Detailed Corporate Finance Report: Vita Life Sciences Analysis

This report provides a comprehensive corporate finance analysis of Vita Life Sciences (VLS), an Australian pharmaceutical company. It begins with an overview of VLS's operations, ownership structure, and core activities. The report then delves into financial ratio calculations from 2014-2017, including Return on Assets (ROA), Return on Equity (ROE), and the Debt Ratio. The analysis examines the trends in these ratios, the relationship between Total Assets and Owner's Equity, and why ROE is greater than ROA. A graph of the company's monthly share price over the past two years is presented, along with an assessment of factors influencing share prices, such as competitors, macroeconomic factors, and management changes. The report also calculates the beta value, assesses the required rate of return, and analyzes the Weighted Average Cost of Capital (WACC) and its implications. Furthermore, it discusses the company's debt ratio, dividend policy, and concludes with a recommendation on whether to include VLS in an investment portfolio.

Corporate Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Questions..........................................................................................................................................1
1. Brief description of the organisation..................................................................................1
2. Ownership-governance structure of company....................................................................2
3. Computation of financial ratios..........................................................................................3
4. Preparation of graph in monthly share price of organisation.............................................5
5. Factors influencing shares price of company.....................................................................5
6..............................................................................................................................................6
1. Beta value of the company ................................................................................................6
2. Assessing required rate of return .......................................................................................6
3. Stating whether company chosen for the investment purpose comes under the category of
conservative ...........................................................................................................................6
7..............................................................................................................................................7
1. Assessing WACC for VLS.................................................................................................7
2. Explaining the implications of high WACC on management’s evaluation pertaining to the
prospective investment projects.............................................................................................8
8. ............................................................................................................................................8
1. Analyzing debt ratio of Vita Life Sciences in relation to the past two years ...................8
2. Stating the adjustment which Vita Life Sciences have done regarding gearing ratio .......9
9. Discussing dividend policy which is implementing by Vita Life Sciences ......................9
10. Giving recommendation to the client whether such company needs to be included in the
investment portfolio or not.....................................................................................................9
CONCLUSION .............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Corporate finance field deals with the aspects of funding sources and capital structure of
the corporation. Such field presents action which manager should take for increasing the value of
firm to the shareholders. The present report is based on Vita Life Sciences, a leading Australian
owned pharmaceutical and healthcare unit. It is one of the well-known and established brands
throughout Asia and Australia. Brand portfolio of the company is wide which in turn includes g
Herbs of gold, Vita Health, Vita Science and Vita life. In this, report will provide deeper insight
about the core activities of VLS and shareholders. Report will also shed light on the key ratios
which helps in determining the extent to which monetary position and performance of the
company is good. Further, report also exhibits share price movement of VLS in against to the All
Ordinaries Index. It will also present whether such business unit should be included in the
portfolio or not.
Questions
1. Brief description of the organisation
Vita Life Sciences Ltd is one of the leading pharmaceutical company headquartered in
Australia and has several branches in all over the world. Organisation is engaged in formulating,
packaging and sales and distribution of healthcare products to customers across the globe. It
provides vitamins and supplements to consumers in the best possible manner. Vita Life Sciences
Ltd has operations in Malaysia, Singapore, Other Asian nations and home country Australia as
well. In relation to this, revenue has been considerably increased in 2017 as compared to 2016
with huge margin which shows that company is making use of resources and as such, generating
profits up to high extent by satisfying customers quite effectually (Vita Life Sciences. 2018). This
is evident from the fact that revenue was increased up to 6.7 % in Malaysian market over the
previous financial year.
On the other hand, revenue declined by 1 % in Singapore in comparison to 2016 figures.
The main reason behind this reduction was increment in advertising and promotional
expenditures for maintaining trading in the country in the best possible manner and as such, retail
sales were to be effectively maintained. However, other Asian countries such as Vietnam,
Thailand and Indonesia, revenue was increased in the financial year 2017 by 15 % in comparison
to previous figures. Major growth in sales and revenue was identified in Vietnam in 2017
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financial year. This implies that Vita Life Sciences Ltd has been successful in its operations quite
effectually.
The company's history had been quite impressive that highlights present picture in
effective manner. Vita health was commenced in Singapore in 1947. Moreover, in 1973,
business opened its own brand of supplements and vitamins. Afterwards, revenue was
consistently maximised and Herbs of Gold was founded in 1989 and thus, health foods were
being supplied by it (Moreno-Bromberg and Rochet, 2018). In 2001, Vita Life Sciences acquired
Herbs of Gold. Moreover, business has expanded its operations in several nations. The core
activities of the organisation are development and formulation of OTC (Over The Counter)
medicines and distribution of the same. Moreover, complementary and alternative medications
are also formulated and offer for sale to customers. Another core activity of business is to
provide dietary supplements and health related foods are also sold under varied brand names in
various nations. Thus, quality assured products are made for enhancing customer satisfaction.
2. Ownership-governance structure of company
The main shareholders of Vita Life Sciences Ltd are Mr Vanda R Gould and Mr Shane
Teoh. They are the directors of the company with more than 20 % of shareholdings in the shares
of organisation. In this aspect, Mr Vanda R Gould has 51.30 % and Mr Shane Teoh has nearly
42.44 % of shareholding in the company. It can be said that both of these directors have
substantial part of shares in their holdings. On the other hand, other directors are Mr Andrew
O'Keefe, Mr Jonathan J Tooth and Mr Henry G Townsing. It clearly highlights that Mr Vanda R
Gould and Mr Shane Teoh both have major shareholdings in the company. Furthermore, it also
shows that firm is non-family company as no members have similar surnames in the
organisation. This is evident from the fact that firm's governance is managed by different
personnels (Rocheteau, Wright and Zhang, 2018).
The main people involved in the company's governance are CEO (Chief Executive
Officer of Australia is Mr Andrew O'Keefe. While Chairman of the company is Mr Henry G
Townsing. On the other hand, Board members are Chin L Khoo who is Company Secretary and
CFO (Chief Financial Officer). Mr Shane Teoh is Non-executive director and Mr Vanda R
Gould is also Non-executive director and Mr Jonathan J Tooth is on the same post as well. Mr
Henry G Townsing having more than 5 % of shareholding is present in corporate governance and
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other directors such as Vanda R Gould and Mr Shane Teoh are also engaged in firm's
governance. Thus, it can be stated that Vita Life Sciences Ltd is classified as non-family
company involving no family members in the ownership-governance structure.
3. Computation of financial ratios
1. Financial ratios of past four years starting from 2014 to 2017
Particulars Formula 2014 2015 2016 2017
Return on
Assets
(NPAT /
Total
Assets) 27.85 14.02 10.33 8.77
Return on
Equity
(Net Profit
After Tax /
Ordinary
Equity) 38.67 19.83 14.55 11.96
Debt Ratio
Total
Liabilities /
Total Assets 0.3 0.31 0.28 0.24
2. Explain phenomenon of Total assets and Owner's Equity
The Total Assets (TA) and Owner's Equity (OE) is the relationship of organisation's total
assets to that of part owned by shareholders of company. The phenomenon captured by TA/ OE
variable is that it shows how effectively firm is utilising total assets to generate sales and giving
out return on owners' equity in the form of dividend by producing desired profits in the best
possible manner. This is essential for business to earn profits in order to enrich shareholders and
maximise their wealth with much ease. It is required so that more investment may be garnered by
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the company quite effectually (Mulherin, Netter and Poulsen, 2018). The investor is planning to
invest in the company an amount of 10 million for generating returns.
Return on Assets and Return on Owners Equity is quite useful for organisation in order to
ascertain profitability position in the best possible manner. Vita Life Sciences Ltd has overall
good revenue in past four years. However, ROA is declined in recent years. This is evident from
the fact that ROA in 2014 was 27.85 % which reduced to 14.03 % in next year. On the other
hand, ratio in 2016 was further minimised to 10.33 %. While, in 2017, it was 8.77 %. This means
that company's ROA is considerably decreased from 2014 to 2017. This implies that firm is
unable to effectively utilise its assets to generate sales and as such, it is declined in subsequent
years.
On the other hand, ROE means that how effectively company uses its shareholders'
investment to produce net income in the best possible way (Dang, Li and Yang, 2018). The ratio
was 38.67 % in 2014, while in next year was 19.83 % which was significantly declined.
Furthermore, ROE was 14.55 % in 2016 and 11.96 % in 2017 financial year. This clearly shows
that Vita Life Sciences Ltd is not effectively utilising shareholders' money in optimised manner.
ROA and ROE are integral part of the company as it led to ascertain true profitability position in
effective manner. In relation to this, organisation has adequate revenue but ROA and ROE is not
good which implies that these two ratios computed highlights inefficiency of company in
generating sales with regards to assets and shareholder's investment. It is impacting firm's
profitability adversely.
3. Discussing why ROE is greater than ROA
ROE and ROA of the organisation is however decreasing in the recent years. In this
aspect, firm has low ROA in comparison to ROE that highlights company's debt is increasing
(Mizen, Packer, Remolona and Tsoukas, 2018). This is not good for Vita Life Sciences Ltd as it
leads to increase in loan repayment instalments to creditors. Furthermore, solvency position of
company is also impacted adversely. Moreover, higher debts led to decrease in ROA which is
adverse situation for company.
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4. Preparation of graph in monthly share price of organisation
The above graph represents monthly price of shares over last two years of the company.
It shows that company performance over last two years is not good. This is evident from the fact
that organisation's shares are gone down. Furthermore, value of beta is 0.81 which means that
investor has moderate risk while investing in the company. Beta shows that firm has moderate
volatility and as such, investor can expect return in long run. Moreover, organisation is required
to utilise assets and shareholders' investment for increasing profitability aspect in effective
manner.
5. Factors influencing shares price of company
1. Impact of competitors-
The competitors' strategies affect market price of shares quite adversely. This shows that
with well-structured strategies implemented by the rivals, prices are affected. It is also evident
from the fact that Vita Life Sciences Ltd share prices are affected by strategies implemented by
competitors (Hansen, 2018).
2. Macroeconomic
factors-
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Illustration 1: Monthly price shares of Vita Life Sciences Ltd

This is another factor that affects price shares. Macroeconomic factors such as inflation
rate, exchange rate, supply of money leads to decrease in market price of shares.
3. Changes in analysts forecast-
It is another factor affecting shares price of Vita Life Sciences Ltd quite adversely. If
analysts are changed frequently, then forecasts may be affected as no two analysts has same
forecast principles (Armour and Enriques, 2018).
4. Unusual write-offs-
Unusual write-offs also led to change in share prices of the company. If amount from
debtors is write-off in the year and is received afterwards influences shares of organisation.
5. Management changes-
Management is important part of company as when frequent changes occurs in
organisation's management team, then prices of shares are affected.
6.
1. Beta value of the company
From assessment, it has identified that beta value of Vita Life Sciences account for .81
respectively. Referring beta value, it can be depicted that stock or shares of the company are
volatile in nature to some extent (Vita Life Sciences Ltd, 2018). Moreover, beta of securities with
less than 1 considered as less volatile in comparison to the market from theoretical perspective.
2. Assessing required rate of return
Computation of required rate of return
Particulars Figures
Beta value .81
Risk free rate (Rf) 4%
Market risk premium (Rm –Rf) 6%
Expected market return (Rm) 10%
Required rate of return
Rf + beta (Rm – Rf)
8.86%
On the basis of CAPM model, in against to the risk undertaken shareholders are
expecting 8.9% return from the stocks of VLS.
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3. Stating whether company chosen for the investment purpose comes under the category of
conservative
Conservative investment implies for the one where investor lays high level of emphasis
on investing money in the lower risk securities such as fixed income and business units with
large capitalization (Häusermann, 2018). Hence, referring beta value (.81) and market
capitalization ($42.78 million) it can be presented that chosen company does not fall into the
category of conservative investment. Moreover, in this, beta value is higher such as .81
significantly and market capitalization of the company considered as lower. Thus, all such
aspects clearly present that company selected for the investment purpose such as VLS is not a
conservative investment.
7.
1. Assessing WACC for VLS
Weighted average cost of capital
Particulars Figures
Share Price 0.78
Shares O/S 56,717,026
Market Cap (E) 44239280.28
Stock Beta 0.81
Risk Free Rate 0.04
(e.g. return on 10 year treasury bonds)
Required Market Return 0.1
Market Risk Premium 0.06
Cost of Equity 8.9%
Particulars Figures Weights
Equity 44239280.28 0.96
Debt 1987000 0.04
Total 46226280 1
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Particulars Figures
Interest rate 5% (Interest rates in Australia, 2018)
Tax rate 30% (Company tax rates, 2018)
WACC = ke * weight of equity + interest rate * weight of debt (1 – tax rate) (García, 2017)
WACC = 0.089 * .96 + 0.05 * .04 (1 - .30)
= 0.085 + 0.05 * 0.028
= 0.085 + 0.0014
= 0.0868 or 8.7%
2. Explaining the implications of high WACC on management’s evaluation pertaining to the
prospective investment projects
By doing assessment, it has found that high WACC has greater impact on the evaluation
of prospective investment projects. Level of WACC decreases when firm takes resort of debt
sources rather than equities. High WACC presents that greater risk is associated with the firm’s
operations. Hence, in the case of investment projects, high WACC shows lower level of return
with the investment project and thereby affects decision.
8.
1. Analyzing debt ratio of Vita Life Sciences in relation to the past two years
Debt-equity ratio: This measure presents the manner in which business entity has fulfilled
its monetary requirements through either debt or equity and both. In other words, debt-equity
ratio presents how much loan undertaken and shares are issues for financing business projects.
Computation of debt-equity ratio for the accounting year 2016 and 2017 is as follows:
Particulars 2016 2017
Long-term debt 2 2
Shareholders’ equity 23 25
Debt-equity ratio 0.09 0.08
The above depicted table shows that, in the accounting year 2016 and 2017, debt-equity
ratio of VLS accounted for 0.09 & 0.08 respectively. Hence, decreasing trend has assessed in the
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debt-equity measure of VLS over the time frame. Considering the current results or outcomes it
can be depicted that debt-equity position of VLS was not good in the period of 2016 & 2017. On
the basis of standards, solvency position of the company can said to be effectual when debt-
equity ratio is equal to or in line with .5:1. Currently, capital structure of the company does not
appear as stable. The rationale behind this, business unit has fulfilled most of its financial needs
or requirements through equity shares rather than debt. Thus, for developing optimal capital
structure VLS should make focus on following .5:1 ratio. On the basis of this, VLS should take
resort of 1 debt in against to 2 equity shares.
2. Stating the adjustment which Vita Life Sciences have done regarding gearing ratio
In the context of gearing ratio, it has found from annual report that approximately 191204
shares were bought back for the accounting year ended on 31st December 2017. This is one of the
main causes behind increase in shareholders’ equity and declining trend in the debt-equity ratio
(Annual report of VLS, 2018).
9. Discussing dividend policy which is implementing by Vita Life Sciences
Annual report of the VLS presents that financial performance of the company for the year
ended on December 2017 was good. Hence, by taking into account financial performance
business unit has declared 2.25 cents as dividend per share. By doing research, it has identified
that from the period of 2014 to 2017 company is offering similar dividend to the shareholders.
Hence, by taking into account overall evaluation it can be presented that stable or constant
dividend policy is followed by VLS. Company undertakes and implements such dividend policy
with the motive to maintain the faith of shareholders in the company’s operations.
10. Giving recommendation to the client whether such company needs to be included in the
investment portfolio or not
To
The Client
Date: 23rd April 2018
Subject: Investment decision and evaluation
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This is to inform you that VLS is one of the leading and well-known brand of pharmaceutical
sector. Ratio analysis has been conducted to analyze or evaluate profitability aspect of the
business unit. Hence, from ratio analysis, it has found that profitability position of VLS has
decreased over the time frame. In comparison to the prior years, ROA and ROE of VLS at the
end of accounting year 2017 accounted for 8.77% & 11.96% respectively. Decreasing trend of
ratio shows that in the accounting year 2017 business unit failed to make effectual use of
assets and investment made by the shareholders. It is reported to the client that debt-equity
position of VLS was not good in the year of 2016. Currently, business unit is following regular
and constant dividend policy. Investment in the securities of VLS does not considered as
conservative. Moreover, beta value is within the range of .75-41 which in turn shows moderate
risk level. Besides this, WACC pertaining to VLS implies for 8.7% significantly which is
neither too high nor too lower. Hence, if client prefers investing money in the securities with
high and moderate risk level then it might offer high returns in the long run. In accordance
with the value investing approaches, investment should be made in the securities with high PE
ratio>10, profitability and solvency position. In the context of VLS, profitability and solvency
position of the company was not good. In addition to this, due to high beta and low market
capitalization value investment in the shares of VLS is not considered as conservative. Thus,
investor should avoid making investment in the shares or stocks of VLS. Hence, client should
not include VLS security in his/her portfolio.
From
Financial analysts
CONCLUSION
By summing up this report, it has been concluded that VLS has built and maintained wide
product portfolio. Company is focusing on providing customers with the high quality
pharmaceutical products or services. Besides this, it can be seen in the report that profitability
level of the company was decreased over the time period. Further, it has been articulated that
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capital structure maintained by VLS is not optimal. It can be summarized from the report that
weighted average cost of capital pertaining to VLS implies for 8.6% significantly. In addition to
this, it can be depicted from the evaluation that VLS is offering dividend to the shareholders
regularly or each year. However, such business unit will prove to be fruitful for investment
purpose only in long run. If investor wishes to earn fixed or suitable return by investing money
lower risky securities then VLS stocks should not be included in the portfolio.
REFERENCES
Books and Journals
Armour, J. and Enriques, L., 2018. The Promise and Perils of Crowdfunding: Between Corporate
Finance and Consumer Contracts. The Modern Law Review. 81(1). pp.51-84.
Dang, C., Li, Z. F. and Yang, C., 2018. Measuring firm size in empirical corporate
finance. Journal of Banking & Finance. 86. pp.159-176.
García, F. J. P., 2017. The WACC. In Financial Risk Management (pp. 345-351). Palgrave
Macmillan, Cham.
Hansen, C. B., 2018. Peter Birch Sørensen University of Copenhagen:" Taxation and the optimal
constraint on corporate debt finance: Why a comprehensive business income tax is
suboptimal". Virtual Reality.
Häusermann, S., 2018. The multidimensional politics of social investment in conservative
welfare regimes: family policy reform between social transfers and social
investment. Journal of European Public Policy. 25(6). pp.862-877.
Lee, H. and Park, K., 2018. Advances in the corporate finance literature: a survey of recent
studies on Korea. Managerial Finance. 44(1). pp.5-25.
Mizen, P., Packer, F., Remolona, E. and Tsoukas, S., 2018.Original sin in corporate finance:
New evidence from Asian bond issuers in onshore and offshore markets (No. 2018/04).
Moreno-Bromberg, S. and Rochet, J. C., 2018. Continuous-Time Models in Corporate Finance,
Banking, and Insurance: A User's Guide. Princeton University Press.
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Mulherin, J. H., Netter, J. M. and Poulsen, A. B., 2018. Observations on research and publishing
from nineteen years as editors of the Journal of Corporate Finance. Journal of Corporate
Finance.
Rocheteau, G., Wright, R. and Zhang, C., 2018. Corporate finance and monetary
policy. American Economic Review.108(4-5). pp.1147-86.
Online
Vita Life Sciences Ltd. 2018. [Online]. Available through: <
https://www.reuters.com/finance/stocks/overview/VLS.AX >.
Annual report of VLS. 2018. [pdf]. Available through:
<http://www.vitalifesciences.com/assets/reports/vls-annual-report-2017.pdf >.
Company tax rates. 2018. [Online]. Available through:
<https://www.ato.gov.au/Rates/Company-tax/>.
Interest rates in Australia. 2018. [Online]. Available through:
<https://www.lend.com.au/business-loan-interest-rates>.
Vita Life Sciences. 2018. [Online]. Available through: <http://www.vitalifesciences.com/ >.
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