ASS2 - Step 3 Accounting Drivers Commentary

Hi everyone,

Take a look at my commentary on the accounting drivers for Breville Group!

Profit Margin: The profit margin fluctuated from 2021 to 2024, showing no consistent trend. Initially, it increased from 7.36% in 2021 to a peak of 10.25% in 2022. This growth period can likely be attributed to the surge in demand for kitchen appliances, as consumers spent more time at home due to the COVID-19 pandemic. However, the rising profit margin trend did not continue beyond 2022. In 2023, the profit margin decreased to 9.82%, followed by a further decline to 8.03% in 2024. This reduction is likely due to rising input costs, driven by inflation and ongoing supply chain disruptions. These increased costs meant that a smaller proportion of revenue could be converted into profit, despite high sales figures in 2023 ($1,478.6 million) and 2024 ($1,530.0 million).

Return on Net Operative Assets (RNOA): The RNOA for Breville Group has decreased from 22.50% in 2021 to 15.23% in 2024. A possible reason for this decline is that international expansion and the integration of new brands such as LELIT and Baratza required increased working capital and initial marketing outlays. This likely resulted in higher net operating assets relative to the profit generated, thus reducing RNOA. In addition, the 2022, 2023, and 2024 annual reports all highlight significant increases in input costs due to inflation and supply chain disruptions. These factors have raised the cost of goods sold and operating expenses, making it more difficult for Breville Group to maintain high operating margins.

Asset Turnover (ATO): The ATO declined from 3.06 in 2021 to 1.66 in 2023, with a minor improvement to 1.90 in 2024. The drop from 2021 to 2023 was driven by the decision to build up inventory as a buffer against global supply chain instability, leading to higher asset levels relative to sales. The increased assets, particularly in inventory and receivables (up by $222,963 and $157,418 from 2021 to 2023), made assets less productive in generating sales. On the other hand, the increase in the ATO reflects the gradual release of excess inventory as the supply chains stabilised after the COVID-19 pandemic.

Economic Profit: The economic profit climbed sharply from $56.3m (2021) to $96.6m (2022), then declined to $73.8m (2023) and further to $58.3m (2024). The peak in 2022 was due to the significant jump in the profit margin and net operating assets, with high consumer demand and inventory levels. On the other hand, the fall in economic profit corresponds to a lower RNOA and narrow margin that was exacerbated by asset build-up without equivalent profit gains. Despite this, the economic profit remained positive, which suggests that the Breville Group continued to create value above the cost of capital.