A2M share price in focus
Founded in New Zealand in 2000, The a2 Milk Company is involved with the sale of products sold under the a2 brand which contain the naturally occurring A2 protein type.
The company is not responsible for producing any of its products itself. It has access to over 25 certified dairy farms across Australia where its suppliers handle the production process. Additionally, its instant formula products are produced by its supply partner Synlait Milk in New Zealand.
There are various claimed health benefits of a2 Milk, the main one being that it’s easier to digest than ‘normal’ milk, so some people that normally have trouble with milk can stomach it a bit better.
Let’s talk profits
Annual reports and income statements can be very complex and hard to get your head around as a new investor. While there are any number of figures you could pull from the income statement, three key ones are revenue, gross margin, and profit.
Revenue is sometimes referred to as the ‘top line’ – everything starts here. If you can’t generate revenue, you can’t generate profit. What we’re interested in is not so much the absolute number, but the trend. A2M last reported an annual revenue of $1,673m with a compound annual growth rate (CAGR) over the last 3 years of 11.6% per year.
Gross margin is the next big number on the income statement. The gross margin tells us how profitable the core products/services are – before you take into account all the overhead costs, how much money does the company make from selling $100 worth of goods/services? A2M’s latest reported gross margin was 45.8%.
Finally, the number we’re most interested in – profit. Last financial year A2 Milk Company Ltd reported a profit of $168m. That compares to 3 years ago when they made a profit of $81m, representing a CAGR of 27.6%.
A pulse check on A2M shares
The next thing we need to consider is the capital health of the company. Is the company generating a reasonable return on their equity (the total shareholder value) and do they have a decent safety buffer? One measure we can look at is net debt. This is simply the total debt minus the company’s cash holdings.
In the case of A2 Milk Company Ltd, the current net debt sits at -$903m. High net debt can mean higher interest payments, greater instability, and higher sensitivity to interest rates. A negative value on the other hand indicates the company has more cash than debt – a good position to be in.
Another figure we can look at is the debt/equity percentage. This tells us how much debt the company has relative to shareholder equity. In other words, how leveraged is the company? A2M has a debt/equity ratio of 5.3%, which means they have more equity than debt.
Finally, we can look at the return on equity (ROE). The ROE tells us how much profit a company is generating as a percentage of its total equity – high numbers indicate the company is generating a lot of value for investors, while a low number raises concerns that capital isn’t necessarily being allocated efficiently. A2M generated an ROE of 12.8% in FY24.
What to make of A2M shares?
With strong revenue growth over the last 3 years, profits trending upwards, and a solid ROE, the A2M share price could be one worth watching in 2025.
Please keep in mind this should only be the beginning of your research. It’s important to get a good grasp of the company’s financials and compare it to its peers. It’s also important to make sure the company is priced fairly. To learn more about share price valuation, you can sign up for one of our many free online investing courses.
