Critical Thinking for Financial Management Assignment

Assignment Task

Subject Learning Outcomes

1. Demonstrate understanding of core contemporary financial management theory, techniques and practice.

2. Critically evaluate and effectively communicate recommendations to address financial management issues.

3. Apply financial management theory and techniques to professional practice in an ethical manner.

Task

Suppose you are the Chief Financial Analyst at TPG Telecom (TPG), one of Australia's largest companies that generates the majority of its revenue from the Telecommunications Services industry. The next Board meeting will be held in late May 2024 for strategic review. A key focus will be analysing the company's financial performance and mapping its growth pathway for the next five years. The Chief Executive Officer of TPG has now requested that you prepare a comparative financial report for the next board meeting. 

Current Ratio

The current Ratio is the ratio that measures a company’s ability to pay its short-term obligations or debt that are due shortly (Irman and Purwati 2020). The higher the current ratio means the company is in a better position to remove current debt quickly. Conversely, a current ratio that is too high, it could mean the company is not active enough and should be investing its assets more efficiently.

The table and graph above show a considerable drop in 2021 after the Covid-19 pandemic. Comparatively to Bega Cheese, who did drop but in smaller increments. A major contributing factor to PM’s larger drop in the current ratio was a large increase in their liabilities without a large increase in their current assets. Bega Cheese’s liabilities are also very similar; however, they were able to increase their current assets much more efficiently. A study conducted by Babatunde (2023) shows a positive relationship between current asset investment to financial performance. However, found it varies depending on the company’s size which is a limitation when comparing PM to Bega Cheese. Pure Milk has reduced its liabilities which has resulted in a current ratio boost, however, its current assets dropped in 2022.

DuPont Analysis Profitability can be quickly determined by the profit margin ratio. As shown in the above table and graph in section 2.3, a poor net profit resulted in a low net profit margin in 2019 for PM and Bega Cheese 2019 and 2022. This drop in net profit may be a result of higher operational costs, poor financial decisions, or a drop in stock value. Overall, the profit margins were sporadic over this period due to the pandemic but averaged out to be similar. The industry average profit margin is 0.8% so both companies are doing well in this sector (IBISWorld 2023).

Recommendations and Limitations

The current ratios show that Pure Milk is in a better position to pay off its current debts. This should be a focus area of Bega Cheese as the ratio has gradually gotten worse. After a spike in the debt ratio post-covid Pure Milk has regained control over its debt but this needs to be monitored and maintained. Net profit for both companies was sporadic over these 5 years due to the pandemic however there were positive signs outside of the pandemic. The DuPont analysis showed that the two companies were similar throughout. However, Bega Cheese’s rise in sales was the driving contributor to its slightly higher ROE. This should be Pure Milk’s focus in the immediate future. This will increase their asset turnover and net profit margins.

Due to the Covid-19 pandemic, the data was inconsistent, and a larger sample size should be explored. There was a lack of data for Pure Milk to investigate thoroughly therefore a lot of data was forced to be compared to the industry average. Due to this lack of data, it was unclear if there was a size difference between the companies.

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