Analysis of Yeop! Beverages FINANCIAL ANALYSIS OF YEOP! BEVERAGES by Student’s Name Class/Course/Code Professor’s Name University/School City, State Date 1 Analysis of Yeop! Beverages 2 Executive Summary The increasing emphasis on reducing obesity by the Australian government has brought concern for organizations in the non-alcoholic beverage market. As an industry leader, Yeop! Beverages needs to assess the potential impact of the government campaigns on revenue, subsequent value and going concern of the company. Through the use of financial statement analysis, forecasts, web-based research and sensitivity analysis, this report aims to disclose the financial health of the organization, its future performance and ability to operate in the face of an aggressive antiobesity campaign from the state. The results from the in-depth analysis provide information regarding Yeop! Beverages financial health and allows for informed decision making pertaining to the recommendations and improvements that management can pursue to ensure the continuance of operations for the organization into the foreseeable future. The use of capital financing techniques has enhanced the overall assessment of the financial health of Yeop! Beverages through the identification of the existing capital structure, and its ability to finance the growth of the organization for increased value creation for shareholders. Analysis of Yeop! Beverages 3 Table of Contents Introduction.................................................................................................................................................4 Financial Assessment...................................................................................................................................5 Capital Financing....................................................................................................................................... 7 Conclusion...................................................................................................................................................8 Reference List............................................................................................................................................10 Analysis of Yeop! Beverages 4 Financial Analysis of Yeop! Beverages Introduction The revenue of the Australian Non-alcoholic drinks market has declined from US$15,737 to US$13,627m in 2019 and 2020 respectively ("Non-Alcoholic Drinks - Australia | Statista Market Forecast", 2020). Despite the 13.41% decrease, the industry is expected to exhibit a year-on-year growth of 4.8% of sales between 2020 and 2025. The industry supplies Australian consumers with mineral water, soft drinks and fruit or vegetable drinks with the exclusion of hot beverages and powdered mixes or syrups (Home - Australian Beverages, 2020). Throughout the world, a growing trend of government intervention with its citizens’ health has brought an increase in health-focused campaigns. With no intention of being left behind, the Australian government has pledged to reducing obesity through targeted media campaigns. The non-alcoholic beverages industry, given the high level of sugar content in their products, is likely to bear the brunt of these campaigns coupled with the increasing health-awareness of consumers around the country. This report will indicate the impact of the aforementioned trends on our organization, Yeop! Beverages, through the assessment of our current financial statements and ratio analysis. A market capitalization of $193.81B indicates that the organization still holds a substantial share in the Australian Non-alcoholic beverages industry. The fact that the organization’s enterprise value exceeds its market capitalization by $34.42B is an indication the Yeop! Beverages currently has more debt instruments than cash reserves. This is not an altogether alarming statistic, as debt instruments are ordinarily sought out for expansion purposes as they are a cheaper option of financing due to their tax-deductible nature and overall lower rates in comparison with equity. The valuation of the organization provides a peak into the Analysis of Yeop! Beverages 5 financial health of Yeop! Beverages, however, for an in-depth analysis of the organization, it is paramount that profitability, liquidity, efficiency and solvency ratios be analysed. Financial Assessment Yeop! Beverages Profit margin of 26.95% is a very impressive ratio given that the industry average is 15.58% for the same period under review. The organizations product range clearly has either a higher price per product or lower costs in comparison with peers in the industry. This statistic indicates a higher level of profitability for Yeop! Beverages relative to its competitors in the same market. With an Operating margin of 28.69%, the company has yet again exceeded the industry average. The Australian Non-alcoholic beverages industry exhibited an Operating Margin of 25.16%, indicating an increased operational profitability from Yeop! Beverages in comparison with the rest of the industry ("Non-Alcoholic Drinks - Australia | Statista Market Forecast", 2020). The measure of management’s effectiveness is obtained from the returns generated with the resources made available to them . For Yeop! Beverages, this means measuring the Return on Assets and the Return on Equity. The organization’s Return on Assets (ROA) is 7.31%, slightly lower than the industry average of 7.63% ("Non-Alcoholic Drinks - Australia | Statista Market Forecast", 2020). Management is required to increase their efficiency by increasing the effective usage of the organizations asset base in the generation of profit. The Return on Equity (ROE) for the company was substantially higher than that of the industry which settled at 30.08% for the same period of assessment ("Non-Alcoholic Drinks - Australia | Statista Market Forecast", 2020). Yeop! Beverages exhibited a ROE of 50.85%, however, this could have been a result of a share consolidation or reverse share split that could have reduced the number of outstanding shares. Analysis of Yeop! Beverages 6 Revenues for the entire industry are poised to increase by 4.8% each year for the next 5 years. The first quarter (Q1) results for Yelp! Beverages shows a decline in sales by -1.10%. It is worth mentioning that this period, between January and March, represents the warmest time of the year for Australia. This means that ceteris paribus, this is the time where revenue should be on the rise due to increased demand as a result of the warm weather (Climate in Australia Aussie Specialist Program - Tourism Australia, 2020) . The decline in revenue for the period could be the first indication of the adverse effect of the Australian government’s effort to curb diabetes incidences through an extensive marketing campaign. The decrease in revenue did not translate to a decrease in quarterly earnings. The aforementioned metric showed a 65.40% gain in the first quarter. Despite the loss in revenue for the period, the organization still managed to increase earnings most likely through a cost leadership approach that focused more on cutting costs as opposed to increasing revenue in light of the government’s diabetes campaign. The liquidity of an organization reflects its ability to honour its short term obligations with its current assets. It is a good measure for the financial strength and well-being of the organization. With a current ratio of 0.87, there is an indication of reduced ability to settle shortterm liabilities with Yeop! Beverages Current assets. Liquidity issues often translate to working capital shortages and increased reliance on other forms of financing to meet the operating demands of the organization. Debt to Equity ratio indicates the reliability of the company on debt as a source of financing as opposed to equity. It is a representation of the organization’s capital structure and a reliable measure of Yeop! Beverages’ financial health. It is evident that the organization heavily relies on debt financing with a Debt to equity ratio of 254.19. Despite the fact that debt is Analysis of Yeop! Beverages 7 cheaper, taking on too much debt is not advisable as it also increases the financial risk of the organization. This entail, will lead to shareholders requesting additional returns to compensate for the additional risk that they have assumed. Despite the strong profitability ratios, the poor liquidity and solvency ratios of the organization paint a bleak picture. For an organization to continue operating into the foreseeable future, it is paramount that it does not overcommit to debt instruments as a source of finance. This is the case with Yeop! Beverages and with the anticipated impact of the government’s diabetes marketing campaign, the organization will find itself in a quagmire if operations continue in this manner. Capital Financing The financing decision is one of management’s most gruelling tasks as it encompasses extensive research and insight to which method the organization should use to fund its projects. The optimal capital structure theory places emphasis on the debt to equity structure of the organization. According to this theory, there is a level of debt to equity mix that which an entity should strive for. At the level, the optimal level, the cost of capital is minimized and the company’s market value is maximised. This theory will be instrumental in improving the financial health of Yeop! Beverages. Management should therefore, set a target capital structure with Weighted Average Cost of Capital at the centre of the decision. The organization is currently over-geared with excessive reliance on debt instruments as a source of finance. Although considered cheaper, past the optimal mix point, additional debt becomes more expensive due to increased risk. This increased risk will result in shareholders requiring additional returns in response to the additional risk assumed. Analysis of Yeop! Beverages 8 It is, therefore, important that going forward, the company makes use of equity financing in the form of ordinary share issuance. The issued shares will result in a cash inflow that could be utilized for profit generating operations which give rise to additional value creation. The fact that ordinary shareholders are not entitled to dividends on an annual basis will also improve Yeop! Beverages’ cash flow position. The additional cash can be ploughed back into the organization resulting in more profits that will increase the organization’s earnings. The continuous growth in earnings will lead to an increase in the price of Yeop! Beverages’ shares due to increased investor confidence and shareholders can receive additional capital gains through this increase in valuation. The adverse consequence of this option of capital financing is the potential dilution of voting rights and the distribution of power. Issuing additional shares tends to dilute the rights of existing shareholders and this could lead to conflicts regarding the strategic direction of the organization. To mitigate this, Yeop! Beverages can also offer Non-cumulative Preference shares as a source of capital financing. The benefit of such a form of financing is that it does not dilute the voting rights of the existing shareholders and since the preference shares are non-cumulative in nature, in years where no dividend is paid, Yeop! Beverages is not obligated to compensate the Preference shareholders for arrears. The management team should therefore consider issuing both Ordinary shares and Preference shares to strike a balance between obtaining funds, and retaining as much control of the organization as possible. Conclusion The financial health of an organization is heavily reliant on the management, performance and mitigation of external risks. As a company in the Non-alcoholic beverage sector, Yeop! Beverages is likely to be adversely impacted by the Australian government’s Analysis of Yeop! Beverages 9 decision to increase awareness surrounding diabetes. This poses a risk on the organization’s revenue as the bulk of its product offering are sugar-based drinks which have been linked to an increase in diabetes incidences. An already weakened state of financial health as a result of overreliance on debt will leave the company vulnerable to the aforementioned threat. It is paramount that Yeop! Beverages invest in projects that will reduce the impact of the diabetes campaigns. This could be achieved by diversification, which is, venturing into new territories of operations, and innovation in the form of same-taste sugar-free alternatives that could be added to the existing product line (‘More work needed’: Australian soft drinks industry urged to ‘shift gears’ to hit 2025 sugar-reduction target, 2020). Implementation of these strategies will ensure that the organization secures its position as one of the market leaders in the industry and that it remains profitable for the foreseeable future. Yeop! Beverages will solidify its going concern and continue creating value for its shareholders into the foreseeable future. Analysis of Yeop! Beverages 10 Reference List Aussiespecialist.com. 2020. Climate In Australia - Aussie Specialist Program - Tourism Australia. [online] Available at: <https://www.aussiespecialist.com/en/sales-resources/factsheets-overview/weather.html#:~:text=The%20warmest%20months%20are%20December,winter %20months%20are%20the%20wettest> [Accessed 6 November 2020]. Australian Beverages. 2020. Home - Australian Beverages. [online] Available at: <https://www.australianbeverages.org> [Accessed 6 November 2020]. Corporate Finance Institute. 2020. Enterprise Value (EV) - Formula, Definition And Examples Of EV. [online] Available at: <https://corporatefinanceinstitute.com/resources/knowledge/valuation/what-is-enterprise-valueev/> [Accessed 6 November 2020]. Csimarket.com. 2020. Nonalcoholic Beverages Industry Financial Strength, Leverage, Interest, Debt Coverage And Quick Ratios. [online] Available at: <https://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?ind=502> [Accessed 6 November 2020]. Csimarket.com. 2020. Nonalcoholic Beverages Industry Management Effectiveness Information And Trends By Quarter, ROE, Return On Assets, Return On Investment From 3 Q 2020 To 3 Q 2019 - Csimarket. [online] Available at: <https://csimarket.com/Industry/industry_ManagementEffectiveness.php?ind=502> [Accessed 6 November 2020]. Analysis of Yeop! Beverages 11 Foodnavigator-asia.com. 2020. ‘More Work Needed’: Australian Soft Drinks Industry Urged To ‘Shift Gears’ To Hit 2025 Sugar-Reduction Target. [online] Available at: <https://www.foodnavigator-asia.com/Article/2019/11/26/More-work-needed-Australian-softdrinks-industry-urged-to-shift-gears-to-hit-2025-sugar-reduction-target> [Accessed 6 November 2020]. Gurufocus.com. 2020. Beverages - Non-Alcoholic Industry - Gurufocus. [online] Available at: <https://www.gurufocus.com/industry_overview.php?industry=Beverages-_Non_Alcoholic&region=Asia> [Accessed 6 November 2020]. https://www.accaglobal.com, A., 2020. Optimum Capital Structure | F9 Financial Management | ACCA Qualification | Students | ACCA Global. [online] Accaglobal.com. Available at: <https://www.accaglobal.com/uk/en/student/exam-support-resources/fundamentals-exams-studyresources/f9/technical-articles/optimum-capital-structure.html> [Accessed 6 November 2020]. Non-Alcoholic Drinks - Australia | Statista Market Forecast. Statista. (2020). Retrieved 6 November 2020, from https://www.statista.com/outlook/20000000/107/non-alcoholicdrinks/australia.
