ACCT13017 ASS#2 Step 4
ACCT13017 ASS#2 Step 3: Accounting Driver Commentary
Accounting Driver Commentary:
Return on Net Operating Assets (RNOA)
The RNOA results tell me that GrainCorp has been prospering in their operating activities using their net operating assets. The exception is FY2019. As mentioned before the results were 6.88% for FY2017, 5.55% for FY2018, -2.11% for FY2019 and 15.79% for FY2020. The key accounting drivers for RNOA are OI and NOA. RNOA can be calculated using the PM and ATO as well, and so these are key accounting drivers too. The declining performance of OI, despite the rising investment in NOA, has caused the RNOA to decline from FY2017 to FY2019. However, FY2020 had a great RNOA, with a better performance in OI with a much lower amount of NOA.
Comprehensive Operating Income after Tax (OI)
The OI is the comprehensive after-tax earnings from the firm’s operations, excluding any earnings from the financing activities of the firm. It can be seen as a measure of how profitable the firm has been in its operations. The higher the number, the more profitable a firm has been in its operations.
GrainCorp has had a declining OI since FY2017, with the exception of a great comeback in FY2020. The OI results were $179.0 million in FY2017, $161.4 million in FY2018, -$63.3 million in FY2019 and $199.3 in FY2020.
Overall, the OI results tell me that GrainCorp’s overall performance from their diversified operations have been poor, up until FY2020. GrainCorp’s agribusiness, in which they take Australian grains from producers and sell them on to producers, accounts for most of their sales revenue. The other main area of revenue is their processing business, making edible oil products. FY2019 was a particularly bad year for GrainCorp, due to the lower levels of Australian crop produce caused by extremely dry weather and drought on the east coast of Australia. This drought can be attributable to much of the decline in performance over the years from FY2017 to FY2019. In FY2020, there was a change in crop conditions, returning to favourable weather with good rainfall and the end of the drought in most areas on the Australian east coast. This caused the much-improved performance in FY2020.
Net Operating Assets (NOA)
The net operating assets (NOA) are the value of the operating assets (OA) used within the firm’s operations minus the operating liabilities (OL) obtained from and used for the operations, usually within the working capital cycle. The OA is the key focus of the capital invested into the firm’s operations (Vaidya, n.d.). The higher the number, the greater the firm’s capability to earn revenue in its operations.
GrainCorp has had an increasing NOA from FY2017 to FY2019. FY2020 saw a large decrease in NOA. The NOA results were $2,603.3 million in FY2017, $2,909.6 million in FY2018, $3,000.2 million in FY2019 and $1,261.9 in FY2020.
Overall, the NOA results tell me that GrainCorp was increasing investment in NOA up until FY2020. However, from FY2017 to FY2019, the OI was not favourable, with no corresponding increase, despite the increased capability to theoretically earn more. In the aftermath of the financial damage in FY2019, GrainCorp demerged their malt business, now United Malt Group (ASX: UMG), unlocking extra needed funds. This caused the NOA to decline a lot in FY2020.
The revenue used with the calculations for the PM and ATO exclude the Rental Income received, because this is not in the nature of GrainCorp’s core operations.
Profit Margin (PM)
As mentioned before, apart from FY2019, GrainCorp has had good PM results. In FY2017, they achieved an operating PM of 3.92%. Similarly, in FY2018, the operating PM was 3.81%. It was a poor but modest negative operating PM in FY2019 of -1.80%. FY2020 had a great result with 5.46%.
Overall, the operating PM results tell me that GrainCorp has had good performance arising from their operations. The exception is FY2019. However, the negative FY2019 result was small. Hence, over all four years, it can be said that GrainCorp has been running efficient operations. This has limited their losses in the bad years. For example, in the 2019 annual report, GrainCorp said that it was improving their ability to adapt and overcome bad times “by streamlining our country receival and storage network, investing to improve efficiency at key sites, reducing fixed costs and negotiating more flexible rail transport contracts” (GrainCorp Limited, 2019, p. 7). With a strong result in FY2020, it can be said that GrainCorp have been performing well and have had profitable operations.
Asset Turnover (ATO)
GrainCorp has had good ATO results over the years. They had solid results in FY2017 and FY2018, with 1.75 and 1.46 respectively. FY2019 was a modest result, with only 1.17. FY2020 was a great result which saw sales revenue more than double the ATO, with 2.89.
Overall, the ATO results tell me that GrainCorp has been efficient in using its NOA to generate sales revenue. FY2019 was a poor year, delivering a modest but acceptable result. Nevertheless, the other years were very good. It seems GrainCorp are an efficient organisation, when it comes to their operations and asset management. As seen from the levels of NOA, GrainCorp uses a lot of assets in their operations. Therefore, a great amount of sales revenue is expected for the dollars of NOA invested in the firm.
Sales Revenue
To explain the PM and ATO properly, one needs to look at sales revenue. GrainCorp has had declining sales revenue over the years, up until FY2020. The declining revenue goes from $4,563.5 million in FY2017 to $4,240.6 million in FY2018 to $3,522.0 million in FY2019. FY2020 was a great year with sales revenue stabilising and slightly rising to $3,649.1 million.
Overall, the sales revenue results tell me that GrainCorp has been suffering in performance from FY2017 to FY2019, and returned to a great performance in FY2020. To explain the sales revenue in more detail, a look at the sales revenue and total assets by GrainCorp’s operating segments, namely agribusiness, processing and malt, is necessary. Although the operating assets disregarding the financing assets cannot be distinguished from these numbers, and so the RNOA and ROOA by operation cannot be known, other insights are available. Table 1 calculates several ratios to reveal these other insights.
As seen from Table 1, the asset turnover for the agribusiness operations increased in FY2017, and declined in FY2018, and then lifted in FY2019, and again in FY2020. What can be seen from the agribusiness operations is that in spite of the drought, the performance from these operations in FY2019, the worst year of overall performance for GrainCorp across all four years, was actually not that bad. In FY2017 and FY2019, the growth in sales revenue was greater than the growth in total assets invested for the agribusiness operations, and so there were higher asset turnovers. In theory, a higher asset turnover will make the RNOA higher. FY2018 was the only year where sales growth was bad. What is worse is that there was positive and substantial growth in the total assets invested for the agribusiness operations. Yet the rewards from these investments were not seen in FY2018, and may have only been seen until FY2019. Hence, the FY2018 sales growth was bad because it was negative and because it was less than the injected asset investments. There is a lesson here, that investments in assets may not generate economic benefits until much later in a firm’s life. With FY2020, the asset turnover was high. However, the sales growth was very small, and yet there was retraction in total assets. The only reason why FY2020 had a good asset turnover was because the investment in total assets for agribusiness had retracted. Given that the firm was able to earn more with less, it was efficient and profitable in asset utilisation for FY2020.
The asset turnover for the processing operations increased in FY2017, and declined in FY2018, and then lifted again in FY2019, and decreased again in FY2020. What can be seen from the processing operations is that the performance from these operations in FY2019, the worst year of overall performance for GrainCorp across all four years, was worse than agribusiness and the malt business. In fact, the agribusiness and malt business were profitable and had efficient asset utilisation in FY2019. Given the problem of viewing GrainCorp as just an agribusiness company, no wonder the capital markets did not pick up on the problems with GrainCorp prior to the end of FY2019. For the processing operations, the FY2017 growth in sales revenue was greater than the growth in total assets invested, and so there was a higher asset turnover. Again, a higher asset turnover will make the RNOA higher. FY2018 and FY2020 were the only years where sales growth was bad, not being more than the total assets invested for the processing operations. Even though FY2019 was a poor year for the processing operations, at least sales growth was greater than growth in total assets. However, FY2019 actually saw declines in sales and total assets, just that the decline in sales was less than total assets. It seems that the diversification strategy by GrainCorp to generate value for equity investors by expanding into new growth areas is not working that well after all. It appears that the firm is destroying value for equity investors rather than generating value.
As for the malt operations, the asset turnover ratios were never above 1, meaning that greater investments into total assets were required than returns that were being received from the sales revenue. This can be in FY2017 where sales growth declined to a negative number, and yet the growth in total assets was easily higher. In FY2018, sales growth returned to a modest positive number, indicating growth. However, the growth in total assets was still higher. Finally, in FY2019, sales growth at last was significantly higher than growth in total assets. Upon a successful year in FY2019 with the malt business, and a horrible year of overall performance, the firm demerged this business segment and unlocked valuable funds to turn things around. Nevertheless, prior to FY2019, the malt business was a concern for GrainCorp. Each operating segment had made an annual return, except for malt. Hence, the demerger may have been justified. With the demerger, total assets fell for FY2020.
Getting back to the PM and ATO enterprise ratios, we know that FY2018 and FY2019 were back-to-back bad years for GrainCorp. Given that the OI and sales revenue were declining in FY2018 and FY2019, and that the NOA was increasing in FY2018 and FY2019, this means that GrainCorp was destroying value for equity investors. That is, despite NOA investments increasing, there was no immediate reward for this in more sales revenue. We now know that FY2018, in particular, was a poor year with this problem. However, it is still unknown why FY2019 was a poor year. The agribusiness and malt business saw sales revenue growth in FY2019. Well, one of the key reasons why FY2019 was a poor year is because the ‘Goods purchased for resale’ were up by 19.52% from $2,407.4 million in FY2018 to $2,877.4 million. This was a significant increase in operating expenses. Figure 1 further explains why the OI was poor in FY2019.
FY2020 was a fantastic year in overall performance for GrainCorp, with a great PM of 5.46% and a great ATO of 2.89. However, these ratios may not be accurately reflecting the good performance of GrainCorp’s operations, despite the PM and ATO making up an excellent RNOA of 15.79%. We now know that FY2020 saw a large positive amount of sales growth for the processing operations, but this was not higher than the growth in total assets for the processing operations. So, again, there was bad sales growth, with GrainCorp was destroying value for equity investors. That is, despite total asset investments increasing, there was no immediate reward for this in greater sales revenue than the increased investments. Also, there was a little bit of sales growth with GrainCorp’s agribusiness operations, but with a large decline in total assets for agribusiness. Hence, the good performance of the agribusiness operations as presumed in the asset turnover (not the enterprise ATO) is misleading. Nevertheless, the firm earned more with less, and so was efficient in asset utilisation. Yet the agribusiness operations were hardly more profitable than FY2019, going from $2,984.2 million to $3,033.6 million in FY2020, a 1.66% increase. The reason why OI and PM were great for FY2020 was more likely due to the profit after tax from discontinued operation coming from the malt business operations, being $308.1 million. Without this, the OI, PM and RNOA are negative for FY2020. The reason why this number is included in the OI calculation is because it came from GrainCorp’s real operations. Therefore, it can be said that GrainCorp is not very profitable after all.
Figure 1
Significant Items and Abnormal Factors Affecting the FY2019 Operating Income
* These abnormal factors are unaudited.
Note. GrainCorp’s FY2019 OI performance was adversely affected by several items and factors. Adapted from GrainCorp Limited 2019 Annual Report, by GrainCorp Limited, 2019 (https://www.annualreports.com/HostedData/AnnualReportArchive/G/ASX_GNC_2019.pdf).
Cost of Capital for Operations
The cost of capital for operations represents the cost of the funds from equity and any debt financing that are exposed to the risks of the firm’s operations. This cost is not purely the cost of financing but rather the cost of financing adjusted for the risks to which the financing is exposed to in its use in the firm’s operations. The higher the number, the riskier the operations are, and the greater the rate of return required by the firm to excess the cost.
The cost of capital for operations is reflective of the operational risk measured by the finance managers of GrainCorp. It was 9.06% in FY2017, 8.99% in FY2018, 8.70% in FY2019 and 9.14% in FY2020. These rates are consistent and are greater than 8%, reflecting the high risk in GrainCorp’s operations, particularly in their agribusiness operations which has high revenue volatility.
Economic Profit
The economic profit results were -$56.9 million for FY2017, -$100.2 million for FY2018, -$324.4 million for FY2019 and $83.9 million for FY2020. The first three years were negative because the RNOA was not greater than the cost of capital for operations, and so no value was added for equity investors. FY2020 saw a good economic profit because the RNOA was greater than the cost of capital for operations, and this was because the OI was positive and good, and the NOA were greatly reduced.
Free Cash Flow (FCF)
The FCF results were -$145.0 million for FY2018, -$153.9 million for FY2019 and $1,937.6 million for FY2020. The moderate FCF result for FY2018 was negative because the NOA increase was greater than the OI. The moderate FCF result for FY2019 was negative because the OI was negative and, again, the NOA increase was greater than the OI. The massive FCF result for FY2020 was due to the positive OI being greater than the massive decrease in NOA because of the demerger of the malt business and the sale of the Australian Bulk Liquid Terminals (GrainCorp Limited, 2020, p. 6). This is an example of converting the investment in NOA back into cash for new purposes.
References:
GrainCorp Limited (2019). GrainCorp Limited 2019 annual report. https://www.annualreports.com/HostedData/AnnualReportArchive/G/ASX_GNC_2019.pdf
GrainCorp Limited (2020). GrainCorp Limited 2020 annual report. https://www.graincorp.com.au/wp-content/uploads/2021/02/2020-Annual-Report.pdf
Vaidya, D. (n.d.). Ratio Analysis – Definition, Formula, Calculate Top 32 Ratios. WallStreetMojo. https://www.wallstreetmojo.com/ratio-analysis/#gross
ACCT13017 ASS#2 Step 3: Ratio Commentary
The structure to the following work consists of: the ratio definition, followed by the results, and then the interpretation.
Ratio Commentary:
Net Profit Margin
The net profit margin is a profitability ratio, measuring how profitable a firm is by looking how much money from the sales revenue remains after expenses, interest and taxes have been deducted. The higher the number, the more profitable the firm has been.
GrainCorp had small positive net profit margins in FY2017 and FY2018, of 2.74% and 1.66% respectively. FY2018 saw a slight decline from FY2017. GrainCorp suffered a small negative net profit margin of -3.21% in FY2019, which was a bad year. Nevertheless, in FY2020, they achieved a substantial positive net profit margin of 9.41%, which was a great year. The benchmark industry average for a pre-tax profit margin is 9.24% as at 30 September 2020, which translates into an after-tax profit margin of 6.468% (IBISWorld Pty Ltd, 2020, p. 14).
Overall, the net profit margin results tell me that GrainCorp was losing profitability from FY2017 to FY2019, but are now recovering and performing strongly, with great results in FY2020. They have surpassed the benchmark industry average pre-tax profit margin is 9.24% with an after-tax net profit margin of 9.41%, which is further proof of their return to good profitability (IBISWorld Pty Ltd, 2020, p. 14).
Return on Assets
The return on assets is a profitability ratio, measuring the effectiveness of a firm to generate a return in ‘net profit after tax’ from its assets, being the total capital invested in the firm (Vaidya, n.d.). The higher the number, the more profitable the firm has been from its level of asset employment.
GrainCorp had a solid positive return on assets (ROA) result for FY2017 of 3.48% and a small positive return for FY2018 of 1.77%. FY2018 saw a slight decline from FY2017. GrainCorp suffered a small negative return on assets of -2.92% in FY2019, which was a bad year. Nevertheless, in FY2020, they achieved a large positive return of 17.15%, which was a great year. The benchmark industry average for return on assets is 3.64% as at 30 September 2020 (IBISWorld Pty Ltd, 2020, p. 14).
Overall, the ROA results tell me that GrainCorp was losing profitability from its asset employment, from FY2017 to FY2019, but are now recovering and performing strongly, with great results in FY2020. They have surpassed the benchmark industry average, which is further proof of their return to good profitability (IBISWorld Pty Ltd, 2020, p. 14).
Total Asset Turnover Ratio
The total asset turnover ratio is an efficiency ratio, measuring the efficiency of a firm to generate sales revenue from its assets. The higher the number, the more the successful the firm has been in generating sales from its level of asset employment.
Apart from the outstanding result in FY2020 of 1.82, GrainCorp has had modest results from FY2017 to FY2019. They have had a decline trend up until FY2020, with 1.27 in FY2017, 1.07 in FY2018 and 0.91 in FY2019. The benchmark industry average for the total asset turnover ratio is 0.46 as at 30 September 2020 (IBISWorld Pty Ltd, 2020, p. 14).
Overall, the total asset turnover ratio results tell me that GrainCorp has been losing its ability to generate sales from its level of asset employment over the years until recently in FY2020. At one stage, in FY2019, the assets were not generating sales more than their value. However, the benchmark industry average for FY2020 is low, with an expectation for the industry to have small total asset turnover ratios. This is likely to reflect the expected poor sales revenue rather than a decline in assets. Nevertheless, GrainCorp reduced its amount of assets significantly in FY2020. GrainCorp is exceeding industry expectations, with even the FY2019 result of 0.91 well surpassing the benchmark industry average for FY2020. To conclude, GrainCorp is now performing extremely well in total asset turnover and over time has been comparatively successful in generating sales from its asset employment.
Current Asset Turnover Ratio
The total asset turnover ratio is an efficiency ratio, measuring the efficiency of a firm to generate sales revenue from only its current assets. It can also reflect how well a firm is running and sustaining its working capital cycle, given that most current assets are used in this cycle. The higher the number, the more the successful the firm has been in generating sales from its use of current assets.
GrainCorp has had good current asset turnover ratio results across all four years, showing 3.00 for FY2017, 2.26 for FY2018, 1.85 for FY2019 and 4.65 for FY2020. Again, the results were weaker in each successive year from FY2017 to FY2019, with a great lift in results for FY2020.
Overall, the current asset turnover ratio results tell me that GrainCorp has had a good ability to generate sales from its current assets. It produces enough sales to maintain its level of current assets because the ratio results are greater than 1. This could reflect a good working capital cycle as well. As assets should embody the future economic benefits of a firm, the ratio results and the fact that GrainCorp has reduced their assets for FY2020 suggests that the current assets have been used well to generate sales revenue for the firm.
Current Ratio
The current ratio is a liquidity ratio, measuring the potential capacity of the firm to cover its current liabilities with its current assets, as those liabilities fall due and payable within the next 12 months. If the number is greater than 1, then the firm has the capacity to meet its liabilities as and when they fall due and payable within the next 12 months. It is solvent. If the number is greater than 1.5, then the firm has a good capacity and is very solvent.
GrainCorp had good current ratio results across all four years, showing 1.87 for FY2017, 1.66 for FY2018, 1.68 for FY2019 and 1.51 for FY2020. With GrainCorp significantly reducing both current assets and liabilities for FY2020, they have been able to keep the current ratio at a good minimal level. The benchmark industry average for the current ratio is 1.48 as at 30 September 2020 (IBISWorld Pty Ltd, 2020, p. 14).
Overall, the current ratio results tell me that GrainCorp has a good capacity to meet its liabilities as and when they fall due and payable within the next 12 months. It is solvent. However, it may be taking on a little more risk at the end of FY2020, by having the ratio at a good minimal level of 1.51, a much-reduced ratio result from previous years. Also, it is only just ahead of the benchmark industry average. Whilst GrainCorp has surplus borrowing facilities it can use if necessary, this fact may be of concern to the banks or financial institutions who would be lending. This could mean that there is more pressure on GrainCorp’s working capital cycle, because any short-term liabilities would not be used to acquire non-current assets in general, but rather to support current assets. There may be pressure on the firm now to convert any current assets using new current liabilities into revenue and then to pay off the current liabilities as they are. Alternatively, the firm would be forced to extend the loan terms to turn their current liabilities into non-current liabilities, thereby disappointing banks and financial institutions, and potentially diminishing future borrowing capacity.
Quick Ratio 1
The quick ratio 1 is a liquidity ratio, measuring the potential capacity of the firm to immediately pay its current liabilities with its current assets minus those current assets that are needed for other immediate operational purposes, such as inventory and prepayments. If the number is greater than 1, then the firm has the capacity to meet its liabilities as and when they fall due and payable within the short term.
GrainCorp has had consistently average quick ratio 1 results across all four years, showing 1.10 for FY2017, 0.90 for FY2018, 1.00 for FY2019 and 0.95 for FY2020. The results could be better, with only FY2017 and FY2019 successfully matching current assets, without those for immediate operational purposes, with all current liabilities.
Overall, the quick ratio 1 results tell me that GrainCorp has an average capacity to meet its liabilities as and when they fall due and payable within the next 12 months, if those current assets required for immediate operational purposes, such as inventory and prepayments, are withheld. However, they currently will need extra financing to meet their liabilities in the short term because the FY2020 ratio of 0.95 suggests that the liquidity is average.
Quick Ratio 2
The quick ratio 2 is a liquidity ratio, measuring the potential capacity of the firm to immediately pay its current liabilities with its current assets minus those current assets that are needed for other immediate operational purposes and that are difficult to liquidate quickly, such as inventory, prepayments and receivables. The quick ratio 2 aims to measure liquidity in a shorter timeframe than the quick ratio 1. If the number is greater than 1, then the firm has a good capacity to meet its liabilities quickly.
GrainCorp has had consistently poor quick ratio 2 results across all four years, showing 0.53 for FY2017, 0.43 for FY2018, 0.45 for FY2019 and 0.45 for FY2020. The results could be a lot better, with no year revealing a quick ability to find present liquid finances needed to meet all current liabilities.
Overall, the quick ratio 2 results tell me that GrainCorp has a poor capacity to meet its current liabilities, if they were to fall due and payable quickly. They currently will need extra financing to meet these liabilities quickly. The results suggest that, from year to year, GrainCorp is carrying a lot of current assets that are required for immediate operational purposes and that are difficult to liquidate quickly, such as inventory, prepayments and receivables. Although the capacity to pay current liabilities quickly is poor, GrainCorp has reduced its current liabilities significantly in FY2020. Yet surprisingly, the firm held the same ratio result as FY2019. In FY2020, GrainCorp has only utilised $213.9 million of their $2,084 million of their short-term debt capacity (GrainCorp Limited, 2020, p. 71). In particular, the capacity for debt financing with their inventory funding facility recently went up from a principal facility amount of $511.5 million to $1,375 million, to anticipate and meet the upcoming seasonal demands of a good year for Australian crops (GrainCorp Limited, 2020, p. 71). Also, the working capital facility’s principal facility amount was lifted from $205 million to $695 million (GrainCorp Limited, 2020, p. 71). Therefore, the FY2020 quick ratio 2 result is of little concern, with significant debt facilities standing by.
Debt/Equity Ratio
The debt/equity ratio is a financial structure ratio, measuring how the firm is structured with debt and equity financing, looking at the level of financing within the firm using debt as contrasted with equity financing. The higher the number, the more the firm is relying on borrowings and the harder it will be to obtain further debt financing (CPA Australia, 2012, p. 13).
Until FY2020, GrainCorp has had debt/equity ratio results indicating increasing levels of debt financing over equity financing, with 58.32% for FY2017, 66.98% for FY2018 and 75.86% for FY2019. These levels have increased progressively at a great rate. However, in FY2020, GrainCorp significantly reduced a large amount of its borrowings to reduce the ratio to 33.22%, which is a low amount.
Overall, the debt/equity ratio results tell me that GrainCorp has been relying on debt financing a lot over the years up until FY2020. However, the rate of increase in the level of debt to equity has been concerning, with FY2017 holding over fifty percent in debt funding, followed by FY2018 moving to two thirds of the firm being financed with debt, and then up to three quarters in FY2019. Nevertheless, FY2020 saw somewhat of a reset in the financial structure of GrainCorp with a demerger providing a large amount of financing, and with several assets and liabilities being reduced. This may have been necessary because GrainCorp may have been heading toward the point of having little to no further debt capacity, endangering their financial position in bad times. The firm is now funded with a low level of debt. This reduces their financial risk but increases their financial flexibility and their capacity for future spending as well.
Equity Ratio
The equity ratio is a financial structure ratio, measuring how much of the firm’s total assets are supported by equity financing. The higher the number, the more the firm owns its own assets without the use of financing from its liabilities.
GrainCorp has had good equity ratio results over the years, with 51.70% in FY2017, 48.86% in FY2018, 47.38% in FY2019 and 54.71% in FY2020. In particular, the level of liabilities was less than equity in FY2017 and FY2020. These are the stronger years for GrainCorp, whereby they had less reliance on external financing and had less indebtedness.
Overall, the equity ratio results tell me that GrainCorp was increasing its amount of liabilities from FY2017 to FY2019. This decline in self-funding is consistent with the fact that FY2018 and FY2019 were not good years for GrainCorp. In FY2020, GrainCorp has lowered their indebtedness and financial support through liabilities by 7.33%, with over half of the firm’s funding now supported by equity at 54.71%. This is a large turnaround, and testament to a year of needed change in FY2020. Owning more its own assets reduces GrainCorp’s financial risk, increases their financial flexibility and lifts their capacity for future spending. This should increase confidence in shareholders and future investors.
Times Interest Earned
The times interest earned is a financial structure ratio, measuring the potential capacity of the firm to cover its interest payments due to its borrowings, being the cost of its debt financing, with its net earnings before tax and interest are deducted. The higher number, the more the firm has the capacity to meet its interest payments.
GrainCorp has had mixed times interest earned results over the years. FY2017 had a good result, with 5.43, meaning that the firm had a great capacity to meet its interest payments from its net earnings before tax and interest (EBIT). In FY2018, GrainCorp increased its level of current liabilities and, with a poorer year, was reduced to a moderate capacity to cover its interest payments with EBIT, coming up with a ratio of 2.61. FY2019 was a bad year, with -7.38, whereby GrainCorp did not have a positive EBIT. In FY2020, GrainCorp returned to a moderate capacity to pay for its cost of debt financing, with debt levels being greatly reduced. The FY2020 ratio was 2.76. The benchmark industry average for times interest earned is 3.92 as at 30 September 2020 (IBISWorld Pty Ltd, 2020, p. 14).
Overall, the times interest earned results tell me that GrainCorp has had a good, but moderate, capacity to cover its interest payments, due to its borrowings, from its positive EBIT performances. However, its financial risk of default was greatly increased in FY2019, due to a negative EBIT and large levels of debt. It seems like GrainCorp, in FY2020, have escaped a precarious financial position. Nevertheless, they are well below the benchmark industry average. Given that various sub-industry revenue growth rates applicable to GrainCorp’s operations have been mostly negative on average over the last five years from FY2017 to FY2021, the benchmark industry average for times interest earned could suggest that the expected level of borrowings should be low (IBISWorld Pty Ltd, 2020, p. 12). Yet GrainCorp is conforming to this expectation. Therefore, perhaps the benchmark is more of a testament of the level of risk involved in GrainCorp’s main industry, being agribusiness.
Earnings per Share (EPS)
The earnings per share (EPS) is a market ratio, measuring the amount of money, as a return in ‘net profit after tax’, that each share issued in the firm has been earning. It could indicate the firm’s ability to generate net earnings upon the equity interests of shareholders. The higher number, the more the firm has been successful in doing this.
GrainCorp has had declining earnings per share (EPS) results from FY2017 to FY2019, with $0.548 for FY2017, $0.309 for FY2018 and -$0.494 for FY2019. However, there was a strong comeback result for shareholders in FY2020, with $1.500.
Overall, the EPS results tell me that GrainCorp has been performing well recently, after preforming quite poorly in FY2019. Nevertheless, GrainCorp’s performance has been declining since FY2017. FY2020 produced the strongest EPS result over one dollar for the firm since 2012 (GrainCorp Limited, 2016, p. 31). Shareholders should now get good confidence going forward with GrainCorp, given that its ability to generate net earnings upon their equity interests has been reconfirmed through the EPS.
Dividends per Share (DPS)
The dividends per share (DPS) is a market ratio, showing how much money the firm paid out in dividends for every issued ordinary share. The higher the amount per share, the more profitable the shares have been to shareholders in terms of income return for each share held.
GrainCorp has had mixed dividends per share (DPS) results over the last few years. Good amounts of dividends were paid out in FY2017 and FY2018, with $0.300 for FY2017 and $0.160 for FY2018. No dividends were paid out in FY2019, due to the bad year. GrainCorp started to pay dividends after a return to profitability in FY2020, with a modest $0.070 per share. The benchmark industry average for the DPS is $1.34 as at 30 September 2020 (IBISWorld Pty Ltd, 2020, p. 14).
Overall, the DPS results tell me that GrainCorp have paid out dividends when their performances have been good and have withheld them when their performances have been bad. After the bad year of FY2019, GrainCorp has been cautious to pay out dividends in FY2020, with a modest amount. This shows prudent financial management. GrainCorp is a long way behind the benchmark industry average. If the benchmark is to be believed, GrainCorp should be paying out more or performing better to do so. However, it is understandable that GrainCorp are looking to recover from a significant poor performance in FY2019.
Dividend Yield Ratio
The dividend yield ratio is a market ratio, measuring how much of a return in dividends the firm could pay out, if identical to the previous period, were an investor to purchase shares at the market price as at the applicable date (AccountingTools, 2021).
GrainCorp has had modest return levels when it has paid out dividends, with 3.68% for FY2017, 2.03% for FY2018, 0% for FY2019 and 1.85% for FY2020. No dividends were paid out in FY2019. Despite the strong financial performance in FY2020, GrainCorp is currently recovering from the poor performance of FY2019.
Overall, the dividend yield ratio results tell me that GrainCorp have been able to deliver a modest return in dividends for investors who purchase shares, when their performances have been good. Recently, they have been cautious in paying out dividends, due to the bad year of FY2019. The returns are not substantial at the present point in time. Nevertheless, if management is to be consistent with the past, future good performances will see a return to substantial returns in addition to the capital growth received by investors in the market price.
Price Earnings Ratio
The price earnings ratio is a market ratio, measuring the market share price as a value over and above the firm’s earnings made upon each share. It reveals how much more or less an investor will pay as at the applicable date for the recent level of net earnings that could be available for dividend pay outs. The lower the number, if positive, the better the market share price for investors because the least money will be paid for an amount of earnings that could be paid out as dividends.
GrainCorp has had mixed price earnings (P/E) ratio results over the last few years. They had large positive number results for FY2017 and FY2018, with 14.89 and 25.60 respectively. This meant that shareholders were paying for the earnings that that could be paid out as dividends. FY2019 was worse, with a significant negative result of -16.02, meaning that there would be no earnings for that year for the market price paid. FY2020 was a better year for GrainCorp and investors with a P/E result of 2.52, meaning that investors would not be paying too much more than the amount of earnings that could be paid out as dividends.
Overall, the P/E ratio results tell me that investors were not getting value for money in FY2017, FY2018 and FY2019. Interestingly, the share price remained steady between FY2018 and FY2019, with $7.90 for FY2018 and $7.91 for FY2019, even though there were signs that performance was declining in GrainCorp from FY2017 to FY2018, potentially making FY2019 difficult. One of these signs known to me was a large increase in current liabilities. Yet the capital market did not pick up on this sign, to change its future expectation, and thus the price. In light of this, it seems to me that the capital markets are only semi-efficient. Another thought is that GrainCorp has the image of an agricultural business but not a processing business as well. This concept suggests that it is too easy to look at GrainCorp as an agricultural business, and not consider that they are a processing business as well. This way of viewing GrainCorp may lead to misleading expectations of the firm’s future. For example, if it is forecasted that the following year will be bad for Australian crops, then investors may think that the performance of GrainCorp will be poor. Yet this may be misleading, because the economic and business realities of GrainCorp will have been ignored, in that the firm has a diversified business model with both agribusiness and processing operations, as well as the crop production contract (CRC) derivative financial plan designed to assist and smooth cash flows during tough times for Australian crops. This may explain why the capital market failed to pick up on GrainCorp’s waning performance in FY2018, leaving its share price almost unchanged a year later.
Net Asset Backing per Share Ratio
The net asset backing per share ratio is a market ratio, measuring the amount of net assets that each issued ordinary share supports within the firm. It also shows the book value of equity that each ordinary share has a claim to (AccountingTools, 2021).
GrainCorp had consistent net asset backing per share ratio results from FY2017 to FY2019, indicating that shareholders had a good amount of net assets that they financially supported and that had claim to, with $8.144 per share for FY2017, $8.501 per share for FY2018 and $8.024 per share for FY2019. In FY2020, the level of net asset backing per share dropped significantly to $4.786. This was not due to the drop in the number of issued shares, but rather the demerger of GrainCorp’s malt business. The number of issued shares was similar between FY2017 and FY2018, and between FY2019 and FY2020, with 228,446,485 for FY2017; 228,471,717 for FY2018; 228,853,728 for FY2019; and 228,855,628 for FY2020. The benchmark industry average for the net asset backing per share ratio is $6.60 as at 30 September 2020 (IBISWorld Pty Ltd, 2020, p. 14).
Overall, the net asset backing per share ratio results tell me that GrainCorp was doing well with maintaining a great level of net assets per share, that shareholders were financially supporting and that they had claim to, until FY2020. In FY2020, GrainCorp did not meet the benchmark industry average, and the firm saw a very large decline in the net asset backing per share ratio. This was mostly due to the demerger of GrainCorp’s malt business. Unfortunately, this was probably a necessary move for GrainCorp, as liabilities were rising and the FY2019 performance was poor. Out of all market ratios, this one is the most disappointing for investors.
Market/Book Ratio
The market/book ratio is a market ratio, comparing the market share price to the book value of equity and net assets per share, to reveal how much a share of the firm’s equity is selling for above or below the book value per share as at the applicable date (Carlson, 2019). If the number is greater than 1, this means that the market value of equity is greater than the book value of equity per share, meaning that a further incentive for the future will need to apply to become a good buy (Carlson, 2019). If the number is less than 1, this means that the book value of equity is greater than the market value of equity per share, meaning that the share price is discounted and may be a good buy if the share price is expected to rise above the present lower level (Carlson, 2019). If the number is equal to 1, this means that the market value is equal to the book value of equity per share, meaning that a further incentive for the future will need to apply to become a good buy.
GrainCorp has had favourable market/book ratio results for investors, except for FY2017 where the ratio was equal to 1. There was not much value to be received for investors in FY2018 and FY2019, with a ratio of 0.93 for FY2018 and 0.99 for FY2019. However, in FY2020, the book value of equity finished greater than the market value of equity per share, with a ratio result of 0.79, meaning if the share price was expected to rise above this level in the future, then this could be a great bargain buy for investors.
Overall, the market/book ratio results tell me that GrainCorp has favourable shares at the end of FY2020, whereas before the shares were only slightly favourable in FY2018 and FY2019. No years had results greater than 1. Given that from FY2017 to FY2019 the share prices were steady and strong, and the market/book ratios remained steady and close to 1, this was contradictory. Also, with GrainCorp significantly seeing a drop in its net assets and equity value for FY2020, this may have been bad timing for investors where the share price had declined significantly from FY2019 to FY2020 as well, going from $7.91 to $3.78. If the book value of equity had not experienced a massive decline, it would have been massively greater than the market value of equity per share, meaning an excellent bargain buy for investors if the share price were to rise close to the book value level.
Dividend Payout Ratio
The dividend payout ratio is a ratio based on the reformulated financial statements, measuring how much money the firm paid out in dividends for every issued ordinary share in contrast to its recent comprehensive income (CI) earnings. The lower the amount, the greater the firm’s capacity to pay out dividends again in the following financial year. The higher the amount, the greater shareholders have prospered from the recent payout, taking a share from the company’s good fortune.
GrainCorp has had mixed dividend payout ratio results over the last few years. In FY2017 and FY2018, the firm had large dividend payout ratios, with 43.17% for FY2017 and 27.17% for FY2018, due to good positive comprehensive income results and both interim and final dividends being paid. In FY2019, there were no dividend payouts, due to the poor negative comprehensive income result. In FY2020, GrainCorp were planning on paying out a fully franked final dividend in December 2020, to deliver a ratio result of 7.39% (GrainCorp Limited, 2020, p. 73). The benchmark industry average for the dividend payout ratio is 14.15% as at 30 September 2020 (IBISWorld Pty Ltd, 2020, p. 14).
Overall, the dividend payout ratio results tell me that GrainCorp have paid out dividends when their comprehensive income performances have been good and have withheld them when there has been poor performance. After the bad year of FY2019, management has been cautious to pay out dividends for FY2020, with only a modest amount being paid out. This shows prudent financial management. GrainCorp is a long way behind the benchmark industry average. If the benchmark is to be believed, GrainCorp should be paying out more or performing better to do so. However, it is understandable that GrainCorp are looking to recover from a significant poor performance in FY2019. The strong comprehensive income performance of $216.6 million and the modest final dividend of $0.07 per share for FY2020 indicate that the firm has a good capacity to pay out dividends again in the next financial year.
Return on Equity (ROE)
The return on equity (ROE) ratio is a ratio based on the reformulated financial statements, measuring the CI earnings as a return upon the total amount of equity invested in the firm. The higher the number, the more profitable the firm has been to earn a return on interests of the equity owners.
GrainCorp has had mostly good return on equity (ROE) ratio over the last four years. FY2017 was a strong year with 8.82%. FY2018 saw the return on the interests of equity owners slide to 7.08%, although this is still good. FY2019 was a bad year with -4.65%. FY2020 saw a good comeback, with 14.78%.
Overall, the ROE ratio results tell me that GrainCorp has been performing well over the last few years. Apart from FY2019, the CI earnings as a return upon the total amount of equity invested in the firm have been healthy and positive. GrainCorp has also recovered well from FY2019. However, the firm is yet to reach the level of ROE achieved in FY2017. Nevertheless, even in FY2019, the ROE could have been worse. Therefore, GrainCorp have recently been performing well in achieving good ROE results.
Return on Net Operating Assets (RNOA)
The return on net operating assets (RNOA) is a ratio based on the reformulated financial statements, measuring the effectiveness of a firm to generate a return from its ordinary operating activities in ‘operating income (OI) after tax’ from its net operating assets, being the net capital invested in the firm’s operations (Vaidya, n.d.). The higher the number, the more profitable the firm has been from its operations using the operating assets.
Apart from FY2019, GrainCorp has had good return on net operating assets (RNOA) results. In FY2017, they delivered a strong 6.88% RNOA from their operations. In FY2018, they achieved a slightly lower result with 5.55%, which is still good. In FY2019, the performance was poor, with a -2.11% return. FY2020 saw an excellent large positive return of 15.79%.
Overall, the RNOA results tell me that GrainCorp has been prospering in their operating activities using their net operating assets. The exception is FY2019. However, I was surprised to see a comparatively low return when compared to the profitability ratio of return on assets for FY2019, with a -2.92% return. This suggests that GrainCorp’s operations were not that bad in FY2019 after all, although still poor, and that other factors outside of their operations were also to blame for the poor performance. GrainCorp had a lot of success in their diversified operations in FY2020 with an outstanding result. Again, this is proof that they have been performing well of late.
Net Borrowing Cost (NBC)
The net borrowing cost (NBC) is a ratio based on the reformulated financial statements, measuring the amount of net financial expenses after tax (NFE) generated by the net financial obligations (NFO) carried by the firm to finance their operations. If the number is positive and large, then the firm’s overall cost of holding NFO is high. If the number is negative, then the firm’s NFO, or more likely to be net financial assets (NFA) instead, are generating value for it.
GrainCorp has had moderate net borrowing cost (NBC) results of late. From FY2017 to FY2019, they had positive but modest and small NBC, with 2.13% for FY2017, 3.12% for FY2018 and 2.31% for FY2019. It was different in FY2020, where the NBC ratio was negative, with -2.60%. This means that the NFO was generating value for the firm, rather than taking value.
Overall, the NBC results tell me that GrainCorp has had no problems with the cost of holding NFO’s, being the net financial expenses after tax (NFE) generated by the NFO. These costs have been moderate, and are comparatively so when compared with the business lending rates in those years (Reserve Bank of Australia, 2021). In FY2020, the NFO generating a negative NBC ratio was not due to net financial assets (NFA), but rather a derivative financial instrument used to provide financing in the hard times. This was the crop production contract (CRC) that was designed to support GrainCorp’s primary operation of agribusiness, which involves taking crops from producers and selling them on to consumers. The receipts from the CRC exceeded all other financial expenses, causing the NBC to be negative.
Profit Margin (PM)
The profit margin (PM) is a ratio based on the reformulated financial statements, measuring how profitable a firm is by looking how much money from the sales revenue remains after operating expenses and taxes have been deducted. The higher the number, the more profitable and efficient the firm has been in its operations.
Apart from FY2019, GrainCorp has had good profit margin (PM) results. In FY2017, they achieved an operating PM of 3.92%. Similarly, in FY2018, the operating PM was 3.81%. It was a poor but modest negative operating PM in FY2019 of -1.80%. FY2020 had a great result with 5.46%.
Overall, the operating PM results tell me that GrainCorp has had good performance arising from their operations. The exception is FY2019. However, the negative FY2019 result was small. Hence, over all four years, it can be said that GrainCorp has been running efficient operations. This has limited their losses in the bad years. With a strong result in FY2020, GrainCorp have been performing well and have had profitable operations.
Operating Liability Leverage (OLLEV)
The operating liability leverage (OLLEV) is a ratio based on the reformulated financial statements, measuring how the firm’s NOA is structured with leverage from its operating liabilities, looking at the level of operational financing within the firm using debt generated from its own operations. OLLEV can also be contrasted with financing from its financing activities using equity and the NFO. The higher the number, the more the firm’s operations are relying on operational borrowings and the riskier, and perhaps harder, it will be to obtain further operational credit within the working capital cycle (CPA Australia, 2012, p. 13).
GrainCorp has had modest and consistent operating liability leverage (OLLEV) results from FY2017 to FY2019, with a large rise in FY2020. Until FY2020, the firm has not had a lot of OLLEV to support its operations, with 24.89% in FY2017, 25.04% in FY2018 and 21.40% in FY2019. In FY2020, there was a change in this trend and the OLLEV came to 42.96%.
Overall, the OLLEV results tell me that GrainCorp has not used much OLLEV until FY2020, meaning that their operations have only used a modest level of operating leverage. Things have changed. In FY2020, the level of net operating assets decreased dramatically, causing a doubling of the portion of operating liabilities that was used in FY2019. FY2019 was a poor year, leaving GrainCorp with a dangerous financial position. It makes sense that GrainCorp demerged their malt operations to receive more cash. With a higher portion of operating liabilities to net operating assets, they are carrying more risk. Even though GrainCorp reduced much of its debt liabilities in FY2020, taking the debt/equity ratio from 75.86% to 33.22%, perhaps the operating liabilities are at a level where the firm should not take on anymore, as they may not be able to get further credit once a substantial amount has been taken already. GrainCorp have a large amount of unutilised debt facilities. Therefore, the risk of increased operating liabilities may not be material but minimal, as extra financing can be found elsewhere.
Financial Leverage (FLEV)
The financial leverage (FLEV) is a ratio based on the reformulated financial statements, measuring how the firm’s financing is structured with avenues of funding outside of the firm’s operations, looking at the level of financing within the firm using financial debt as contrasted with equity financing. The higher the number, the more the firm is relying on borrowings and the harder it will be to obtain further debt financing (CPA Australia, 2012, p. 13).
GrainCorp has had inconsistent financial leverage (FLEV) ratio results. In FY2017 and FY2019, the levels of FLEV were over 50%, with 52.27% for FY2017 and FY2019. Yet in FY2018 and FY2020, the levels were well under 50%, with 44.98% for FY2018 and 45.39% for FY2020.
Overall, the FLEV results tell me that GrainCorp has been using moderate levels of debt financing over the years, but with a much reduced amount in FY2020. With a demerger providing a large amount of financing, and with NFO being greatly reduced in FY2020, the firm is now funded with a low level of debt. This reduces their financial risk but increases their financial flexibility and their capacity for future spending as well.
Return on Operating Assets (ROOA)
The return on operating assets (ROOA) is a ratio based on the reformulated financial statements, measuring the effectiveness of a firm to generate a return from its total operating assets (OA) employed in its ordinary operating activities, with OA being the key focus of the capital invested in the firm’s operations (Vaidya, n.d.). The after-tax cost of operating liabilities (OL) is disregarded in the ‘OI after tax’ to arrive at the ROOA (CFI Education, n.d.). The higher the number, the more profitable the firm has been in using the operating assets for its operations.
Apart from FY2019, GrainCorp have had good return on operating assets (ROOA) results, with 5.80% for FY2017, 4.77% for FY2018 and 11.30% for FY2020. FY2019 was a poor year with a negative return of -1.47%.
Overall, the ROOA results tell me that GrainCorp have been successful, profitable and efficient in their ordinary operating activities. They have used their total operating assets to deliver pleasing returns consistently. Even though FY2019 was the exception, even that year had a small negative return, suggesting that GrainCorp is also efficient in their operations and in their asset management. Their recent performance in FY2020 was outstanding, suggesting that the firm is going well and that their ordinary operating activities are adding value.
Operating Liability Leverage Spread (OLSPREAD)
The operating liability leverage spread (OLSPREAD) is a ratio based on the reformulated financial statements, measuring the ROOA that the firm has achieved less the cost of the operating liabilities (OL) that the firm has to pay, in order to achieve the ROOA. The higher the number, the greater the leverage obtained in the RNOA for each dollar of OL (Turner, 2021b, p. 23).
Like the ROOA ratio results, GrainCorp has had good operating liability leverage spread (OLSPREAD) results. The exception is FY2019, where the OLSPREAD was -2.88%. Nevertheless, the other years were good, with 4.31% for FY2017, 3.00% for FY2018 and an outstanding 10.54% for FY2020.
Overall, the OLSPREAD results tell me that GrainCorp has not been adversely affected by the cost of holding operating liabilities (OL) to achieve their ROOA results. However, they were adversely affected when they had a negative return in FY2019 because the cost makes the loss bigger. Significantly, the OLSPREAD results show that GrainCorp is likely to have a greater amount of leverage obtained in the return on net operating assets (RNOA) for each dollar of OL in those years of positive returns. As FY2020 had a large OLSPREAD result of 10.54%, the RNOA would have a greater amount of leverage for each dollar of OL.
Asset Turnover (ATO)
The asset turnover (ATO) is a ratio based on the reformulated financial statements, measuring the amount of sales generated for each dollar of NOA within the firm. Given that NOA is used in the operations of the firm directly, it can be seen from the ATO how efficient the firm has been in generating sales revenue with these assets. The higher the number, the more sales revenue has been received for each dollar of NOA in the firm.
GrainCorp has had good asset turnover (ATO) results over the years. They had solid results in FY2017 and FY2018, with 1.75 for FY2017 and 1.46 for FY2018. FY2019 was a modest result, with only 1.17. FY2020 was a great result which saw sales revenue more than double the ATO, with 2.89.
Overall, the ATO results tell me that GrainCorp has been efficient in using its net operating assets (NOA) to generate sales revenue. FY2019 was again a poor year, delivering a modest but acceptable result. Nevertheless, the other years were very good. It seems GrainCorp are an efficient organisation, when it comes to their operations and asset management. GrainCorp uses a lot of assets in their operations, with $1,261.9 million in NOA. Therefore, a great amount of sales revenue is expected for the dollars of NOA invested in the firm.
Growth in Sales
The growth in sales ratio measures the level of sales revenue growth from the previous financial year to the current financial year. If the number is positive, the firm has been successful in achieving revenue growth. If the number is negative, the firm has suffered a decline in revenue.
GrainCorp has suffered several declines in sales growth over the years, with a small return to positive results recently in FY2020. Sales growth from FY2016 to FY2017 was strong, with 10.03%. However, there were concerning declines after this, with -7.08% in FY2018 and another -16.95% in FY2019. FY2020 was a much-needed comeback year with a positive sales growth of 3.61%. The benchmark industry average for the growth in sales is -4.82% as at 30 September 2020 (IBISWorld Pty Ltd, 2020, p. 14).
Overall, the growth in sales results tell me that GrainCorp has been suffering in performance from FY2017 to FY2019. Yet they returned to a great performance in FY2020. These declines in FY2018 and FY2019 were probably due to the Australian drought, which saw poor crop productions on the east coast of Australia. Therefore, this would have given GrainCorp less produce to deal with. Without a product, there can be no sales. With a return to more favourable weather conditions for crops, there has been a return to sales growth for the grain wholesaling industry, and these results reflect this. GrainCorp exceeded operational expectations for FY2020 by surpassing the benchmark industry average easily.
Growth in Operating Income
The growth in operating income is a ratio based on the reformulated financial statements, measuring the level of operating income (OI) growth from the previous financial year to the current financial year. If the number is positive, the firm’s operations have been successful in achieving revenue growth. If the number is negative, the firm’s operations have not been successful, and the firm has experienced a decline in revenue.
Like with the growth in sales results, GrainCorp has suffered several declines in operating income (OI) growth over the years. The years of FY2018 and FY2019 were poor, with declines in OI of -9.84% for FY2018 and a terrible -139.20% for FY2019. Then FY2020 had an outstanding return to growth with an impressive 415.06%.
Overall, the growth in OI results tell me that GrainCorp has been suffering in performance from their ordinary operating activities, from FY2018 to FY2019. Yet they returned to a great performance in FY2020. These declines in FY2018 and FY2019 were probably due to the Australian drought, which saw poor crop productions on the east coast of Australia. Therefore, this would have given GrainCorp less produce to deal with. With a return to more favourable weather conditions for crops, there has been a return to OI growth. There was a significant decline in GrainCorp’s processing business operations as well, where the external revenue for this reportable segment declined from $969.1 million in FY2018 to $537.8 million in FY2019. This revenue returned to $615.5 million in FY2020. Therefore, it seems that all operations were good for GrainCorp in FY2020.
Growth in Net Operating Assets
The growth in net operating assets is a ratio based on the reformulated financial statements, measuring the level of net operating assets (NOA) within the firm from the previous financial year to the current financial year. The ratio is indicative of investment growth to achieve more. If the number is positive, the firm has increased their level of NOA. If the number is negative, the firm has decreased their level of NOA.
GrainCorp has had a declining amount of net operating assets (NOA) over the last few years. The firm has gone from 11.77% NOA growth in FY2018 to 3.11% in FY2019 to a big decline in FY2020 of -57.94%.
Overall, the growth in NOA results tell me that GrainCorp has been decreasing investment in its NOA. The large decline in FY2020 was probably due to the demerger of their malt business. In FY2020, the firm’s operating assets, in particular, were decreased substantially.
Growth in Shareholders’ Equity
The growth in shareholders’ equity is a ratio based on the reformulated financial statements, measuring the level of equity growth, if any, from the previous financial year to the current financial year. Any significant change in the book value of shareholders’ equity might indicate an adjustment in the value of assets held, such as a demerger resulting in an exit of equity and a large reduction, or the result of the net earnings into retained earnings, such as a large profit or loss (Kumar, 2019). If the number is positive and large, the firm’s book value of equity has grown, and this is usually a positive sign for investors if issued shares remain the same or at a similar level. If the number is negative and large, the firm’s book value of equity has declined, and this is usually a negative sign for investors if issued shares remain the same or at a similar level.
GrainCorp has had a declining amount of shareholders’ equity over the last few years. The equity has gone from 4.40% growth in FY2018 to a -5.45% decline in FY2019 and a large decline of -40.35% in FY2020.
Overall, the growth in shareholders’ equity results tell me that GrainCorp has seen a declining amount of shareholders’ equity since FY2018, which could trigger an issue of ordinary shares in the near future. The number of registered issued ordinary shares was similar between FY2019 and FY2020, but FY2018 had less shares. The shares were 228,471,717 for FY2018; 228,853,728 for FY2019; and 228,855,628 for FY2020. The exchange differences on translation of foreign operations in FY2019 helped to offset some of the negative total comprehensive income for the year. This mitigated the decline in equity for FY2019. FY2019 was a bad year and the FY2019 decline in equity was a bad sign for investors. There was a demerger of GrainCorp’s malt business in FY2020, which saw a large decline in contributed equity and reserves. Despite the large positive total comprehensive income for the year lifting retained earnings, the FY2020 decline in equity was a negative sign for investors as the issued shares remained at a similar level to FY2019. However, the demerger was probably necessary, unlocking much-needed financing, given that the poor performance of FY2019 left GrainCorp in a precarious financial position.
Free Cash Flow
The free cash flow is a ratio based on the reformulated financial statements, showing the amount of money that the firm has available to distribute to its shareholders, debt suppliers or reinvest back into the business, after the operating expenses, taxes and the required net investment for the business have been deducted from the OI (Turner, 2021a, pp. 5-6). Given the OI and the changes in NOA, the free cash flow (FCF) ratio could reveal how large the OI has been or the amount of net investment in NOA required to earn that level of OI (Turner, 2021a, p. 6). The higher the number, the greater the firm’s capacity to pay out dividends in the following financial year and the greater the firm’s prospects for future business growth.
GrainCorp has had poor negative free cash flow (FCF) for FY2018 and FY2019, until a significant improvement in FY2020. FY2018 had a moderately negative FCF result with -$145.0 million, as did FY2019 with -$153.9 million. There was a massive turnaround in FY2020, delivering a FCF of $1,937.6 million.
Overall, the FCF results tell me that GrainCorp has not had the surplus money from operating earnings to pay dividends, pay off debt or to reinvest back into the business, until the turnaround in FY2020. The operating income (OI) was great and the net operating assets (NOA) decreased a lot in FY2020, and this is what caused the massive increase of FCF. Regardless of the forecast for FY2021, the FY2020 FCF result shows that GrainCorp has been positioned to have that good capacity to pay out dividends in the following financial year and to advance for future business growth.
Implicit Interest After Tax
The implicit interest after tax ratio presents an interest rate allowance for the use of operating liabilities (OL), as an opportunity cost of acquiring a traditional short-term commercial business loan instead. It is assumed that the cost of debt from an alternative debt provider would be the same as that from a reasonable supplier of credit. The interest rate is based on the short-term borrowing rate, usually equal to the lenders’ interest rates for business, set by the Reserve Bank of Australia (RBA) (Reserve Bank of Australia, 2021). The tax benefit is accounted for to leave an after-tax interest rate, and so the ratio presents the bare cost of using the OL to support operations.
GrainCorp has had modest implicit interest after tax ratio results, due to the low short-term interest rates. The implicit interest after tax was $9.6 million in FY2017, rising to $12.2 million in FY2018, approximately returning to the FY2017 level of $9.7 million for FY2019, and then falling by more than 50% to $4.5 million in FY2020. These results followed the same trend movements in short-term borrowing rates and OL from FY2017 to FY2020.
Overall, the implicit interest after tax ratio results tell me that GrainCorp has had low cost operating debt. Given that the cost has been low, the levels of OL can be higher. However, it seems that the amounts of OL held have followed the level of short-term borrowing rates. That is, when OL was higher, the short-term borrowing rate has higher. When OL was lower, the rate was lower. In any case, OL was reduced in FY2020, and the short-term borrowing rate was less than 1%. The FY2020 result confirms the opportunity for GrainCorp to take on more OL, given the low cost, if required, further consolidating their financial flexibility.
Economic Profit
The economic profit ratio presents the return the firm has made from its investment in NOA, over and above its cost of capital for its operations (Turner, 2021a, p. 5). The higher the number, the more profitable the firm has been in adding value for its equity investors (Turner, 2021a, p. 6). This may be due to the ability to earn profits at levels over and above the cost of capital for operations or the increased level of NOA which have the ability to earn profits at levels over and above the cost of capital for operations (Turner, 2021a, p. 5).
Before FY2020, GrainCorp has had worsening negative economic profit results since FY2017. In FY2017, the economic profit was negative with -$56.9 million. In FY2018, it was bigger with -$100.2 million. In FY2019, it was even worse, being a large -$324.4 million. Things turned around moderately in FY2020 with a positive economic profit of $83.9 million.
Overall, the economic profit results tell me that GrainCorp has not successful in generating value for equity investors of late, until FY2020. Again, it seems to me that accounting is more than the numbers. In FY2017, the numbers might have indicated that GrainCorp was doing well, with a return on equity (ROE) of 8.82% and a return on net operating assets (RNOA) of 6.88%, for example. However, the firm was not generating profits, as measured in the RNOA from its operations, over and above the cost of capital for operations. GrainCorp has prospered and added value for equity investors in FY2020, even with a high cost of capital for operations, being 9.14%. The RNOA for FY2020 was 15.79%. The economic profit could have been higher as well, was it not for the NOA falling from $3,000.2 million to $1,261.9 million. However, GrainCorp have demonstrated a good ability to earn more with less NOA, in FY2020. Although the firm is well positioned to do well in the future, there does seem to be high risk inherent in their business model and the nature of their operations, as reflected in the cost of capital for operations remaining around 9% per annum. This makes GrainCorp more vulnerable to not adding value in the bad years.
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Reserve Bank of Australia. (2021b). F7 Business lending rates: Statistical table. https://rba.gov.au/statistics/tables/xls/f07hist.xls?v=2021-05-28-20-40-56
Turner, M. (2021a). ACCT13017 financial statement analysis: Study guide Term 1 2021 – Chapter 1. CQU Moodle https://moodle.cqu.edu.au
Turner, M. (2021b). ACCT13017 financial statement analysis: Study guide Term 1 2021 – Chapter 4. CQU Moodle https://moodle.cqu.edu.au
Vaidya, D. (n.d.). Ratio Analysis – Definition, Formula, Calculate Top 32 Ratios. WallStreetMojo. https://www.wallstreetmojo.com/ratio-analysis/#gross
Reinstating the Restating
My comments and responses to restating my firm’s financial statements
I still found the job of restating my firm’s financial statements a bit tricky. In fact, I found it quite difficult! Knowing more about accounting actually made it harder. The more I know, the more I look into the financial statements and their accompanying notes. Not only this, but I also like to be precise and break certain amounts up if I see further underlying items of significance.
It was so refreshing to see Dr Maria Tyler again in the videos for restating the financial statements in Excel. She did an amazing job with those videos. They were helpful. With those videos, I noticed that Dr Tyler had her financial statements reading from left to right, with her financial years. After noticing this, I looked into Dr Martin Turner’s restated financial statements in chapter four of the study guide, only to find out that he had it this way too. I then proceeded to become quite concerned, because I had my statements reading from right to left, and decided to ask other students on Facebook what they made of this. Lisa O’Neill and Dr Turner implied that it did not matter that much.
I had some issues with borrowings and provisions. With borrowings, I had to discern the real financial obligations from the operating liabilities. Borrowings are, of course, financial obligations. However, separating the operating from the financing made me see things differently, in that I had to be careful about how I was thinking about liabilities. That is, determining which ones are for financing and which ones are just simply a part of their operating activities, like trade payables. The process of separating all of the accounting items is very much an item-by-item approach! I also had a small issue with provisions, forgetting what they really are. After watching Dr Turner’s YouTube video about provisions, I remembered. And one thing is for sure, they are certainly not great big pots of gold reserved in the company!
Dealing with the derivative financial instruments was really difficult! These appeared in all areas of the balance sheet, including the current assets, non-current assets, current liabilities and non-current liabilities. Discerning between the operating and financing would have been easier if they did not the interest rate swap contracts, because these derivatives related to the borrowings. I had to find out the contributions of these derivatives to income as well. It was hard to judge the total fair value changes of these derivatives because the total changes were not told in the annual report necessarily. However, there was enough information on the type of contracts, being current or non-current, as well as the fair value change in each period. Knowing what new contracts there were likely to be, was a big help in sorting out the fair value changes from year to year. These derivatives were a part of a cash flow hedge. As such, I had to investigate and revise what the accounting treatment for cash flow hedge derivatives was. According to paragraph 6.5.11(b) of AASB 9, a gain or loss on the subsequent measurement of a hedging instrument is included in other comprehensive income (OCI) (Loftus et al., 2020, p. 820). Having been stored from OCI into the cash flow hedge equity reserve, the amount is removed through OCI when the contract is finished, and the amount in the reserve after the reclassification adjustment becomes zero (Loftus et al., 2020, p. 822).
I had an issue with what to do with the United Malt Group (ASX: UMG) profit after tax and the related OCI. However, I determined from the annual report that the decision to demerge GrainCorp’s malting and craft brewing business was not purely to acquire financing. So this was good, as I could just left it alone and as is.
I got really stuck with adding positives and negatives. This was an issue causing me much confusion. For instance, subtracting positives from negatives produces different results from adding positives to negatives. Each one is applicable in different situations though. So I had to figure this out. So annoying!
I also got tricked with Dr Turner’s restated income statement in chapter four of the study guide. For example, Ryman Healthcare had a positive reported tax amount for 2020. I thought it was an expense and made this item positive in my spreadsheet as well. However, most of the time, this item is not positive, as it is an expense. So I had to figure this issue out. Very frustrating for me!
Later on, I had to go back and make an extra adjustment for the crop production contract derivative, as it is for financing underlying the operations. This required quite a bit of other work as well, such as increasing the financial income, and getting the positives and negatives right in the calculations.
Thanks to feedback from Keelyn Hunter (that great CQU student), I was also able to find out about my restated income statement’s comprehensive income after tax (CI) not reconciling with my income statement’s total comprehensive income, for both 2020 and 2018. There was rounding issues with the calculations concerning the deferred income tax calculations on the fair value changes for the interest rate swap contracts in the cash flow hedge. The lesson for me was to have everything link. I did not do this initially, and so I had problems. This was annoying. Having to develop great big formulas to work around variable positive and negative numbers. That is, if a number is not consistently positive or negative from year to year, then I really need to write a formula to automatically handle this rather than me just lazily typing in the right number manually.
From restating my firm’s financial statements, I learnt that there is not a lot that I can really gain from seeing the financing activities of the firm. This is because they only deal with the equity and debt markets, to acquire financing to support the firm’s operations (Turner, 2018, p. 6). They are not really the focus of the core business of the firm. By mentally ignoring the financing activities, I was able to look at the core business of the firm more. Restating the financial statements does help me to look at the business as the business, the very image in my head. That is, when I am looking at a business, I am not very interested in how it is financed necessarily. This is only a small concern. The bigger concern is the business, and its operating activities.
Overall, for me, the job of restating the financial statements was time-consuming, difficult, confusing at times and complex. Second time around, after doing it in ACCT11059 Accounting, Learning and Online Communication, it was not quicker, easier, without confusion and simpler. With practice, it will get easier. Nevertheless, the more I know about accounting, the more advanced and complex I will make it.
References:
Loftus, J., Leo, K. J., Daniliuc, S., Boys, N., Luke, B., Ang, H. N., & Byrnes, K. (2020). Financial reporting (3rd ed.). John Wiley & Sons Australia.
Turner, M. (2018). ACCT11059 accounting, learning and online communication: Study guide Term 1 2018 – Chapter 4. CQU Moodle https://moodle.cqu.edu.au
Media Links for GrainCorp Limited
News Articles – About the Firm
(2020-11-19) Record-breaking day for GrainCorp as farmers rejoice over bumper winter harvest
News Articles – About the Agribusiness
News Articles – About the Processing Business
(2021-03-24) Australian hay growers brace for China hit as export permits lapse amid trade tensions
(2020-10-28) Strong global demand for Australian canola puts growers in box seat
News Articles – About Opportunities and Challenges
(2021-03-02) Agriculture’s record year, but challenges remain
(2021-02-27) Russia’s wheat export tax expected to deliver big pay day for Australian farmers
Blog Posts – About the Firm
(2021-03-26) Technical Analysis: 26 March 2021
(2020-05-18) ASX stocks under spotlight: GrainCorp, Charter Hall, Resolute Mining, Saracen Mineral
Blog Posts – About the Agribusiness
(2020-08-03) Australian agribusiness in disruption due to COVID-19
(2019-07-03) Australian Grain & Rice Shortage 2019
Blog Posts – About the Processing Business
(n.d.) Wiley secures contract to expand and upgrade GrainCorp Foods’ processing facility in Victoria
(2020-12-07) 15 Largest edible oil companies in the world
Blog Posts – About Opportunities and Challenges
(2021-01-05) CSIRO ‘gene sandwich’ to enhance wheat rust resistance
(2020-09-11) Demographic change unleashes opportunities for Australia’s grains industry
(2020-04-03) Beyond the virus: will there continue to be a shortfall of skills in agriculture?
(2017-01-25) Changing climate has stalled Australian wheat yields: study
Videos – About the Firm
GrainCorp: A look back at 2020 (03:59 mins)
GrainCorp Full Year Results 2020 (06:03 mins)
Morgans Best Ideas: Grain Corp (ASX:GNC) – Belinda Moore, Senior Analyst (02:21 mins)
Videos – About the Agribusiness
Investing in Australia – Agribusiness (01:21 mins)
AgriBusiness | Knight Frank Australia (01:25 mins)
Videos – About the Processing Business
Australian Canola: good for you, good for the country (04:34 mins)
Australian innovation in Food and AgTech (03:16 mins)
Videos – About the Opportunities and Challenges
A roadmap for the future of Australia’s Food & Agribusiness sector (01:29 mins)
Transforming food and agribusiness industries with Blockchain and emerging technologies (03:30 mins)
Promoting Australian-Grown food innovation to South East Asia (02:17 mins)
GrainCorp Limited
GrainCorp Limited (ASX: GNC) is an Australian agriculture and processing business dealing in agricultural commodities (GrainCorp Limited, n.d.). Through their supply chain, they connect farm growers to domestic and international customers (GrainCorp Limited, n.d.). They take and deliver several grown grains, pulses and oilseeds (GrainCorp Limited, n.d.). In their processing business, they produce edible oils, biofuel components and animal feeds (GrainCorp Limited, n.d.). They also produce oils and shortenings for the food production industry (GrainCorp Limited, n.d.).
GrainCorp has a vision to lead innovative and sustainable agriculture through expertise, innovation and leading technologies (GrainCorp Limited, n.d.). They are committed to an efficient supply chain and quality assurance (GrainCorp Limited, n.d.). They also believe in the values of teamwork, leadership, inclusivity, integrity, innovation, responsibility, accountability, safety, customer delivery and customer communications (GrainCorp Limited, n.d.).
GrainCorp sources its commodities from Australia, the United Kingdom, Ukraine and Canada (GrainCorp Limited, n.d.) They ship to customers anywhere in the world, with the help of marketers in China, India and Singapore as well as a network of grain, pulse and oilseed specialists (GrainCorp Limited, n.d.). They have been around for over 100 years, and their logo is shown in Figure 1 below.
Figure 1
GrainCorp Limited Logo
Note. The GrainCorp Limited logo. From GrainCorp Limited 2020 Annual Report, by GrainCorp Limited, 2020 (https://www.graincorp.com.au/wp-content/uploads/2021/02/2020-Annual-Report.pdf).
References:
GrainCorp Limited (2020). GrainCorp Limited 2020 annual report. https://www.graincorp.com.au/wp-content/uploads/2021/02/2020-Annual-Report.pdf
GrainCorp Limited (n.d.). About us. https://www.graincorp.com.au/about-us/
ACCT13017 ASS#1 Steps 3-5 & 7-8 Draft Work
Scoring Big Quickly on PeerWise – Another PeerWise Theory
Do you need to lift your score on PeerWise? Are you wondering why your score just isn’t getting up as fast as you would like?
First of all, let’s review the ways one scores on PeerWise. According to PeerWise, one will only score when another student endorses, matches or agrees with your contribution. A contribution could be a question, a comment, an answer or a rating.
Now, from my experience, the quickest way to increase your score on PeerWise is to simply answer and rate as many as new questions as possible. Of course, creating questions and leaving comments are necessary as part of ACCT13017’s requirements. We should, therefore, be complying. However, these tasks are more time consuming, requiring stop-and-start typing; whereas answering and rating requires only the use of your mouse (or touch with a touch screen). Hence, in considering speed of progress, answering and rating questions is quicker than creating questions and leaving comments. By answering and rating new questions, particularly early on at the start of the Term, you will find that other students will be endorsing, matching or agreeing with your contributions naturally. For example, suppose you are the first one to answer and rate 10 new questions, which are ‘easy’ and ‘good’, in Week 1. It is likely that a good number of students will also answer and rate these questions in a similar way to you, and so your score will increase quickly. Alternatively, by just answering and rating new questions, even if you are not the first one to do so, you may find that this helps to quickly increase your score as well. The key is to make fast and easy contributions that are likely to be endorsed, matched or agreed with by others early on in the Term while the volume of student activity on PeerWise is high.
Remember, this is only a theory! Each student may have different experiences. Nevertheless, I encourage you to test the theory for yourself.
The Mystery of the Intrinsic Value of a Firm
One of the key concepts that might be a mystery to students after reading Chapter 1 of the ACCT13017 Study Guide is ‘the intrinsic value of a firm’. Well, perhaps this video (below) might throw a little more light on the subject, and could serve as a complement to Chapter 1. I came across this video about this time last year. For me, it brings the ACCT13017 Financial Statement Analysis unit into an exciting context, and even reviews a few concepts from ACCT19061 Advanced Financial Accounting. If you like Warren Buffett, then this will especially come to you as a treat. Enjoy!
Reference:
Cooper Academy. (2020, March 11). Warren Buffett: Should we buy stocks now or wait? [Video]. YouTube. https://www.youtube.com/watch?v=Tkimihccefs
Starting ACCT13017
Well, HE Term 1 2021 has started.
This term I am doing ACCT13017 Financial Statement Analysis at CQU.
This unit is very similar in structure to ACCT11059, which I did 36 months ago.
I am required to use this blog for ACCT13017. This is the exciting capstone unit in CQU’s Bachelor of Accounting degree. In this unit, we shall reach the top of the accounting mountain and see the glorious vista that is the ultimate usefulness of accounting in the context of understanding the economic and business realities of a firm, realising that accounting is not just about the numbers. See Figure 1 below for hopefully what that vista will be equal to, as a minimum.
Figure 1
Beautiful Vista on a Mountain Top
Note. Vista from a mountain top. From Pexels, by Felix Mittermeier, n.d. (https://www.pexels.com/photo/forest-aerial-photography-1146127/). Copyright 2021 by Pexels. Reprinted with permission.
Reference:
Pixels. (n.d.). Forest aerial photography [online image]. Retrieved from https://www.pexels.com/photo/forest-aerial-photography-1146127/
