Detailed Financial Analysis of A2 Milk Company - Semester 2

This report provides an in-depth financial analysis of The A2 Milk Company, a New Zealand-based firm listed on the ASX 200. It begins with a company overview, including its core activities, market presence, and ownership structure, detailing substantial shareholders and key governance figures. The analysis includes calculations of key financial ratios such as ROE, ROA, and the debt ratio, along with an explanation of the equity multiplier and its impact. The report further examines the movements in A2 Milk's share price, comparing it against the All Ordinaries Index, and highlights significant announcements that have influenced the company's stock. Concluding with a recommendation for investment, the report suggests that the company's improved financial performance, high share returns, and strategic leadership changes make it a promising investment opportunity.

RUNNING HEAD: CORPORATE FINANCE
Financial statement analysis

Corporate finance 2
Contents
Introduction......................................................................................................................................2
Description of the company.............................................................................................................2
Ownership and governance structure...............................................................................................3
Main substantial shareholders......................................................................................................3
Main people involved in the firm governance.............................................................................3
Calculation of key ratios..................................................................................................................4
Graph and share price movements...................................................................................................5
Significant announcements..............................................................................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Introduction
The report explains the overall analysis of a New Zealand based company named as The A2
Milk Company. It provides a brief overview of the firm highlighting its core activities and the
market in which it operates. Furthermore, the report also discusses the structure of ownership and
governance including its CEO, board of directors and substantial shareholders. In the later part,
the key ratios of the company are calculated which includes ROE, ROA and Debt ratio followed
by the explanation of the concept of equity multiplier. The report also discusses the movements
in the share price of A2 Milk and the same has been compared to the all ordinaries index. In the
last, the significant announcements made by the firm are made followed by a conclusion in the
end.
Description of the company
The A2 Milk Company Limited is a corporation which is listed on ASX 200 and is engaged in
the commercialization of intellectual property related to the company and distribution of the A2
brand milk. Previously, it was known as A2 Corporation Limited and was found in 2000. The
firm also owns the intellectual property that allows the identification of cattle for producing A1
protein free milk products. The company operates through four segments that include Australia
and New Zealand, United Kingdom, USA, China and Asia. The sale of milk, cream, milk
powder, ice cream and other related products is operated through Australia and New Zealand
segment. The Asian segment and China includes sale of infant formula, whole milk powder and
the division is also responsible for the supply chain of infant formula from NZ to all the markets
(Reuters. 2018).

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A2 Milk operate in consumer staples sector and as per the report, Australian costumer staples has
made a gain of 24.1% recently due to the outstanding performance of Wesfarmers Limited
through its Coles and Bunnings sector. The share price of the company rises by 22% making a
huge contribution in the growth of sector (The Motley Fool. 2018).
Ownership and governance structure
Following section provides the details of individuals that forms the governance and ownership
structure of A2 Milk Company.
Main substantial shareholders
 Higher than 20% shareholdings
The company has no shareholders that hold more than 20% of the shares in the organization.
 Higher than 5% shareholdings
i) Commonwealth Bank with 7.34% holdings
ii) Pendal Group Ltd. With 5.26% holdings
iii) BlackRock Inc have holdings of 5.21%
iv) UBS Group AG and other related bodies hold 5.05% of holdings.
Main people involved in the firm governance
 The Chairman: David Hearn (Executive director)
 Board of directors: Julia Hoare (Deputy Chairman & Non-Executive Director), Peter
Hinton, Warwick Every-Burns and Jesse Wu.
 The CEO: Geoffrey Babidge (Managing Director and Chief Executive Officer (CEO).
None of the shareholders are involved in the firm governance of the company.

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Calculation of key ratios
Part 1
Ratios Formula 2014 2015 2016 2017
Return on Assets NPAT / Total Assets 0.01% -2.4% 14.5% 26.4%
Return on
Equity Net Profit After Tax / Ordinary Equity 0.02% -3.6% 22.9% 37.5%
Debt ratio Total Liabilities / Total Assets
23.48
% 34.0% 36.7% 29.8%
(A2 Milk. 2017).
Part 2
According to the concept of DuPont analysis the return on equity breaks down into different
components. The calculation of ROA is divided into two elements and then the product is
multiplied with the equity multiplier which is calculated by dividing total assets with owners’
equity. It is the phenomenon which establishes a link between company’s return on assets and
return on equity. The equity multiplier is used to measure the degree of leverage taken by the
firm. Generally, a high multiplier indicates higher portion of debt financing. The manner in
which the multiplier influences the relationship of ROE and ROA is that an increase in it will
bring an upsurge in the total assets which result in a decrease in the ROA. However, increase in
sales quantity will boost the ratio but the multiplier will remain same. Thus, it can be interpreted
that the variable has negative and no relationship with the ROA. Therefore, a high multiplier will
reduce the ROA and increase the ROE whereas a boosted return on assets ratio will bring an

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upsurge in return on equity, keeping the equity multiplier constant (Brigham and Houston,
2012).
Part 3
The ROE of A2 Milk Company was more than its ROA for the past four years. in 2015, both the
ratios were negative. However, in 2016, the trend got reversed and the firm reported a ratio of
22.9% in 2016 and 37.5% in 2017. This was due to the huge amount of profit earned by the
company in the last two years. The reason for having a negative ratio was the losses made by A2
Milk in 2015. The strong growth in A2 Milk brand contributed to the increase in profits. This is
the reason why ROE (EBIT ) was more than the ROA (EBIT) in case of A2 Milk Company.
Graph and share price movements
Part 1
Graphical representation of the fluctuations in the share prices of A2 Milk and the comparison of
the same with All Ordinaries Index.
1/05/2016
1/07/2016
1/09/2016
1/11/2016
1/01/2017
1/03/2017
1/05/2017
1/07/2017
1/09/2017
1/11/2017
1/01/2018
1/03/2018
1/05/2018
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
Share price movements
Average return (A2M)
Average return (ASX)
Months
%

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(Source: Yahoo Finance. 2018).
Part 2
The above graph shows the variations in the average returns of company’s share prices and
market return. It can be interpreted that the market has been stable for the past two years while
huge movements can be observed in the share price returns of A2 Milk. In October 2016, the
company offered high return of 36% while the market was at low 2.3%. Similarly, when
company’s return became negative the market remains positive. Overall, it can be said that
returns offered by A2 Milk were higher than the market. In the start of 2018, A2 Milk offered
47.5% of returns while the market was negative. Thus, it can be said that the line is not closely
related and the firm’s stock is highly independent of the market fluctuations.
Significant announcements
The following are the noteworthy announcements made that have influenced the share price of
the company.
 The company announce about its financial results for the year 2018. It is reported that the
revenue of the firm increased by 68% with an upsurge of 101% in EBITDA. The report
also highlights the increase in company’s EPS by 113%. All this has impacted the share
price of the firm (ASX. 2018).
 On July 2018, the company declare the appointment of Ms Jayne Hrdlicka as managing
director and CEO of A2 Milk. Previously, she was the senior executive having strengths
related to A2MC’s next growth phase. All the material terms of Jayne’s employment are
properly disclosed in the announcement (ASX. 2018).

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 On January 2018, A2 Milk Company announce about the expansion of its US business to
the North East region. The area is significant for the refrigerated milk category and has
20% of the total milk category volume in US. As a result, the retail stores of A2 Milk
increased in the numbers from 3600 to 5000 (ASX. 2018).
Conclusion
From the above report, it can be concluded that the performance of A2 Milk Company has
improved and increased from financial aspect as its debt ratio reduces in 2017 and return on
equity and return on assets has shown an upsurge during the same year. Also, the company has
offered high returns on its shares irrespective of the fluctuations in the market return. Further, the
appointment of Ms Jayne Hrdlicka will help the business to grow with a high pace with
appropriate strategies. So, it will be recommended to the investor to invest $10 million in the
company as it is focused on increasing its sales and improving its profits. Moreover, the
company has offered high returns to its shareholders so it will be appropriate to invest the funds
in the company.

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References
A2 Milk (2017). Annual Report 2017. [Online]. Available at: https://thea2milkcompany.com/wp-
content/uploads/The-a2-Milk-2016-2017-Annual-Report-spreads.pdf [Accessed 7th October
2018].
ASX (2018). The a2 Milk Company expands US business to the North east. [Online]. Available
at: https://www.asx.com.au/asxpdf/20180116/pdf/43qvn9wd8qfth0.pdf[Accessed 7th October
2018].
ASX (2018). Annual Report 2018. [Online]. Available at:
https://www.asx.com.au/asxpdf/20180822/pdf/43xjp6x9rfwlbx.pdf [Accessed 7th October
2018].
ASX (2018). Managing Director and CEO Succession. [Online]. Available at:
https://www.asx.com.au/asxpdf/20180705/pdf/43w9jw42n71r1c.pdf [Accessed 7th October
2018].
Brigham, E.F. and Houston, J.F. (2012). Fundamentals of financial management. USA: Cengage
Learning.
Reuters (2018). Company overview of A2MXX.AX. [Online]. Available at:
https://www.reuters.com/finance/stocks/companyProfile/A2MXX.AX [Accessed 7th October
2018].

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The Motley Fool (2018). These were the best performing sectors in FY 2018. [Online]. Available
at: https://www.fool.com.au/2018/07/02/these-were-the-best-performing-sectors-in-fy-2018/
[Accessed 7th October 2018].
Yahoo Finance (2018). The a2 Milk Company Limited (A2M.AX). [Online]. Available at:
https://finance.yahoo.com/quote/A2M.AX/history?p=A2M.AX&.tsrc=fin-srch [Accessed 7th
October 2018].