A2M share price in focus
Founded in New Zealand in 2000, The a2 Milk Company sells dairy products which contain the naturally occurring A2 protein type. Most other dairy products on the market contain the A1 protein, which is claimed to be harder to digest for some people.
The company is responsible mainly for distribution and marketing, with the production outsourced to suppliers who source from over 25 certified dairy farms across Australia. A large part of the a2 business is infant formula, which is produced by its supply partner Synlait Milk in New Zealand.
While the science is a little uncertain on why a2 milk might be easier to digest, randomised studies have repeatedly shown that it is an effective solution for many people who struggle with ‘normal’ dairy products.
The key metrics
If you’ve ever tried reading a company’s income statement on the annual report, you’ll know just how complex it can get. While there are any number of ways you could slice up the statement, three key figures are revenue, gross margin, and profit.
Revenue is important for obvious reasons – everything else (profit, margins, return on equity etc.) is downstream of a company’s ability to generate sales and revenue. What we’re looking for 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.
The next thing we’ll want to consider is the gross margin. 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 and services? A2M’s latest reported gross margin was 45.8%.
Finally, we get to profit, the real headline number. 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%.
Financial health of A2M shares
Next, we could consider the capital health of the company. What we’re trying to work out is whether the company is generating a reasonable return on their equity (the total shareholder value) and whether they have a good safety buffer. One important measure to consider is net debt. This is simply the total debt minus the company’s cash holdings.
In the case of A2M, the current net debt sits at -$903m. A high number here means that a company has a lot of debt which potentially means 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, which can be seen as good (a big safety buffer) or bad (inefficient capital allocation).
A metric that might be more valuable to us is the debt/equity percentage. This tells us how much debt the company has relative to shareholder ownership. In other words, how leveraged is the company? A2 Milk Company Ltd 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 allocating capital efficiently and generating value, while a low number suggests that company growth may be starting to slow. A2M generated an ROE of 12.8% in FY24.
What to make of A2M shares?
One way to have a ‘speedy read’ of where the A2M share price is could be to study something like dividend yield through time. Remember, the dividend yield is effectively the ‘cash flow’ to a shareholder, but it can fluctuate year-to-year or between payments. Currently, A2 Milk Company Ltd shares have a dividend yield of around 0.00%, compared to its 5-year average of 0.28%. Put simply, A2M shares are trading below their historical average dividend yield. Be careful how you interpret this information though – it could mean that dividends have fallen, or that the share price is increasing, or both. In the case of A2M, last year’s dividend was less than the 3-year average, so the dividend has been falling.
The Rask websites offer free online investing courses, created by analysts explaining things like Discounted Cash Flow (DCF) and Dividend Discount Models (DDM). They even include free valuation spreadsheets! Both of these models would be a better way to value the A2M share price.
