall Change in Assets Efficiency

Blackmores Limited experienced higher asset efficiency for the last five fiscal years from 2014 to 2018. Notably, this progressive increase in the assets effectiveness has been driven by property, plant, and equipment. For instance, the PPE for the stated period was $ 63,613, $ 60, 735, $67, 636, $ 74, 207, and $ 76,266. Moreover, the remarkable rise in the asset usefulness has been promoted by higher receivables which stood at $ 70, 567, $ 107, 076, $ 134, 636, $ 132, 146, and $ 150, 965 for the business years 2014 to 2018 respectively. Then high asset efficiency is a signal that Blackmore is effectively utilizing its assets to generate revenues.

Cash Flow Analysis

Financial Risk and Cash Flow Management of Blackmores Limited

Liquidity Ratios (Refer to figure 2)

Acid test ratio or quick ratio and current ratio are the typical examples of liquidity ratios. They assess the ability of an organization to pay its debts as when they occur or when the long-term obligations become short – term (Mercer 2015, p.99). Moreover, they indicate the cash levels of a firm and the potential to convert assets into cash. For instance, Blackmores limited had a current ratio of 2.26, 1.63, 1.53 .1.81, 1.73 and Acid test ratio of 2.91, 1.25, 0.89, and 1.07 respectively between the fiscal year 2014 to 2017. The proportions are considered high to enable the company to meets its financial obligations. A current ratio of more than 1.5 indicates that a firm is financially healthy (Hughes 2012, p.34). These favorable results are attributed to eh lease of assets by Blackmores that increase the asset of the company hence higher income. Additionally, Blackmore has been reducing its liabilities for the last five years and has resulted in higher profitability, therefore, a higher current ratio (Campbell 2012, p.29). Ultimately, the Blackmore Company does face any risks liquidation because it has good financial stability as shown by the current rate.

Solvency Ratios (Refer to figure 3)

Solvency ratios and also known as leverage percentages. They assess the firm’s ability to maintain operations by comparing equity, earning, and assets to debt level (Hitchner 2013, p.77). Notably, the solvency rates indicate the going concern matters of the company and its capacity to settle its debts. Additionally, the solvency ratios emphasize the extended sustainability of an organization rather than making payments and meeting its financial obligations to creditors such as banks and bondholders (Dodd 2014, p.330). Exceptional rates show more financially and creditworthy sound firm in the long- term (Gaughan 2014, p.19). For example, Blackmore has an equity ratio of 45.3, 41.66, 43.40, and 41.63 percent for the last five fiscal years ranging from 2014 to 2017 and a debt ratio of 54.70, 58. 40, 56.74, and 58.5 percent the financial period s between 2014 to 2017. These ratios are considered to be average against the industry debt to equity level (Fishman 2015). Consequently, this indicates that Blackmore can sustain its operations in the long and pay its short-term debts as well. Typically, lower debt to equity rate means more financially and stable business (Fishman 2015, p.20). Correspondingly, Blackmore Company is an economically healthy company since it has a lower debt level which is manageable. Conversely, organizations with greater debt-equity percentage are termed risky for investors and creditors with a lower ratio.

Cash Flow Ratios (Refer to figure 4)

Cash flow ratios indicate the comparison of funds level to other factors of a company’s financial statement (White 2016, p.2). Therefore, a higher degree of money shows better ability to counter failures in operating productivity and the capacity to pay dividends to shareholders. These rates as significant when assessing the corporations whose cash levels diverge remarkably from their published revenues (Gretchen 2014, p.129). For instance, in the analysis of Blackmore Company, it is clear that this company had a cash flow coverage ratio of 2.86, 4.46, 3.32, 1.97, and 2.16 for the last five fiscal years starting from 2014 to 2018. The rate is computed as an operating cash flow by the debt of the firm (Damodaran 2016). The price is considered average against the industry requirement and therefore, implies that Blackmore can pay for interest and the principal amount of its debt.

Additionally, the cash flow margin for Blackmore for the last five financial years was 1.09, 1.52, 1.17, 0.66, and 0.78. From the ratio it is evident that the cash being generated by Blackmore Limited is decreasing and this could be attributed to repayment of the debts since the net borrowing of the company is also simultaneously reducing. Although the ratio is slightly lower than the industry average which 1, Blackmore is considered to be generating more cash and its meeting its debt obligations and may be affected by the risk of bankruptcy in the long – run because its current liability coverage rate is above the sector threshold since in the last five business periods the ratio as 6.22, 4.38, 3.22, and 0.78 respectively. Looking at the financial valuation, it is evident that the company’s performance has been improving over the years. The ratios on the forecasted financial statements also indicate a possibility of performance improvement in the future four years.

References

Anderson, P. 2014, ‘New Developments in business valuation’, in Gaughan P. A., Thornton R. J. (ed.) Developments in litigation economics (Contemporary Studies in Economic and Financial Analysis, Volume 87). Emerald Group Publishing Limited, Bingley, pp.267-306

Brining, A. 2011, Finance & accounting for lawyers,

BV Resources, LLC, Portland.

Campbell, R. 2012, The valuation of business interests, Canadian Institute of Chartered Accountants.

Damodaran, A .2016, Investment valuation, New York, Wiley.

Dodd, D. 2014, Security analysis, John Wiley & Sons, Inc.

Fishman, P .2015, Standards of value: Theory and applications,

John Wiley & Sons, Inc., NJ.

Gaughan, A .2014, Measuring business interruption losses, John Wiley & Sons, Inc., NJ.

Gretchen, M. 2014, Market watch market watch; A time to value words of wisdom security. Analysis by Benjamin Graham and David Dodd.

Hitchner, J .2013, Financial valuation, McGraw-Hill, New York.

Hughes, D. 2012, The Business value myth, Canopy Law Books, Hertfordshire.

Investopedia. 2010, “Financial statement analysis”, Investopedia, Retrieved 2018-07-14, https://wikivisually.com/wiki/Financial_statement_analysis

Koomey, J. 2013, Best practices for understanding quantitative data, John Wiley & Sons, Inc., NJ.

McClure, B. 2012, ”Digging into the dividend discount model”. Investopedia, https://www.investopedia.com/articles/fundamental/04/041404.asp

Mercer, C. 2015, Fair market value vs. the real world. Valuation strategies, https://mercercapital.com/article/fair-market-value-vs-the-real-world/

Patrick, L. 2015, Business economics and finance, Chapman & Hall/CRC, Boca Raton, Florida.

Pratt, S. 2014, Valuing small businesses and professional practices, 3rd ed., New York, McGraw-Hill.

Pratt, R. 2012, The analysis and appraisal of closely held companies. McGraw-Hill, New York.

Trout, R .2015, Business valuations, John Wiley & Sons, Inc., NJ.

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Wolpin, J. 2014, Valuation strategies. John Wiley & Sons, Inc., NJ.

Appendices

Appendix 1: Blackmores Reformatted Income Statement

2014

$’000

2015

$’000

2016

$’000

2017

$’000

2018

$’000

Operating revenue

Sales

346,760

471,615

717,211

692,790

746,681

Other income

991

908

1,045

545

718

Promotional and other rebates

(59,302)

(83,285)

(118,771)

(143,547)

(145,545)

Total operating revenue

288,449

389,238

599,485

549,788

601,854

Operating expense

Raw materials and consumables used

110,692

147,750

214,263

236,184

232,374

Employee benefits expenses

70,156

94,353

134,933

120,209

137,135

Selling and marketing expenses

28,840

34,779

49,177

51,141

59,229

Depreciation and amortization expenses

6,266

6,391

7,045

8,411

8,940

Operating lease rental expenses

3,163

3,519

4,496

7,942

9,306

Professional and consulting expenses

4,442

7,372

9,168

8,923

11,647

Repairs and maintenance expenses

2,869

3,275

4,683

5,172

7,014

Freight expenses

5,905

6,615

10,906

9,809

13,546

Bank charges

845

1,355

2,099

1,300

1,141

Research and development expenses

9,162

8,972

10,200

3,592

2,035

Other expenses

13,673

11,565

17,494

14,466

17,875

Total operating expense

256,013

325,946

464,464

467,149

500,242

Net operating profit before tax

32,436

63,292

135,021

82,639

101,612

Tax on operating profit

(10,982)

(23,306)

(43,934)

(25,212)

(29,703)

CSP adjustments

(1,216)

3,758

(301)

(1,961)

3,228

Net operating profit after tax (NOPAT)

20,238

43,744

90,786

55,466

75,137

Finance revenue

309

415

462

384

416

Finance costs

(5,135)

(3,847)

(2,272)

(4,346)

(4,564)

Net finance costs

(4,826)

(3,432)

(1,810)

(3,962)

(4,148)

Tax shelter (30%)

1,448

1,030

543

1,189

1,244

NFEat

(3,378)

(2,402)

(1,267)

(2,773)

(2,904)

CSP

16,860

41,342

89,519

52,693

72,233

Appendix 2: Blackmore’s Reformatted Balance Sheet

2014

$’000

2015

$’000

2016

$’000

2017

$’000

2018

$’000

Operating assets

Current assets

Cash and cash equivalents

18,599

36,931

37,653

34,251

36,468

Receivables

70,567

107,076

134,636

132,146

150,788

Inventories

38,742

38,665

116,486

84,794

103,965

Tax receivable

-

-

-

-

-

Other assets

3,468

5,172

5,849

7,471

10,811

Total current asset

131,376

187,844

294,624

258,662

302,032

Non-current assets

Receivables

-

-

-

-

-

Property, plant and equipment

63,613

60,735

67,626

74,207

76,261

Other intangible assets

18,363

18,530

32,736

32,293

36,751

Goodwill

16,863

16,863

20,032

29,461

29,461

Deferred tax assets

3,815

6,713

12,257

9,960

12,590

Other assets

86

562

628

-

-

Amounts advanced to related parties

-

-

3,960

4,111

3,600

Total non-current assets

102,740

103,403

137,239

150,032

158,663

Total operating assets

234,116

291,247

431,863

408,694

460,695

Operating Liabilities

Current liabilities

Trade and other payables

49,153

94,908

160,478

124,365

157,868

Current tax liabilities

2,793

12,862

24,204

1,811

4,246

Provisions

5,471

6,284

7,588

11,549

8,065

Other liabilities

623

944

9

4,831

4,085

Total current liabilities

58,040

114,998

192,279

142,556

174,264

Non-current liabilities

Deferred tax liabilities

177

202

916

10,224

9,341

Total non-current liabilities

177

202

916

10,224

9,341

Total operating liabilities

58,217

115,200

193,195

152,780

183,605

Net Current Asset

73,336

72,846

102,345

116,106

127,768

Net Non-Current Asset

102,563

103,201

136,323

139,808

149,322

Net operating assets (NOA)

175,899

176,047

238,668

255,914

277,090

Financing liabilities

Current liabilities

Interest-bearing liabilities

-

-

-

-

-

Other financial liabilities

-

-

-

485

203

Total current liabilities

-

-

-

485

203

Non-current liabilities

Provisions

906

730

1,134

1,372

1,229

Interest-bearing liabilities

73,000

44,000

55,446

78,968

86,000

Other liabilities

245

562

3,655

235

483

Total non-current liabilities

74,151

45,292

60,235

80,575

87,712

Total financing liabilities

74,151

45,292

60,235

81,060

87,915

Financial assets

Current assets

-

-

-

-

-

Total current assets

Non-current assets

Investment property

- 2,160

- 2,160

- 2,160

- 2,160

- 2,160

Other financial assets

- 318

-

-

- 1,320

- 1,520

Total non-current assets

- 2,478

- 2,160

- 2,160

- 3,480

- 3,680

Total assets

Net financial obligation (NFO)

71,673

43,132

58,075

77,580

84,235

Closing equity (CSE)

Equity

Issued capital

34,502

37,753

37,753

37,753

37,753

Reserves

3,227

8,063

5,252

4,085

5,926

Retained earnings

66,497

87,099

135,258

135,703

149,196

Equity attributable to shareholders of Blackmores Ltd

104,226

132,915

178,263

177,541

192,875

Equity attributable to non-controlling interests

-

-

2,330

1,278

455

Total equity

104,226

132,915

180,593

178,819

193,330

Opening CSE

98,051

104,226

132,915

180,593

178,819

CSP

16,860

41,342

89,519

52,693

72,233

d

18,038

21,625

52,041

52,041

52,041

Closing CSE

96,873

123,943

170,393

181,245

199,011

Appendix 3: Ratio Analysis

Ratio

Formula

FYR 2014

FYR 2015

FYR 2016

FYR 2017

FYR 2018

NBC

NFE/CSP

3,378/16,860= 20%

2,402/41,342

=5.81%

1,267/89,519

= 1.4%

2,773/52,693

= 5.26%

2,904/72,233

= 4.0%

FLEV

RNOA - NBC

-

27.1%

48.87%

25.84%

34.96%

RNOA

Operating income e/ NOA

20,328/104,226

=19.50%

43,744 / 132,915

=32.91%

90,786 /180,593

= 50.27%

55,466 / 178 ,334

= 31.10%

75,137 /192,855

= 38.96%

ROE

Operating income / NOA OR Net Profit / Shareholder’s Equity

20,238 / 104,226

= 19.42%

43,744/132,915

= 32.91%

90,786 / 178, 268

=50.93%

55,466/177,541

=31.24%

75,137/192,875

= 38.96%

PM

Operating income after tax / sales

20,238/346,760 = 5.84%

43,744/471,615 = 9.30%

90,786/717,211=

12.66%

55,466/692,790=

8.0%

75,137/746,681=

10.06%

Figure 1: Ratio Analysis. A figure showing the ratios analysis for Blackmores for five fiscal years 2014 to 2018.

Appendix 4

Figure 1.1: NBC. A graph showing NBC

Appendix 5

Figure 1.2: FLEV. A graph showing FLEV

Appendix 6

Figure 1.3 RNA. A graph showing RNA

Appendix 7

Figure 1.4: ROE. A chart showing the ROE

Appendix 8

Figure 1.5: PM. A chart showing PM

Appendix 10

Ratio

FORMULA

FYR 2014

FYR 2015

FYR2016

FYR 2017

FYR 2018

Current Ratio

Current Asset/ current liabilities