ACCY801: Comprehensive Financial Analysis of Treasury Wine Estates Ltd

This report presents a financial analysis of Treasury Wine Estates Ltd (TWE), focusing on its performance in 2018. It examines key aspects such as board characteristics, investment and financing decisions, corporate conduct, and the audit firm's findings. The analysis includes a review of the company's corporate governance policies, ethical considerations, and major investors. Furthermore, the report employs ratio analysis to evaluate TWE's financial position, covering liquidity, asset management, profitability, and market values. It also assesses the operating cash cycle and working capital management. The report highlights TWE's strong financial performance, driven by investments in brand development and effective corporate governance, leading to sustainable success and shareholder value.

Accounting Analysis of Treasury Wine Estates Ltd
1

Executive Summary
The report is prepared for undertaking financial analysis of a selected company, that is,
Treasury Wines Estates. In this context, it has been illustrated that the company has maintained
an effective and competent board structure strong corporate governance policies, promoting
higher growth by its investment in brand development initiatives and maintaining financial
integrity by the regular external auditing of its financial statements. The comparison of the
financial performance of the company against its competitor have depicted that it has maintained
a stable financial position and is expected to deliver higher returns in the future context.
2

Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Part 1: Brief Summary of the Company..........................................................................................4
Part 2: Brief Assessment of the Board Characteristics....................................................................5
Part 3: Important Investment and Financing Decisions made by Treasury Wine Estates in the
Financial Year 2018.........................................................................................................................6
Part 4: Corporate Conduct of Treasury Wine Estates......................................................................7
Part 5: Audit Firm & Accounting Information and Independence Stated by Auditor.....................7
Part 6: Key Measures taken by the Company for Ensuring that it’s Business Operations have
incorporating higher level of ethics and ethical judgments.............................................................8
Part 7: Top Five Investors of the Company and Significance of the Ownership Stake..................8
Part 8: Analyses of financial statements using ratios for company Treasury Wine Estates............9
Liquidity Analysis........................................................................................................................9
Non-current Asset management efficiency................................................................................10
Profitability Analysis.................................................................................................................10
Market Values............................................................................................................................10
Part 9: Operating Cash Cycle........................................................................................................11
Conclusion.....................................................................................................................................11
References......................................................................................................................................13
Appendix........................................................................................................................................15
Calculation of Ratios.....................................................................................................................15
3

4

Introduction
The report tends to examine and analyze the financial performance of a selected ASX
listed entity. The overall analysis is based on evaluating the key financial aspects of the selected
corporation by examination of the information presented in its annual report. In this context, it
has primarily assesses the Board characteristics of the company that includes an analysis of its
remuneration, composition, education, experience, age, gender, history, expertise and any other
relevant feature. This is followed by evaluation of its pertinent investment and financing
decisions and the corporate governance structure. The next section of the report analyses its
audit’s firm and the comments made by the auditor’s in relation to the accounting information
and their independence. In addition to this, the discussion in relation to the key measures that the
company undertakes for ensuring that its business operations incorporate higher level of ethics is
also being carried out. The top five investors of the company have also been identified with
examination of their ownership stake. The financial performance of the selected company has
also been evaluated by the use of ratio analysis technique with extracting the required data from
its financial statements. Lastly, the report analyses the operating cash cycle of the company and
provides an assessment of its performance in relation to the working capital management.
Part 1: Brief Summary of the Company
The ASX listed corporation selected for the financial analysis purpose within the report is
Treasury Wine Estates. It is known to be a leading winemaking and distribution company that is
headquartered within Australia. The company initially operates within wine division of
internationally brewing company in Foster’s Group. It conducts its operations specifically in the
four regions, that are, Australia and New Zealand, the US and the UK and Asia. It provides
employment to about 3400 employees since its establishment in the year 2011. The company has
attained a distinct and leading position in winemaking owing to its dedication of developing,
marketing and selling quality wine for its consumers. In addition to this, it emphasizes on
developing suitable partnerships with customers on a global scale has enabled it to achieve a
leading position within the winemaking industry of Australia (Treasury Wines Estates, 2019).
5

The company has adopted a vertically integrated business model and is focused on three
major activities that are, grape growing and sourcing, winemaking and brand-led marketing. The
grape growing business activity of the company emphasizes on accessing quality grapes from
diverse range of sources such as from its vineyards and bulk wine market. The winemaking
activity of the company emphasizes on adopting the use of innovative techniques for wine
production in its locations situated mainly within South Australia, New Zealand and the US. The
brand-led marketing activities of the company emphasizes on marketing and selling of its brands
across the globe. The company has delivered strong financial performance in the year 2018 with
depicting an EBIT of about 18% higher as compared to the previous year (Young, 2019). Also,
its balance sheet has depicted a strong growth of the company in consistency with its investment-
grade credit profile. The strong balance sheet and cash flow position of the company depicts its
strong trading performance thus supporting its long-term and sustainable success (Annual
Report: Treasury Wines Group, 2018).
Part 2: Brief Assessment of the Board Characteristics
The Board of the company currently has eight directors that include about seven non-
executive directors and the Chief Executive Officer (CEO). The Board ensures that it is highly
dedicated towards maintaining skilled, experienced and skilled workforce for supporting its
strategic aims and objectives. This is necessary to conduct the different roles and responsibilities
of the Board members an effective manner to support its strategic aims and objectives (Gay and
Simnett, 2018). It also recognizes the significance of cultural, geographic and gender diversity of
its members. It has also developed a target for achieving about 30% female representation on its
Board by the year 2018. As reflected from the annual report of the company, the Board is able to
maintain a proportion of about 37.5% of women in comparison to the male diversity (Corporate
Governance Statement, 2019). The Board members along with their experience, qualifications
and tenure are stated as follows:
 Paul Rayner: Possess educational qualification of B.Ec and MAdmin and is being a
member of the board since the year 2011 and is being appointed as its chairman in the
year 2012. He is an independent director and has enhanced Board value by providing his
extensive international knowledge in the wine markets.
6

 Michael Clarke: Possess educational qualification of CA, B.Com and is presently holding
the position of managing director and CEO of the company. He is serving the Board since
the year 2014 and possesses an experience of holding senior executive roles in many
international companies such as Kraft’s Food, Coca-Cola and others.
 Michael Cheek: Is a non-executive director and have qualification of B.BA serving the
board since 2012 and has about 25 years experience within the wine market.
 Ed Chan: Non-executive director and has a qualification of B.A &MS and is serving the
Board within financial year 2012 and possess an extensive experience of holding senior
positions within many international companies
 Warwick Every-Burns: Non-executive director and is Board member from 2011 and have
qualification of AMP (Advanced Management Program) in the Harvard University
having an experience of about 30 years within the consumer packaged goods sector.
 Colleen Jay: Is a non-executive director serving the Board from the year 2018 and
possess qualification of B.BA (Hons) and have huge experience in the consumer goods
sector.
 Garry Hounsell: No-executive director and is Board member since 2012. He is having
qualification of B.Bus and also has huge experience in the consumer goods sector.
Lauri Shanahan: Non-executive director and is Board member since 2016. Have qualification of
JB Business Law and BS Finance and possess huge retail, consumer brands, e-commerce and
governance experiences (Annual Report: Treasury Wines Group, 2018).
The total remuneration of the executives and directors within the Board is composed of fixed
remuneration in addition to variable at risk component. The remuneration structure for the
executives as depicted within its annual report in the year 2018 is depicted as follows:
7

(Source: Treasury Wine Estates Annual Report 2018)
Part 3: Important Investment and Financing Decisions made by Treasury Wine Estates in
the Financial Year 2018
The investment in the property, plant & equipment has depicted an increase from $88
million to $1416.5 million due to its continued investments in Australia, the US and New
Zealand. Also, its intangible assets have depicted an increase by $17 million due to its
investments in the IT systems for supporting its entry in the US market. In addition to this, the
company is continuing its investment in brand building initiatives such as developing three-year
partnerships between Wolf Blass and International Cricket Council for the purpose of increasing
its sales and EBIT margin. The company has also developed its strategic customer partnerships
as a key brand development initiative for supporting its investment routes in the new market.
It has also supported growth in its Australian and French portfolio with the successful
marketing launch of its products within the French region. It is strongly focused on driving its
growth in its overall portfolio across the Asia market by securing adequate finances for
supporting its expansion strategy. The strong growth in its EPS by about 36% on account of its
strong trading performance has enabled it to deliver higher shareholder value. The key financing
decision made by the company can be stated as making a non-recourse receivable purchasing
agreement for selling certain domestic and international receivables in a timely manner. The
8

company has sold about $41.9 million receivables as per the financial arrangement in the
financial year 2017(Annual Report: Treasury Wines Group, 2018).
Part 4: Corporate Conduct of Treasury Wine Estates
The company adopts and follows ASX Corporate Governance Principles and
Recommendations for development of its corporate governance policies. The company ensures
that it maintains highest standards of ethics by implementation of adequate governance policies
such as code of conduct, disclosure policy, fraud and corruption policy, whistleblower policy,
conflicts of interest policy, share trading policy and risk management policy. The development
of all such governance policies by the Board ensures that it has maintained highest ethical
standards to promote its long-term growth and protecting the interest of its various stakeholder
groups (Corporate Governance Statement, 2019).
Part 5: Audit Firm & Accounting Information and Independence Stated by Auditor
The auditing firm partner of Treasury Wine Estates is KPMG and its has ensured its
independency by providing its declaration of independency as per Section 307C of the
Corporations Act 2001 that has been stated within its annual report as follows:
(Source: Treasury Wine Estates Annual Report 2018)
9

The auditor’s report has stated that the auditor as per the Corporations Act 2001 has provided fair
view of the financial position of the company and it has adequately compiled with the AASB
standards. The key audit matters as stated within the auditor’s report include valuation of
inventory and recognition of discounts and rebates. The valuation of inventories is a key audit
matter as identified by the auditor because the auditor need to examine the estimates and
judgments used for inventory valuation. Also, the Group’s estimates amounts of discounts and
rebates that have been incurred but yet not paid. As such, the estimation’s of the amounts of
discounts and rebates is regarded as a key audit matter as it requires key judgments to be applied
for estimation of the accruals (Annual Report: Treasury Wines Group, 2018).
Part 6: Key Measures to ensure ethics in Business Operations by Treasury Wines Estates
The company is committed to promote highest ethical judgments by demonstrating
continued commitment to improve governance framework. It fosters on improving the health and
safety of employees in the workplace. It has developed a destination zero harm employees to
promote health and safety of its employees and empowering them for company leaders to engage
their teams and safety performance. Also, it has maintained an organizational culture to improve
employee performance and thus supporting the growth of its global business (Plessis and Harris,
2018). The Board also ensures to maintain highest ethical standards for development of a fair
remuneration policy to attract and retain the best possible people (Mayes and Wood, 2013). In
addition to this, there has also been development of a group’s risk profile and risk management
framework to mitigate the material and business risks that the company is facing. It has also
maintained an effective governance framework for developing internal control over the business
operations (O'Donnell and Marshall, 2013). The company also ensures to maintain integrity in its
financial operations through ensuring top carry out its external as well as internal audit in a
timely manner(Annual Report: Treasury Wines Group, 2018).
Part 7: Investors of the Company and Significance of the Ownership Stake
The top five shareholders of the company are stated as HSBC Custody Nominees
Limited, JP Morgan, Citicorp Nominees Pty Limited, National Nominees Limited and BNP
Paribas Noms Pty Ltd. Their stake of ownership within the company can be depicted as follows:
10

(Source: Treasury Wine Estates Annual Report 2018)
Part 8: Analyses of financial statements using ratios for company Treasury Wine Estates
Liquidity Analysis
It helps to review the financial position of respective company in relation to availability
of short term assets to settle the current liabilities that arises during the year. It also helps to
review availability cash and cash equivalents to pay for current liabilities.
 Current Ratio: This ratio provides availability of current assets with comparison to
current liabilities. It takes into account all forms of current assets such as inventories that
have uncertainty to be sold and converted into cash in next year. On the basis of
calculation of current ratio of Treasury Wine was 2.15 times for year 2018 (Refer
Appendix) and as of its competitor Finsbury Food Group was 0.81 times for the same
year (Refer Appendix). It is clearly reflected form comparison that Treasury Wines was
financial sound to meet requirement of paying the current liabilities during the next year.
Treasury Wines has current assets of more than 2 times of current liabilities whereas
Finsbury Food Group has only 0.81 times the current assets in comparison to current
liabilities (Brigham and Michael, 2013).
 Quick Ratio: It is important ratio as it depicts refined liquidity position of the company
and provides position of only those current assets that can be easily convertible in cash
and cash equivalents. Quick assets do not include inventories and prepaid expenses as
they cannot be easily convertible in cash and its equivalents. Quick ratio of Treasury
11

Wines was 0.90 times (Refer Appendix) that represents moderate liquidity position and it
can be said that company can be able to pay its current liabilities on time. Quick ratio of
Finsbury Food Group was 0.65 times (Refer Appendix) which was very low as compared
to Treasury Wines (Damodaran, 2011).
Overall it can be said that Liquidity position of Treasury wines was strong enough to
survive next year requirements to pay for the current liabilities. Comparison with its competitor
Finsbury Food Group reflects Treasury Wines has better liquidity position in the market.
Non-current Asset management efficiency
Non-current asset efficiency ratios used to determine the management effectiveness to
use the non-current assets to earn the revenue.
 Non-current asset turnover: This ratio determines the efficiency on how the non-current
assets are being used to earn revenue in defined period. Low non-current assets turnover
rate reflects that business is not using its assets effectively and whereas high turnover rate
reflects management is highly efficient to make use of its non-current assets (Davies and
Crawford, 2011). Treasury Wines has non-current asset turnover ratio of 0.67 (Refer
Appendix) times that reflects management at Treasury Wines has not utilized its assets
effectively as compared to its rival company. Its rival company Finsbury has non-current
asset turnover ratio of 2.21 times which was very high and shows effectiveness of
management to use the available assets (Huddleston, 2018). Capital Structure
This analysis provides use of different sources of capital by the management to have
optimum capital structure and to earn maximum shareholders return.
 Debt to equity ratio: This ratio provides proportion of debt capital with reference to
equity capital. It means times the debt capital is being used by company in relation to
equity capital to finance the total assets of the company (Krantz, 2016). Low ratio
represents optimum use of leverage capital and provides company dependency on equity
capital rather the debt capital. Debt to equity capital of Treasury Wines was 0.56 times
which means capital structure was optimum as per the requirement of company financial
position. Finsbury Food Group has 0.96 times that represents equal proportion of debt
12

and equity. Comparison reveals that Treasury Wines has optimum capital structure as
compared to its rival Finsbury (Moles and Kidwekk, 2011) (Refer Appendix).
Profitability Analysis
 Net profit Margin: This ratio determines percentage of net profit in relation to revenue.
Higher net profit ratio means better profitability performance of the company. It has been
observed from the calculation that net profit ratio of Treasury Wines was 14.44% and
Finsbury Food Group was 1.04% that reflects Treasury Wines has ability to make most
from its revenue and earn maximum profit in comparison to its rivalries (Business News
Australia, 2019).
Market Values
 Dividend yield ratio: This ratio reveals how much cash flow each shareholder gets on
investment made by them. Dividend yield ratio of Treasury Wines was 11.71% (Refer
Appendix) in current year 2018 which can be regarded as best in class return provided to
any shareholder. On the other hand, shareholders of Finsbury Food Group have received
return of 3.06% on the investment made by them. Comparison reveals that market
position of Treasury Wines was far better than its competitor Finsbury Food Group
(Refer Appendix) (Martine, 2016).
Part 9: Operating Cash Cycle
Operating cash cycle also refers to cash conversion cycle and it is length (In days) of time
between purchases of inventory, receipts of accounts receivables and cash payments to the
suppliers. It is calculated through using the following formula:
Formula: Inventory days outstanding (in days) + Days sales outstanding (In days) – Days
payment outstanding (in days)
Financial Items 2018
$'Million
Beginning Inventory $ 947.90
Ending Inventory $ 1,012.30
Average Inventory $ 980.10
13

COGS $ 1,435.60
Beginning Account Receivables $ 606.50
Closing Account Receivables $ 593.00
Average Accounts Receivables $ 599.75
Sales Revenue $ 2,496.40
Beginning Account Payable $ 662.50
Closing Account Payable $ 702.90
Average account payable $ 682.70
(Annual Report: Treasury Wines Group. 2018, pages 64-67)
Inventory days outstanding (in days) 249.19
Days sales outstanding (In days) 87.69
Days payment outstanding (in days) 173.58
Operating cash cycle 163.30
Conclusion
The overall discussion held within the report has inferred that Treasury Wine Estates has
maintained a leading position within alcoholic beverage industry of Australia. It is mainly due to
its strong corporate governance policy and ethical conduct that has enabled it to deliver high
shareholder value. The financial analysis of the company has depicted that it is presently having
strong financial performance as compared with its competitor Finsbury Food Group. As such, it
is recommended to investors that there is less financial risk related to investing their money
within the company owing to its financial stability and expected higher financial growth in the
future context.
14

References
Annual Report: Finsbury Food Group. 2018. [Online]. Available at:
http://content.yudu.com/web/1xd6f/0A3xxi2/AnnualReport2018/html/print/
FinsburyFoodGroup_AR_2018_DV.pdf [Accessed on: 18 October, 2019].
Annual Report: Treasury Wines Group. 2018. [Online]. Available at:
https://www.tweglobal.com/-/media/Files/Global/Annual-Reports/2018-Annual-Report.ashx
[Accessed on: 18 October, 2019].
Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Canada: Cengage
Learning.
Business News Australia. 2019. Treasury Wine Estates records strongest net sales revenue
growth in its history. [Online]. Available at:
https://www.businessnewsaus.com.au/articles/treasury-wine-estates-records-strongest-net-sales-
revenue-growth-in-its-history.html [Accessed on: 18 October 2019].
Corporate Governance Statement. 2019. Treasury Wines. Available at:
https://www.tweglobal.com/-/media/Files/Global/Corporate-Governance/Related-Materials/
Corporate-Governance-Statement-2019.ashx [Accessed on: 18 October, 2019].
Damodaran, A, 2011. Applied corporate finance. USA: John Wiley & sons.
Davies, T. and Crawford, I., 2011. Business accounting and finance. USA: Pearson.
Gay, G. and Simnett, R. 2018. Auditing and Assurance Services in Australia. Sydney: McGraw-
Hill Education Australia.
Huddleston, N. 2018. Treasury Wine Estates performance trends 2014-2018 - results data.
[Online]. Available at: https://www.just-drinks.com/analysis/treasury-wine-estates-performance-
trends-2014-2018-results-data_id126674.aspx [Accessed on: 18 October 2019].
Krantz, M. 2016. Fundamental Analysis for Dummies. USA: John Wiley & Sons.
15

Martinez, I. 2016. Australia's Treasury Wine Estates raises dividend. [Online]. Available at:
https://www.spglobal.com/marketintelligence/en/news-insights/trending/
cq1eNKlPLuEQyQpZlH-Tig2 [Accessed on: 18 October 2019].
Mayes, D. and Wood, G. 2013. Reforming the Governance of the Financial Sector. UK:
Routledge.
Moles, P. and Kidwekk, D. 2011. Corporate finance. USA: John Wiley &sons.
O'Donnell, A. and Marshall, S. 2013. Law, Corporate Governance and Partnerships at Work: A
Study of Australian Regulatory Style and Business Practice. UK: Ashgate Publishing, Ltd.
Plessis, J. and Harris, J. 2018. Principles of Contemporary Corporate Governance. Australia:
Cambridge University Press.
Treasury Wines Estates. 2019. A Global Leader In Wine. [Online]. Available at:
https://www.tweglobal.com/ [Accessed on: 18 October 2019].
Young, A. 2019. TWE records strongest organic growth in its history. [Online]. Available at:
https://www.theshout.com.au/news/twe-records-strongest-organic-growth-in-its-history/
[Accessed on: 18 October 2019].
16

Appendix
Calculation of Ratios
Financial Data Treasury Wine Estates Finsbury Food Group
2018 2018
Amount In $ Million Amount in $'000
Current Assets $
1,741.80
$
67,952.00
Inventory $
1,012.30
$
13,456.00
Prepaid Expenses $
-
$
-
Current Liabilities $
809.40
$
84,121.00
Sales Revenue $
2,496.40
$
303,600.00
Book value of non-current assets $
3,703.90
$
137,153.00
Total Liabilities $
1,949.40
$
100,523.00
Shareholder's Equity $
3,496.30
$
104,582.00
Net profit $
360.40
$
3,164.00
Revenue $
2,496.40
$
303,600.00
Dividend per share
$
2.04 (Annual Report:
Treasury Wines Group,
2018, p 76)
$
0.03 (Annual Report:
Finsbury Food Group.
2018, p 3)
17

Share price
$
17.39 (Annual Report:
Treasury Wines Group,
2018, p 51)
$
1.08 Annual Report:
Finsbury Food Group.
2018, p 84)
(Annual Report: Finsbury Food Group. 2018, pages 54-56) and (Annual Report: Treasury Wines
Group. 2018, pages 64-67)
Liquidity Ratios
Current Ratio Current Assets/Current Liabilities
Treasury Wine Estates Finsbury Food Group
2018 2018
Current Ratio 2.15 0.81
Quick ratio Current Assets-Inventories -Prepaid Exps /Current Liabilities
Treasury Wine Estates Finsbury Food Group
2018 2018
Quick Ratio 0.90 0.65
Non-current Asset management efficiency
Non-current asset turnover Sales Revenue/Book Value of non-current assets
Treasury Wine Estates Finsbury Food Group
2018 2018
Non-current asset turnover 0.67 2.21
Capital Structure ratio
Debt to equity ratio Total Liabilities/Shareholders Equity
Treasury Wine Estates Finsbury Food Group
2018 2018
Debt to equity ratio 0.56 0.96
18

Profitability Ratio
Net profit margin Net profit margin/Revenue
Treasury Wine Estates Finsbury Food Group
2018 2018
Net profit margin 14.44% 1.04%
Market Values
Dividend Yield Dividend per share/Market price per share
Treasury Wine Estates Finsbury Food Group
2018 2018
Dividend Yield 11.71% 3.06%
19