Tatua Financial Analysis The Dairy Cooperative

Question: Describe about the Tatua Financial Analysis for The Dairy Cooperative. Answer: Introduction Tatua is an independent entity based out of New Zealand and calls for experience of more than 100 years in the field of dairy-cooperative. In the era when most of the companies in the industry has gone for amalgamation, the company has been able to stay independent. This is the prime reason why company has been able to create a strong identity and brand in the industry. The companys factories are located in Tatuanui in the part of North Island. As required to evaluate the investment attractiveness of the company, we will conduct a detailed financial analysis of the company based on the last 3 year financials. We will use both horizontal and vertical analysis to make inferences. To establish critical industry approach we will also conduct a detailed ratio analysis and compare it with industry peer data (Lakshmi, 2016). This will provide us clear cut understanding of financials and coupled with some qualitative factors, we will try to conclude the investment attractiveness of Tatua. Findings Analysis In this section we will explore the findings of ratio and financial analysis of the company. The three parameters under which we will evaluate the company are profitability, financial stability including short term and long term financial stability Asset utilization. Let us now have a look at each one of these parameters in details to evaluate the financial status of the company. Profitability The objective of this section is to evaluate the profitability of the company based on certain parameters. Each of these parameters will throw in some information or the other. a) Net Profit % This is calculated by dividing the net profit of the company vis--vis the total sales. This is indicative of the net margins with which the company is operating. 2015 2014 2013 Net Profit % 6% 3% 2% As we can see from the above table the net margin of the company has expanded in last three years. This is a good indicator for the company, as its net margin has increased from 2% in 2013 to 6% in 2015. b) Gross Profit % This is calculated by dividing the gross profit of the company vis--vis the total sales. This is indicative of the gross margins with which the company is operating (Damodaran, 2016). We have done it for the company as a whole and also for the segment in which the company operates. In this case the segments or the products which the company operates are Whipped Cream Cheese Sauce. 2015 2014 2013 Gross Profit % Overall 43% 38% 37% Whipped Cream 50% 43% 40% Cheese Sauce 15% 26% 30% The overall gross profit % of the company has improved from 37% in 2013 to 43% in 2015. However when we see the segment wise gross margin, we can see that the gross margin for Whipped cream product has increased from 40% in 2013 to 50% in 2015, however the gross margin for the Cheese Sauce segment has declined sharply from 30% in 2013 to 15% in 2015. It can be seen that gross margin of the company are pulled down by Cheese Sauce segment of the company. This is a cause of worry and a potential red flag on the investment attractiveness of the company. c) Return on Assets This is calculated by dividing the Net operating profit after tax of the company vis--vis the total assets which the company holds. 2015 2014 2013 Return on Assets 15% 6% 5% Return on Assets of the company has steadily improved from 5% in 2013 to 15% in 2015. The increase has been sharp from 6% in 2014 to 15% in 2015. This is a potential green flag on the investment attractiveness of the company. d) Return on Owners equity This is calculated by dividing the Net operating profit after tax of the company vis--vis the owners equity (Shareholders Fund + Retained Earnings) which the company reports in its balance sheet. 2015 2014 2013 Return on owner's equity 27% 13% 12% Return on owners equity of the company has steadily improved from 12% in 2013 to 27% in 2015. The increase has been sharp from 13% in 2014 to 27% in 2015. This is a potential green flag on the investment attractiveness of the company. e) Increase in net operating profit This is calculated based on simple increase that one notes in Net operating profit after tax figure of the company year over year. 2015 2014 Increase in Net Operating Profit 143% 38% As we can see from the table above, net operating profit after tax has increased by 38% in 2014 and in 2015 it has increased by 143%. This is a huge jump year on year and augments good news for the company. f) Change in total sales, whipped cream sales and cheese sauce sales This is calculated based on simple increase that one notes in total sales figure of the company year over year. We have done it for the company as a whole and also for the segment in which the company operates. In this case the segments or the products which the company operates are Whipped Cream Cheese Sauce. 2015 2014 Change in Sales Overall 2% 2% Whipped Cream 12% 5% Cheese Sauce -33% -6% The overall total sales of the company has increased by 2% in 2014 and 2% in 2015 in comparison to the previous period. The increase in sales has been driven by the Whipped cream segment which has seen sales jump of 12% in 2015 and 5% in 2014. However on the other segment, i.e. Cheese Sauce sales have been constantly declining over the last two years. The trend becomes alarming as drop in sales in 2015 has been as high as 33%. This is a cause of worry and a potential red flag on the investment attractiveness of the company. g) Selling Distribution expenses % This is calculated by dividing the total Selling Distribution expenses with the total operating expenses. 2015 2014 2013 Selling and Distribution expenses as a % total operating expenses 70% 66% 67% Selling and Distribution expenses as a % Total Sales 24% 23% 23% There has been increase in Selling Distribution expenses as percentage of total operating expenses (Damodaran, 2016). This might be one of the reason due to which increase in sales are happening, however to be cautioned this can also be one of the calls taken by management to increase the sales in Cheese Sauce segment. Higher Selling Distribution expenses has been mainly driven by higher sales commission given by the company in 2015. h) Administration General expenses % This is calculated by dividing the total Administration General expenses with the total operating expenses. 2015 2014 2013 Administration General expenses as a % total operating expenses 25% 25% 23% Administration General expenses as a % Total Sales 8% 8% 8% There has been increase in Administration General expenses as percentage of total operating expenses. If seen in details it has been the office expenses which has been the prime reason on why the Administration General expenses for the company has increased. i) Financial Expenses % This is calculated by dividing the total financial expenses with the total operating expenses. 2015 2014 2013 Financial expenses as % total operating expenses 5% 9% 10% Financial expenses as % Total Sales 2% 3% 3% Financial expenses as part of total operating expenses has reduced to 5% in 2015 from the high of 10% in 2013. This improvement has been due to lower expenses booked under bad debt and lower borrowing cost for the company. If seen in conjunction with the loan taken by the company from Bank of New Zealand, it can be seen that the total liability in this case has sharply declined in 2015. Financial stability including short term and long term financial stability The objective of this section is to evaluate the financial stability of the company based on certain parameters. Each of these parameters will throw in some information or the other. a) Working Capital Ratio This ratio is calculated based on dividing the total current assets with the total current liabilities. It indicates the working capital management efficiency of the company and higher is considered to be better. 2015 2014 2013 Working Capital Ratio 1.95 1.92 1.50 As indicated by the data the company has been efficiently managing it working capital. The ratio has steadily improved from 1.50 in 2013 to 1.95 in 2015. a) Liquidity Ratio A better judge on liquidity availability than working capital ratio is the quick ratio which is also known as liquidity ratio. It is calculated as (Current Asset-Inventories)/Current Liabilities. 2015 2014 2013 Liquidity Ratio 1.36 1.45 1.13 The liquidity ratio of the company has declined from 2013 to 2015. This is because of the higher inventory that the company has been holding in the year 2015. c) Age of trade Creditors Age of trade creditors is a measurement of how long does the company takes to pay of its invoices to the creditors. The longer the company has been able to pay its creditors, the longer the company will have cash in its hand and hence better for the company. 2015 2014 2013 Age of Trade Creditors 63 86 105 Over the years this ratio has declined fast for Tatua Company. This is bad as now it has been paying back suppliers cash faster and hence it is more dependent on its own cash to run the business. d) Equity Ratio Equity ratio is indicative of how much the equity is part of the total capital that is used in the business. 2015 2014 2013 Equity Ratio 87% 79% 74% The equity ratio of the company has improved to 87% in 2015 compared to low of 74% in 2013. This is because of the fact that Tatua Company has been able to pay a good portion of its long term debt in 2015. e) Interest Coverage Ratio This ratio determines the capability of the company in paying back its due interest. Higher the value better it is indicative of the companys financial stability. 2015 2014 2013 Interest Coverage 20.57 4.94 3.12 As company has paid back huge amount of its debt in 2015, the interest cost has reduced and this is one of the prime reason why its interest coverage ratio has drastically improved to 20.57 in 2015 compared to 3.12 in 2013. Asset utilization The objective of this section is to evaluate the asset utilization of the company based on certain parameters. Each of these parameters will throw in some information or the other. a) Stock Turnover Ratio This is indicative of how well company has been able to churn or rotate its inventory. The low ratio is indicative of weakness in sales and larger holding period of inventory 2015 2014 2013 Stock Turnover 13.0 15.5 16.7 As we can see that the ratio has declined to 13 in 2015 from 33.3 in 2013. This is indicative of the fact that company has seen rise in holding of inventory which is not good for the company. b) Age of Debtors This is indicative of how fast the company has been able to convert the invoices it raises against the debtors into cash. The lower it is better it is for the organization. 2015 2014 2013 Age of debtors 39.6 51.7 54.8 The figures indicate improvement for the company in 2015 as ratio has lowered to 39.6 compared to 54.8 in 2013. If seen in conjunction with the Age of creditors, which we have already seen above, it can be said that it is an industry trend and company has still maintained a good enough cash cycle. c) Total Asset Turnover Ratio This is a proper utilization ratio which indicates how company has utilized its total asset. The higher the ratio better it is for the company and is indicative of good utilization. 2015 2014 2013 Total Asset Turnover Ratio 2.5 2.5 2.7 c) Current Asset Turnover Ratio This is a proper utilization ratio which indicates how company has utilized its current asset. The higher the ratio better it is for the company and is indicative of good utilization. 2015 2014 2013 Current Asset Turnover Ratio 3.5 3.5 4.1 Peer Analysis Industry Tatua 2015 2014 2013 2015 2014 2013 Net profit % 6.50% 5% 4% 6% 3% 2% Stock Turnover 11 times 13 times 11 times 12 times 16 times 16 times Age of Trade Creditors 30 days 32 days 36 days 63 days 86 days 105 days Age of Debtors 33 days 40 days 45 days 40 days 52 days 55 days Selling distribution expenses % 17% 18% 18% 24% 23% 23% Admin and general expenses % 7% 6% 7% 8% 8% 8% Equity % 50% 45% 40% 87% 79% 74% The peer table and its comparison is indicative of a broader trend of where Tatua is going. The company has not been able to increase its stock turnover, inventory holding period is increasing. The company is paying of its creditors faster, but still better than the industry average. However the debtor period is on higher side compared to peers, which is not a good signal for the company. The selling distribution expenses are high for the company and is not a good signal for the company. Conclusion Tatua is a very good company and most of the financials are in place but when one digs deep, it is clear that company is facing headwinds in certain sections which need orderly correction and urgent attention. The sales of Cheese sauce segment has been constantly falling and the margins of the company is also pulled down sharply by this segment. Operationally as around peers company has not been able to manage its cash cycle as efficiently as peers. There is a need to decrease debtors day sharply and increase rollover of the inventory. Company has been spending high on marketing and sales and even after that sales have not increased substantially. Tatua is a good company and among many green signals of its investor attractiveness, one can find some red flags too. The call on purchasing of the company should be a function of how an investor intend to turn around Cheese Sauce Segment. References Lakshmi, T. M., Martin, A., Venkatesan, V. P. (2016). A Genetic Bankrupt Ratio Analysis Tool Using a Genetic Algorithm to Identify Influencing Financial Ratios.IEEE Transactions on Evolutionary Computation,20(1), 38-51. Damodaran, A. (2016).Damodaran on valuation: security analysis for investment and corporate finance(Vol. 324). John Wiley Sons. Lau, C. (2016). Financial Management. Khan, M. N., Khokhar, I. (2015). THE EFFECT OF SELECTED FINANCIAL RATIOS ON PROFITABILITY: AN EMPIRICAL ANALYSIS OF LISTED FIRMS OF CEMENT SECTOR IN SAUDI ARABIA.Quarterly Journal of Econometrics Research,1(1), 1-12. Robinson, T. 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