Analysis of Blackmore's Accounting and Investment Recommendations Making

ACCOUNTING ANALYSIS
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TOC \o "1-3" \h \z \u 1. Introduction PAGEREF _Toc51171233 \h 42. Company Background PAGEREF _Toc51171234 \h 43. Accounting Disclosures PAGEREF _Toc51171235 \h 43.1. Changes in Accounting Policies PAGEREF _Toc51171236 \h 43.1.1. New Application of AASB 16 (Australian Accounting Standards Board) PAGEREF _Toc51171237 \h 43.2. Size and Profitability of Reporting Segments PAGEREF _Toc51171238 \h 53.3. Net Income and Income Tax Paid in Late Five Years PAGEREF _Toc51171239 \h 54. Accounting and Market Valuation PAGEREF _Toc51171240 \h 55. Additional Disclosures PAGEREF _Toc51171241 \h 65.1. Key Management Personnel (KMP) PAGEREF _Toc51171242 \h 65.2. Independent Auditor PAGEREF _Toc51171243 \h 75.2.1. Payment to Auditor PAGEREF _Toc51171244 \h 75.3. Largest Investors and Shareholdings PAGEREF _Toc51171245 \h 76. Financial Statement Analysis PAGEREF _Toc51171246 \h 76.1. Trend Analysis for Previous Five Years for Profit and Cash Flow Figures PAGEREF _Toc51171247 \h 76.1.1. Horizontal and Vertical Analysis on Financial Statements PAGEREF _Toc51171248 \h 86.2. Ratio Analysis PAGEREF _Toc51171249 \h 96.2.1. Profitability Ratios PAGEREF _Toc51171250 \h 96.2.1.1. Net Profit Margin (NPM) and Gross Profit Margin (GPM) PAGEREF _Toc51171251 \h 96.2.1.2. Return on Equity (ROE) PAGEREF _Toc51171252 \h 96.2.1.3. Return on Assets (ROA) PAGEREF _Toc51171253 \h 106.2.1.4. Operating Cash Flow to Sales Ratio (OCFS) PAGEREF _Toc51171254 \h 106.2.2. Asset Efficiency Ratios PAGEREF _Toc51171255 \h 106.2.2.1. Asset Turnover Ratio (ATR) PAGEREF _Toc51171256 \h 106.2.2.2. Days Inventory Outstanding (DIO) PAGEREF _Toc51171257 \h 106.2.2.3. Days Sales Outstanding (DSO) PAGEREF _Toc51171258 \h 106.2.3. Liquidity Ratios PAGEREF _Toc51171259 \h 116.2.3.1. Current Ratio (CR) and Quick Ratio (QR) PAGEREF _Toc51171260 \h 116.2.3.2. Cash Flow Ratio (Liquidity) (CFR) PAGEREF _Toc51171261 \h 116.2.4. Capital Structure Ratios PAGEREF _Toc51171262 \h 116.2.4.1. Debt to Equity Ratio (DE) PAGEREF _Toc51171263 \h 116.2.4.2. Times Interest Earned Ratio (TIE) PAGEREF _Toc51171264 \h 116.2.4.3. Debt Coverage Ratio (DC) PAGEREF _Toc51171265 \h 126.2.5. Market Performance Ratios PAGEREF _Toc51171266 \h 126.2.5.1. Net Tangible Assets Per Share (NTA) PAGEREF _Toc51171267 \h 126.2.5.2. EPS (Earnings Per Share) PAGEREF _Toc51171268 \h 126.2.5.3. DPS (Dividend Per Share) PAGEREF _Toc51171269 \h 126.2.5.4. Operating Cash Flow (OCF) Per Share PAGEREF _Toc51171270 \h 126.2.5.5. Price Earnings (PE) Ratio PAGEREF _Toc51171271 \h 126.3. Impact of COVID-19 Pandemic on the Company and Industry PAGEREF _Toc51171272 \h 136.4. Recommendations for Investment Based on Current Share Price PAGEREF _Toc51171273 \h 13Reference List PAGEREF _Toc51171274 \h 15Appendices PAGEREF _Toc51171275 \h 16Appendix B: Ratio Analysis Results PAGEREF _Toc51171276 \h 16Appendix B.1: Groups Income Statement of 2019 and 2020 PAGEREF _Toc51171277 \h 16Appendix B.2: Groups Balance Sheets of 2019 and 2020 PAGEREF _Toc51171278 \h 17Appendix B.3. Groups Statement of Cash Flows of 2019 and 2020 PAGEREF _Toc51171279 \h 18Appendix C: Vertical Analysis on Group’s Income Statement of 2019 and 2020 PAGEREF _Toc51171280 \h 19Appendix D: Horizontal Analysis of Group’s Balance Sheets of 2019 and 2020 PAGEREF _Toc51171281 \h 20
Accounting Analysis
1. Introduction
Organizations around the globe have experienced perilous economic times. The current market conditions reflect that managements need to focus on continuous evaluation of the current financial statements to identify the relevant opportunities and challenges. The report presents detailed financial analysis on an Australian publicly listed company known as the Blackmore Ltd (BKL). The analysis is conducted as a consultant for an investment firm. Therefore, the report highlights an investment strategy on whether to invest or not in shares of BKL in current market conditions.
2. Company Background
BKL Group is an international company with a total number of 1400 of employees in different countries. Group provides high quality and diversified products that include BioCeuticals, natural health products for pets, Oriental Botanicals and Chinese herbal medicine (BKL, 2020, p.1). Group’s vitamin and natural skin treatment products in Australia and NewZealand have helped to reach a market capitalization of AUD$ 1.223 billion (Bloomberg, 2020). BKL has a large supply chain system with more than 33,000 distribution points in Australia. The group has raised more than $2 million for charitable purposes in 2020. Group’s reported revenue is $568 million, and underlying net tax profit is $18.7 million in 2020 (BKL, 2020).
3. Accounting Disclosures
Analysis of accounting disclosures helped to identify and evaluate the financial policies of the company.
3.1. Changes in Accounting Policies
Group has experienced certain changes in accounting policies.
3.1.1. New Application of AASB 16 (Australian Accounting Standards Board)
Group has replaced the AASB 16 with the AASB 17 on the period after 1st January 2019. Under AASB 16, the accounting requirements for the leases are changed. AASB 16 implementation has encouraged the company to recognize the operating leases as a lessee and further creates recognition of ROU (Right-of-Use) asset (BKL, 2020, p.85). The liability associated with the lease is recognized on the balance sheet. Interest expense and depreciation charge on the ROU assets are recognized on the ROU assets. The accounting treatment for the leases as a lessor does not change under the AASB.
The new standard has created a significant impact on the income statement. Depreciation expense on ROU for continued operations is $6,752,000 and $81,000 for discontinued operations, interest expense on lease liabilities is $531,000 for continued operations and $2000 for discontinued operations, expense related to low-value assets of continued operations is $1,786,000 for continued operations and $10,000 for discontinued operations in 2020 (BKL, 2020, p.106).
3.2. Size and Profitability of Reporting Segments
* Group’s New Zealand and Australia segments have reported revenue of $227 million in 2020,
* Vitamin and dietary supplement have a market share of 16% in the Australian market,
* Revenue decreased by 16.4% as compared to the prior year because of the impact of COVID-19,
* China operations have reported revenue of $103 million,
* Market share increased in China by 2%,
* Global operations reported a 30% higher revenue of $139 million with the largest growth of 36% reported in Indonesia,
* And BioCeuticals reported revenue of $99 million and reached 18% of share in Australia’s VDS cold and flu market (BKL, 2020, p.17).
3.3. Net Income and Income Tax Paid in Late Five Years
BKL net incomes for last five years is; $100,008,000 in 2016, $59,031,000 in 2017, $70,005,000 in 2018, $53,469,000 in 2019 and $18,114,000 in 2020 (BKL, 2020, p.43). Company’s tax paid in last five years is; $43,719,000 in 2016, $22,962,000 in 2017, $27,281,000 in 2018, $20,947,000 in 2019 and $7,411,000 (BKL, 2020, p.43).
4. Accounting and Market Valuation
The current market capitalization of BKL is $1,231.68 million (Reuters, 2020).
Accounting net assets = Total assets – Total liabilities
Net assets = $561,132,000 – $283,209,000 (See Appendix B.2)
Net assets = $277,923,000 or $277.92 millions
There exists a difference between the net assets and market capitalization of BKL. In simple terms, net assets are defined as the total assets of the firm net of liabilities and expenses and market capitalization is explained as the company’s value traded on the stock market (Value Research, 2020). The main reason for such a high difference is that company’s total shareholders equity has risen by 47.28% from $207,292,000 in 2019 to $305,295,000 in 2020 (See Appendix B.2). Total ordinary shares have increased from 17,295,000 in 2019 to 17,495,000 in 2020 (BKL, 2019). It also suggests that BKL has adopted the option of equity finance to raise funds. However, the current company’s performance is not high to meet the shareholders’ required rate of return.
5. Additional Disclosures
Information about additional disclosures provides support to examine BKL from a different perspective.
5.1. Key Management Personnel (KMP)
Table 1: Remunerations (BKL, 2020, pp.48-71)
All values in thousands

Fees and allowances

Profit-Sharing

Short-term employment benefits

Post-employment benefits

Total

Non-Executive Directors:






David Ansell

$146,538


$0

$13,921

$160,459

John Armstrong

$146,538


$134

$13,921

$160,593

Christine Holman

$155,116


$0

$14,736

$169,852

Brent Wallace

$254,000


$0

$20,882

$274,882

Executive Directors:






Marcus Blackmore



$375,595

$21,003

$396,598

Alastair Symington



$1,403,634

$21,003

$1,424,637

Former senior executives:






Aaron Canning

$407,059

$8796

$2930


$418,785

Peter Osbome

$803,392

$9333

$0


$812,725

5.2. Independent Auditor
Deloitte Touche Tohmatsu Limited has conducted the audit of Blackmores limited.
5.2.1. Payment to Auditor
Table 2: Auditor Remunerations (BKL, 2020, p.123)

2018
$

2019
$

2020
$

Audit of the financial statements

325,944

320,774

455,534

Network firm auditor:
Auditing or reviewing the Financial Statements

246,493

285,255

322,170

5.3. Largest Investors and Shareholdings
Table 3: Major investors of BKL (BKL, 2020, p.126)
Investors

Number of shares

Percentage of shareholdings

Mr. MC Blackmore

3,409,525

17.62%

HSBC Custody Nominees (Australia) Limited

2,260,308

11.68%

JP Morgan Nominees (Australia) Limited

2,179,596

11.27%

6. Financial Statement Analysis
Analysis of BKL’s financial statements is mentioned-below.
6.1. Trend Analysis for Previous Five Years for Profit and Cash Flow Figures
Table 4: Profit and Cash Flows Figures of Five Years
 All numbers in thousands

2016

2017

2018

2019

2020

 

AUD

AUD

AUD

AUD

AUD

Total Revenues

595,705

530,550

579,535

609,502

568,353

EBIDTA

151,766

90,773

106,556

87,322

50,676

EBIT

144,734

82,550

97,708

76,554

29,383

Profit Before Tax

142,924

78,372

93,778

71,559

23,470

Profit After Tax Attributable to Shareholders

100,008

59,013

70,005

53,469

18,114

Net cash flows from operating activities




19,832

62,078

Net cash used in investing activities


(14,212)