Holmes Institute: HI5002 Company Performance Analysis of TWE

This project is a comprehensive analysis of Treasury Wine Estates (TWE), a public company listed on the Australian Stock Exchange. The analysis begins with an executive summary and introduction, followed by a detailed examination of TWE's key products, particularly Penfolds. Financial performance is assessed using liquidity, asset turnover, capital structure, and profitability ratios from 2017 to 2019. A non-current asset analysis is performed, identifying depreciation methods and trends. Scenario analysis, including best-case and worst-case scenarios, is conducted to evaluate the project's sensitivity. The report also discusses share issuance and analyzes the Price Earnings (PE) ratio and share price movements. Finally, a recommendation letter is provided to investors based on the financial analysis, concluding with a summary of the findings.

Running head: COMPANY PERFORMANCE ANALYSIS
Company Performance Analysis
Name of the Student:
Name of the University:
Author Note

1COMPANY PERFORMANCE ANALYSIS
Executive Summary
Treasury Wine Estate is one of the premium wine producing industries in Australia. It has a
strong financial position due to which it has been expanding its operations. It has many
products that it produces. The liquidity and capital structure ratios have help to know more
about the performance of the company. The cash flows calculated have assisted to know the
Net Present Value. The company has given dividends to its shareholders. A Non-Current
analysis has also been done and the depreciation method has been identified. The change of
trends in the price earnings ratio and share price have been shown using graphs. A
recommendation has been given to the investors.

2COMPANY PERFORMANCE ANALYSIS
Table of Contents
Introduction................................................................................................................................3
Financial Analysis of Treasury Wine Estates............................................................................4
Description of the key product by Treasury Wine Estates.....................................................4
Analysis of the calculated performance ratios.......................................................................4
Non-Current Asset Analysis..................................................................................................9
Scenario Analysis.................................................................................................................11
Issuance of share by Treasury Wine Estate..............................................................................14
PE Ratio and Share price Analysis...........................................................................................15
Recommendation Letter...........................................................................................................17
Conclusion................................................................................................................................18
Reference list............................................................................................................................19

3COMPANY PERFORMANCE ANALYSIS
Introduction
The report has been prepared on Treasury Wine Estates. It is a type of public
company which is listed on the Australian Stock Exchange. It was founded in 2011 by the
Predecessor Group. Michael Clarke is the Chief Executive Officer of the company. Its
headquarters is in Melbourne (Mozell and Thach 2014). It has provided employment to more
than 3400 people. The products of the company include Lindemans, Penfolds,
WynnsCoonawarra and Wolf Blass. It generates a revenue of A$2.5 billion.A financial
analysis of the company has been done. The key products and services provided by the
company have been described (Varsei and Polyakovskiy 2017). The liquidity and capital
ratios along with other ratios have been calculated and used for analyzing the liquidity,
solvency and profitability of the company. A non-current analysis has been performed for the
three years. The depreciation method has been identified and its treatment has been discussed
for the purpose of identifying the operating cash flows of the project that involve purchasing
a long term asset (Chong 2014). A scenario analysis has also been performed using the data
provided and two situations have been measured. The best case and the worst case situations
and their outcome on the project have been highlighted. The outcome of the scenario analysis
has helped to conclude the sensitivity of the project’s Net Present Value. The latest bond or
share issued by the company has been identified and discussed (Renneboog and Szilagyi
2015). The Price Earnings ratio of the company has been calculated and discussed using the
Net Profit for the past 3 years. The movements in the share price have been shown using the
trend graphs. A recommendation letter is written to the client on the basis of the analysis that
has been conducted.

4COMPANY PERFORMANCE ANALYSIS
Financial Analysis of Treasury Wine Estates
Description of the key product by Treasury Wine Estates
Penfolds is one of the key product of Treasury Wine Estates. It has played an
important role in the history of winemaking. The heritage is a reflection of the journey of
Australia from colonialism to modernization. There are philosophies and stories behind every
wine produced making it special and compelling to its drinkers and collectors. It is located in
Magill and Barossa Valley. It was founded in the year 1844 in Adelaide by an English
physician, Christopher Rawson Penfold along with his wife, Mary Penfold. Treasury Wine
Estates has been its parent company since 2011 (Fleming, Park and Marshall 2015). It has
varietals like Cabernet Sauvignon, Riesling, Chardonnay and Shiraz. It is amongst the oldest
wineries in Australia and is popularly known for Penfolds Grange. Peter Gago has been its
chief winemaker ever since 2002. It purchased vineyards in New South Wales and McLaren
Vale. It has operations in New South Wales, Tasmania and South Australia and produces a
large variety of grapes into the market. It has won awards like the “New World Winery of the
Year” in 2013. It listed itself as a partner with Girl, Converse, Nike and American Express of
the RED campaign.
Analysis of the calculated performance ratios
Liquidity Ratios
 Working Capital
Working
Capital
Current Assets 1835.2 1741.8 2168.6
Current
Liabilities 779.3 809.4 885
Ratio 2.35493
39
2.1519
644
2.45039
55

5COMPANY PERFORMANCE ANALYSIS
The working capital ratio has shown a fluctuation in its trend. It dropped in the year
2018 to 2.15 and had risen up again in 2019. This fluctuation had occurred due to the
decrease in its current assets and increase in its liabilities (Aktas, Croci and Petmezas 2015).
An ideal ratio of 1 is desired as favorable for all the companies. Treasury Wine Estates has
more than its double, therefore the liquidity position is good.
 Asset Turnover
Asset
Turnover
Sales Revenue 2534.2 2496.4 2883
Average Total
Assets 5282.9 5362.5 5722.95
Ratio 0.47969
87
0.46552
91
0.50376
12

6COMPANY PERFORMANCE ANALYSIS
The Asset Turnover Ratio has also witnessed a fluctuating trend. It dropped to 0.46 in
2018. It helps to measure the efficiency in using its assets for generating sales. The decrease
in sales revenue and increase in its total average of assets has impacted the ratio (Zainudin
and Hashim 2016). The low ratio indicates that the company has high profits.
 Accounts Receivable Turnover
Accounts Receivable
Turnover
Net Credit Sales 2534.2
2496.
4 2883
Average Accounts
Receivable 604.95
599.7
5 627.15
Ratio 4.1891
065
4.162
401
4.59698
64
The Accounts Receivable Turnover ratio has shown a fluctuating trend. It slightly
dropped in the year 2018. In 2019, it again increased by a huge margin. This was a result of a
decrease in its net credit sales as well as the average accounts receivable (Siekelova et al.
2017). It reflects the debt collection and the credit extension capacity of the company. It
expresses the management of credits by the company to its customers. A low accounts
receivable turnover ratio signifies that the financial position of the company is critical while a
high ratio signifies the proportion of its customers who make timely payments of the debts.

7COMPANY PERFORMANCE ANALYSIS
 Inventory Turnover Ratio
Inventory
Turnover
Cost of Goods
Sold 1568.3 1435.6 1660.8
Average
Inventory 921.8 980.1
1018.1
5
Ratio 1.7013
452
1.46474
85
1.6311
938
The Inventory Turnover Ratio has shown a decline in 2018 while it again increased in
2019. This was a fluctuating trend shown by the ratio (Lee, Zhou and Hsu 2015). It shows the
number of times the inventory has been sold. The effectiveness of inventory has been
determined by comparing the Cost of Goods Sold with the average inventory. It is used to
compare the inventory level with the level of sales. It also helps to know about the
controllability of the merchandise through its sales. A high inventory turnover ratio is
favorable for the company as it indicates its inventory management.
Capital Structure
 Debt to Equity Ratio
Debt to
Equity
Total Liabilities 1670.8 2294.1 1949.4
Shareholder's
Equity 3496.3 3608.5 3569.2

8COMPANY PERFORMANCE ANALYSIS
Ratio
0.47787
66
0.63574
89
0.54617
28
The Debt to Equity Ratio has also shown a fluctuating trend. It increased in 2018 to 0.63
and decreased in 2019. It is often known as gearing, leverage or risk ratio. It indicates the
relativity in the proportion of debt and equity that has been used by the company for its assets
(Pianeselli and Zaghini 2014). The Total Liabilities and Shareholder’s Equity increased in
2018 and decreased in 2019 as reflected by the ratio.
 Debt to Total Assets
Debt to Total
Assets
Total
Liabilities 1670.8 2294.1 1949.4
Total Assets 5279.3 6000.2 5445.7
Ratio
0.31648
14
0.38233
73
0.35797
05

9COMPANY PERFORMANCE ANALYSIS
The Debt to Total Asset Ratio increased slightly in 2018 and decreased marginally in the
year 2019. It reflects the financial leverage of the company. It indicates the proportion of the
assets that has been financed by its creditors and not by the investors (Türkmen 2016). It
shows the growth in the acquired assets of the company. It has shown a fluctuating trend due
to an increase in its total assets and liabilities. It again decreased in its next financial year.
Non-Current Asset Analysis
Every company has two types of assets which are known as Current Assets and Non-
Current Assets. The Current Assets show the assets that can be forecasted to be consumed,
exhausted or sold throughout the regular operations of the business during current operating
cycle. The Non-Current Assets reflect the value of the investments that will not be converted
to cash within the current operating cycle (Agha 2014). The Non-Current Assets of Treasury
Wine Estates include agricultural assets, deferred tax assets, inventories, property, plant and
equipment, intangible assets and other non-current assets.
The Non-Current Asset balances have shown an increasing trend from the year 2017
to 2019. It amounted to $M3444.1 in 2017, then increased to $M3703.9 in 2018 and
massively increased to $M3831.6 in 2019. The inventories, intangible assets and other non-
current assetshave shown an increase over the three years (Andreou, Louca and Panayides

10COMPANY PERFORMANCE ANALYSIS
2016). The property, plant and equipment, agricultural assetsand deferred tax assets have
been fluctuating between the years.
The property, plant and equipment is recorded at its cost initially after which the value
of accumulated depreciation is deducted from it along with the impairment losses. They are
depreciated for the purpose of writing down the assets to their residual value over the time it
is used. The method of depreciation of straight line or reducing balance is determined on the
basis of its nature. The assets which relate to the leases are written-off over the useful life or
the lease period, the one that has a shorter duration (Oczkowski and Doucouliagos 2015).
Useful lives, amortisation methods and residual values are examined every year and modified
whenever needed. The reversal is identified in the profit and loss statement that is
consolidated and has the adjustment of depreciation in its future periods for the allocation of
the revised assets carrying value, deducting the residual value, in a systematic manner over
the remaining useful life.
In 2017, the capital expenditure of the company amounted to $210.4 million which
included the expenditure of $109.8 million per guidance for maintenance and replacement,
$48.4 million for deliver integration synergies, $37.9 million on acquisition of vineyard for
the incremental drive access to Luxury supply and $14.3 million for the activities relating to
deliver Supply Chain Optimisation (Mullinova 2015). A deployment of funds was expected
for the Diageo Wine integration of circa. In 2018, it increased to $215.4 million including
$128.3 million for maintenance and replacement for the increase in its investment in
vineyard, $36.9 million for integration of Diageo Wine, $36.8 million for acquisitions of
vineyard that would increase the access to Luxury supply and $13.3 million for other growth
initiative investments. The increase in its maintenance and replacement expenditure was
expected to reflect the growth and scale on which the Luxury operated. In 2019, the amount
decreased to $159.8 million constituting $132.1 million for maintenance and replacement and

11COMPANY PERFORMANCE ANALYSIS
$27.7 million for growing the IT investments and acquisitions of vineyards.The expenditure
on growth was expected to increase in the next year to support premiumisation.
Scenario Analysis
Base Case Values-
Sale of 450000 units @$25 as average price per unit, variable cost of $15 per unit,
fixed cost of $450000, depreciation method followed was straight line for 4 years and tax rate
of 30%
Calculation of Initial Cash Flow
Calculation of Cash Flow for 4 years