Accounting Analysis of Gff - Relevant Company Background

Relevant Company Background

(a)(“Who are we”GFF,2014)The company A is Goodman Fielder Limited (GFF), which is consumer staple in the GICS sector, and belongs to the Food, Beverage & Tobacco Industry group. This company is a food products industry according to GICS. With the principle activities of manufacture, marketing and distribution of the food ingredients and food products. They produce such as milk, bread, flour, biscuits, cake mix, desserts, and other related goods. The location of GFF is headquartered in Sydney Australia. The main target market of GFF is across Australia, New Zealand and Asia Pacific. (BGA student source,2014)  The company B is Bega Cheese Limited (BGA), which is the comparative company to GFF, with the same GICS sector, Industry Group, GICS industry to company A. The principal activity is Receiving, processing, manufacturing and distributing dairy and associated products. The main products are natural cheddar cheese, mozzarella and processed cheddar cheese products. Located in Australia. Target market the domestic and also exports. The similarities are they both belongs to the same GICS sector, groups and industry. They both produce food products. Australia are the main markets for both of them, and they both located in Australia. The differences is that GFF produce wider range of foods and ingredients. BGA is mainly produce cheese products. GFF has manufacture in the target countries. BGA produce their cheeses in Australia farms, and export to other countries.

(b)Economic factors: (interest factors 2009).Interest rate can affect the income statement in “interest expenses”.  If the interest has not been paid, it will exist in the balance sheet as “current liabilities”. If the interest rate goes up, the company will probably reduce the borrowing and made more investment.

Industry factors: online sales can affect the financial statement on the income statement and cash flows. More online sales lead to less cash inflows, more account receivables (Filus, S. 2007). by looks at the cash flow for both company. The percentage of operating cash inflow on revenue is reducing, and the accounts receivables is increased.

Specific factors: Change of CEOs. The change of CEO, will affect the decision making and company develop strategy. A lower leadership ability will probably cause the lower performance of the company. Both the company didn’t change the CEO, so the changes on the financial statement is stable, and the directions considered continuous.

(c) Company A: the most significant challenges is the increased competitive markets environment. It compete against many private brands which sells the same products. It affected the GFF’s income, shares and revenues caused by the reducing of customers.  Company B: the most significant achievement is take-over the largest competitive company WCABF. It improved the BGA shares market condition and it to generate Group profit before tax $ 66 million related to transaction costs, and enhance the opportunities for the implementation of organic and businesses in the future(Barry Irvin,2014)

Scenario 1

(a)Referring to the ratio has been calculated (Appendix A) for GFF. The current ratio for the year 2012, 2013 and 2014 are 1.6558, 1.8819, and 1.4648. It can reflect the company’s working capital condition. The ratio for the last 3 years is all greater than 1, which means the working capital is positive. The higher the ratio, the greater the financial stability and the lower risk for the investors and owners. Interest coverage ratio also need be analysed in this case. It got the ratio with -1.1964, 1.8378 and -7.0264 for the last 3 years. The ratio is indicates the company’s ability to get sufficient operating cash flow to cover its interest payments. And the trend is not stable. In this case, the company probably cannot gain enough profit to pay the interest. With the quick ratio 0.9530, 1.5408 and 1.0943 for the last 3 years. the trend is not stable, The company has the risk to sell their inventory to pay the liabilities.   In conclusion, the company has acceptable current ratio, means they has the possible ability to repay the loan, but with the interest coverage ratio, we can see the company cannot get sufficient profit to pay interest, even get lost on profit. And the quick ratio shows that they probably need to sell the inventory to pay the loan. So, the company is considered low ability to repay the loan. half equity amount of loan is 570million. Which is much larger than its profit and beyond its ability to repay. So I decide not to lend the money to GFF.

(b)In the year 2012, the company has 129m operating cash inflow, 84.6m investing cash outflow and 32.4m financing cash inflow. This situation means the company is prosperous and growing. They received much capital from financing activities to gain the advantages of growth opportunities. And they made many investments for further growth. In the year 2013, the company has 178.7m operating cash inflow, 148.9m investing cash inflow and 92.1m financing cash outflow. In this situation, the company is still well, but may not have a good opportunity of growth. It is using operating cash to pay off the debt and shareholders. In the year 2014, the company has 118.3m cash inflow from operating, 56.4m investing cash outflow and 276.0m financing cash outflow. In this year, the cash inflow from operating activity is much lower, while there’s a large amount outflows in investing and financing. The financing get huge amount to pay off the borrowings, which is beyond the company’s ability of repayment. The company cannot get cash inflows as much as the liabilities. The trend will be more borrowing and less cash inflow. Which is more risky to the company, this is also supporting my decision: not to lend the money.

(c) Debt coverage ratio:  this ratio is also known Debt Service Coverage Ratio. The net operation income divided by annual debt service. The ratio measures the ability to pay the debt comparing with the operating incomes. The ratio is used by leaders to evaluate the loans in income property. a ratio of 1.2 will support the company’s credit(Wyman, H.E. 1977). If we use the ratio to evaluate company A. we will get the ratio 0.27, 0.31 and 0.21, which is means the company has very low ability to repay the loan. It is also supporting my diction made.  

Scenario 2:

(a) The company A has the negative return on equity in the last year, the company get net lost last year, and compare to the previous two years, the ROA is not stable, the income is not consistently. Which indicates the returns on shareholder’s investment is considered small. Comparing with company B, using the ROA, ROE, Profit Margin ratios. We can figure that Company B is performed better on both ratio, and the ratio is stable consistently, while company A has negative ratios in the year 2012 and 2014.  It means to invest on Company B has less risk on the return. Regarding the dividend paid on cash flows and earning per shares in the income statement. Company B has paid more dividend and earned more per share. In this case, company B is the better choice to invest compare to company A.