Business Report
The A2 Milk Company
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Part 1 – Introduction
1.1 What is the name of the Entities Reporting (Quote the page number from the Annual Report)
Answer:
The name of the entity reporting is company FMC. It is created for the purpose of part 7 of the Financial Markets Conduct Act 2013. The financial statements comply with companies Act 1993.
1.2 How does the company make money?
Answer:
The company makes money by commercializing A2 branded milk all around the world. It generates profit by distributing the A2 products all over the world through advertisement and promotions. It supplies healthy and benefit products in the international market and obtain high profit from that.
1.3 Main products / brands.
Answer:
The main products of The A2 Milk Company are Dairy, Milk, and infant formula that are supplied under the brand name of A2.
1.4 How would you categorize your company’s consumer product? (Convenience, Shopping, Specialty, Unsought). Justify your answer
Answer:
The products of the company are convenient for the consumer as people use this type of products in their daily routine. The milk and dairy products are widely used in all homes to remain active and healthy. The product has high demand in the international market as it is the basic necessity that many people consume daily. Moreover, this type of product is available at superstores, grocery stores, dairy milk shops, and bakeries. Consumer can have easy access to the product that is supplied in all season.
1.4 In your opinion would this company be classified as, Local, National, Trans-Tasman, International, Multi National or Global. Justify your classification with evidence– quote the page number(s) from the Annual Report
Answer:
The company can be classified as an international company as it operates in several distinct markets and the branded products are supplied all over the world (pg.16). The A2 Milk Company expands its business by entering into new markets depending on the external factors and preparing growth strategies to compete in those markets. The expansion plans of the company show that it has potential to increase the operations in different cities while local customers are also entertained at large.
Part 2 –Financial Performance
2.1.1 What was the $ amount of change in Total Revenue? [From Appendix C]
Answer:
There was a change of $456 in 2015 and $679 in the total revenues of the company due to the inclusion of royalties and other revenues. All the items are recorded at their actual price, so there is a slight change of total revenues.
2.1.2 What was the $ amount of change in NPaT as a result of the change in Total Revenue? [From Appendix C]
Answer:
There is a slight change of $456 in NPaT of the company in 2015 as the loss increased by this amount due to the change of total revenue. There was a change of $679 in the NPaT of the company in 2014 and the changes resulted in loss for the company in 2014.
2.1.3 WHAT were the key reasons for the change in Total Revenue? (Support your answer with evidence from the Annual Report.)
Answer:
The key reason for the changes in total revenue was the royalties that were received under the licensing agreement with third parties on the sale of A2 milk products in different markets (pg.74). Royalties and other revenues are excluded from the total revenue to provide a clear and concise view to the users of financial statements. However, these amounts are also considered as revenue for the company other than that from operations, so they were included in the unadjusted income statement of The A2 Milk Company.
2.2.1 What was the % change in Efficiency? [From Appendix C]
Answer:
There was a decrease of 21.8 percent in the efficiency of the company in 2015 as the loss of the company increased. The efficiency was decreased by 6,790 percent in 2014 due to the loss incurred in the period after reconciliation.
2.2.2 What was the $ amount of change in NPaT as a result of the % change in Efficiency? [From Appendix C]
Answer:
The amount was similar to the changes in the total revenue of the company as there was no change in other accounts. The changes were $456 and $679 in 2015 and 2014 respectively due to the inefficiency of the company.
2.2.3 WHAT were the key reasons for the change in Efficiency % (Support your answer with evidence from the Annual Report as to why expenses have increased or decreased).
Answer:
The key reasons for the inefficiency were increasing expenses of taxes due to small amount reserved in the provision of income tax and there was a slight change in the depreciation due to the increasing assets of the company. The management of the company was inefficient in managing and controlling revenue and capital expenditures to generate potential profits for the period.
2.3.1 What was the $ amount of change in NPaT as a result of changes in DAIIT (Depreciation, Amortisation, Impairment, Interest, Tax) [From Appendix C]
Answer:
The total change in the amount of NPaT was $2,692 that was due to the increase in expenses of the company in 2015 as compared to 2014.
2.3.2 IF the $ amount of change is more than 20% of the Total change, then identify what caused the change to occur. (Support your answer with evidence from the Annual Report)
Answer:
If the amount of change were more than 20 percent, it would increase the expenditures, and the company would be unable to manage the expenses. It would represent the inefficiency of the company in controlling costs and expenses while performing in a competitive environment. The NPaT of the company would have also increased by 20 percent due to the change in total revenue and expenditures. The company would suffered a great loss due to the increased in total expenditures if the amount of revenue would remain unchanged.
Part 3 – Gearing
3.1 Identify who is taking the investment risk in this business (use a ratio from Appendix A to justify your answer)
Answer:
The company officers are taking the investment risks by exercising equity option to manage the overall operations of business. It is observed that the decision makers are entitled to take the risk of investment in any company. Here, the officers of the company are the key risk takers who have an implied responsibility to utilize their personal skills and abilities to mitigate the risk and ensure a high return on the investment associated with the risk. The internal gearing ratio shows that the equity is utilized more to purchase potential assets of the company. It is evident from the information that 65.97 in 2015 of the total assets are acquired by Equity. It can be noticed that the internal gearing ratio of the company was 76.52 in 2014 that shows that equity portion is the major risk taker in this business.
3.2 WHY is that group required / prepared to take the risk?
Answer:
The group is required to take the risk of investment as they have a responsibility to invest the money of shareholders in less risky investments. They have enough knowledge to assess and mitigate the risks associated with different types of investment. Their expertise and experience enable them to take a viable decision for the stakeholders of the business. The risk taker should think and react in the broader perspective and ensure that there are less risk and potential revenue in the particular investment. However, he can do it easily by collecting relevant information from the market and prepare a report on the external risks involved in the particular risks.
Part 4 – Current Issues
4.1.1 What was the amount of Donations paid by the company in 2015? [Quote the page number from the Annual Report]
Answer:
The company paid a donation of 196,462 in 2015 in the form of cash and inventories (pg.50). The company paid such donations to fulfill its ethical and social responsibilities as it is supplying the basic necessity of life all over the world.
4.1.2 Who received the donations? [Quote the page number from the Annual Report]
Answer:
The substantial portion of the total amount was received by the charitable organizations that need such types of food products to the needy people (Pg.50). The managers and caretakers of the organizations received donation to transfer them to whom they were sent.
4.1.3 Give a personal critique as to whether “the donations paid, correspond to the company’s social policy statements.”(Justify all information by quoting the page number(s) of the annual report)
Answer:
The donations paid do not correspond to the company’s social policy statements as there is no disclosure of the social responsibility in the annual report. Also, there is no information regarding the social or ethical responsibility of the company to fund or donate such products to the charitable organizations. The core business activity of the company is to sell or distribute dairy and milk products (pg. 5).
04.2.1 Define ‘work place giving”–(use weekly reading material to support your definition. Use appropriate in-text referencing).
Answer:
Workplace giving is the program followed by different organizations. It is run by various organizations such as Earth Share to support and engage employees in their sustainability programs. Many organizations support this campaign as it is created to support and protect the environment. The donations and funds are collected online, and there is an effective security system to protect the information of donors so that no one has easy access to it (EarthShare, 2016).
4.2.2 What evidence is there in the Annual Report that your company does / does not support the concept of “work place giving”. (Quote the page number(s) from the Annual Report to support your answer)
Answer:
The company promotes diversity to provide an effective environment to the employees who are helpful in bringing growth in the overall organization. The performance of the organization is appreciated although they belong to a different culture and have different languages, skills, knowledge, and expertise. The policy of the organization is to promote diversity for enhancing the performance of employees that will ultimately increase the overall performance of the company (pg. 44).
4.3.1 Who is the Chief Executive Officer / Managing Director AND how much does that person earn? (Quote the page number from the Annual Report)
Answer:
Howard Paterson is the Chief Executive Officer of the company, and there are directors of the company who get salaries and benefits. The total amount of their salaries and benefits was $5,286,000 in 2015 (pg.97).
4.3.2 Create a profile and an annual salary for the “average” Full Time Employee
Answer: Role / job title Chief Executive Officer
Responsible for strategic decision making and overseeing the company’s operations.
Annual Salary $ 2,500,000
4.3.3 Calculate the CEO: Average Full Time Employee pay ratio? (Round to TWO decimal places)
Answer:
Average Full Time Employee pay ratio= CEO compensation/Average Salary of Employees.
Average Full Time Employee pay ratio =5286000/250000=21.14
4.3.4 In your opinion is the ratio equitable? (Use weekly reading material and lecture notes as evidence to support your answer. In-text reference your source)
Answer:
The CEO compensation is equitable in my belief as the ratio is less than other companies working in the same industry. The CEO compensation and benefits are being criticized by the shareholders for many years, but it should be recognized that the pay is not higher than others operating in the same industry. The CEO of the company is entitled to get a high risk, so the amount compensates to him is equitable to the risk associated with this designation (Dr. Chamberlain, 2015).
4.4.1 What is the effective rate of tax paid by the company? [Quote the rate from Appendix A]
Answer:
The effective rate of tax paid by the company is 20 percent as it was increased from 2.75 (pg.75).
4.4.2 Given that the prescribed rate of company tax in New Zealand is 28%, then in your opinion is the rate paid by the company justifiable. (use weekly reading material and lecture notes as evidence to support your answer. In-text reference your source)
Answer:
The rate paid by the company is justifiable because the rate of prescribed interest in New Zealand is much higher than the effective rate of tax paid by the company. The prescribed rate of interest is amended at the time so the company should pay according to the effective rate of interest and makes a provision for that. It will allow the company to take precautions (Smith, 2016).
4.5 Reference a current news article (less than six months old) from either stuff.co.nz or nzherald.co.nz relating directly to your company or to the industry sector. In 200 words, summarise the article and comment on the significance of this article to the company’s future NPaT?
Answer:
The current news regarding the potential growth of the sales of the company is a2 Platinum campaign across New Zealand and Australia. The campaign has shown tremendous growth in the starting six months, so it is predicted that it will provide long-term benefits to the company by increasing sales in New Zealand and Australia. The NPaT of the company is also expected to increase in future as the effective management of the company that has used digital media to attract a large number of audiences is running the campaign. Although the NPaT of The a2 Milk Company is showing negative figures that are low, the leaders of the company predict that it will prove to be a viable investment that should give a potential return in the coming period. However, there is a need of special attention on the campaign as it is the only hope to reduce the risk of liquidity and strengthen the operations of business. The financial condition of the company will be strong if the campaign will provide effective outcomes at the end. The marketing team of the company is efficient and reliable to give potential output in less time. The new idea will prove to be beneficial for the company if it goes in a designed direction (New advertising campaign for a2 Platinum® Toddler Milk, 2016).
Part 5– Share market factors [Use the information from Appendix B]
5.1 If you had $10,000 to invest, How many shares in your report company could you buy? (round up to next whole share) [Use Share price on Appendix B]
Answer:
I can buy 6290 shares of the company as per share price of the company is 1.59.
5.2.1 If you wanted an annual growth of 7.5%, what should be the value of each share in 30 years’ time? [Use share price from Appendix B and use FV formula]
Answer:
10000*(1+ (0.075*30)) = 32,500/6290=5.17
The value of each share should be 5.17 in thirty years’ time to achieve desire goals.
5.2.2 What is the current Earnings Yield for your company? [Use share Price from Appendix B]
Answer:
The current earning yield of the company is showing a negative figure that is 20.75 percent in 2015. It shows that the company is incurring a loss due to the increasing competition and high tax paid in 2015. The company failed to make profits in the year 2015 and incurred loss will be shared with the shareholders of the company.
5.2.3 If you were an investor motivated by GROWTH would you buy shares in your company? (you will need to discuss outlook and RISK in your answer. Quote the page number from the Annual Report)
Answer:
I would not buy the shares of the company as there is no growth shown in the financials of the company. An investor is concerned with the profits that should be driven in less time to ensure a high return in the short run (pg.82). Also, there is a high risk of investment in the company due to the competitive environment. The management of the company is failed in minimizing the risk factor and there is no evidence for the factors that can influence the decision of the investor to buy the shares of the company to enjoy dividend.
5.3.1 What is the current Dividend Yield for your company? [Quote the rate from Appendix B]
Answer:
There is no current dividend yield of the company as it only declared the dividend but did not pay it to satisfy the shareholders of the business. There is no evidence of paying a dividend to the shareholders in the annual report. The reason may be the loss incurred by the company in 2015. It means that there is nothing to pay to the shareholders; in fact, they had to share loss with the company.
5.3.2 What is the current interest rate of a $10,000 5 year fixed term Bank Deposit? (in-text reference your source)
Answer:
The current rate of interest on 5 year fixed term bank deposit is 3.60 percent per annum (Term deposits 1 to 5 years, 2016).
5.3.3 If you were an Investor motivated by INCOME would you buy shares in your company or would you put your money in the Bank Term Deposit? (You will need to discuss investment RISK in your answer)
Answer:
I would prefer to make an investment by depositing the entire amount in the bank rather than considering the company that is ineffective in satisfying the needs of shareholders. The company does not follow the dividend policy, and it is trying to make profits from the existing operational activities. The main reason for rejecting the company for investment is that it had not shown positive figures in 2015, so it is immaterial to consider the company for investment. Also, there is no expectation for growth due to the high competition of products of the company in the international markets. The company is expecting a change in the financials by paying attention to the a2 Platinum campaign but there is no reliable estimations that can convince the investors to make investment in this company (New advertising campaign for a2 Platinum® Toddler Milk, 2016).
5.4 Assume that you spend $4,000 per annum on your company’s products / services
5.4.1 How many shares would you need to buy to recover the spending in Dividends? [Use the information on Appendix B &Show your workings]
Answer:
There is no evidence of the dividend paid by the company to the shareholders. The growth rate is mentioned 2 percent per annum on the investment so if the company make strategy to pay half of the amount of the growth in net profit than the calculation is provided as follows.
4,000*1=4,000 shares are required to recover the spending.
5.4.2 What would be the cost of buying the required number of shares as calculated in 5.4.1 above? [use the share price on Appendix B]
Answer:
The cost of buying 4,000 shares would be $6,360. The calculation is provided below.
4,000 * 1.59 = 6,360
5.4.3 What would be the return on that Investment?
Answer:
The return on that investment would be 127.2 if we considered that estimated growth rate is 2 percent per annum and the company is effective in accomplishing their desired objectives. The calculation is provided below.
6,360 * 2%= 127.2 per annum
5.4.4 Would you be persuaded to make that investment? (Justify your answer based on comparative risk and returns)
Answer:
I would not persuade to make that investment because the return is based on assumptions and there is no evidence for the estimated growth of business in the international market. However, the investor who is willing to make the investment to receive to high return, in the long run, can take risks by investing in this company. The company is not paying a dividend to the shareholders due to loss so it would not be preferable to make short-term investments in this company. Moreover, there is a high risk of investment in the company due to its continuous losses because of the increasing expenses of taxes and interest. In my opinion, it is not a viable investment and the investor should not take high risk for low return.
Part 6 –Conclusion
In approx. 250 words give your overall impression of the company, with particular emphasis on the company’s future outlook (quote the page number from the Annual Report)
Answer:
The impression of the company is not effective for attracting investors as the operation management of the a2 Milk Company had not shown a profit in 2015. The management of the company did not try to reduce investment risks by strengthening operational activities of business. Moreover, the dividends are not paid to the shareholders who are expecting growth from the business. However, it is preferable to make an investment in banks rather than seeking the company for investment. The company operates in an international environment (pg.10), but it did not succeed in making profits to be distributed to shareholders. It is necessary for every business to make estimations for the future growth of the business. The company has also estimated the growth of 2 percent per annum (pg.44) and acquires new subsidiaries to increase the investment.
The a2 Milk Company is ineffective in controlling the financials (pg.79), and high risk is attributed to the investment in this company. The shareholders will not trust on the estimations and will move towards other companies or banks to ensure a high return on potential investment. However, the advertising campaign a2 Platinum is (New advertising campaign for a2 Platinum® Toddler Milk, 2016) expected to make growth in the sales of the company but there is no actual or reliable growth seen in the financial statements of the company. The company is expecting growth but the investor sees dividend and return on the investment. The company did not provide any evidence of growth in the business in the coming years.
List of References
New advertising campaign for a2 Platinum® Toddler Milk. 2016. [Online] Available at: <https://www.thea2milkcompany.com/new-advertising-campaign-fora2-platinum-toddler-milk/> [Accessed 2 June 2016].
Term deposits 1 to 5 years. 2016. [Online] Available at: <http://www.interest.co.nz/saving/term-deposits-1-to-5-years> [Accessed 2 June 2016].
Dr. Chamberlain, A., 2015. CEO to Worker Pay Ratios: Average CEO Earns 204 Times Median Worker Pay. [Online] Available at: <https://www.glassdoor.com/research/ceo-pay-ratio/>.[Accessed 2 June 2016].
EarthShare, 2016. Workplace Giving Campaigns. [Online] Available at: <http://www.earthshare.org/workplace-giving-campaigns.html>. [Accessed 2 June 2016].
Smith, M., 2016. New prescribed rate of interest in effect. [Online] Available at: <http://www.financialinstitutionslegalsnapshot.com/2016/01/new-prescribed-rate-of-interest-in-effect/> [Accessed 2 June 2016].
APPENDIX A
Company Profile
Income Statement Summary
Statement of Cash Flows– Summary
Balance Sheet – Summary
Make sure that Eq = A – L or A = L + Eq
APPENDIX B
Company Profile
Share market Metrics
GROWTH factors
These factors are to be calculated by you from the information on Appendices A and / or B
INCOME factors
these factors are to be calculated by you from the information on Appendices A and / or B
APPENDIX C
Financial Performance
Change in Net Profit after Tax
