Analysis Mangotta Winery

Executive Summary

The purpose of this report is to critically examine the financial health of Magnotta Wines ("firm") by examining its annual report published on March 2011. This analysis focuses on the firm's financial position; financial performance and cash flow numbers. For further benchmarking data from the balance sheet of Andrew Peller Limited ("competition") and the trailing twelve month ("TTM") industry averages are used wherever applicable. Trends over the last five years have been identified using historical data. The conclusions so derived will be used as a preliminary tool by Sirius Koolaid and other managers to assess the firm's investment worthiness.

The firm reported an impressive year on year growth in 2011 in its bottom line. This performance is despite a decline in its top line over the same period. However the reported yearly growth is distorted by a one-time retirement allowance recorded in 2010. Trend analysis over a five year period reveals that while the although top line for the firm has improved marginally, expenses and other associated costs have risen much faster resulting in an erosion of profitability and absolute net income numbers. The financial position of the firm continues to be strong. A low debt to equity ratio and a high current ratio indicate no liquidity problems. Analysis of the inventory turnover ratios and cash flow numbers on the other hand show a trend of slowdown in sales which is a cause of concern.

Overall the wine industry is in a state of consolidation. The firm will witness more pressure on its margins as it starts to compete more with its larger rivals. Further the firm operates in highly regulated environment with respect to taxes and retail licences. The effects of the CIC tax were felt on sales last year and will continue this year too. Currently the firm has licences to retail in only seven locations across Ontario, additional licences are not being issued by the provincial government placing severe restrictions on the firm's potential to grow.

To conclude investment in the firm should only be considered if high returns are not expected in the short run. Even though the financial position of the firm is strong, the financial performance and the cash flows are deteriorating yearly. Further although the firm operates in a stable and mature industry and has consistently increasing shareholder equity over the years, it has no recorded history of paying out dividends.  

1.0 Financial Performance

1.1 Net Earnings and Return on Sales

Year 2011 2010 * 2009 2008 2007

Net Revenue 23.22 24.17 24.05 23.39 22.96

Net Earnings 2.34 1.59 2.64 2.66 2.84

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