IntroductionBlackmores，the leader of Australian pharmaceuticals with over 80-year history, keeps focusing on natural health care and becoming the first choice of the public. This essay will discuss the financial condition by analyzing the annual reports of Blackmores in the period from financial year 2010 to financial year 2012. It will be demonstrated by focusing on financial statements analysis, financial statements comments and comparison with Mcksson. Financial statement analysis
Goals and ethical issuesAs the famous Australian pharmaceuticals, Blackmores sets its objectives as pursuing the leadership position of Australian natural health brands and improving people’s lives by delivering the world’s best natural health solutions so as to become the first choice of people. To achieve the goal, Blackmores translates their unrivalled resources and knowledge into innovative, quality branded healthcare solutions and considers five objectives as their values, which includes passion for natural health, integrity, respect, leadership and social responsibility.
These values bring a strong and united team working towards a common goal. In 2011 financial year, according to the CEO’s report of Blackmores, although the sales was grown in Australia by 3% over the year, pharmacies which were the biggest sales channel of Blackmore, was suffered by the general sluggishness of retail sales. Therefore, in 2012 financial year, in order to get closer to customers, Blackmores presented a significant service named as “Blackmores online”, which performed as the core part of their marketing and education program with over 375,000 online members.
Therefore, the development of MyBlackmores is regarded as the first program in Australia to offer consumers the latest interactive technology combined with personal health support from a team of qualified naturopaths. Furthermore, since the application of the service was presented on Apple’s App store, Blackmores became the first Australian vitamin and dietary supplement company with an App. In addition, as the report of ABC online, Blackmores struck an agreement with the guild to promote their products except certain prescription drugs.
According to the agreement, when pharmacists dispensed medicines for several common conditions, they would receive a prompt in their computer system reminding them to promote a complementary Blackmores product. However, the subsequent report showed that pharmacists receiving computer prompts to promote Blackmores supplements when selling certain prescription drugs.
This event caused the denouncement from both Australian Medical Association and the Pharmaceutical Society of Australia. According to the interview of Dr. Harvey of the news report (2011), the supplements of Blackmores would have been offered to treat the side effects of drugs including blood-pressure and lipid-lowering medications. However, the side effects are uncommon and there is little evidence that the supplements are effective in the treatment.
Furthermore, a report released by the Department of Health and Ageing in 2010 showed that up to 90 percent of complementary medicines which were reviewed were found to be non-compliant with regulatory requirements. Therefore, the event was regarded as a symbol of profit ahead of good pharmacy practice. To solve the problem, Blackmores fully considered the feedbacks and removed the Gold Cross endorsement from the proposed IT dispensary software by discussing with the subsidiary of Blackmore.
They also updated the product names to reflect the key ingredients under the Companions brand (2011). Furthermore, they published a research review for healthcare professionals to highlight the scientific evidence underpinning these formulations.
The respondence showed that Blackmores and the Pharmacy Guild had the utmost respect for pharmacists as highly ethical and professional members of the community. Additionally, Blackmores announced that they welcome any suggestion about the collaboration and remained absolutely committed to supporting pharmacists in providing better natural health advice in their community Comprehensive income statement analysis
According to the comprehensive income statement of Blackmores in the financial year 2010, 2011 and 2012, the main sources of the company were the revenues of sales, royalties and other income. Sales took the most percentage of total revenue. The revenue of sales increased gradually from $ 214,934 (in thousands) in 2010 to $ 260,832 in 2012 while the figure of royalties reduced gradually from $ 873 in 2010 to $ 681 in 2012 (in thousands).
The revenue of other income increased from $ 1,286 to $ 1,325 during this period and then the figure decreased dramatically to $ 533 in the financial year 2012. In addition, in the financial year 2012, a new resource of revenue called membership was developed with the figure of $54.
The top four expenses of Blackmores in the three years were the cost of raw materials and consumables used, employee benefits expense, selling and marketing expenses and promotional and other rebates. All the four expenses increased gradually in the three years. The cost of raw materials and consumables used raise from $ 65,748 to $ 76,551 while employee benefits expense increased from $ 48,179 to $ 54,910. The costs of selling and marketing expenses and promotional and other rebates increased to$ 24,462 and $ 32,478 respectively from both around $ 19,000.
According to the comprehensive income statements of Blackmores, the figures of net profit margin of the three years kept steadily around 11%, with 11.3% in 2010, 11.6% in 2011 and 10.7% in 2012. Meanwhile, EBITs of the three years increased gradually while the figures increased from $36, 740 to $ 41,957. It infers that, although the expenses of Blackmores increased gradually in the three years, the high level of revenues, mainly the sales, can still balance the cost and bring satisfied profits. Furthermore, the comprehensive income statements of Blackmores are in correct format, because they satisfied the requirement of AASB 101.
The three comprehensive income statements all displayed a separate income statement and a statement of comprehensive income in accordance with para.81(b) AASB101. Meanwhile, they all included line items, such as revenue, finance costs, tax expense, profit or loss and total comprehensive income, which are required in para.82 (Financial Reporting Handbook, 2012). Statement of financial position analysis
According to the balance sheets of Blackmores in the three years, it can be inferred that Blackmores has a “healthy” balance sheet. Firstly, current assets of the company have more percentage of total assets than non-current asset, while Blackmores has a significant amount of non-current liabilities and less current liabilities. It indicates that Blackmore has a healthy cash flow.
Secondly, according to the working capitals, the figure increased gradually from $ 48,528 in 2010 financial years to $ 58,446 in 2012 financial years. It shows that the company can meet all of its obligations. Thirdly, the current ratio also shows the affordability of obligations, with the figure kept steadily around 2.4 in the three years.
Furthermore, the leverage or D/E ratio decreased from 0.67 in 2010 to 0.54 in 2012. Generally speaking, smaller numbers reflect a healthier company because D/E ratio indicates how well the company finances its assets. Therefore, the company has a healthy financial condition. According to the statement of financial position, the most significant assets and liabilities were receivable and borrowing.
The figure of receivable increased from $36,494 to $53,698 while borrowing decreased from $47,356 to $40,000. Too much receivable would cause bad debt and even damage the cash flow. In addition, the amount of cash kept decreasing in the three years, the problem was significant. Furthermore, high-level of borrowing will cause higher interest which will increase the cost of operation. Once the obligation cannot be repaid, the reputation of the company will be damaged. Expense and depreciation analysis
In the income statement, the largest expense amounts were raw materials and consumables used with the amounts were $65,748 in 2010, $69,920 in 2011 and $76,551 in 2012. The expense may get out of control due to the rise of price and needs of raw materials and consumables or a poor management of inventories.
The inventory turnovers of the three years kept around 3.3 while the figure increased slightly from 3.27 in 2010 to 3.40 in 2012. Thus the reason for getting out of control is increasing price and demands. According to the income statement, the depreciation or amortisation expense increased gradually with $4,141 in 2010, $4,529 in 2011 and $4,922 in 2012.
There is more information disclosed in the Notes about the depreciation and amortization. In the Notes, depreciation was defined as provided by property, plant and equipment which including freehold building but excluding land. Depreciation was calculated on a straight-line basis thus it can write off the net cost of each asset over its expected useful life to its estimated residual value. Furthermore, amortization was separated from intangible assets which recognized on a straight-line basis over their estimated useful lives. Financial statements comments
The financial statements of Blackmore can be found with understandability, reliability, relevancy and comparability because they are consistent with the Framework for the Preparation and Presentation of Financial Statements (AASB, 2012). Firstly, it is understandable. The information in the statements not only can be understand by the general public, but also included some complex matters. Since the statements are prepared assuming the users having a basic and reasonable knowledge of business, the content are professional. The notes provide detailed explanations and definitions to the items in balance sheet.
For example, the explanations of the depreciation or amortisation expense are very detailed. It not only describes the sources where the expenses generated, but also introduces the methods to measure the amounts. Secondly, the statements are relevant to the decision-making needs of users. They can be used to help readers evaluate past and present events and to indicate a trend about future events. In addition, material information were presented as the line items in the Financial Statements while some immaterial information was disclosed in the Notes.
Thirdly, the financial statement and notes are reliable because they are free from material error and bias. The information presented is objective. Bothe the amount and nature are presented appropriately. Lastly, the statements are comparable. All the statements in three years provided figures from both previous year and current year, making it possible for users to compare through time. Comparison with Mckesson
In order to compare with Mckesson, which is the oldest and largest health care service company in the USA, the financial statements are analyzed by utilizing five ratios. They are current ratio, quick ratio, gearing ratio, interest cover ratio and dividend payout ratio. The results of the ratios are shown in the table. | Blackmores| Mckesson|
Year| 2010| 2011| 2012| 2010| 2011| 2012|Current Ratio| 2.41| 2.36| 2.40| 1.26| 1.19| 1.09|Quick Ratio| 1.75| 1.65| 1.64| 0.71| 0.70| 0.62|Gearing Ratio| 40.1%| 34.0%| 35.2%| 32.6%| 40.6%| 40.1%| Interest Cover| 18.24| 18.78| 15.20| 10.97| 8.36| 8.65| Dividend Payout| 52.1%| 70.0%| 74.8%| 10.4%| 14.2%| 13.9%|
Current ratio measures the ability of the company to pay back its short-term liabilities with its short-term assets. The higher the current ratio, the more capable the company is to pay off its obligations. According to the annual reports of Blackmores and Mckesson in the financial years 2010, 2011 and 2012, the current ratio of the both companies are higher than 1, it indicates that both of the companies are able to pay off its obligations.
However, the figure of Blackmores kept steady around 2.4 while the figure of Mckesson decreased from 1.26 in 2010 to 1.09 in 2012. Therefore, according to current ratio, Blackmores has higher level of ability to pay off its obligations whereas the ability of Mckesson was reducing during the period. Similar with current ratio, quick ratio gives users an idea of the ability of a company to meet its short-term liabilities with its short-term assets.
However, quick ratio is more conservative than the current ratio. It is a more well-known liquidity measure because it excludes inventory from current assets. According to the table, Blackmores has higher ability to pay of the debts. Furthermore, compared with Blackmores, the operation of Mckesson relays more heavily on its inventory due to its lower quick ratio. It even may suggest a liquidity problem to Mckesson since the quick ratio is substantially below 1.0.
The gearing ratio of each company is similar with the figures around 40%. It can be inferred that both of the companies do not have excessive borrowing. However, the trend of gearing ratio of Blackmores is decreasing while that of Mckesson is increasing. It indicates that Mckesson may face the downturns in the business cycle due to Mckesson has to deal with its debts, whereas the debts of Blackmores seems to be decreasing. Interest cover ratio is a ratio used to determine how easily a company can pay interest on outstanding debt.
When a company’s interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. Fortunately, the interest cover ratios of both companies are higher than the standard. It means both the companies can satisfy the requirement of their debt. However, the lower the ratio, the more the company is burdened by debt expense. Therefore, Blackmores has a better operation condition than Mckesson. Dividend payout ratio provides an idea of how well earnings support the dividend payments.
According to the table, the dividend payout for Blackmores is very high, and the figure kept increasing from 52.1% to 74.8%. Generally speaking, more mature companies tend to have a higher payout ratio. Therefore, the income of Blackmores can support its dividend better than Mckesson. In summary, Blackmores has a healthier financial condition than Mckesson, because of its higher ability of paying the obligations, less excessive borrowing and better satisfying of dividends and interests. Cash flow analysis
Operating ActivitiesAccording to the cash flow statement, the operating activities show little change in the reports. However, as the information disclosed in notes, some changes in the items of operating activities are significant. It can be seen that, in 2012, the company sold its non-current assets for $ 73(in thousands) cash in. Meanwhile, there was no indication of foreign exchange gain in 2012 while it occurred to be a loss of $227 in 2011.
Furthermore, in the movement of working capital, the cash outflow of the current inventories showed a significant increase from $1,015 in 2011 to $8,037 in 2012. It might be inferred that more resources were invested in inventories in the 2012 financial year. Meanwhile, both other debtors and prepayments and current trade payables demonstrated an opposite cash flow in the two years, with the former one showing a change from cash inflow of $914 in 2011 to cash outflow of $977 in 2012 whereas the latter showing an outflow of $898 to an inflow of 9094.
The former might be caused by a late receipt of accounts receivable from other debtors or more prepayments and the latter might be resulted from a late payment when the payables should be paid. Even though the change was slight when taking the operating activities in the Cash Flow Statement as a whole, the detailed changes described above are unusual and there might be some problems behind them. Investing Activities
The change in investing activities of cash flows in 2012 was significant, the net cash used in investing activities decreased significantly from $5,187 in the financial year 2011 to $3,399 in the following financial year.
Firstly, among the items in the section of cash flows from investing activities in 2012, the most significant change was the proceeds from bank guarantee, which was resulting in cash inflows with $1, 504. It might be inferred that Blackmore paid the debt of banks. Secondly, the cash inflows of proceeds from disposal of property, plant and equipment increased from $16 in 2011 to $ 47 in the year 2012, whereas the investment of non-current assets increased. The payment for property, plant and equipment was $4,993 in the year 2012 while the figure was $3,396 in 2011
. In the financial year 2011, Blackmore acquired subsidiary while the net cash outflow on acquisition of subsidiary was $1,968. However, in the financial year 2012, Blackmores acquired investments instead of subsidiary with cash outflows was $144. Furthermore, Blackmores received $15 as dividends in 2012 whereas there was no such cash flow in 2011. In addition, the amount of interest received still kept steady in the financial year 2012 with $172, while the figure was $161 in 2011. Financing Activities
According to the cash flows from financing activities, the net cash used in financing activities was reduced from $26,598 in the financial year 2011 to $16,007 in the financial year 2012. In the financial year 2012, the major financial activities of Blackmore were borrowing $5,000 from lending institutions and payment of dividends to shareholders with $20,808.
Compared with the condition of borrowing in the previous year, it could be inferred that Blackmores paid the borrowing back with the repayment was $7,356 and the company applied a new borrowing in the following year. According to the cash flows of dividend paid in both years, the figure increased slightly from $19,107 in the financial year 2011 to $20,808 in 2012. The steady figure shows that it is enough to pay dividends to the shareholders of Blackmores. Conclusion
According to the analysis above, Blackmores has a healthy financial condition with higher ability of paying the obligations, less excessive borrowing and better satisfying of dividends and interests. Although ethic problem was caused in 2011, the solution of Blackmore has proved to be property by its increasing sales. Therefore, as a health care company, Blackmore is a good example of success.
Reference* Blackmores responds to pharmacy feedback on companions range 2011, viewed on 26 August 2013 <http://www.blackmores.com.au/about-blackmores/media-centre/media-releases/blackmores-companions-range-bkl-responds-to-pharmacy-feedback> * Collett, M 2011, Controversial Blackmores Pharmacy deal withdrawn, viewed on 26 August 2013