A. In evaluating a company should an investor rely more on accounting profits or cash flow An investor should give his or her decisions basing on a statement of cash flows because:
The greatest difference between profits and cash flows is that profits data use accrual accounting, while cash flows base on real figures. Precisely, profit data will be recorded in the current period regardless of a company received money or not. Meanwhile, the other expenses such as wages, interest and rents must be paid by cash. Therefore, a company might be broken if sales is mainly from account receivable. In addition, the statement of cash flows is usually more reliable than profit data because profit data in income statement relied on the board …show more content…
The historical share price of A2 Milk shows that EAR of A2 Milk in the last 5 years is 92.08% per annum, while share price in the last 4 months fluctuated slightly between $ 1.70 and $ 2.10. Therefore, long-term investors should buy the stock of this company. Current information Pros
- The Reserve Bank of New Zealand cut rates to 2.25%. It was the fifth rate cut from June 2015. It is a good signal for A2 Milk which depends on export market such as Australia, China, and the U.S.
- A2 Milk used $ 40 million raised from a private placement to expand the scale of their business. Precisely, their products were on the shelves of Wholefoods in California, the first step to enter United States market. The company aim to reach 65% of grocery stores in California.
- The company’s intellectual property which is producing non – A1 protein milk help A2 Milk to have a competitive advantage with another milk company.
- The Chinese infant formula market which has been projected to increase to US$ 25 billion in next year is keen on A2 Milk but mainly from grey channel out of Australia into China.
- Chinese government promulgates regulations to eliminate grey channel, therefore, it will be able to pull sales because Chinese have to buy A2 Milk with higher