I. EXECUTIVE SUMMARY. Founded in 1888, Foster's group is the result of a long history of amalgamations. Nowadays, regarded as a premium global multi-beverages company, Foster's group possesses three main operating arms: Beringer Blass Wine Estate, Carlton and United Beverages, Foster's Brewing International. The group delivers premium branded beers, wine spirits and entertainment products. With US$5.
2 billion in total operating revenue, Foster's group's operates in Australia, New Zealand, China, California, Italy, Chile, Vietnam, India and Fiji. Besides, its products are sold in over 150 countries around the world. The report has analyzed the financial performance and financial stability of Foster's Group over a three years period that is from 2002 to 2004 included. The Ratio Analysis technique was used to conduct the report. Therefore, comparison with industry averages and Coca Cola Amatil supplemented the analysis to complement the results.
In 2002, it was found that profitability had increased significantly compared to 2001, this was mainly due to Foster's group policy in expending its distribution and sales worldwide and Forster's European partnership which increased its income. However, 2003 showed smaller profitability than 2002 mainly due to a non profitable foreign exchange rate, tough competition in California, adverse trading conditions in the US and the impact of global events restricting travels, tourism and leisure activities (Swan, 2003: 5). Foster's group did however generate greater amount of operating cash flows, and made a considerable amount of acquisitions. In 2004, Profitability ratios did however increase but that was due to the selling off of ALH (Australia Leisure Hospitality) that generated $1. 5 billion, "Excluding the impact of significant items, net profit after tax was $469. 4 million, a decrease of 17.
4% over the previous year's result" (Foster's Audit, 2004: 61). On the three year basis, when compared to the industry averages, the stability ratios are actually lower, but when they are compared to Coca Cola Amatil the ratios are actually similar and even a bit higher. Due to the accumulation of consistent profits over the years, both companies do not need as much financial leverage as other companies would, which reflects the stability of the company. In fact, those companies rely more on equity than debt to generate their assets. Overall, Foster's group is a relatively stable and performing enterprise. The results show that Foster's performance and stability have moved in accordance to outside world events.
However, the company continues to maintain its position as a leading group in the beverages industry. II. QUALITY, SCOPE, USEFULNESS, FORMAT AND READABILITY OF THE MOST RECENT ANNUAL REPORT. The chairman's report for 2004 begins with recognition of the work contributed by the outgoing President, Ted Kunkel and the appointment of the new CEO, Trevor O'Hoy... Useful data such as the NP AT and EBIT values are clearly stated. The difficult conditions in the global wine market are briefly mentioned.
The report also highlights the strategy adopted by Foster's on focusing on core business activities by selling of non-core businesses such as Lensworth and ALH. Three major areas where the Foster's group focuses on are (i) Foster Lager as a global brand, (ii) CUB as a regional multi-beverage industry and (iii) the global wine business. The chairman's report is short, precise and to the point. The CEO's report has a lot of scope and good readability since it clearly defines the priorities of the company and differentiates the three major areas of focus by highlighting the importance of sustainable growth, in the case of the wine industry, and building momentum and maximizing potential, in the case of CUB and Foster's Lager respectively. The concise annual report mentions the key competitive drives of the company as Product, Brand Equity, and Distribution. Separate and independent reports of the three main groups, CUB, Foster's Brewing International, and Beringer Blass Wine Estates are provided in the annual report.
The financial highlights mentioning the net sales revenue and EBITA along with the percentage change are tabulated in all the three individual reports. This gives a picture of the improvement in financial performance of the groups in the year 2004. Foster's group is the only Australian company represented on the International Centre for Alcohol Policies (ICAP) and this shows the company's recognition of social responsibility. Moreover, the Foster's Group made direct as well as indirect contributions to many not-for-profit and charitable organizations.
III. ANALYSIS THE PUBLISHED FINANCIAL STATEMENTS FOR THE LAST THREE YEARS. o PART A: Financial analysis Financial ratios provide the best way to judge how well a company is performing. In evaluating the company, it is imperative to use both time series comparisons. Both will be used in the following analysis.
Gross profit is the difference between net sales and the cost price of the goods that have been sold for the period. Relating this to the net sales revenue produces the gross profit margin. The gross profit margin ratio is a financial ratio used to assess profitability. The gross profit margin for Fosters Group was 49.
71 % in 2002. However, in 2003 the gross profit margin declined to 48. 11 % mainly due to the negative impact of the growing Australian dollar against the US dollar and the high competition in California in the wine industry. These together decreased the net profit. The gross profit remained around 48% in 2004, because the conditions in the wine market wine continued to be extremely difficult. Compared to Coca Cola the gross profit margin of Foster's is slightly higher over the three years, showing that it is fairly profitable.
Net Profit Margin is another profitability ratio. This ratio is an indication of how effective a company is at cost control. The higher the net profit margin is, the more effective the company is at converting revenue into actual profit. The net profit margin is a good way of comparing companies in the same industry, since such companies are generally subject to similar business conditions. Foster's net profit margin was quite a bit higher then Coca Cola over the three years, which shows that the company is very successful at converting revenue into profits.
Foster's net profit margin however, fluctuated over the last three years. In 2002, the net profit margin was 21. 7%, and it declined in 2003, to 17. 7%. This decrease was again due to the unfavorable conditions in the wine market. The net profit margin however, increased in 2004 largely due to the divestment of Australia Leisure and Hospitality.
This divestment increased net profit by over $500 million, and overestimated the profitability for the year. The Profit Margin is a measure of profitability. It is a reflection of the relationship between net profit and sales. The profit margin is part of the Dupont Identity, which makes up both ROA and ROE. It is the operating efficiency aspect of both.
The profit margin for Foster's significantly increases from 2003 to 2004. This is due to the increase in net profit. This is the same effect the occurred in the net profit margin. Compared to Coca Cola's profit margins, these results are very favorable.
Coca Cola' profit margins were under 8% every year. The industry average was also very low at 6. 1%. This high profit margin achieved by Foster's is desirable, and their situation corresponds to their low expense ratios relative to their sales.
The asset turnover ratio is net sales divided by total assets. It is an assessment of the overall performance of the organization. Asset turnover measures the firm's efficiency at using its assets in generating sales or revenue. It is generally accepted that the higher the asset turnover number the better. Asset turnover also indicates pricing strategy. It suggests that companies with low profit margins tend to have high asset turnover, while those with high profit margins tend to have low asset turnover ratios.
Foster's asset turnover ratio has been relatively low over the past three years and this can be explained by their high profit margin. Coca Cola on the other hand, has a higher asset turnover ratio over the past three years, but a lower profit margin. The reason for this is there differences in pricing strategy. Foster's prides themselves on being a premium beer and wine beverage company, and with this comes a higher price strategy. A higher price always leads to fewer sales. Coca Cola use a different pricing strategy.
They sell their product at a cheaper price, which leads to higher sales. The industry average for asset turnover is 1. 08; this again is offset by the low average profit margin in the industry. Return on Assets is another ratio used to show profitability. According to the Dupont Identity, ROA = Profit Margin x Asset Turnover.
This ratio shows the company's return on investment. From 2002 to 2003, Foster's ROA declined from 10. 41% to 8. 55%. This was a result of Foster's declining profit margin over the 2 years. The ROA rebounded back in 2004 increasing to 11.
24%. This again was a result because of the change in profit margin. Asset turnover remained relatively the same over the three years and had very little effect in any of the changes. Comparing Foster's ROA to Coca Cola's, shows that Foster's has very good return on investment.
Its ROA is slightly higher then Coca Cola's each year. The manufacturing industry average for ROA is 6. 6%, which makes Foster's ROA results even more impressive. The Quality of Income ratio is the cash flow generated from operations divided by the net profit. This ratio is a measure of management's efficiency into turning their profits into cash.
This ratio is another measure in which the 2004 net profit affected its results. Return on Equity is considered by some the true bottom line measure of performance. This is because it is a measure of how well the shareholders fared during the year. And since benefiting shareholders is the goal of most companies this ratio is one of the most important. According to the Dupont Identity, ROE = Profit Margin x Asset Turnover x Equity Multiplier. This shows that ROE is affected by three things: operating efficiency, asset use efficiency, and financial leverage.
Foster's earned a very respectable 17. 53% on shareholders equity in 2004. The fact that ROE exceeds ROA reflects Foster's use of financial leverage. Foster's ROE over the three years was not as high. In 2002, it was 13.
44% and in 2003, it was 10. 47%. By looking at the Dupont Identity it, helps locate which part of the business that caused change in ROE. In 2003, the ROE dipped because of the decrease in profit margin, which means it was due to the operating efficiency.
When compared to Coca Cola's ROE over the three years, Foster's results look very respectable. However, compared to the industry average of 17%, Foster's falls below this two of the three years. Financial leverage could be used more by Foster's to increase these results. The Current Ratio is one measure of short-term liquidity.
It shows how well the debts represented in current liabilities are covered by the resources represented in current assets. To a firm, a higher current ratio indicates liquidity, but it may indicate an inefficient use of cash, and other short-term assets. Anything below 1 indicates negative working capital. While anything over 2 means that, the company is not investing excess assets. Most believe that a ratio between 1. 2 and 2.
0 is sufficient. The manufacturing industry average is 1. 628. Foster's falls between this range for all three years, but it has been decreasing steadily since 2002.
And in 2004, it even comes close to the minimum sufficient level of 1. 2. The Current Ratio is also useful for comparing companies within the same industry. Coca Cola has had very low short-term liquidity over the past three years, and in 2003 even had negative working capital.
This shows that Foster's relatively low current ratio could be a move towards other successful companies in the beverage industry. Another measure of short-term liquidity is the Quick Ratio. It is a stringent test that indicates if a firm has enough short-term assets (without selling inventory) to cover its immediate liabilities. This ratio is very similar to the current ratio, but a more strenuous version of it, indicating whether liabilities could be paid without selling inventory. This ratio detects risk that the current ratio cannot. Foster's quick ratio for the past three years have all been less than 1, which means that they do not have enough liquid assets to cover an unexpected draw down of liabilities.
This would be a negative for any lender or supplier to the company. However, when Foster's quick ratio numbers are compared to that of Coca Cola, they are higher. This shows that large successful companies in the beverage industry don't keep large amounts of excess assets. One last short term liquidity ratio is the cash flow ratio. This ratio is used to show the degree of reliance on cash generated from activities other than operations of the firm. This ratio overcomes the assumption that current assets can be liquidated at or close to their book value.
If the ratio falls below 1, then the company is not generating enough cash to meet its current commitments, and indicates some reliance's on cash flow from sources other than normal operations to meet short-term debt. This ratio gives a more dynamic picture of what resources a company has available to meet its current financial commitments, then the current ratio and the quick ratio. Foster's cash flow ratio over the last three years has been well below 1. It ranges from between. 3 and. 38.
This means that Foster's is likely to have to find other sources to fund its operations, since there cash flow is insufficient. By comparing Foster's cash flow ratios to Coca Cola's you can see that they are very similar, both are roughly around. 3. This shows that Foster's insufficient cash flow is nothing to worry about and it might be a beverage industry average. The debt to asset ratio is the total liabilities divided by the total assets. This stability ratio shows the proportion of a company's assets which are financed through debt.
If the ratio is higher then 1, then most of the company's assets are financed by debt. If the ratio is less then 1, then most of the company's assets are financed by equity. Foster's debt to asset ratio for the three years has been less then 1, it has roughly been around. 45 to. 55. These numbers are very similar to that of Coca Cola, and show that companies in the beverage industry finance their assets mostly through equity.
The industry average is also below 1, at. 614. Another measure of financial structure is the debt equity ratio. It is a measure of a company's financial leverage. It indicates what portion of equity and debt the company is using to finance its assets. A ratio greater than 1 means assets are mainly financed with debt.
A ratio less than one means equity provides a majority of the financing. A high debt equity ratio means that a company has financed its growth with debt and it is in a risky position, especially if interest rates are on the rise. The cash interest coverage ratio is very similar to the times interest earned ratio. In this ratio, cash flow from operations is used in the numerator, instead of EBIT to better reflect that interest payments are provided by cash flows, not profit. Another measure of financial structure in long-term solvency is times interest earned. This ratio indicates the extent of which earnings are available to meet interest payments.
It is usually quoted as a ratio and indicates how many times a company can cover its interest charges. A lower ratio means less earnings are available to meet interest payments and it makes the business more vulnerable to interest rate increases. A high ratio however can indicate that a company is paying down too much debt with its earnings that can be used for other projects. Equity multiplier is a measure of leverage.
The higher the ratio is, the more the company is relying on debt to finance its asset base. Equity multiplier also relates to ROE. According to the DuPont Identity, ROE = Profit Margin x Asset Turnover x Equity Multiplier. It is the financial leverage part of it. o PART B: Contextual Analysis Over the last three years, Foster's group has encountered several events influencing the trends of its financial performance and stability. For instance, in 2002, the company implemented a business strategy known as the "bolt-on acquisition strategy" consisting of "adding small synergistic acquisitions to our core beer and wine businesses so that the returns could be quickly grown" ().
In occurrence, CUB bought BCB beverages in order to produce pre-mix and spirit drink production flexibility. More over, the merger of Beringer Wine Estates and Mildura Blass Limited in 2000, demonstrated convincing results for the 2002 year. This merger created a diverse, global company with premium wine making, brand management, and international distribution. Foster's also faced a decline in its share prices due to the slump of the equity market worldwide, the "wait and see reaction" of shareholders in front of the September 11 event, and confusion over the changing cash flow of the company. In 2003, the company saw itself pursuing its bolt-on acquisition strategy: CUB bought Bulmer Australia; FBI acquired the Distribution Company African and Eastern in the Middle East, and the Danang Brewery.
BB WE purchased T'Gallant in Australia, the Nappa Valley in California, The Californian Carmen et Brand, and Ponder Estates Wine in New Zealand. Lensworth, Foster's property business assumed development management responsibility for the North Lakes projects in Queensland. Apart from the considerable amount of acquisitions, and due to the tough competition in the Californian market and unfavorable exchange rate, Foster's had decided to divest Australian Leisure and Hospitality for 1. 5 billion, in order to generate value for the shareholders. With this divestment, Foster's also refined their business portfolio to more adequately reflect their core business activities. Foster's is moving away from non-core businesses and is trying to position themselves as a global premium branded beverage company.
2003 was also marked by changes in the executive management team in order to "accelerate the company's future growth and maximize potential within the team by providing individuals with the opportunity to broaden their skills sets and experiences" (). In 2004, Lensworth, the group's residential property development business, was put up for sale. While this was a highly successful and high returning business, Lensworth is non-core business and therefore the sale of it will show there commitment to their core multi beverage portfolio. This commitment has led to a new slogan, "One company, one culture, one team." This is Foster's long-term objective, in which the company obtains a sustainable competitive advantage, by innovation, distribution, and being the lowest cost producer at every price point in which they choose to compete. They plan on achieving this by adopting an integrated team approach, supported by a single cost base, which will simplify decision-making and increase speed into markets. It gives a competitive edge over their single product and single region competitors.
In April 2004, a significant change occurred in the company. The Board of Directors appointed Trevor O'Hay as Foster's president and CEO, succeeding Ted Kunkel who stepped down after 12 years. Another important decision was made when the shareholders approved the re-election of Max Ould, to the Foster's Board of Directors in March. Also in 2004, the conditions in the North American wine market continued to be extremely difficult. The issues remained the same with an over supply of grapes, and fierce competition in the market. However, Foster's reported excellent business success with its Carlton & United Beverages and its International Brewing divisions.
Carlton & United Beverages' EBITA was up 9. 5%, and its International beer, Foster's Lager, achieved 8. 5% growth. o PART C: Limitations of the reportLimitationsThe different year-end dates may affect the comparison between Foster's (June 30 th) and Coca Cola (Dec 31 st). Different year-end dates can cause year-end values to not be representative. Certain account balances that are used to calculate ratios may increase or decrease at the end of the accounting period because of seasonal factors.
Such changes may distort the value of the ratio. Foster's year-end date is in June, which is in the winter season when sales are quieter. Foster's would be expected to build up their inventory during this time and have a run-down of debtors. Coca Cola's year-end date is at the end of December, which is summer when sales are at its peak. Coca Cola would be expected to have the opposite of Foster's with a run-down of inventory and a buildup of debtors. Another limitation is that different firms use different accounting procedures.
This makes it difficult to compare statements between organizations because comparisons may be distorted. Therefore, are comparisons between Foster's and Coca Cola may be distorted. Unusual or transient events, such as a one-time profit from an asset sale, may affect financial performance. This is also another limitation because such events will give misleading signals for comparisons. This occurred in 2004, when Foster's divested Australia Leisure and Hospitality to generate value for their shareholders. The divestment of Australia Leisure and Hospitality gave Foster's a net gain of $553.
1 million. This contributed to an increased net profit of 72% over the following year. Any ratio that included the net profit may have been distorted because of this divestment. The net profit excluding the impact of the significant items was actually down 17. 4% over the previous year's result.
Many firms are conglomerates, owning more or less unrelated lines of business. The consolidated financial statements don't really fit into any neat industry category. This is true for both Foster's and Coca Cola. Both are conglomerates, and own other businesses outside the industry category of manufacturing. In our financial analysis, we used the consolidated financial numbers for both companies, and therefore the financial numbers will not be a true 100% representation of the industry category. It will also distort any analysis when comparing Foster's financial ratios to the industry averages.
One limitation to this report is that ratios must be compared to some established standard, to be meaningful. One way that was used, was using industry average ratios for comparison. This was a limitation because the industry average statistics were only available from 2001 and before. Therefore, it was not possible to compare the actual industry average for each year, with the performance and stability ratios from 2002-2004. This makes the analysis results not as reliable and less meaningful. These industry averages were however still used, because we assumed that the averages don't significantly vary from year to year, to make them not useful..