RATIO ANALYSIS: FONTERRA CO-OPERATIVE GROUP LIMITED AND SAPUTO DAIRY AUSTRALIA PTY LTD

Posted: August 26th, 2021

RATIO ANALYSIS: FONTERRA CO-OPERATIVE GROUP LIMITED AND SAPUTO DAIRY AUSTRALIA PTY LTD

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Ratio Analysis: Fonterra Co-operative Group Limited and Saputo Dairy Australia Pty Ltd

Financial ratios are crucial in understanding the fundamental performance of a company. Investors seek financial ratio analysis reports to extract essential information on corporate financial statements that could help in making financial decisions(Raiyani & Bhatasna 2011, p. 103). The ratios are used in both cross-sectional and trend analysis to compare different organizational performance overtime. The primary ratios include profitability, turnover, liquidity and leverage, and dividend policy or payout ratios(Raiyani & Bhatasna 2011, p. 123). Therefore, the paper aims to conduct financial ratios analysis of two companies, that is, Fonterra Co-operative Group Limited and Saputo Dairy Australia Pty Ltd. The period of the analysis is five years, starting from 2015 to 2019.

Profitability Ratios

These refer to financial metrics used in assessing an organization’s capability to generate income compared to its balance sheet items, equity, and expenditure over time(Raiyani & Bhatasna 2011, p. 103;Lee, Chen & Lee 2019). The ratios measure a firm’s performance and are explained below;

Gross Margin

The ratio indicates the profitability of a company’s products by showing how much it costs to produce one unit of a product. It is given as a percentage of gross profit divided by net sales(Raiyani & Bhatasna 2011, p. 103-112). The analysis of Fonterra Co-operative’s statements shows that it is generating more profits as demonstrated by higher figures than Saputo Dairy Ltd across the five years. Table 1 summarizes the gross margin comparison between the two companies.

Table 1: Gross Margin Ratio Comparison

Details	2015	2016	2017	2018	2019
Fonterra Co-operative Group Limited	17.3945%	21.1175%	16.9717%	15.4565%	13.8212%
Saputo Dairy Australia Pty Ltd	9.9620%	10.6819%	11.5520%	10.9569%	9.0454%

Operating Margin

The ratio considers costs that are not related to the direct production of a company’s products, such as administrative and overhead expenditures. It is expressed as a percentage of the division of operating profit and net sales(Raiyani & Bhatasna 2011, p. 103-112). The operating margin ratio of Fonterra Co-operative has been deteriorating over time as the company is making losses. However, the case is different from Saputo Dairy Ltd since it has a better operating margin ratio,as demonstrated in Table 2.

Table 2: Operating Margin of Ration Analysis

Company	2015	2016	2017	2018	2019
Fonterra Co-operative Group Limited	1.3850%	5.9131%	0.038634	-2.1186%	-3.0079%
Saputo Dairy Australia Pty Ltd	8.9915%	6.0938%	7.4284%	5.8861%	5.8303%

Return on Assets (ROA)

It indicates how effectively an organization generates income from its non-current and current assets. It is calculated as a percentage of division between the net income and total assets. From this ratio, the ratio of Saputo Dairy Ltd is higher and performing better than Fonterra Co-operative.

Table 3: Return on Assets (ROA)

Company	2015	2016	2017	2018	2019
Fonterra Co-operative Group Limited	1.4251%	5.9411%	0.041643	-2.3924%	-3.5434%
Saputo Dairy Australia Pty Ltd	14.0919%	9.3387%	10.9154%	8.4893%	7.9631%

Return on Equity (ROE)

The ratio shows how much a firm generates from the shareholders’ investment. It is given by dividing a company’s net income with shareholders’ equity. The examination of ROE shows that Fonterra Co-operative has been generating negative returns compared to Saputo Dairy Ltd, which depicted consistency across the five years.

Table 4: Return on Equity (ROE)

Company	2015	2016	2017	2018	2019
Fonterra Co-operative Group Limited	3.919%	14.639%	10.251%	-6.820%	-10.424%
Saputo Dairy Australia Pty Ltd	26.409%	16.457%	19.182%	14.161%	14.523%

Turnover Ratios

The ratios show the efficiency of an organization. In this case, the higher the value, the more effective the organization is on every unit of assets invested. Form the table below, Saputo Dairy Ltd is more efficient than Fonterra Co-operative as it has higher costs.

Table 5: Turnover Ratio Analysis

Fonterra Co-operative
Turnover Ratio	2015	2016	2017	2018	2019
Capital employed	1.42	1.31	1.47	2.00	1.67
Total Asset	1.03	1.00	1.08	1.00	1.18
Debtors	31.00	32.00	32.27	32.00	32.63
Fixed Asset	1.03	1.43	1.64	2.00	1.79
Debt Collection period	11.94	11.49	11.31	11.25	11.19
Inventory Turnover	4.63	5.00	6.39	2.26	5.83
Saputo Dairy Ltd
Capital employed	1.90	2.70	1.74	1.72	1.70
Total Asset	1.57	1.53	1.47	1.44	1.37
Debtors	27.88	26.98	25.20	26.56	25.60
Fixed Asset	2.20	2.20	0.19	2.07	2.00
Debt Collection period	13.09	13.53	14.49	13.74	14.26
Inventory Turnover	9.90	7.07	8.78	10.20	9.26

Liquidity Ratios

The ratios indicate a company’s ability to meet the short-term obligations when the financial requirements arise(Lee, Chen & Lee 2019). The liquidity ratios of the two companies are promising, although Saputo Dairy Ltd has better rates than Fonterra Co-operative.

Table 6: Liquidity Ratios

Fonterra Co-operative
Ratio	2015	2016	2017	2018	2019
Current Ratio	1.207	1.273	1.285	1.162	1.167
Acid-Test Ratio	0.606	0.673	0.737	0.594	0.578
Cash Ratio	0.076	1.386	0.205	0.098	0.119
Saputo Dairy Ltd
Current Ratio	1.663	1.995	1.995	1.874	1.622
Acid-Test Ratio	0.811	0.420	1.012	0.919	0.752
Cash Ratio	0.062	0.0529	0.209	0.095	0.058

Dividend Policy

The payout ratio dictates dividends amount paid by a company to existing shareholders and the frequency of the payment. From table 7 below that shows the dividend policy of the two companies, the dividend policy of Fonterra Co-operative is slightly higher than Saputo Dairy Ltd.

Table 7: Dividend Policy Ratio analysis

Fonterra Co-operative
Ratio	2015	2016	2017	2018	2019
Dividend yield	0.0447	0.0729	0.067	0.017	0.022
Payout ratio	0.5269	0.5	0.435	0.417	0.588
Saputo Dairy Ltd.
Dividend yield	0.0195	0.020	0.021	0.021	0.021
Payout ratio	0.4	0.425	0.349	0.340	0.298

            Hence, from the four ratio analysis, Saputo Dairy Ltd is performing better than Fonterra Co-operative.

Trend Analysis

Fonterra Co-operative Group Limited

            Fonterra Co-operative is on a downward trend, as indicated by the five-year ratio analysis. The company has been incurring losses for the last two years, in the financial year 2018 and 2019. From the historical financial information, the forecast is that the company will continue with the same trend of incurring losses if the management does not intervene. Therefore, the company’s performance in the next five years will be on a negative trend, as indicated by the criticalfinancial ratio analyzed over the five years.

Saputo Dairy Australia Pty Ltd

            Saputo Dairy Ltd has a robust financial performance, as noted in the company’s financial reports and ratio analysis. The company has been consistently generating profits and giving shareholders returns in the form of dividends. From the five-year ratio analysis, there is a demonstration that the company will continue making profits in the future. Thus in the next five years, it will have a positive financial trend in its financial reports as indicated by the historical performance.

Reference List

Lee, C., Chen, H. & Lee, J. (2019). Financial econometrics, mathematics and statistics : theory, method and application. New York, NY: Springer

Raiyani, J. & Bhatasna, R. (2011). Financial Ratios and Financial Statement Analysis. New Delhi: New Century Publications.