Key Highlights:

 earnings before interest, tax, depreciation and amortization (EBITDA) of $87.8

million, compared to $78.9 million in FY2019, being an increase of 11%
 earnings before interest and tax (EBIT) of $42.0 million compared to $28.3 million
in FY2019, being an increase of 48%
 profit before tax (PBT) of $31.0 million, compared to $8.4 million in FY2019,
being an increase of 269%
 profit after tax (PAT) of $21.3 million, compared to $4.4 million in FY2019, being
an increase of 384%
 earnings per share (EPS) of 9.9 cents, compared to 2.1 cents in FY2019, being an
increase of 371%.

Profitability

The profitability of Bega over the analysed period is calculated by utilising the
financial ratios:

1. Return on Equity (RoE)

This ratio calculates the return to the owners for each dollar invested in the
company.

2. Return on Assets (RoA)

This ratio is used to compare Bega’s profit compared to the assets it owns to generate
these profits.

3. Gross Profit Margin (GPM)

The percentage of sales revenue that can be classed as gross profit.

4. Net Profit Margin (NPM)

The part of sales revenue that can be classed as net profit.

5. Cash Flow to Sales

It measures a company's ability to produce cash flow in relation to its sales volume.

6. Earnings per Share

The part of a company's profit allocated to each outstanding share of common stock.  

7. Dividends per Share

The amount of a company's declared dividends paid for each ordinary share outstanding.

8. Share Price

The cost of purchasing a single share of a business. A share's price is not set in stone but
fluctuates with market conditions. If the company is considered to do quite well, it will likely
rise, while if the company isn't performing poorly, it will likely decline.

9. Dividends Payout Ratio

The proportion of a company's net profits to the total amount of dividends paid out to
shareholders. It is the sum of profit distributed to shareholders in the form of dividends.

10. Price Earnings Ratio

This ratio aids investors in determining a stock's market value in relation to its earnings. In a
nutshell, the P/E ratio shows how much the market is willing to pay for a stock today based on its
past or projected earnings.

Graph 1, which shows increase in RoE, RoA and NPM between 2019 and 2020.
Information provided in the Annual Report attributes this 5.20 percentage RoE
increases mainly due to the profit earned this year by the successful launching of simply
nuts product, Launch of B honey which was the huge success despite the pandemic.
Although invested highly on new lactoferrin plant at Koroit but it gives only fruits and
boosted the sale due to which net income increased so as ROA. Both ROE and ROA
are below the standards as compare to industry average but as the things are going Bega
cheese will catch them in few years. Gross profit margin decreases slightly due to
increase in supplier cost however net profit margin increases due to increase in sales.
Although they are very far behind the industry therefore, they should focus on
controlling its cost. Cashflow to sales increases as sales increases. Earnings per share
increase drastically despite issuing new shares due to increase in net profit but
decreases its dividend per share. Share price is stable. Dividend payout ratio decreases
due to increase in EPS. Price earning ratio also decreases and there is a chance for
investors to make a profit from it.

Table No 1

2019 2020 Industry

Average
Return on Equity 3.53% 5.20% 15.52%
Return on Assets 1.91% 2.89% 5.03%
Gross Profit Margin 20% 19% 33.43%
Net Profit Margin 0.31% 1% 20.73%
Cashflow to Sales 7% 9% N. A
Earnings per share 2.1 cents per share 9.9 cents per share N. A
Dividends per share 11 cents per share 10 cents per share N. A
Share price $4.78 $4.38 N. A
Dividend Payout 524% 101% N. A
Ratio
Price Earnings ratio 2.2710 0.4424 N. A

Graph No. 1

Chart Title
25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
2019 2020

Return on Equity Return on Assets Gross Profit Margin

Net Profit Margin Cashflow to Sales

Efficiency

The efficiency ratios “evaluate how well a company uses its assets and liabilities to
generate sales and maximize profits” (Investopedia 2018). The ratios that we
calculate to perform this evaluation are:

1. Asset Turnover Period (ATP)

It shows how efficient the company’s assets are at generating revenue.

2. Inventory Turnover Period (days) (ITP)

It shows how long the inventory takes from going from produced to sold. This
can be expressed in a number of days or times per annum (pa).
 3. Accounts Receivable Turnover or Debtors Turnover (ART)

It measures how well a business collects its accounts receivable. This ratio assesses how well a
business handles and uses the credit it provides to consumers, as well as how easily the debt is
received or charged.

4. Inventory Turnover (times)

It refers to how many times a business can replace its sold inventory in a given time span.

5. Receivable Turnover (times)

It determines how many times a dollar of accounts receivable can be converted into cash by a
business.

(Investopedia 2018)

The results of the calculations for Bega Cheese LTD period FY 2019 – FY 2020 are
listed in Table 2 and compared visually in Graph 2 and show that asset turnover has
increased slightly and they are now using their assets more efficiently and more than
the industry average. Inventory turnover ratio increases from 6.33 times to 8.099
times shows that company is now selling their product quickly as compare to
previous years. It is also more than the industry which is a positive sign for the
company and investors. The results show that the debtors are now paying at faster
rate shows that company has a high proportion of quality customers.

2019 2020 Industry

Average
Asset Turnover 0.945 times 1.02 times 0.31 times
Inventory Turnover 87.27 days 80.32 days N. A
(days)
Receivables Turnover 46.24 days 36.33 days N. A
(days)
Inventory Turnover 6.33 times 8.099 times 5.29 times
(times)
Receivables Turnover 7.89 times 10.044 times N. A
(times)

Liquidity

The liquidity of a company refers to their ability to meet debt obligations and is
measured with three main ratios:

1. Current Ratio
The ability to use current assets to pay back current liabilities in an emergency.

2. Quick Asset Ratio

It is similar to the current ratio but excludes assets that can be quickly converted to cash
equivalents.

3. Cash Flow Ratio

It shows whether the business cover their liabilities from their cash flows?

(Atrill et al. 2012)

The horizontal liquidity comparison displayed in Table and plotted in Graph 3 once
again show a change for FY 2020. The decrease in current ratio is due to decrease in
current assets as the company buys less inventory but it is still above 1 which is good
to pay their short-term loans although lower than industry average. The quick asset
decreases and is far behind industry average meaning that, in times of emergency, the
companies cannot cover their liabilities with their cash and cash equivalents. The
company shows higher cashflow ratio means that a company has generated more
cash in a period than what was immediately needed to pay off current liabilities.

2019 2020 Industry

Average
Current 1.51 times 1.33 times 2.48 times
Quick Asset 0.67 times 0.49 times 1.78 times
CFfO 0.309 times 0.450 times N. A

Gearing

The comparison between the amount a company is funded by external debt vs

shareholder equity is called gearing (Atrill et al. 2012). There are 3 ratios financers
look at to assess the leverage of a company:

1. Debt to Equity Ratio

It depicts the proportions of equity and debt used to fund a company's assets, and it indicates the
degree to which shareholder equity will meet creditors' obligations in the event of a business
failure.

2. Debt: Asset Ratio

The percentage of assets that are financed by borrowed funds.

3. Equity Ratio
It indicates how much of a company's assets are financed by stock issuance rather than debt.
4. Debt Coverage Ratio

(Investopedia 2018)

Because there is a significant reduction in net debt from $303.4 million at the end of
1H FY2020 to $236.4 million as at 30 June we see drastic change in debt to equity
ratio indicates a lower amount of financing by debt and so as in the case of Debt to
asset ratio as now assets are lesser financed by debt. Similarly in the case of Bega
Cheese LTD, we see a change in equity ratio as more assets are now financed by
equity. gearing in 2015, when the company borrowed extra funds to cover the
additional expenses of the Milk Sustainability and Growth program and acquiring
extra processing facilities for its baby formula expansion. This ratio drops 2.8ppt in
2016 as the company profits from the assets and repays the loan. Bega’s debt:asset
ratio remains fairly steady and in line with the other competitors in the dairy.

2019 2020 Industry

Average
Debt to Equity 84% 75% N. A
Debt:Asset 46% 43% N. A
Equity Ratio 54 % 57% N. A
Debt 3.61 times 2.20 times N. A
Coverage
Ratio

Recommendation & Overall Assessment:

Has the reporting year been better than the prior reporting year for the company?

After conducting ratio analysis it is clear that the company overall has done a great job in
achieving its target despite the pandemic as compare to the last year. The profitability ratios
shows improvement due to the profit they earn this year. EPS of 9.9 cents, compared to 2.1 cents
in FY2019, being an increase of 371%.

Overall, the efficiency ratios show signs of improvement as they are using assets more efficiently
than before. The liquidity ratio however shows decline. The gearing ratios indicating that the
company is now moving towards equity-based financing.
Will the company succeed in the future?

Tt has been an important year for our Bega Foods business. Sales in peanut butter range
continue to grow, particularly as a result of the successful launch of Simply Nuts
products, additionally the continue to develop Farmer’s Table cream cheese and butter
branded business, and the promotion of Vegemite has seen a return to growth, and the
iconic status of this much-loved brand reinforced. Bega Foods has successfully
expanded in the spread’s category with the launch of B honey, which combined with
existing range and new product development gives the company a significant presence
in Australian retail and food service channels in dairy and spreads. Bega Foods has
continued to grow our international retail and food service business prior to the onset of
COVID-19 where sales have since stabilised.

we can conclude that Bega Cheese Company LTD is in a stable financial position and
will continue to deliver a steady return on shareholder investments by comparing the
various profitability, efficiency, liquidity, and gearing ratios over time. The
organisation appears to be on track to fulfil its financial commitments and is
approaching the targets set by its rivals.

The likelihood of a merger or acquisition of the company?

Bega Cheese has grown substantially over the past decade making a number of acquisitions most
notably the acquisition of Koroit.

The way company is doing its business and the profit they earn this year and if we see the
company’s history it is very much in the cards that company will go for aquation rather sooner
than later.

Suggest what should the company be doing help it succeed

The company should first focus on liquidity ratios by paying off liabilities also quickly improves
the liquidity ratio, as well as cutting back on short-term overhead expenses such as rent, labor,
and marketing.

Although company did a good job as compare to last year but below industry average. Both ROE
and ROA needs to be improved by either increasing net income or decreasing in total assets and
similarly by increasing profit margin not only by selling more but also by increasing prices of
each product sold, lowering the cost of goods sold, reducing its overhead expenses, or a
combination of each.

External impacts that need to be taken into consideration

The government policies regarding covid-19 has impacted the business. The pandemic is
expected to impact the customers and our supply chain well into FY2021 or longer. Income tax
is increased which effect the profit.

Last year the company commenced piloting several Industry 4.0 initiatives with Swinburne
University with funding support from the Federal Government as the introduction of new ERP
system help to improve cost efficiencies in supply chain which ultimately helps the business to
grow.

Would you invest in this company?

It is noteworthy that the Bega Foods business was able to quickly respond to changed market
conditions as a result of COVID-19, the business managed a collapse in both the Australian and
international food service markets and a short-term surge in demand in retail.

Ratio analyses suggest the same that the company is going into the right direction and it will only
grow and therefore I would surely invest into it.

References:

Atrill, P, McLaney, E, Harvey, D & Jenner, M. 2012, Accounting: An introduction, 5th edition,

Pearson Australia

Eugene F Brigham. 2015, Financial Management: theory and practice, 13th edition, Good Knight

Books

Bega Cheese LTD 2020, 2020 Annual Report

Bega Cheese LTD 2019, 2019 Annual Report

Investopedia 2021, Ratio Analysis retrieved from

https://www.investopedia.com/terms/e/efficiencyratio.asp#ixzz54Ffcmtgi

Corporate finance Institute, Financial ratios retrieved from

https://corporatefinanceinstitute.com/resources/knowledge/finance/financial-ratios/