Financial Statements of A2 Milk Company-Free-Samples for Students

Question: Analyze the financial statements of A2 Milk company for the year 2017. Answer: Background of A2 Milk Company This company was known previously known as A2 corporation. A2 Milk Company is engaged in the production of milk and milk related products. A2 milk Company also makes milk products which are related to infant formula. The company was founded by Dr Corran McLachlan and it was founded in 2000 in New Zealand. Dr Corran McLachlan was engaged in the research of health effects of Milk Protein of A1 Beta-casein. The company carried out genetic test to identify which cows which can produce milk with A1 protein. The company started its operations on farm breeding programs in order to breed cows which can produce A2 milk. The company has its headquarter in Sydney, Australia and the total revenue of the company as per 2016 figures is $ 337.3 million (The a2 Milk Company", 2018). The core activities of A2 Milk Company consist producing A2 Milk, other related dairy products and infant formula. Ownership Governance Structure of the a2 Milk Company Substantial Shareholders of A2 Milk Company The main shareholders of the company who have a majority shareholding in the total shares of the A2 Milk Company which is greater than 5% are USB Group AG and its related parties which has a shareholding of 8.10%. The other shareholders which have a shareholding of more than 5% are challenger Limited, Colonial First State Asset Management (Australia) Limited, Commonwealth Bank of Australia, Greencap Capital Pvt Limited, Harbour Asset Management Limited. There are no shareholders who holds more than 20% shares in the company. USB Group AB is not in any way related to the A2 Milk Company and thus it is not a family company. Major roles involved in Corporate Governance The corporate governance of the company lies with the board of directors and CEO of the company (Ahmed Henry, 2012). David Hearn is the Chairman and Executive Director of the company and he is responsible for the corporate governance policy of the company along with the board of directors of the company. The board of director of the company includes Julia Hoare, Peter Hinton, Warwick Every-Burns and Jesse Wu. The CEO and the Managing Director of the Company is Geoffrey Babidage. There are no such shareholders which have a shareholding of more than 20% as per the shareholders Information of the company. The shareholders which hold more than 5% of the total shareholding of the company are not in any way related to the company and therefore does not have any role in the corporate governance of the company. Key Ratios of the Company Trend Particulars` 2014 2015 2016 2017 2014 2015 2016 2017 Net Profit/(Loss) after Tax (NPAT) A 10000 -2091000 30436000 90646000 -100.0% 20910.0% -304360.0% -906460.0% Total Assets (TA) B 76643000 88867000 210152000 343930000 100.0% 115.9% 274.2% 448.7% Ordinary Equity (OE) C 58644000 58629000 133078000 241482000 100.0% 100.0% 226.9% 411.8% Total Liabilities D 17999000 30238000 77074000 102448000 0.0% 100.0% 254.9% 338.8% Return on Assets (ROA) E= A/B 0.01% -2.35% 14.48% 26.36% -100.0% 18033.75% -111000.91% -201999.87% Return on Equity (ROE) F=A/C 0.02% -3.57% 22.87% 37.54% -100.0% 20915.35% -134123.51% -220134.17% Debt Ratio G=D/B 0.235 0.340 0.367 0.298 100.0% 144.89% 156.17% 126.84% The above table depicts the ratios such as Return on Assets (ROA), Return on Equity (ROE) and Debt Ratio (Heikal, Khaddafi Ummah, 2014). As per the above chart the total asset (TA) and Ordinary Equity (OE) figures as shown in the table are increasing. Such changes in total assets and ordinary equity affects the return on total assets and return on total equity (Fan, Titman Twite, 2012). As the total assets of the company increases the net revenue of the company will also be high and such will be also be reflected in the Return on Assets (ROA) of the company. Moreover, as the assets increases there would be a reduction in the debt ratio of the company which will in turn increase the Return on equity (ROE) of the company. As per the table given the increase in the ROE is much more as compared to the increase in the return to assets of the company. This may be due to the fact that A2 Milk Company is utilizing more equity capital in the capital structure of the company (Baos-Caballero, Garca-Teruel Martnez-Solano, 2014). As per 2017 financial reports the companys balance sheet shows no debt capital or long term borrowings in the non-current liability section. Graphical Presentation of Stock Prices Figure1: (Graph showing Stock price Movement) Source: (Created by the Author) As per the above represented chart, the stock prices of the company has fluctuated a bit and it has even gone down below the all ordinary index (Handley, 2012). The stock prices of A2 Milk Company has increased and the stock line is above the all ordinary index line from 1/11/16 as shown in the graph above till it declines below the all ordinary index line in 1/9/17 as shown in the graph. It can be said that the stocks are less volatile as there have been case where there is sharp increase and decrease in the stock prices of the company. Factors which influences the Share Prices The major factor which affect the stock prices of the company is that the company has a lot of competitors in the market which results in intense competition. The competition among rivals segments the market and its consumers and have an overall impact in the stock prices of the company. Moreover due the company focuses on milk products which are free from A1 Beta-Casein proteins, the company has differentiated product from normal milk which are produced by the competitors. This does affect the creditability of the company and its products which affect the stock prices of the company. Computation of Required Rate of Return The beta of A2 Milk Company as per analysis of the stock prices and stock market information is 0.97. The computation of the required rate of return is given below: Particulars Amount Beta of the company A 0.97 Risk Free Rate B 4% Market Risk Premium C 6% Required Rate of Return D=B+[AxC] 9.82% The rate of return of the company is 9.82 as shown in the chart above considering the beta and risk-free rate of return and market premium (Arrow Kruz, 2013). The investors should invest in the company as the rate of return is high. Computation of Weighted Average Cost of Capital Particulars Amount Weightage Cost Return Rate Tax Rate WACC Total Long Term Debt 0 0.00% 0 0.00% 30.00% 0.00% Total Equity 241482000 100.00% 9.82% 9.82% TOTAL 241482000 100% 9.82% As per the above table it is evident that the company does not have any debt capital or long term borrowings as per the financial statement of A2 Milk Company for 2017. Therefore the company uses only equity capital in its capital structure. The higher is the weighted average cost of capital the more risks the company faces. In this case the cost of equity is the weighted average cost of capital for the company (Barberis et al., 2015). The company can add debt capital to the capital structure mix to gain benefits of leverages. Debt Ratio and Capital Gearing Ratio of the Company The debt ratio of the company shows the relation between the total liabilities to the total assets of the company. The debt ratio of the company has reduced from the previous years trend. The companys debt ratio was 0.367 in 2016 and it reduced to 0.298 in 2017. The company does not have any debt capital as per the financial statement of 2017 and the capital structure of the company only consist of equity share capital. The company thus seems to be avoiding the use of debt capital of the company (Hou, Van Dijk Zhang, 2012). As per the financial statements of the company, the management of the company intends to make a buyback of its shares in the next 12 months period which will be up to $ 40 million. Dividend Policy The company has not announced any dividends for the year, however the company plans to announce special dividends due the buyback plans which the company intends to follow (Travlos, Trigeorgis Vafeas, 2015). The dividend of the company is on the basis of the profits which the company earns during the year. The company has a basic Earnings per Share of 12.66 cent per share. Letter of Recommendation Dear client, Perth Australia Respected Sir, I would like to advise you to invest in A2 Milk Company as the performance of the company has been outstanding in the past few years. The company has achieved tremendous growth in the Australian market with its infant formula. Moreover. the rate of return which the company is offering is around 9.82% which is a decent rate of return as per the market. The significant ratios such as return on assets and return on equity is on an increasing trend which is favorable for investment. The company has also been earning good rate of net profit over the past two years. In addition to this the company has potential for further development. I hope this letter of recommendation will help you to take necessary investment decisions in this regard. Thanking you Client Investment Company References Ahmed, K., Henry, D. (2012). 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