ASS2 - Step 3 Ratio Commentary

Hi All,

Here is a sneak peek of my ratio commentary! My next post will cover the accounting drivers - Profit Margin, ATO, RNOA, and Economic Profit.

Profitability Ratios

The net profit margin was consistent across the board, ranging from 7.45% (2021) to 7.75% (2024). This signals to me effective cost control and pricing power for Breville Group, even amidst inflationary pressure and volatile global demand – as disclosed in the directors’ report. The slight increase to 7.75% in 2024 can be attributed to rising sales from geographic expansion efforts. For example, Baratza and LELIT were both introduced into the United Kingdom and Australia. The two premium coffee brands grew the company’s revenue by 196% with their expansion into these new markets in 2024.

The return on assets (ROA) declined from 11.80% (2021) to a low of 8.02% (2023), then rose to 8.84% (2024). The decline from 2021 to 2023 is due to the growing asset base without equivalent profit growth. The statement of financial position supports this reasoning as there was a 16.6% increase in total assets from 2022 ($1.179 billion) to 2023 ($1.374 billion). This growth was from investments in PP&E, and intangible assets, specifically the goodwill from the LELIT acquisition. The ROA recovery in 2024 indicates stabilisation following these earlier investments.

Efficiency (Asset Management) Ratios

The total asset turnover ratio fell from 1.54 (2021) to 1.08 (2023), indicating that each dollar of assets produced less revenue. This is likely due to the build-up of inventory after the COVID19 pandemic. The statement of financial position supports this explanation as the inventory level from 2022 ($445.9 million) and 2023 ($439.6 million) was greater than in 2024 of $332.8 million. The improvement in total asset turnover in 2024 (1.14) shows to me a recovery following the previous years' accumulation of inventory.

The current asset turnover follows a similar trend in that the ratio dropped from 2.51 (2021) to 1.68 (2022), then climbed back to 2.00 (2024). The decline likely resulted from inventory accumulation as consumers did not purchase products due to lockdown confinements. Again, the rebound in 2024 shows quicker inventory turnover as the world was returning to a state of normality.

Quick Ratios

The quick ratio 1 was consistent across the board, ranging from 1.17 (2021) to 1.28 (2024). There were no unusual highs or lows, so I assume the liquidity is in a healthy state. A quick ratio of 1 or above is favourable as the company can meet short-term obligations (current liabilities) with the current assets on hand.  

On the other hand, the figures for quick ratio 2 are inconsistent. This ratio declined suddenly from 2022 (0.60) to 2023 (0.32), before showing a slight recovery in 2024 (0.44). The narrative behind the 2023 decline is likely similar to that established for quick ratio 1, where elevated inventory levels was the causation. In fact, the 2024 Chair and CEO Review mentions the use of liquid assets to maintain high inventory to buffer supply chain disruptions in 2023.