Blackmores Financial Analysis Report

This assignment focuses on a detailed financial analysis of Blackmores, a well-known supplement company. It examines the company's capital structure, including its low debt ratio and high equity proportion. The report analyzes key financial performance indicators such as earnings per share, P/E ratio, return on equity, and net income growth. It also incorporates expert financial analyst opinions regarding Blackmores' strengths and weaknesses, considering both short-term investment strategies and long-term fundamentals. Finally, the assignment discusses Blackmores' market position and competitive landscape.

Running head: FINANCIAL MANAGEMENT ANALYSIS
Financial management analysis
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1FINANCIAL MANAGEMENT ANALYSIS
Table of Contents
Part I – Debt valuation...............................................................................................................2
Part II – Share valuation.............................................................................................................3
Part III – Cost of capital.............................................................................................................7
Part IV – Market analysis...........................................................................................................9
Reference..................................................................................................................................10

2FINANCIAL MANAGEMENT ANALYSIS
Part I – Debt valuation
1. Short – term and long – term debt
Short term-debt – Blackmores restructured their borrowings during 2016 to the unsecured
debt with a common deed of terms with 3 banks. Short-term loan raised through the
unsecured overdraft facility from bank that is annually reviewed and becomes payable at call.
During the year 2016, total amount borrowed was amounted to $ 50,00,000, out of which $
570,000 was used and $ 44,30,000 remained unused.
Long-term debt – the long-term debt is raised by Blackmores through unsecured revolving
term of debt facility under the deed of common terms and the amount was $ 137,506,000 out
of which $ 55,446,000 was utilised and $ 82,060,000 remained unutilised.
2. Debt structure – total debt of the company is amounted to $ 17,793 ,000 out of which
approximately 100% was long-term debt
3. Industry influence – as the company belongs to retail industry and the retail industry
in Australia is flourishing rapidly the investors are interested in investing which in
turn, reduce the debt requirement of the company.
4. Cost of debt
From the financial report of the company for the year ended 30th June 2016 it is found
that the cost of debt for Blackmores is 2.8%.

3FINANCIAL MANAGEMENT ANALYSIS
Part II – Share valuation
1. Cost of equity of the company
Cost of equity (ke) = Rf + β (Rm – Rf)
Where, Rf = Risk free rate = 2.82%
Β = Beta = 0.35
Rm = Market risk premium = 4.35%
Therefore, ke = 2.82 + 0.35 (4.35 – 2.82) = 3.36%
2. Evaluation of the company’s performance
Revenue – it can be seen from the annual report of Blackmores for the year ended 30th June
2016 that the revenue of the company was amounted to $ 717,211 thousands as compared to
$ 471,615 thousand for the year 2015. Therefore, the revenue of the company is in increasing
trend.
Earning – looking at the earning of the company y it can be identified that net income of the
company was amounted to $ 100,020 thousands as compared to $ 46,556 thousand for the
year 2015 (Velez-Pareja 2016). Therefore, the profit of the company is in increasing trend
and the increase is 215%. Therefore, it can be said that the from the profit perspective, the
company is growing well.
EPS – the EPS of the company for the year 2016 is 575.9 cents whereas for 2015 it was
269.10 cents. It represents that the EPS percentage on the share price for the year 2016 is
114.01% as compared to 80.36% of 2015. Therefore, the EPS is in increasing trend and
significantly grown over the year 2015 to 2016.
Dividend – the final dividend paid by the company for the year ended 30th June 2015
amounted to $ 23,254,000 that represents the dividend per share of 135 cents. However for
the year ended 2016, the total amount of dividend was $ 36,174,000 that represents the
dividend per share of 210 cents. It represents that the company is growing with respect to
payment to the shareholders.

4FINANCIAL MANAGEMENT ANALYSIS
Growth expectation – the growth aspects of the company for the year ended 30th June 2016
were as follows –
 The revenue of the company reached to $ 717 million that shown an increase by 52%
as compared to 2015.
 The EBIT of the company jumped to 101% and amounted to $ 145 million.
 The net profit after tax of the company jumped to 114% and reached to $ 100 million
 EPS of the company increased to 114.5% and amounted to 580.6 cents per share
 The fully franked dividends were increased by 102% and reached to 410 cents per
share.
The main reason behind the revenue growth of the company were various reasons
including launching of new 117 products and new acquisition of the business ventures.
3. Valuation of company’s stock
Comparable approach – the main objective of the equity valuation is estimating the value of a
security or firm. One of the main approaches for valuing the stock is the comparable
approach. The comparable approach is relative valuation approach and is used to evaluate the
company’s value through the usage of price earnings ratio. The most common method of
valuing the stock under comparable approach is the next twelve month (NTM) approach. The
comparable approach for Blackmores with its peers are shown as below –
Company name P/E Last P/E 2017 P/E NTM
Blackmores Limited 26.7 36.3 30.5
Food products 16.21 19.97 18.75
S & P / ASX 200 17.84 22.0 20.6
Australia -2.16 14.17 14.03
It can be identified from the above table that the P/E NTM for Blackmores is
considerable high at 30.5 as compared to its peer Food Products at 18.75. Further, the last 5
years historical average for Blackmores is way better at 26.7 as compared to its peers.
Dividend growth model – under this the dividend yield of the company is compared with the
peers for valuing the stock. The comparable approach with respect to dividend yield for
Blackmores with its peers are shown as below –

5FINANCIAL MANAGEMENT ANALYSIS
Company name Past year Current year Future year
Blackmores Limited 2.06% 2.54% 2.95%
Asaleo Care 6.45% 6.27% 6.39%
BWX 0.99% 1.48% 1.85%
It can be seen that the dividend yield of Blackmores at 2.95% for future year is
considerably low as compared to 6.39% of Asaleo Care. However, it is better as compared to
1.85% of BWX.
4. As per the above analysis with P/E ratio and dividend growth model, the P/E ratio
approach is looking better for valuing the stock of Blackmores as the price earning of
the company is far better as compared to its peers.
5. Apart from P/E ratio and dividend growth model, the other information that can be
used for valuing the stock of the company are the market capital, net profit after tax,
dividend per share, changes in earnings per share of the company compared to its
peers.

6FINANCIAL MANAGEMENT ANALYSIS
Part III – Cost of capital
1. Calculation of WACC
Net debt = 17,793
Shareholder’s equity = 178,263
Weight of debt = 10%
Weight of equity = 90%
WACC after tax –
WACC = wd (cost of debt after tax) + we (cost of equity)
= [(1-0.303)*(0.1*2.82)] + (0.9*3.36)
= 0.197 + 3.024
= 3.22%
2. Tax rate of the company for the calculation of WACC is 30.30%.
3. Difference between cost of equity and cost of debt
Debt are the funds borrowed that is to be paid at future date. The debt allows the
organization to leverage the small sum of money into the greater amount. The borrower has
to pay interest on the borrowing that is known as the cost of capital and generally the debt
payment is tax-deductible. On the other hand, the equity capital is generated from the funds
that are invested by the investors (Shibata and Nishihara 2015). The returns on the
investments are paid through repayment on the basis of the performance of the company. For
paying the investors, the company must earn to produce the returns. Therefore, there is
difference in the cost of debt and equity.
4. Yes, the current liabilities are included while calculating the cost of capital. The main
advantage of including the current liabilities in cost of capital is the current liabilities
are tax deductible. However, the main disadvantage of including the current liabilities
in cost of capital is it will increase the risk (Della Seta, Morellec and Zucchi 2015).
5. Major value for the calculation of WACC for Blackmores is equity it carries 90%
weightage in the capital structure. As the debt component is lower as compared to the

7FINANCIAL MANAGEMENT ANALYSIS
equity component in the capital structure of Blackmores, it represents the stability of
the business. Further, the high debt component is treated as the company is more risky
by the investors. Therefore, the investors will take the company as good one for
making their investment related decision.
6. Blackmores recently increased its plant capacity and undertaken the new market
campaign through borrowing debts as the company is having only 10% of debt in its
capital structure.
7. The capital structure of Blackmores includes 10% debt and 90% equity that amount to
$ 17,793,000 net debt and $ 178,263,000 equity. It is considered better if the capital
structure includes more equity and less debt. An ideal proportion for debt to equity is
1:2 that means equity is double as compared to debt. However, as the company’s
capital structure includes only 10% of debt, it can borrow more debt if required.
8. The optimal capital structure is stated as the best ratio of debt to equity at which the
firm can maximizes its value (De Fiore and Uhlig 2015). For any company, it is that
structure which offers the balance among the ideal range of debt to equity and which
minimizes the cost of capital for the firm. If the capital structure includes more debt
portion it will make the company more burdened for paying the interest and expose it
to more risk which in turn deteriorate the economic condition of the company.

8FINANCIAL MANAGEMENT ANALYSIS
Part IV – Market analysis
1. Blackmores financial performance
As per The Wall Street Journal the earning per share of the company is 3.42, P/E
ratio is 39.69, diluted earnings per share is 3.40 and return on total total capital is 24.08.
However, the net income growth of the company is - 46.65%. The book value per share of the
company is 10.31
2. Financial analyst’s report
As per the financial analysts, the company has the strong fundamentals with lower
mix of debt, profitability, growth and visibility criteria. However, with regard to the short-
term strategy of investment the company is regarded to have the poor fundamentals (Valta
2016). The company has higher margin of return that supports the profitability of business.
However, the company is not generous with regard to the compensation of the shareholders.
I am agree with the financial analyst’s report as the debt is comprised of 10% of total
capital structure and the net margin of the company is 10.74 and the return on equity is 33.17
3. Any other item to be mentioned is that the P/E ratio NTM of the company is higher at
30.5 as compared to its peers.

9FINANCIAL MANAGEMENT ANALYSIS
Reference
De Fiore, F. and Uhlig, H., 2015. Corporate debt structure and the financial crisis. Journal of
Money, credit and Banking, 47(8), pp.1571-1598.
Della Seta, M., Morellec, E. and Zucchi, F., 2015. Debt structure, rollover traps, and default
risk. Working Paper.
Shibata, T. and Nishihara, M., 2015. Investment timing, debt structure, and financing
constraints. European Journal of Operational Research, 241(2), pp.513-526.
Valta, P., 2016. Strategic default, debt structure, and stock returns. Journal of Financial and
Quantitative Analysis, 51(1), pp.197-229.
Velez-Pareja, I., 2016. Return to basics: cost of capital depends on free cash flow.