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INTRODUCTION

Corporate finance field deals with the aspects of funding sources and capital structure of the corporation. Such field presents action which manager should take for increasing the value of firm to the shareholders. The present report is based on Vita Life Sciences, a leading Australian owned pharmaceutical and healthcare unit. It is one of the well-known and established brands throughout Asia and Australia. Brand portfolio of the company is wide which in turn includes g Herbs of gold, Vita Health, Vita Science and Vita life. In this, report will provide deeper insight about the core activities of VLS and shareholders. Report will also shed light on the key ratios which helps in determining the extent to which monetary position and performance of the company is good. Further, report also exhibits share price movement of VLS in against to the All Ordinaries Index. It will also present whether such business unit should be included in the portfolio or not.

Questions

1. Brief description of the organisation

Vita Life Sciences Ltd is one of the leading pharmaceutical company headquartered in Australia and has several branches in all over the world. Organisation is engaged in formulating, packaging and sales and distribution of healthcare products to customers across the globe. It provides vitamins and supplements to consumers in the best possible manner. Vita Life Sciences Ltd has operations in Malaysia, Singapore, Other Asian nations and home country Australia as well. In relation to this, revenue has been considerably increased in 2017 as compared to 2016 with huge margin which shows that company is making use of resources and as such, generating profits up to high extent by satisfying customers quite effectually (Vita Life Sciences. 2018). This is evident from the fact that revenue was increased up to 6.7 % in Malaysian market over the previous financial year.

On the other hand, revenue declined by 1 % in Singapore in comparison to 2016 figures. The main reason behind this reduction was increment in advertising and promotional expenditures for maintaining trading in the country in the best possible manner and as such, retail sales were to be effectively maintained. However, other Asian countries such as Vietnam, Thailand and Indonesia, revenue was increased in the financial year 2017 by 15 % in comparison to previous figures. Major growth in sales and revenue was identified in Vietnam in 2017 financial year. This implies that Vita Life Sciences Ltd has been successful in its operations quite effectually.

The company's history had been quite impressive that highlights present picture in effective manner. Vita health was commenced in Singapore in 1947. Moreover, in 1973, business opened its own brand of supplements and vitamins. Afterwards, revenue was consistently maximised and Herbs of Gold was founded in 1989 and thus, health foods were being supplied by it (Moreno-Bromberg and Rochet, 2018). In 2001, Vita Life Sciences acquired Herbs of Gold. Moreover, business has expanded its operations in several nations. The core activities of the organisation are development and formulation of OTC (Over The Counter) medicines and distribution of the same. Moreover, complementary and alternative medications are also formulated and offer for sale to customers. Another core activity of business is to provide dietary supplements and health related foods are also sold under varied brand names in various nations. Thus, quality assured products are made for enhancing customer satisfaction.

2. Ownership-governance structure of company

The main shareholders of Vita Life Sciences Ltd are Mr Vanda R Gould and Mr Shane Teoh. They are the directors of the company with more than 20 % of shareholdings in the shares of organisation. In this aspect, Mr Vanda R Gould has 51.30 % and Mr Shane Teoh has nearly 42.44 % of shareholding in the company. It can be said that both of these directors have substantial part of shares in their holdings. On the other hand, other directors are Mr Andrew O'Keefe, Mr Jonathan J Tooth and Mr Henry G Townsing. It clearly highlights that Mr Vanda R Gould and Mr Shane Teoh both have major shareholdings in the company. Furthermore, it also shows that firm is non-family company as no members have similar surnames in the organisation. This is evident from the fact that firm's governance is managed by different personnels (Rocheteau, Wright and Zhang, 2018).

The main people involved in the company's governance are CEO (Chief Executive Officer of Australia is Mr Andrew O'Keefe. While Chairman of the company is Mr Henry G Townsing. On the other hand, Board members are Chin L Khoo who is Company Secretary and CFO (Chief Financial Officer).  Mr Shane Teoh is Non-executive director and Mr Vanda R Gould is also Non-executive director and Mr Jonathan J Tooth is on the same post as well. Mr Henry G Townsing having more than 5 % of shareholding is present in corporate governance and  other directors such as Vanda R Gould and Mr Shane Teoh are also engaged in firm's governance. Thus, it can be stated that Vita Life Sciences Ltd is classified as non-family company involving no family members in the ownership-governance structure. 

3. Computation of financial ratios

  1. Financial ratios of past four years starting from 2014 to 2017

Particulars

Formula

2014

2015

2016

2017

Return on Assets

(NPAT / Total Assets)

27.85

14.02

10.33

8.77

 

 

 

 

 

 

Return on Equity

(Net Profit After Tax / Ordinary Equity)

38.67

19.83

14.55

11.96

 

 

 

 

 

 

Debt Ratio

Total Liabilities / Total Assets

0.3

0.31

0.28

0.24

 

  1. Explain phenomenon of Total assets and Owner's Equity

The Total Assets (TA) and Owner's Equity (OE) is the relationship of organisation's total assets to that of part owned by shareholders of company. The phenomenon captured by TA/ OE variable is that it shows how effectively firm is utilising total assets to generate sales and giving out return on owners' equity in the form of dividend by producing desired profits in the best possible manner. This is essential for business to earn profits in order to enrich shareholders and maximise their wealth with much ease. It is required so that more investment may be garnered by the company quite effectually (Mulherin, Netter and Poulsen, 2018). The investor is planning to invest in the company an amount of 10 million for generating returns.

Return on Assets and Return on Owners Equity is quite useful for organisation in order to ascertain profitability position in the best possible manner. Vita Life Sciences Ltd has overall good revenue in past four years. However, ROA is declined in recent years. This is evident from the fact that ROA in 2014 was 27.85 % which reduced to 14.03 % in next year. On the other hand, ratio in 2016 was further minimised to 10.33 %. While, in 2017, it was 8.77 %. This means that company's ROA is considerably decreased from 2014 to 2017. This implies that firm is unable to effectively utilise its assets to generate sales and as such, it is declined in subsequent years.

On the other hand, ROE means that how effectively company uses its shareholders' investment to produce net income in the best possible way (Dang, Li and Yang, 2018). The ratio was 38.67 % in 2014, while in next year was 19.83 % which was significantly declined. Furthermore, ROE was 14.55 % in 2016 and 11.96 % in 2017 financial year. This clearly shows that Vita Life Sciences Ltd is not effectively utilising shareholders' money in optimised manner. ROA and ROE are integral part of the company as it led to ascertain true profitability position in effective manner. In relation to this, organisation has adequate revenue but ROA and ROE is not good which implies that these two ratios computed highlights inefficiency of company in generating sales with regards to assets and shareholder's investment. It is impacting firm's profitability adversely.

  1. Discussing why ROE is greater than ROA

ROE and ROA of the organisation is however decreasing in the recent years. In this aspect, firm has low ROA in comparison to ROE that highlights company's debt is increasing (Mizen, Packer, Remolona and Tsoukas, 2018). This is not good for Vita Life Sciences Ltd as it leads to increase in loan repayment instalments to creditors. Furthermore, solvency position of company is also impacted adversely. Moreover, higher debts led to decrease in ROA which is adverse situation for company.

4. Preparation of graph in monthly share price of organisation

Monthly price shares of Vita Life Sciences

The above graph represents monthly price of shares over last two years of the company. It shows that company performance over last two years is not good. This is evident from the fact that organisation's shares are gone down. Furthermore, value of beta is 0.81 which means that investor has moderate risk while investing in the company. Beta shows that firm has moderate volatility and as such, investor can expect return in long run. Moreover, organisation is required to utilise assets and shareholders' investment for increasing profitability aspect in effective manner.

5. Factors influencing shares price of company

  1. Impact of competitors-

            The competitors' strategies affect market price of shares quite adversely. This shows that with well-structured strategies implemented by the rivals, prices are affected. It is also evident from the fact that Vita Life Sciences Ltd share prices are affected by strategies implemented by competitors (Hansen, 2018).

  1. Macroeconomic factors-

            This is another factor that affects price shares. Macroeconomic factors such as inflation rate, exchange rate, supply of money leads to decrease in market price of shares.

  1. Changes in analysts forecast-

            It is another factor affecting shares price of Vita Life Sciences Ltd quite adversely. If analysts are changed frequently, then forecasts may be affected as no two analysts has same forecast principles (Armour and Enriques, 2018).

  1. Unusual write-offs-

            Unusual write-offs also led to change in share prices of the company. If amount from debtors is write-off in the year and is received afterwards influences shares of organisation.

  1. Management changes-

            Management is important part of company as when frequent changes occurs in organisation's management team, then prices of shares are affected.

6.

1. Beta value of the company

From assessment, it has identified that beta value of Vita Life Sciences account for .81 respectively. Referring beta value, it can be depicted that stock or shares of the company are volatile in nature to some extent (Vita Life Sciences Ltd, 2018). Moreover, beta of securities with less than 1 considered as less volatile in comparison to the market from theoretical perspective.

2. Assessing required rate of return

Computation of required rate of return

Particulars

Figures

Beta value

.81

Risk free rate (Rf)

4%

Market risk premium (Rm –Rf)

6%

Expected market return (Rm)

10%

Required rate of return

Rf + beta  (Rm – Rf)

8.86%

 

On the basis of CAPM model, in against to the risk undertaken shareholders are expecting 8.9% return from the stocks of VLS.

3. Stating whether company chosen for the investment purpose comes under the category of conservative

            Conservative investment implies for the one where investor lays high level of emphasis on investing money in the lower risk securities such as fixed income and business units with large capitalization (Häusermann, 2018). Hence, referring beta value (.81) and market capitalization ($42.78 million) it can be presented that chosen company does not fall into the category of conservative investment. Moreover, in this, beta value is higher such as .81 significantly and market capitalization of the company considered as lower. Thus, all such aspects clearly present that company selected for the investment purpose such as VLS is not a conservative investment.

7.

1. Assessing WACC for VLS

Weighted average cost of capital

Particulars 

Figures

Share Price

0.78

Shares O/S

56,717,026

 

 

Market Cap (E)

44239280.28

 

 

Stock Beta

0.81

Risk Free Rate

0.04

(e.g. return on 10 year treasury bonds)

 

Required Market Return

0.1

 

 

Market Risk Premium

0.06

 

 

Cost of Equity

8.9%

 

Particulars

Figures

Weights

Equity

44239280.28

0.96

Debt

1987000

0.04

 

 

 

Total 

46226280

1

 

Particulars

Figures

Interest rate

5% (Interest rates in Australia, 2018)

Tax rate

30% (Company tax rates, 2018)

 

 

WACC = ke * weight of equity + interest rate * weight of debt (1 – tax rate) (García, 2017)

WACC = 0.089 * .96 + 0.05 * .04 (1 - .30)

              = 0.085 + 0.05 * 0.028

= 0.085 + 0.0014

= 0.0868 or 8.7%

2. Explaining the implications of high WACC on management’s evaluation pertaining to the prospective investment projects

            By doing assessment, it has found that high WACC has greater impact on the evaluation of prospective investment projects. Level of WACC decreases when firm takes resort of debt sources rather than equities. High WACC presents that greater risk is associated with the firm’s operations. Hence, in the case of investment projects, high WACC shows lower level of return with the investment project and thereby affects decision.

8.

1. Analyzing debt ratio of Vita Life Sciences in relation to the past two years 

Debt-equity ratio: This measure presents the manner in which business entity has fulfilled its monetary requirements through either debt or equity and both. In other words, debt-equity ratio presents how much loan undertaken and shares are issues for financing business projects.

Computation of debt-equity ratio for the accounting year 2016 and 2017 is as follows:

Particulars

2016

2017

 Long-term debt

2

2

Shareholders’ equity

23

25

Debt-equity ratio

0.09

0.08

 

The above depicted table shows that, in the accounting year 2016 and 2017, debt-equity ratio of VLS accounted for 0.09 & 0.08 respectively. Hence, decreasing trend has assessed in the debt-equity measure of VLS over the time frame. Considering the current results or outcomes it can be depicted that debt-equity position of VLS was not good in the period of 2016 & 2017. On the basis of standards, solvency position of the company can said to be effectual when debt-equity ratio is equal to or in line with .5:1. Currently, capital structure of the company does not appear as stable. The rationale behind this, business unit has fulfilled most of its financial needs or requirements through equity shares rather than debt. Thus, for developing optimal capital structure VLS should make focus on following .5:1 ratio. On the basis of this, VLS should take resort of 1 debt in against to 2 equity shares.

2. Stating the adjustment which Vita Life Sciences have done regarding gearing ratio

In the context of gearing ratio, it has found from annual report that approximately 191204 shares were bought back for the accounting year ended on 31st December 2017. This is one of the main causes behind increase in shareholders’ equity and declining trend in the debt-equity ratio (Annual  report of VLS, 2018). 

9. Discussing dividend policy which is implementing by Vita Life Sciences

Annual report of the VLS presents that financial performance of the company for the year ended on December 2017 was good. Hence, by taking into account financial performance business unit has declared 2.25 cents as dividend per share. By doing research, it has identified that from the period of 2014 to 2017 company is offering similar dividend to the shareholders. Hence, by taking into account overall evaluation it can be presented that stable or constant dividend policy is followed by VLS. Company undertakes and implements such dividend policy with the motive to maintain the faith of shareholders in the company’s operations.

10. Giving recommendation to the client whether such company needs to be included in the investment portfolio or not

To

The Client

Date: 23rd April 2018

 

Subject: Investment decision and evaluation

 

This is to inform you that VLS is one of the leading and well-known brand of pharmaceutical sector. Ratio analysis has been conducted to analyze or evaluate profitability aspect of the business unit. Hence, from ratio analysis, it has found that profitability position of VLS has decreased over the time frame. In comparison to the prior years, ROA and ROE of VLS at the end of accounting year 2017 accounted for 8.77% & 11.96% respectively. Decreasing trend of ratio shows that in the accounting year 2017 business unit failed to make effectual use of assets and investment made by the shareholders. It is reported to the client that debt-equity position of VLS was not good in the year of 2016. Currently, business unit is following regular and constant dividend policy. Investment in the securities of VLS does not considered as conservative. Moreover, beta value is within the range of .75-41 which in turn shows moderate risk level. Besides this, WACC pertaining to VLS implies for 8.7% significantly which is neither too high nor too lower. Hence, if client prefers investing money in the securities with high and moderate risk level then it might offer high returns in the long run. In accordance with the value investing approaches, investment should be made in the securities with high PE ratio>10, profitability and solvency position. In the context of VLS, profitability and solvency position of the company was not good. In addition to this, due to high beta and low market capitalization value investment in the shares of VLS is not considered as conservative. Thus, investor should avoid making investment in the shares or stocks of VLS. Hence, client should not include VLS security in his/her portfolio. 

 

From

Financial analysts

 

CONCLUSION

By summing up this report, it has been concluded that VLS has built and maintained wide product portfolio. Company is focusing on providing customers with the high quality pharmaceutical products or services. Besides this, it can be seen in the report that profitability level of the company was decreased over the time period. Further, it has been articulated that capital structure maintained by VLS is not optimal. It can be summarized from the report that weighted average cost of capital pertaining to VLS implies for 8.6% significantly. In addition to this, it can be depicted from the evaluation that VLS is offering dividend to the shareholders regularly or each year. However, such business unit will prove to be fruitful for investment purpose only in long run. If investor wishes to earn fixed or suitable return by investing money lower risky securities then VLS stocks should not be included in the portfolio. 

REFERENCES

  • Armour, J. and Enriques, L., 2018. The Promise and Perils of Crowdfunding: Between Corporate Finance and Consumer Contracts. The Modern Law Review. 81(1). pp.51-84.
  • Dang, C., Li, Z. F. and Yang, C., 2018. Measuring firm size in empirical corporate finance. Journal of Banking & Finance. 86. pp.159-176.
  • García, F. J. P., 2017. The WACC. In Financial Risk Management (pp. 345-351). Palgrave Macmillan, Cham.
  • Hansen, C. B., 2018. Peter Birch Sørensen University of Copenhagen:" Taxation and the optimal constraint on corporate debt finance: Why a comprehensive business income tax is suboptimal". Virtual Reality.
  • Häusermann, S., 2018. The multidimensional politics of social investment in conservative welfare regimes: family policy reform between social transfers and social investment. Journal of European Public Policy. 25(6). pp.862-877.
  • Lee, H. and Park, K., 2018. Advances in the corporate finance literature: a survey of recent studies on Korea. Managerial Finance. 44(1). pp.5-25.
  • Mizen, P., Packer, F., Remolona, E. and Tsoukas, S., 2018.Original sin in corporate finance: New evidence from Asian bond issuers in onshore and offshore markets (No. 2018/04).
  • Moreno-Bromberg, S. and Rochet, J. C., 2018. Continuous-Time Models in Corporate Finance, Banking, and Insurance: A User's Guide. Princeton University Press.
  • Mulherin, J. H., Netter, J. M. and Poulsen, A. B., 2018. Observations on research and publishing from nineteen years as editors of the Journal of Corporate Finance. Journal of Corporate Finance.
  • Rocheteau, G., Wright, R. and Zhang, C., 2018. Corporate finance and monetary policy. American Economic Review.108(4-5). pp.1147-86.

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