Financial Analysis and Ratio Calculation

The assignment content discusses the financial analysis of Blackmores Limited, an Australian company listed on the Australian Stock Exchange. The report analyzes the company's retained earnings, interest-bearing liabilities, and debt-to-equity ratio. It also presents a profitability analysis, margin analysis, asset turnover ratios, short-term liquidity ratios, and long-term solvency ratios. The results indicate that the company has declined in almost all aspects over the last two years, but it is expected to do well in the future based on its retained profits and use of debt in its capital structure.

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Date: 01 September 2017.

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Contents
Question no. 7……………………………….………….……………………..2
Question no. 8……………………………….………….……………………..5
Conclusion.....……………………………………………………………….....7
Refrences.....……………………………………………………………….......8
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Question No. 7
Blackmores is one of the companies listed on Australian Stock Exchange. As per the statement o
fchanges in Equity and the Notes on Accounts on the retained earnings, the amount has changed from $
135.258 Mn in 2016 to $ 135.703 Mn in 2017. Retained earnings is generally the amount of profit made
by the company and retained by it for future growth and investment based on the opportunities seen in
the market. Profit may be distributed to shareholders in the form of dividend or retained for growth.
Profit which is retained is called “retained earnings”
In the year 2017, the company made a retained earnings of $59.013 Mn out of the profits earned for the
year and made a dividend distribution to the shareholders amounting to $58.568 Mn.
The company is bearing the long term interest bearing liabilities in its Balance Sheet at $ 78.96 Mn in
2017 which was $ 55.45 Mn in 2016. The group is carrying a floating rate interest borrowing and this
faces the strong interest rate risk. (Das, 2017) The interest is well managed by the company by the use
of interest rate swaps. A detailed extract of the annual report showing the interest rates on financial
instruments is attached below. The component of debt has increased considerably in 2017 in the capital
structure due to which the debt to equity ratio has increased from 9.1% in 2016 to 20.1% in 2017. This
shows that the company is taking use of trading on equity and making use of the funds at lower rates of
interest.
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Question No. 8
On the basis of the balance sheet, the income statement and the cash flow statement, the following
ratio analysis has been done. The results of the same have been discussed below.
Ratios
For the Fiscal Period Ending 12 m onths
Jun-30-2015
12 m onths
Jun-30-2016
12 m onths
Jun-30-2017
Profitability
Return on Assets % 17.4% 25.0% 12.8%
Return on Capital % 25.9% 44.6% 22.1%
Return on Equity % 39.3% 63.8% 32.3%
Return on Common Equity % 39.3% 64.3% 33.2%
Margin Analysis
Gross Margin % 61.1% 63.4% 56.1%
EBITDA Margin % 20.5% 25.7% 17.4%
EBITA Margin % 19.0% 24.6% 15.9%
EBIT Margin % 19.0% 24.6% 15.9%
Net Income Margin % 12.0% 16.7% 10.7%
Asset Turnover
Total Asset Turnover 1.5x 1.6x 1.3x
Fixed Asset Turnover 6.2x 9.3x 7.7x
Accounts Receivable Turnover 4.4x 5.0x 4.2x
Inventory Turnover 3.9x 2.8x 2.4x
Short Term Liquidity
Current Ratio 1.6x 1.5x 1.8x
Quick Ratio 1.3x 0.9x 1.2x
Avg. Cash Conversion Cycle 81.1 107.4 85.0
Long Term Solvency
Total Debt/Equity 33.1% 30.7% 44.2%
Total Debt/Capital 24.9% 23.5% 30.6%
LT Debt/Equity 33.1% 30.7% 44.2%
LT Debt/Capital 24.9% 23.5% 30.6%
Total Liabilities/Total Assets 54.7% 59.3% 56.6%
Blackmores Limited (ASX:BKL) : Ratio Analysis
 From the profitability analysis, it is clear that the company is suffering to sustain the old profit
percentages as the Return on capital employed and return on equity has decreased from 45%
and 65% respectively in 2016 to 22% and 32% respectively in 2017. The returns have almost
halved. This can be attributable to the market pressure and the competition from the peers. The
return on the assets has also declined from 17% to 12% over the past year which means that the
revenue has declined and the company has not been able to extract the best possible benefit
out of it. (Knechel & Salterio, 2016)
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 The margins of Blackmores Limited have dropped just marginally over th period of last 2 years,
as we can see that Gross margin has dropped from 61% to 56%, Nat margin has dropped from
12% in 2015 to 10.7% in 2017 which represents the slowness in the business done by the
company. Both the gross margin and the net margin have dropped fractionally representing that
the direct expenses and the indirect expenses are in line with the revenue booked for the
company.
 From the analysis of the asset turnover ratios, it comes to notive that the fixed assets turnover
ratio has increased from 6.2 times in 2015 to 7.7 times in 2017, which reflects the optimum use
of the fixed assets to generate the sales. The accounts receivable ratio has almost remained
constant over this period from 4.4 times to 4.2 times which means that the strong control is
being maintained on the collection cycle. The inventory turnover ratio is however on the
negative side and it has fallen from 3.9 times to 2.4 times which is evident of the fact that the
company is finding it difficult to liquidate the inventory in the long run and is holding inventory
for a long time. (Raiborn, et al., 2016)
 The short term liquidity ratios of current ratio and liquid ratio has remaine almost constant over
the last 3 years and this shows the stability of the working capital being maintained by the
company. Where current ratio has moved from 1.6 times to 1.8 times, the quick ratio has moved
from 1.3 times in 2015 to 1.2 times in 2017. This also shows that the ratio is above the industry
average of 2 and 1 respectively.
 Lastly the long term solvency ratios represent how the company would be able to meet its long
term obligations and what is the capital structure of the company. As per the data of the last 3
years, the debt equity ratio has increased from 33% to 44% which shows that the company is
using the benefit of debt in the capital structure. It is using the benefit of trading on equity and
hence making use of the outside funds at lower rates of interest. (Murray & Markey Towler,‐
2017)
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Conclusion
From the above analysis and the financial statements of the entity for 2017, it is evident that the
company is doing well financially and beating the market expectations. It has declined over the last 2
years in almost all the aspects but that is majorly attributable to the current slowness in the market
conditions. The company has retained profits and is also making use of the debts in the capital
structure to leverage the capital. The company is expected to do well in the future based on the
above analysis.
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References
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
Studies, 2(2), pp. 10-17.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.
Murray, C. & Markey Towler, B., 2017. A Theory of Return-Seeking Firms.‐ SSRN, pp. 1-14.
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good
Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
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