Business Valuation and Financial Analysis - Desklib

This report focuses on the financial performance as well as financial forecast of one of the major Australian companies, Blackmores Limited (Blackmores). The main aim of this report is the analysis as well as evaluation of the future financial performance of Blakemores along with analyzing and evaluating the stock price, business valuation so that effective strategies can be recommended.

Running head: BUSINESS VALUATION AND FINANCIAL ANALYSIS
Business Valuation and Financial Analysis
Name of the Student:
Name of the University:
Author’s Note

1
BUSINESS VALUATION AND FINANCIAL ANALYSIS
Table of Contents
1. Introduction..............................................................................................................................................3
2. Blackmore’s Prospective Analysis...........................................................................................................4
2.1 Future Financial Performance of Blackmores........................................................................................4
2.1.1 Growth Rate of Sales.......................................................................................................................4
2.1.2 Profit Margin.......................................................................................................................................6
2.1.3 Asset Turnover................................................................................................................................7
2.1.4 Net Dividend Payout.......................................................................................................................8
2.1.5 Cost of Debt after Tax.....................................................................................................................9
2.2 Valuation of Blackmores........................................................................................................................9
2.2.1 Assumptions for the Valuations.........................................................................................................10
2.2.2 Four Valuation Model...................................................................................................................10
2.2.2.1 Divided Discount Model (DDM)................................................................................................11
2.2.2.2 Residual Income Model (RIM)...................................................................................................11
2.2.2.3 Residual Operating Income Model (ROIM)...............................................................................11
2.2.2.4 Discounted Cash Flow Model (DCM)........................................................................................11
2.3. Sensitivity Analysis.............................................................................................................................12
2.3.1. Sales Growth................................................................................................................................13
2.3.2. Profit Margin (PM).......................................................................................................................14
2.3.3. Asset Turnover (ATO)..................................................................................................................14
2.3.4. Weighted Average Cost of Capital (WACC)................................................................................14
3. Management Application for Blackmores Ltd........................................................................................15
3.1. Opportunities.......................................................................................................................................15
3.1.1. Growth Opportunities in Asian Market........................................................................................15
3.1.2. Revenue Generation and Brand Loyalty.......................................................................................15
3.1.3. Innovation and Product Development...........................................................................................16
3.2. Challenges...........................................................................................................................................16
3.2.1. Focus on Australia Market............................................................................................................16

2
BUSINESS VALUATION AND FINANCIAL ANALYSIS
3.2.2. Competitors..................................................................................................................................17
3.2.3. Increase in the Costs of the Business............................................................................................18
3.3. Measures to be Adopted by the Business.............................................................................................18
4. Reference...............................................................................................................................................19
5. Appendix................................................................................................................................................22

3
BUSINESS VALUATION AND FINANCIAL ANALYSIS
1. Introduction
The managements of the business organizations have to deal with different types of business
operations in order to ensure the smooth running of the companies and thus, they are needed to put equal
attention to each dimensions of the business operations of the companies. One of such aspects or
dimensions is the Accounting and Financial Operations of the companies. It needs to be mentioned that
the success of the business organizations largely depends on the financial performance of the companies
(Vogel 2014). In order to ensure the effective financial performamce of the business organizations, it is
the prime responsibility of the upper level management to develop effective financial strategies by taking
into consideration all the relevant financial as well as accounting aspects. This aspect indicates towards
the vast responsibilities of the financial managers of the business organizations related to some of the
crucial areas of accounting and finance. For this reason, the major considerable areas by the finance
managers of the companies are the future financial performance of the companies, analysis as well as
evaluation of the stock prices of the companies with the aim to evaluate the financial performance,
valuation of different aspects of the business like asset valuation and recommendations with the aim to
formulate effective financial strategies for the businesses’ sustainable growth (Cucchiella, D’Adamo and
Gastaldi 2015). At the time of the analysis and evaluation of these important factors, the finance managers
of the business organizations are needed to take into consideration certain factors like historical data
related to the financial performance of the companies, the financial performance of the industries in which
the companies are operating, economic environment of the countries in which the companies are
operating, nature of the business, the style of strategic development of the managements of the companies
and others; and all these aspects are used as basis of financial forecast as well as analysis of the financial
performance of the companies (Trugman 2016).
This report focuses on the financial performance as well as financial forecast of one of the major
Australian companies, Blackmores Limited (Blackmores). The main aim of this report is the analysis as
well as evaluation of the future financial performance of Blakemores along with analyzing and evaluating
the stock price, business valuation so that effective strategies can be recommended. In order to achieve
this objective, this report takes into account aspects like historical financial data of Blakemores, present
situation of the industry, economic development, nature of business and others. Blakemores is a major
Australian health supplement company operates in the health supplement industry of Australia. The
company was founded in the year of 1930 and it is headquartered at Sydney, Australia
(blackmores.com.au 2018). Different parts of the report consider the financial analysis and forecast the
company.

4
BUSINESS VALUATION AND FINANCIAL ANALYSIS
2. Blackmore’s Prospective Analysis
It is an essential part of this report as this part of the report takes into consideration the prediction
of the future financial performance of Blakemores and the main aim of this is the estimation of the value
of the organizations with the use of various models for business valuation along with the sensitivity
analysis. In order to achieve these objectives, this report takes into consideration the financial statements
of the Blakemores from the year 2013 to 2018.
2.1 Future Financial Performance of Blackmores
This part of the report takes into consideration the future financial performance of Blakemores by
considering all the relevant aspects like historical data, industry condition, economic condition and others.
2.1.1 Growth Rate of Sales
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
-30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00%
6.17%
36.01%
52.08%
-23.01%
8.87%
2.50%
2.50%
2.50%
2.50%
2.50%
Sales Growth Rate
Forecasted
Actual
Figure 1: Sales Growth Rate of Blackmores Limited
Source: (Created by the Author)
Sales growth can be considered as a certain metric that helps in the measurement of the ability of
the business organizations to increase their sales revenue over a fixed period of time; and there is not any
exception of this fact in case of Blackmores. This section of the report takes into consideration the
analysis of various financial factors of Blackmores such as historical financial performance of the
company, orientation of the health supplement industry of Australia, the present economic situation of

5
BUSINESS VALUATION AND FINANCIAL ANALYSIS
Australia, the nature of the business of Blackmores and others as all these aspects are required for
forecasting the sales growth of Blackmores for the next five years (Wales, Parida and Patel 2013).
The above figure indicates towards the fact that the growth of the sales of Blackmores is steady at
2.5% from the year 2019 to 2023. Steadiness in sales growth can be considered as a good indicator for the
sustainability of the company as it provides the motivation to the potential investors in invest in
Blackmores in the presence of steady sales growth. It can be observed from the historical performance of
Blackmores over the years that there have been some major fluctuations in the growth of the sales for the
company. As per the above table, the year 2014 witnessed small growth on sales that is 6.17%, but the
opposite situation can be seen in the year 2015 as the company registered huge growth in sales as
compared to 2014 that is 36.01%. As per the same trend, Blackmores registered growth in sales in the year
2016 that is 52.08%. The presence of some major contributors to this growth can be seen in Blackmores
like the expansion of the business of the company in China in the year 2015 as it has strengthen the
opportunity for investment in the company (Delen, Kuzey and Uyar 2013).
In addition, in the sale year, Blackmores added 170 new products too their product portfolio in
order to cater to the ever increasing demand of the customers. Apart from this, as a part of the strategy to
decrease the number of competitors, Blackmores acquired some major companies in the same industry
that led to the increase in sales. For example, Blackmores made the 100% acquisition of the shares of New
Century Herbals Pty Ltd and Global Therapeutics in the year 2016 in order to increase the sales growth by
increasing the amount of customers. Moreover, the nature of the product of Blackmores along with the
nature of the market provides the company with the opportunity to increase the sales. In addition,
expansion in China has majorly helped the company in increasing the sales due to the huge population of
the country (Coad, Segarra and Teruel 2016).

6
BUSINESS VALUATION AND FINANCIAL ANALYSIS
2.1.2 Profit Margin
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
7.33%
9.87%
13.95%
10.51%
11.52%
9.50%
6.00% 6.00% 6.00% 6.00%
Profit Margin
ForecastedActual
Figure 2: Profit Margin of Blackmores Limited
Source: (Created by the Author)
Profit margin is considered as another major indicator for the financial performance of the
companies and there is not any exception of this fact in case of Blackmores (Heikal, Khaddafi and
Ummah 2014). It is required to be mentioned that the management of the company considers Cost of
Goods Sold (COGS) as one of the major costs of their business as it contributes towards more than 30%
sales for Blackmores. For this reason, COGS has the uppermost impact on the profit margin of
Blackmores. Economy Forecast Agency has indicated towards the fact that there will be minor drop in the
exchange rate of AUD/CNY in the next five years and the effect of this will lead to the increase in COGS
for Blackmores. From the point of view of the sales, the result of depreciation of AUD against CNY will
cause in the increase in sales along with the increase in the other costs simultaneously (Delen, Kuzey and
Uyar 2013). The fact is observable from the profit margin forecast in figure 2 that there will be decrease in
the profit margin for Blackmores in the coming two years, but the profit margin will be steady after those
two years.

7
BUSINESS VALUATION AND FINANCIAL ANALYSIS
2.1.3 Asset Turnover
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
0.00
0.50
1.00
1.50
2.00
2.50
3.00
1.48
1.78
1.97
1.31 1.37
2.50 2.50 2.50 2.50 2.50
Assets Turnover Ratio
ForecastedActual
Figure 3: (Asset Turnover Ratio of Blackmores Limited)
Source: (Created by the Author)
Asset turnover ratio is regarded as another major metric to measure the financial performance of
the business organizations and this is also applicable for the financial operations of Blackmores (Agha
2014). This particular ratio helps in measuring the value of the sales or revenue of the companies
generated by using the assets of them and thus, this ratio is used to measure the financial efficiency of the
business organizations. It can be observed from the above figure that there have been fluctuations in the
asset turnover ratio of Blackmores over last years and the main reason behind this fluctuation is the
increase in the investment by the company in the other markets like China and others. It is mentioned in
the earlier part that there was major increase in the sales margin of the company in the year 2015 and 2016
due to the expansion in the markets like China; and this increase in revenue led to the increase in asset
turnover ratio in the year 2015 and 2016 that is 1.78 and 1.97 respectively. It is observable from the above
figure that the asset turnover ratio of Blackmores for the year 2018 is 1.37 and it implies that Blackmores
has been able in generating revenue worth $1.37 for every dollar of their assets. It can also be observed
from the forecasted part in figure 3 that the asset turnover ratio will be stable at 2.50 after the year 2018
(Muritala 2018).

8
BUSINESS VALUATION AND FINANCIAL ANALYSIS
2.1.4 Net Dividend Payout
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
84.91%
55.75% 57.69%
100.93%
72.17% 68.00% 68.00% 68.00% 68.00% 68.00%
Net Dividend Payout
Forecaste
d
Actual
Figure 4: (Net Dividend Payout for Blackmores Limited)
Source: (Created by the Author)
Dividend payout ratio is considered as a major indicator for the financial performance of the
business organizations and it is the fraction of the new income of the business organizations that they pay
to their shareholders in dividend (Oladipupo and Okafor 2013). Thus, it is regarded as a major profitability
ratio of the business organizations. On a more specific note, the dividend payout ratio assists in reflecting
the percentage of earnings of the companies paid to their shareholders. The above figure shows the
dividend payout by Blackmores. It is visible from the above figure that Blackmores paid the highest
amount of dividend in the year 2017 as Blackmores allocated 100.93% of the profit to their shareholders.
It indicates towards good profitability of the company in the year 2017. It can be seen on the overall basis
that there has been major fluctuation in the dividend payout ratio of Blackmores over the years and it
indicates towards the fluctuation in profitability in the business of Blackmores (Floyd, Li and Skinner
2015). However, based on the growth in the dividend payout ratio of Blackmores in the year 2017, it can
be expected that this ratio will grow in the future as a result of large distribution of the products of
Blackmores in the market. In the presence of all these aspects, it is assumed that the forecasted dividend
payout ratio of Blackmores for the coming years will be 68%.

9
BUSINESS VALUATION AND FINANCIAL ANALYSIS
2.1.5 Cost of Debt after Tax
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
4.92%
6.12%
2.87%
4.05% 3.54% 3.50% 3.50% 3.50% 3.50%
0.00%
Cost of Debt after Tax
Forecaste
dActual
Figure 5: Cost of Debt after Tax of Blackmores Limited
Source: (Created by the Author)
After tax cost of debt is considered as a rate of interest on the debts and it is a major financial
indicator for understanding the debt position of the companies (Heider and Ljungqvist 2015). The above
figure shows the cost of debt after tax of Blackmores on actual and forecasted basis. It can be observed
from the above figure that the forecasted cost of debt after tax of Blackmores will be 3.50% from the year
2019 to 2022. It is also observable from the above figure that Blackmores registered highest cost of debt
after tax in the year 2015 that is 6.12%. On the overall basis, it can be seen that there has been fluctuation
in the cost of debt after tax of Blackmores from the year 2014 to 2018. In this context, it needs to be
mentioned that the cash rate of RBA is expected to be remain unchanged in the coming years and interest
rate for the corporate loans is 1.5% set by the banks of Australia.
2.2 Valuation of Blackmores
This section of the report involves in providing the estimation of the value of the business of
Blackmores and its stock prices with the assistance of four specific valuation models and assumptions for
cost of capital.

10
BUSINESS VALUATION AND FINANCIAL ANALYSIS
2.2.1 Assumptions for the Valuations
The use of cost of equity can be seen in the aspects of Capital Asset Pricing Model (CAPM) and it
is based on the process of weighted average cost of capital (Frank and Shen 2016). It can be seen from the
table 1 that the rating of risk free rate is done with the use of 1 year average 10 years and it is 2.5%. The
measurement of beta of Blackmores is done at 0.34. 6% is considered as the average equity risk premium.
4.88% and 4.54% are the WACC and CAMP respectively for Blackmores.
Risk-Free Rate (Rrf) 2.50%
Risk Premium = RM – Rrf 6.00%
Cost of Capital for Equity (Re) 4.00%
Beta 0.34
WACC = NFO/(NFO+MVe)*Rd+MVe/(NFO+MVe)*Re 4.88%
CAPM = Rf + Beta * Risk Premium 4.54%
Outstanding Shares (000) 17,226.00
Share Price 131.29
Market Value 1,848,177.54
Table 1: CAMP and WACC
2.2.2 Four Valuation Model
The valuation models are shown below:
Particular Total Equity’s Value Price of Stock
Divided Discount Model (DDM) $1212299.54 $70.38
Residual Income Model (RIM) $1435171.24 $83.31
Residual Operating Income Model (ROIM) $1237463.17 $71.84
Discounted Cash Flow Model (DCM) $1469542.17 $85.31

11
BUSINESS VALUATION AND FINANCIAL ANALYSIS
Table 2: Modes for Valuation
2.2.2.1 Divided Discount Model (DDM)
The reliability of this model can be seen on the share price valuation of the company with the use
of the forecasted dividends; after that, it involves in discounting them back to the present value of the
prices (Lazzati and Menichini 2015). For example, the companies overprice the stocks in case their value
in DDM is less than the present stock price. Thus, there is a need for the use of CAPM for the calculation
of stock price with the help of this model. In the presence of CAMP, the cost of equity (Re) value is equal
to 4%. According to table 2, the generation of a stock price of $70.38 can be seen from DDM that is equal
to $1212299.54 (Agosto and Moretto 2015).
2.2.2.2 Residual Income Model (RIM)
The generation of residual income can be seen from the deduction of required rate of return on
equity from net income. As per this model, the company will disclose the actual economic profit of the
business in the presence of positive profit by them. Under the DDM model, the use of Capital Asset
Pricing Model (CAPM) can be seen by RIM (Heinrichs et al. 2013). Under both DDM and RIM, the value
of stock is the same, but RIM helps in providing the absolute value of the stocks. According to table 2, the
generated RIM is equal to $83.31 and the total value of the equity is equal to $1435171.24.
2.2.2.3 Residual Operating Income Model (ROIM)
This model puts main focus on the net financial obligations. Weighted Average Cost of Capital
(WACC) determines the ROIM unlike the previous discussed models (Bauman 2014). According to table
2, the value of cost of capital (Rf) can be obtained from WACC for Blackmores and it is equal to 4.88%.
The generated stock price from ROIM is $71.84 and equity total value is $1237463.17.
2.2.2.4 Discounted Cash Flow Model (DCM)
It can be seen from the table 2 that the derived stock price with the use of DCM is $85.31 and the
total value of equity under this model is $1469542.17. The use of forecasted free cash flow can be seen
under this model and it discounts them with the aim to reach to the present value. Compatibility of this
model can be seen with ROIM as both of them use WACC model (Mellichamp 2013).

12
BUSINESS VALUATION AND FINANCIAL ANALYSIS
2.3. Sensitivity Analysis
Sensitivity
Analysis:
Cur
ren
t
Val
ues
:
Sale
s
Gro
wth
-
Op
timi
stic
Sale
s
Pesi
mis
tic
PM
-
Op
tim
isti
c
PM
-
Pes
imi
stic
AT
O-
Op
timi
stic
AT
O-
Pesi
mis
tic
Div.
Pay
out
-
Op
timi
stic
Div.
Pay
out
-
Pesi
mis
tic
NB
C-
Op
timi
stic
NB
C-
Pesi
mis
tic
WA
CC-
Op
timi
stic WACC-Pesimistic
Sales Growth
Rate
2.5
0%
3.5
0%
1.5
0%
PM
6.0
0%
7.0
0%
5.0
0%
ATO
2.5
0
2.5
5
2.4
5
Dividend
Payout Ratio
68.
00
%
78.
00
%
58.
00
%
NBC
3.5
0%
5.0
0%
3.0
0%
WACC
3.9
92
%
6.0
00
% 4.000%
Discount
Dividend
Model (DDM)
Tot
al
Equi
ty
1,1
51,
08
4
1,1
59,
53
1
1,1
42,
63
6
30
7,6
31
11
5,5
43
84,
00
8
32
2,4
69
1,1
75,
05
4
1,1
27,
11
4
1,1
51,
08
4
1,1
51,
08
4
1,1
51,
08
4 1,151,084
Shar
e
Pric
e
34.
19
34.
45
33.
94
9.1
4
3.4
3
2.5
0
9.5
8
34.
91
33.
48
34.
19
34.
19
34.
19 34.19
Discounted
Residual
Income Model
(RIM)
Tot
al
Equi
ty
2,9
01,
50
3
3,1
55,
54
8
2,6
78,
95
7
22
2,9
46
5,3
32
2,3
77,
76
2
3,7
86,
72
1
-
89
1,5
45
70
2,9
46
3,5
67,
73
4
2,7
33,
32
6
2,9
01,
50
3 2,901,503
Shar
e
Pric
e
86.
19
93.
74
79.
58
6.6
2
0.1
6
70.
63
11
2.4
9
-
26.
48
20.
88
10
5.9
8
81.
20
86.
19 86.19
Discounted
Residual
Operating
Income Model
Tot
al
Equi
ty
1,7
10,
89
4
1,7
28,
42
5
1,6
93,
36
3
14
1,6
03
-
82,
49
3
1,7
11,
08
0
1,7
10,
70
1
1,7
10,
89
4
1,7
10,
89
4
1,7
10,
89
4
1,7
10,
89
4
55
4,1
38
1,699,949

13
BUSINESS VALUATION AND FINANCIAL ANALYSIS
(ROIM)
Shar
e
Pric
e
50.
82
51.
34
50.
30
4.2
1
-
2.4
5
50.
83
50.
82
50.
82
50.
82
50.
82
50.
82
16.
46 50.50
Discounted
Free Cash Flow
Model (DFCF)
Tot
al
Equi
ty
2,1
51,
89
7
2,1
69,
61
6
2,1
34,
17
8
37
5,3
53
86,
76
8
42,
49
9
39
9,4
43
2,1
51,
89
7
2,1
51,
89
7
2,1
51,
89
7
2,1
51,
89
7
98
6,2
14 2,140,884
Shar
e
Pric
e
63.
92
64.
45
63.
40
11.
15
2.5
8
1.2
6
11.
87
63.
92
63.
92
63.
92
63.
92
29.
30 63.60
Figure 3: (Table Showing Sensitivity Analysis)
Source: (Created by the Author)
The above table shows application of sensitivity analysis for the purpose of analyzing the four
methods which is used by the management of the company for the purpose of valuation. Sensitivity
analysis is used by business to understand the impact of certain independent variable on the dependent
variable of the business under specific conditions. The analysis which is shown in the table above
considers certain assumptions on the basis of which results of the four different method of valuation is
effectively shown by the business (Delen, Kuzey and Uyar 2013). The table also portrays that important
sensitivity factors like sales growth, ATO, Dividend Payout Ratio and weighted average cost of capital of
the business has significant impact on the valuation of share prices which is shown above. Therefore, the
analysis of sensitivity which is conducted in the above figure effectively shows the impact of important
independent variable such as WACC, ATO, sales growth on dependent variable of the business which is
shown to be share price of the business (Pardalos, Siskos and Zopounidis 2013).
2.3.1. Sales Growth
The sales growth as shown in the table above is an important factor which influences the share
price of the business. In a sensitivity analysis, an optimistic position and a pessimistic position are
considered. As per the optimistic sales growth which is shown to be 3.50% and due to which there has
been significant increase in the share prices of the business (Imai and Yamamoto 2013). The increase in
the sales of Blackmores Ltd is considered to be so high due to the opportunity which the business has in
terms of expanding the operations of the business in Asia especially China. The annual report of
Blackmores ltd for the year 2018 discusses the future potential which the company has in terms of
generating revenue from Asia. The pessimistic sales growth is taken to be 1.50% which assumes that the
demand for the products of Blackmores ltd will reach and a saturation point and thus the sales of the
business will fall (Borgonovo and Plischke 2016). The maximum share price valuation is shown for the

14
BUSINESS VALUATION AND FINANCIAL ANALYSIS
Discounted Residual Method of valuation as per the table which is shown above which is $ 93.74. On the
basis of the pessimistic condition which is assumed for the situation, the share price is shown to have
fallen considerably.
2.3.2. Profit Margin (PM)
As per the annual report, the management of Blackmores ltd has acquired the business of Catalent
Australia which is a medical supplement manufacturing site and the same is estimated to impact the profit
generating ability of the business and contribute to the growth of the business. The increase in the profit
margin of the business is shown to be 7% under optimistic situation and the same is shown to be 5% under
pessimistic situation (Modarres 2016). The policies and activities of the business are aimed towards
growth of the business which would also result in more profitability for the business.
The increase in the operating activities of the business in China has resulted in increase in the
revenue generating capacity of the business and thereby also the profitability of the business has also
increased. This shows the intent of the business to maximise the profits of the business and thereby in the
optimistic situation the share prices are shown to be high.
2.3.3. Asset Turnover (ATO)
The asset turnover of the business is also shown to be a determining factor which affects the
shares price of the business as shown in the table above. As per the annual reports of 2018, the business
has grown tremendously in the year and also generated appropriate assets of the business. The estimate is
shown to be 2.55% under the optimistic position while on the other hand, the estimate is shown to be
2.45% under the pessimistic position of the business (Razafindrambinina and Anggreni 2017). The impact
on the shares price of the business is shown in the above table. The annual reports of the business specify
that the company has invested significant amount in the assets of the business for the year 2018.
2.3.4. Weighted Average Cost of Capital (WACC)
The weighted average cost of capital of the business is also effectively demonstrated in the table
which is shown above. The return on equity of the business can be identified as the main the influencing
factor of cost of capital of the business (Frank and Shen 2016). As per the present situation which is stated
in the annual reports of the business, the management has established an efficient risk management system
which reduces the Beta and also market risk of the business and this in terms affects the WACC of the
business as shown in the table above (Ortiz-Molina and Phillips 2014). The WACC also affects the
valuation process which is followed by the management to value the shares of the business and the same is
shown under both optimistic and pessimistic situation.

15
BUSINESS VALUATION AND FINANCIAL ANALYSIS
3. Management Application for Blackmores Ltd
The analysis of the market conditions and also the valuations of the shares of the business for both
optimistic and pessimistic situation reveals that the business has prospects of achieving greater growth in
the years to come. As per the annual reports of the business, the management is in the process to further
expand the business operations and take the company to the next level in terms of profit generation and
sustainable growth of the business. This part of the assessment would be discussing about the
opportunities which are available to the business of Blackmores ltd regarding expansion of the scale of
operations of the business and also with respect to the competition which the business faces during the
period. This part would also be including recommendations which are suggested by the business and how
the same can bring about improvements in the operations of the business.
3.1. Opportunities
3.1.1. Growth Opportunities in Asian Market
The annual reports of Blackmores ltd for the year 2018 clearly indicates the intention of the
management of the business to expand and penetrate in the markets of Asia. The CEO’s letter indicates
that the business has done exceedingly well in Asia especially in China where the medical products of
Australia especially of Blackmores ltd have been extremely popular. This has resulted in increase in the
sales of the business exponentially and the business has recorded the best ever sales of the products of the
company in its history of 86 years of existence (Choi et al. 2015). This clearly indicates the expansion
plan of the business and also the intention of the business to expand in different regions of the world
(Kogan and Papanikolaou 2014). Therefore, it is clear that Blackmores ltd should continue to make
investments in its brands in China as the product is very much profitable in the area and has scope of
generating more revenues in future.
3.1.2. Revenue Generation and Brand Loyalty
The annual reports of Blackmores ltd for the year 2018 also shows that the sales revenue which is
collected by the business is shown to be highest in the history of the business. This can be attributed to the
sales revenue which the business has been able to generate in parts of Asia especially China. The annual
report specifies that the strong growth which is achieved by the business is due to the record sales which is
achieved by the business (Lee et al. 2015). The annual reports show that the gross profit margin of the
business has increased by 4.4%. The business has also been able to build a strong brand image for the
products which are offered among the customers which has created brand loyalty for the business in the
market and same also be counted as one of the factors which has created such high sales in the market

16
BUSINESS VALUATION AND FINANCIAL ANALYSIS
(Malik et al. 2013). The brand is so popular in Australia that it secured most trusted brand recognition for
a consecutive period of five years.
3.1.3. Innovation and Product Development
The annual report clearly sets out the objectives of the business for achieving sustainable growth
and development for the business. In addition to this, the competitive pressures which are in place in the
industry needs to be combated by the management of the company. In order to do so, the management
focuses huge amount of resources on the development of new products and also on innovative practices
which is to be followed in the operations of the business (Dadfar et al. 2013). As per the annual reports of
the business, the management of the business uses herbal and natural ingredients for the purpose of
making the products which are offered by the business. This is an opportunity for the business to develop
new products and also combat the competitive pressures which are available in the market.
3.2. Challenges
3.2.1. Focus on Australia Market
The focus is on the market of Australia as the major revenue which is generated by the business of
Blackmores ltd is generated from this market. The management of the company is focusing on achieving
growth in revenues of the business and therefore for the same purpose, the management also needs to
focus on the revenue which is generated by the company within Australian market. The industry faces lot
of competition from major medical companies providing similar health and vitamin products and therefore
the investments in the market has slightly detoriated. The management of Blackmores ltd needs to
formulate a strategic plan which would help the business to secure the desired level of revenue from the
market and also needs to differentiate the products which are offered by the business.

17
BUSINESS VALUATION AND FINANCIAL ANALYSIS
Figure 4: (Chart Showing 5 years valuation of shares of the business)
Source: ()
3.2.2. Competitors
The competitive pressure which is faced by the business of Blackmores ltd is very high as per the
market conditions. The company has been able to maintain the lead position in the market and is also a
preferred choice for the customers but however the close competitors of the business such as Swiss,
Thomson, Homart Spring leave and Healthcare are gaining up on the business with identical
products which are offered. The management needs to focus on such competitive pressures and
implement a strategy in order to combat the same. The adverse competitive pressure would affect
the revenue of the business if the same are not kept under check by the management of the
company.

18
BUSINESS VALUATION AND FINANCIAL ANALYSIS
3.2.3. Increase in the Costs of the Business
The overall costs of the business have also increased as the sales and scale of operations of the
business has increased over the years. As per the annual reports of Blackmores ltd for the year 2018, the
costs of the business are shown to have increased in comparison to previous years which is a sign of
concern for the business and the management of the company needs to take appropriate steps to rectify the
situation. An increase in the costs of the business has resulted in the lowering of profits of the business
which affects the interest of the business (Enqvist, Graham and Nikkinen 2014). The costs of the business
not only represent increase amount of expenditures for the business but also shows ineffectiveness of the
business to appropriately control the costs of the business on a day to day basis (Eriksson et al. 2015).
Therefore, the management of the company needs to come up with strategies as to how the costs of the
business can be controlled by the management of the company. In addition to this, a major portion of the
costs of the business is incurred in product development and also innovation activities which is carried on
by the management of the company.
3.3. Measures to be Adopted by the Business
The management of Blackmores ltd needs to come up with effective strategies for the purpose of
combating the situation which is presented before the management of Blackmores ltd for the year 2018.
Some of the measures which can be suggested to the management of Blackmores ltd are given below in
details:
 The management of the company needs to make the products which are offered by the business to
be different from the products which are offered by the competitors of the business. This can be
achieved by effectively investing the resources of the business in R&D activities and bring about
innovative products in the market.
 The management of the company needs to adopt an appropriate management accounting tool such
as budgeting, standard costing or any other technique for the purpose of reducing the costs of the
business and also needs to supervise the activities of the business in order to ensure that no
unproductive costs are incurred by the business.
 The management of the business needs to formulate strategies which can improve the reputation
of the business and also promote customer loyalty among the customers of the business.
 The management needs to invest more in the market of Asia as the same holds ore potential for
the business for making more revenues from the same with the help of the products which are
offered by the business.

19
BUSINESS VALUATION AND FINANCIAL ANALYSIS
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5. Appendix
Appendix 1: Forecasting
2016 2017 2018 2019 2020 2021
1 Forecast Sales
Sales Growth Rate 8.87% 2.50% 2.50% 2.50% 2.50% 2.50%
Sales Revenue
601,13
6 616,164
631,56
9
647,35
8
663,54
2
680,13
0
2 Forecast PM and calculate NOPAT
Forecast PM 11.52% 9.50% 6.00% 6.00% 6.00% 6.00%
NOPAT = Sales*PM 69,223 58,536 37,894 38,841 39,812 40,808
3 Forecast ATO and calculate NOA
Forecast ATO 1.37 2.50 2.50 2.50 2.50 2.50
NOA=Sales/ATO
438,51
2 246,466
252,62
7
258,94
3
265,41
7
272,05
2
Change in NOA
-
192,046 6,162 6,316 6,474 6,635
4 Calculate Free Cash Flow
FCF=NOPAT - Change in NOA 250,582 31,732 32,526 33,339 34,172
5 Forecast Net Dividend Payout
Divided payout ratio 72.17% 68.00% 68.00% 68.00% 68.00% 68.00%
Dividend 49,957 170,396 21,578 22,118 22,670 23,237
6
Calculate net payments to debt
holders
F=FCF-d 80,186 9,133 0 0 0
7
Forecast Cost of Debt and debt
balance
Forecast Cost of Debt after Tax 3.54% 3.50% 3.50% 3.50% 3.50% 3.50%
ND Opening 86,000 8,824 0 0 0
NFEAT=FCODAT*NDO 3,010 309 0 0 0
ND Closing=NDO+NFEAT-F 86,000 8,824 0 0 0 0

23
BUSINESS VALUATION AND FINANCIAL ANALYSIS
Check Leverage=debt/NOA Ratio 3.58% 0.00% 0.00% 0.00% 0.00%
8 Calculate Comprehensive Income
NI=NOPAT - NFEAT 55,526 37,585 38,841 39,812 40,808
9 Calculate equity
OE= NOA - ND 237,642
252,62
7
258,94
3
265,41
7
272,05
2
Appendix 2: CAPM and WACC
Risk Free Rate (RrF) 2.50%
Risk Premium= RM - RrF 6%
Beta 0.34
Cost of Capital for Equity (Re) 4%
WACC=NFO/(NFO+Mve)*Rd+Mve/(NFO+Mve)*Re 3.992%
CAPM=Rf + Beta*Risk Premium 4.54%
Shares Outstanding (000) 33,663
Share Price - 30/6/2018 142.50
Market Value 4,796,978
Appendix 3: Discounted Dividend Model (DDM)
Discounted Dividend Model
201
8 2019 2020 2021 2022 2023
Forecasted Dividend
170,39
6 21,578 22,118
22,67
0
23,23
7
Cost of Capital 4.54% 1.045 1.093 1.142 1.194 1.249
Calculate Forecast Dividend Growth
Pattern
-
87.34
% 2.50%
2.50
%
2.50
%
Calculate TV = Div/(r-g)
1,084,1
93
Discounted Dividend Stream to TV
Year 202,100
162,99
6 19,745 19,359
Discount TV 948,984
Total Equity Value
1,151,0
84
Share Price 34.19
Appendix 4: Discounted Residual Income Model (RIM)

24
BUSINESS VALUATION AND FINANCIAL ANALYSIS
Residual Income/Abnormal Earnings
Model
201
8 2019 2020 2021 2022 2023
Forecasted CSP/NI 55,526 37,585 38,841 39,812 40,808
Forecasted Book value of Equity/OE
237,64
2
252,62
7 258,943
265,41
7
272,05
2
Calculate Abnormal Earnings 46,020 27,480 28,484 29,196 29,926
Cost of Capital 4.54% 1.045 1.093 1.142 1.194 1.249
Calculate Forecast AE Growth
Patterns
-
40.29
% 3.65% 2.50% 2.50%
Calculate TV
3,207,3
96
Discount AE to TV Year 94,098 44,021 25,145 24,932
Discounted TV
2,807,4
05
Market Value
2,901,5
03
Share Price 86.19
Appendix 5: Discounted Residual Operating Income Model (ROIM)
Residual Operating Income Model 2018 2019 2020 2021 2022 2023
NOPAT
69,22
3
58,53
6
37,89
4 38,841
39,81
2
40,80
8
NOA
438,5
12
246,4
66
252,6
27
258,94
3
265,4
17
272,0
52
Book Value of Debt
86,00
0
Cost of Capital (WACC) 3.99% 1.040 1.081 1.125 1.169 1.216
Residual Operating Income
48,69
7
27,81
0 28,505
29,21
7
29,94
8
Calculate Residual Income Growth
patterns
-
42.89
% 2.50%
Calculate TV
1,910,7
00
Discountee Residual Operating
Income to TV Year 97,890
46,82
8
25,71
6 25,347
Discounted TV
1,699,0
04
Total Value of Firm
1,796,8
94
less:Book Value of Debt -86,000
Total Value of Equity
1,710,8
94

25
BUSINESS VALUATION AND FINANCIAL ANALYSIS
Share Price 50.82
Appendix 6: Discounted Free Cash Flow Model (DFCF)
Discounted Free Cash Flow Model 2018 2019 2020 2021 2022 2023
Forecasted FCF
250,5
82
31,73
2 32,526
33,3
39
34,1
72
Book Value of Debt
86,0
00
Cost of Capital (WACC) 3.99% 1.040 1.081 1.125
1.16
9
1.21
6
Calculate FCF Growth patterns
-
87.34
% 2.50%
2.50
%
2.50
%
Calculate TV
2,180,2
26
Discountee Residual Operating Income
to TV Year
299,22
8
240,9
63
29,34
3 28,922
Discounted TV
1,938,6
69
Total Value of Firm
2,237,8
97
less:Book Value of Debt -86,000
Total Value of Equity
2,151,8
97
Share Price 63.92