Comprehensive Financial Analysis of Bega Cheese Ltd. Report

This report provides a comprehensive financial analysis of Bega Cheese Ltd., an Australian dairy company. It examines the company's background, comparative advantages, and market position. The analysis includes a detailed assessment of profitability ratios (return on equity, earnings per share, return on assets, gross profit margin, and net profit margin) and operating efficiency ratios (account receivable turnover, inventory turnover, account payable ratio, working capital turnover, and asset turnover ratio) over a three-year period. The report also analyzes cash management, sensitivity to new products, and both systematic and unsystematic risk factors. Furthermore, it evaluates the company's dividend policy and offers an investment recommendation based on the findings. The report concludes that Bega Cheese Ltd. presents a potentially profitable investment opportunity, particularly due to its increasing dividend payout ratio.

Running head: FINANCIAL ANALYSIS OF BEGA CHEESE LTD.
FINANCIAL ANALYSIS OF BEGA CHEESE LTD.
Name of the Student:
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Author Note

1FINANCIAL ANALYSIS OF BEGA CHEESE LTD.
Abstract
The report is prepared to analyse the financial performance of Bega Cheese Ltd. This report
provides the brief about the firm and perform the analysis of the profitability and operating
efficiency ratio along with the dividend pay- out ratio policy of the firm. The report also
highlight the comparative advantages of the firm along with the financial risk of the firm.
Further, this report analyse the trend analysis of the ratio and the cash management activity of
the firm.
In the basis of the above transaction, this report recommends to add the Bega Cheese Ltd in
the portfolio of their investment as the company is performing good and shows the increasing
trend in the dividend pay- out ratio. The investing in Bega Cheese Ltd will be profitable for
the investors in the long run.

2FINANCIAL ANALYSIS OF BEGA CHEESE LTD.
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Bega Cheese Ltd....................................................................................................................3
Comparative advantages of Bega Cheese Ltd........................................................................4
Ratio Analysis........................................................................................................................5
Cash Management analysis....................................................................................................9
Sensitivity Analysis................................................................................................................9
Risk Analysis.......................................................................................................................10
Recommendation Letter.......................................................................................................12
Conclusion................................................................................................................................13
References................................................................................................................................13

3FINANCIAL ANALYSIS OF BEGA CHEESE LTD.
Introduction
The report titled “Financial Analysis of Bega Cheese Ltd” is prepared to analyse the
financial performance of the Bega Cheese Ltd. The main objective of the report is to analyse
the financial performance of the any food retailing company of Australia. Hence, this report
chooses the Bega Cheese Ltd. This report contains the brief description of the Bega Cheese
Ltd including the core activity of the firm, its market and like. The report also identify the
comparative advantages of the firm along with the present situation of the firm. Further, the
report analyse the profitability and the operating efficiency ratios of the firm for the last three
years along with the trend analysis of the ratios. The report also analyse the cash management
of the firm along with the marketable security present in the current assets of the firm.
Further, this report performs the sensitivity analysis of the firm in respect of the new product
of the firm. The report also analyse the systematic risk and the un- systematic risk factors that
can affect the performance of the firm along with the dividend policy of the firm. Lastly, this
report provides the letter of recommendation to the investors who are the client of advisory
firm in the basis of the above analysis.
Discussion
Bega Cheese Ltd.
The Bega Cheese Ltd. is dairy company of Australia having the head office in the
Bega, New South Wales, Australia. Initially, the Bega Cheese Ltd. is incorporated as the
agriculture co- operative firm and the owners of the firm was there dairy suppliers. In 2011,
the company get the listing in the Australia Security Exchange and still the half of the total
share of the firm still hold by the dairy suppliers of the firm. This is one of the largest food
retail company of the Australia. The firm also owned the one fourth of stake in the Capitol
Chilled Foods Australia Ltd that is capital territory sole dairy manufacture of the Australia.

4FINANCIAL ANALYSIS OF BEGA CHEESE LTD.
The fifty percent revenue of the Bega Cheese Ltd. is arrived from the retail cheese and the
processed cheese under the flagship brand name of Bega. The Bega Cheese Ltd. have more
than 20% market share in the Australian retain cheese market. The company also export the
cheese in the foreign markets in more than 40 countries. The dairy product of the Bega
Cheese Ltd. is almost available in the every store, departmental and supermarket across the
country. The main business segment of the Bega Cheese Ltd. are the core dairy ingredients
like cheese, cream and powder milk this covers the 40% of the part of their revenue. The
remaining revenue of the firm is generated from the products like nutrition products like
lactoferrin and milk protein and the other products of the firm.
Comparative advantages of Bega Cheese Ltd.
The Bega Cheese Ltd. has a large and strong history in the Australia. By analysing the
history of the firm the followings comparative advantages of the Bega Cheese Ltd.: -
 New products: - The firm is mainly known for the developing the new products as
per the requirement of the customers (Birchall, 2017). This the biggest advantage for
the company as the company have the successful record of accomplishment in
developing the new product.
 Strong distribution chain: - The company have the strong distribution chain across
the Australia as the product of the firm is easily available in the all the stores,
departmental stores and supermarket. The company also have the long term
agreement with two different distribution agents to ensure the smooth distribution of
the products in the Australian market (Robinson et al, 2015). The strong distribution
network is also a comparative advantage for the company.
 Strong brand portfolio: - The Bega Cheese Ltd. has the more strong brand portfolio
compared to its competitors that is also an advantage for the firm. The firm invested
more fund to build the strong portfolio of the company.

5FINANCIAL ANALYSIS OF BEGA CHEESE LTD.
 Successful track record: - The company have the successful track record in the
acquisition and mergers so far. This shows that the management of the firm capable
to make the sound decision for the development of the firm. This is also an important
advantage for the firm and help the firm to attract the investors.
Ratio Analysis
Profitability ratio
To perform the profitability of the firm this report calculates the following ratios of
the chosen firm for the year 2016, 2017 and 2018 from the annual report of the company. The
profitability ratio of the firm states the profit earning capacity of the firm (Uechi et al, 2015).
The following chart shows the different profitability ratios of the firm for the last three years:
-
Return on Equity Return on asset Gross profit margin Net profit margin
0
0.05
0.1
0.15
0.2
0.25
Profitability Ratio
2016 2017 2018
There are several ratios that states about the profitability of the firm. Here, the
following ratios are consider to analyse the profitability of the firm: -
 Return on equity: - The return on equity shows the profit generating capacity of the
firm by using the available capital of the firm. This show the ability of the firm to
generate the profit and measures it in the basis of the total equity of the firm. Here, the

6FINANCIAL ANALYSIS OF BEGA CHEESE LTD.
shows the 0.09 in 2016, 0.24 in 2017 and 0.04 in 2018. This ratio of the firm is low
hence cannot be consider as good. The company need to focus in its return on equity.
 Earnings per share: - The earning per share of the firm measures the profit earned by
the firm in per share outstanding. This shows the earning capacity of the firm in per
outstanding share. This is the most important ratio of the firm in investors’ point of
view. The higher earnings per share is consider as good for the firm as it helps the
company to attract the investors. This ratio also helps the investors to calculate their
return on investment. Here, the firm Bega Cheese Ltd shows the highest earning per
share in the year of 2017 that is $ 90.90. While, in 2016 $ 18.90 and in 2018 in $
15.60. The earnings per share of Bega Cheese Ltd can be consider as good.
 Return on asset: - The return on asset measure the profit generate ability of the firm
by using its available asset. This shows how efficiently the firm use its assets to
generate the profit of the firm. Here, again the high ratio is consider as good for the
company. The Bega Cheese Ltd shows the return on asset ratio as the 0.05, 0.13 and
0.02 for the year 2016, 2017 and 2018 respectively. This is very low and not
favourable for the firm as this means the company does not use its assets properly to
generate the profit for the firm.
 Gross profit margin: - The gross profit margin of the firm reveals that how much
profit the firm earns by selling the product of one dollar. In other words, it shows how
much company expends to sell the product. The high profit margin of the firm shows
the company expends the low amount as the cost of goods sold and this is consider
good for the firm. Here, the Bega Cheese Ltd shows the 13% margin in the year 2016
and 2017 and 19 % in the year 2018. This margin can be consider as the favourable
for the company. The firm also showed the growth in the year of 2018 that means
company is developing its operation in positive direction.

7FINANCIAL ANALYSIS OF BEGA CHEESE LTD.
 Net profit margin: - Same like the gross profit margin, the net profit margin of the
firm shows the ability of the firm to generate the profit from the revenue of the firm.
This also provide the idea about the expenses paid by the firm form the gross profit of
the firm. The higher margin is good for the firm. The Bega Cheese Ltd shows the 2%
margin for the year 2016 and 2018 while; in 2017 the margin reported by the
company was 11%. The net profit margin of the firm is not as high as considerable as
good. Hence, the company need to focus in the management activities to minimize the
expenses not related to the operation.
Operating efficiency ratio
Account Receivable
turnover Inventory Turnover Account Paybles
turnover Working capital
turnover Total asset
turnover
0
1
2
3
4
5
6
7
8
9
Operating Efficiency Ratio
2016 2017 2018
The operating efficiency ratio reveals that how efficiently the firm performs the
operating activities. This measures the effectiveness of the firm in their operating activities.
The efficiency in the operation analysis is very important for the investors as this helps to
predict the future performance of the firm (Pando, San-José & Sicilia, 2019). To analyse the
operating efficiency of the firm the report analyse the following operating efficiency ratio of
the Bega Cheese Ltd: -

8FINANCIAL ANALYSIS OF BEGA CHEESE LTD.
 Account receivable turnover: - The account receivable turnover ratio of the firm
shows that how efficiently the firm recovers the money from their debtors. The ratio
shows the average recovery period from the debtors of the firm. Here, the Bega
Cheese Ltd shows that the 6.22, 7.28 and the 7.17 for the year 2016, 2017 and 2018.
The lower ration is consider as good (Bhootra, 2018). The account receivable
turnover of the Bega Cheese Ltd can be consider as good because the average
recovery period from the investors are less.
 Inventory turnover ratio: - The inventory turnover ratio shows the how efficiently
the firm maintains its inventories or the stock of the inventory. This also shows the
efficiency of the firm in using the inventories. Here, the Bega Cheese Ltd shows the
inventory turnover ratio of 5.4, 6.4 and 5.0 in the year 2016, 2017 and 2018
respectively. This can be consider as good but in this industry the more better
inventory turnover ratio can be expected.
 Account payable ratio: - The account payable ratio measures the efficiency of the
firm in respect of paying out its creditors. In simple words, this measures how
efficiently the firm paid its creditors. The value shown by the Bega Cheese Ltd in last
three years is good as there is the decreasing trend in the ratio that is good for the
firm.
 Working capital turnover: - The working capital turnover ratio shows that how
efficiently company uses its working capital to generate the revenue of the firm
(Mathuva, 2015). Here, Bega Cheese Ltd shows 8.73 in 2016, 2.22 in 2017 and 7.54
in 2018. This can be consider as good but the decreasing trend in this ratio is not
good for the firm.
 Asset Turnover ratio: - The asset turnover ratio measures that how efficiently the
firm uses its assets to generate the profit for the firm. The high ratio is consider as

9FINANCIAL ANALYSIS OF BEGA CHEESE LTD.
good for the firm. Here, the ratio of Bega Cheese Ltd is good but company can
increase it further but decreasing trend in the ratio is not good for the firm.
Trend Analysis of financial ratio
To understand the trend of the Bega Cheese Ltd.’s ratio the report performed the
horizontal trend analysis of the ratios considering the data of last three years (Singh, Jham &
Kaur, 2018). The basis of the trend analysis is the changed between the value of 2016 to 2017
and 2017 to 2018. As per the horizontal analysis, the firm showed the increasing trend in
value of the 2017 ratio compared to the 2016 in the profitability ratio of the firm. While, the
operating efficiency ratio of the firm is decreased in the year 2017. The Bega Cheese Ltd
reported the highest growth in earning per share of 381% and the highest decrease in the
working capital turnover ratio of 75%.
In the second year of trend analysis that is 2017 to 2018, the firm reported the
decreasing trend as all the ratio is decreased in 2018 compared to 2017 except gross profit
margin and working capital turnover (Michaely & Qian, 2017). In this year firm reported the
highest growth of 239 % in working capital turnover and highest decrease in net profit
margin and earnings per share of 83%. The overall performance of the firm is increased in
2017 but again decrease in 2018.
Cash Management analysis
The Bega Cheese Ltd only have the derivative financial instrument as the marketable
securities in the current asset of the firm (Baker & Weigand, 2015). The value of the
marketable security as per the annual report of Bega Cheese Ltd for the year 2018 is $
707,000. The firm uses this market security to manage and reduce the various risk of the firm.
This is used to ensure the availability of the liquid funds and to avoid the overdraft to manage
the liquidity risk. This is used to secure the ability of raising the funds to manage the funding

10FINANCIAL ANALYSIS OF BEGA CHEESE LTD.
risk. This also used in the various performance of the firm to manage the market risk, credit
risk, operational risk and other business related risk.
Sensitivity Analysis
The sensitivity analysis is performed to ascertain that how different values of
independent variables affect the dependent variables. This technique is used to analyse the
change in the output by changing the one or more variables of input (Michaely & Qian,
2017). Here, in the given case, the net present value of the proposed project is the $
32,05,217.54. If the input variable unit sale decreases by the 10 %, Selling price decreased by
the 10 %, Variable cost increased by the 10 % and the fixed cost of the project is increased by
the 10 % then the net present value of the proposed project is decreased by the 75 % and
become $ 6,88,978.35. Hence, the changes in the input variables deeply affect changes the
output of the project. This helps the management of the firm to choose the project wisely
which is more profitable for the firm.
Risk Analysis
The Bega Cheese Ltd have the variety of the financial risk including currency risk,
interest risk and price risk (Bartram, 2015). This risk can be classified in two types systematic
risk and unsystematic risk.
Systematic Risk
The systematic risk are those risks which for the entire market or the industry and
company does not have any control over it. The Bega Cheese Ltd faces the following
systematic risk in their business operation: -
 Foreign exchange risk: - As the firm operates in the different foreign countries,
hence the risk of the foreign exchange is an important risk for the firm. The exchange
rate of us dollar, NZD and EURO affect the business of the firm.

11FINANCIAL ANALYSIS OF BEGA CHEESE LTD.
 Interest rate risk: - The interest rate of the countries also varies time to time. This
change in the interest rate also affect the business.
Unsystematic Risk
The unsystematic risks are those risks that can be controlled by the companies and
varies from company to company (Bustos, Watts & Ayala, 2017). Here, the followings two
are the major unsystematic risk for the Bega Cheese Ltd: -
 Credit risk: - As per the annual report of the firm, all impaired balance of the firm
are due for more than 60 days, shows that the company have the high credit risk but
there is no history of default reduces this risk in some context.
 Liquidity Risk: - The firm also has the liquidity risk that may affect the performance
as the leverage ratio of the firm is more than 3.5 times. The company need to
minimize this ratio to avoid the liquidity risk (Acemoglu, Ozdaglar & Tahbaz-Salehi,
2015).
Dividend
The dividend pay- out ratio of the firm is 0.48, 0.11 and 0.69 times in the year 2016,
2017 and 2018 respectively.
The dividend policy of the firm states that the provision is made for the dividend by
the firm. The announced dividend being appropriately authorised and no longer under the
entity on or before the end of the reporting period.