Predicting the future with absolute certainty is basically impossible, but what we can do is take a look at past and current trends to make a reasonable guess on what the future may hold. This can be done for many things in life, even companies. While the past is not a perfect indicator of a company’s future, I think we can use past trends to help determine future success – especially in established companies, like Blackmores (my company). Having been around for many years, decades even, it is easier to make assumptions about the future compared to newer companies or areas of business. In the 90s and early 2000s, it would have been difficult to predict how successful an e-commerce business would have been with such little knowledge of the internet. However, in 2023, we have a lot of research and evidence that shows us how successful e-commerce may be.
A firm’s economic and business drivers
The economic and business of a firm can greatly impact its future success and roadblocks. The study guide identifies the key drivers for Ryman Healthcare and their effect on the profit margins and return on net operating assets. From this, I have tried to determine some key drivers for Blackmores (that will be used in later steps of this assignment):
- The increasing cost of manufacturing and shipping, including the cost of goods produced
- Increasing interest in health and vitamins, including alternative medicines. I have found myself looking at news articles surrounding my company and the vitamin and supplement area more often – I found an interesting article regarding companies, such as Blackmores, developing vitamins and supplements that focus on mental health and sleep (Koe, 2023). This has the potential for the company to see large growth as we have seen a big shift in the need for individuals to focus on and take care of their mental health and sleep schedules.
- Industry competition – Blackmores in the leading vitamin and supplement supplier in Australia
- Company reputation – Another interesting article that has just come out, Kirin Holdings Company is set to be acquire majority shares in Blackmores – the deal does not appear to be finalised but a change in ownership or majority share owner has the potential to impact a company’s reputation and future (So, 2023).
The firm
A review of my restated financials it appears that, similar to Ryman’s, the financial income and expenses do not appear to add value to the firm and therefore including this in our analysis may be more effort than it is worth. For the purpose of our assessment two analysis we will be focusing on key drivers that impact a firm’s abnormal operating income, these were identified in the study guide as:
- Return on net operating assets (RNOA);
- Cost of capital for operations (WACC); and
- Net operating assets (NOA) put in place to earn the RNOA.
Leverage
Leverage can be used by companies to increase assets; this is done by using finance such as a loan to increase capital instead of issuing shares. The increase in assets has the potential to bring in more profit, for example – Blackmores may use finance from a bank to purchase new machinery that increased production of their vitamins. If the new machinery increased revenue more than the interest and repayments on the loan the company would see an increase on the return on equity. The opposite may happen if the new machine does not increase production in the way they intended, if the interest and repayments are more than the increased revenue the leverage will have a negative impact on the return on equity. Speaking of Blackmores, it appears that the company does not appear to have any interest bearing liabilities, which I would assume was a finance loan. In 2020 or 2021 the interest bearing liabilities were paid out and were cleared from the balance sheet.
References
Koe, T. (2023). Australia nutra trends: Market leaders Blackmores, Swisse gearing up on mental health, sleep products. Retrieved from https://www.nutraingredients-asia.com/Article/2023/05/03/Aussie-nutra-market-leaders-Blackmores-Swisse-gearing-up-on-mental-health-sleep-NPD
So, J. (2023). HSF, Thomson Geer confirm roles in $1.85bn Blackmores-Kirin deal. Retrieved from https://www.thelawyermag.com/au/practice-areas/corporate-and-ma/hsf-thomson-geer-confirm-roles-in-185bn-blackmores-kirin-deal/444959
Accounting 101 