McLean Ltd. has experienced steady financial growth over the past 5 years. Key ratios show improving profitability, liquidity, and efficiency. Gearing has increased moderately as McLean invests in expansion. Asset turnover and inventory turnover could be optimized to further boost returns. Overall, McLean is well positioned for continued success with diligent management of working capital and supply chain relationships.

1. 1
FINANCIAL
ANALYSIS
McLean Limited
ABSTRACT
This report is an analysis of McLean Ltd.’s overall
performance and financial position over the last 5
years with focus on significant key ratios and
recommendations for future success.
Sara Young
Accounting for Managers MBA 5404
McLean Ltd.

2. 2
Executive Summary
This report will cover the financial history over the past 5 years for McLean Limited (Ltd.). Key
ratios in Profitability, Liquidity, Gearing, Activity/Efficiency and Shareholder Equity over the last
5 years will be analyzed with consideration given to economic, environmental and social factors
and their impact on the business with recommendations for future success. In the appendix, the
detailed financial statements of McLean over the past 5 years- the income statement, statement
of financial position and cash flow statement- can be reviewed, along with a chart of all ratios
being discussed. Key areas of focus are McLean’s sales growth of over 2% in 2012 and 2013 which
is in line with the expectation of market growth throughout the world in the vitamin and
supplement industry. McLean has steadily seen a decrease in working capital ratio- down to 2.88
in 2013- as it has worked to make its assets work harder as well as a higher than industry average
quick ratio of 2.15. Asset turnover, a key driver of return on equity as discussed in the DuPont
analysis, has been undesirably low since 2009, with only a slight improvement in 2012. Gearing
in McLean has steadily increased to 38% in 2013 but still lags behind the industry average by
almost 10% showing McLean’s apparent past aversion to risk. Dividend yield has seen a decent
increase since 2011 for McLean, now up to 4.6% and has maintained a higher than industry
average- 40% vs 20%, respectively- in Dividend Payout ratio.
.

3. 3
cLean Limited (Ltd.) has been
helping people achieve greater
health since the mid-2000s in
the vitamin and dietary supplement industry
(VSI). Not simply a Health Food and
Supplement Retail Store, McLean Ltd. is
focused on improving the quality of life of its
clients and employees. Developed from a
small store in downtown Melbourne,
McLean Ltd. has grown to 350 retail stores
spanning from Victoria to Queensland along
with an increasingly strong online presence.
McLean products are currently available
throughout Australia and exports to New
Zealand. Customers enjoy the highest
quality of products while knowing they were
sourced ethically and with the greatest
amount of consideration for the continued
sustainability of the environment. Mclean
has obtained a certified Fair Trade and
organic quality assessment.
Founders
The CEO and Co-Founder Benjamin Smith
along with CFO and Co-Founder Samuel
Jones have extensive experience in the
Health Food and Supplement Industry. Mr.
Smith studied health sciences and medicine
as well as natural therapies from Columbia
University in
America and
has his MBA
from
Melbourne University. Mr. Jones has his
Finance degree and Masters of Finance from
Monash University and is the spokesperson
of McLean. Mr. Jones has successfully
competed in over 15 marathons in his
lifetime and sits on the board of the Run for
Life Charity.
Market History
‘The industry as a whole came under fire in
2010 after a review of complementary
medicine products by the Department of
Health and Ageing found that as many as
90% of those company’s examined did not
comply with regulations, including labelling
breaches which it said might “mislead”
customers’ (Rourke 2013). Women
represent the largest group of purchasers,
according to a survey by the Roy Morgan
group in 2012. It reported that 73% of first-
time mothers-to-be had bought vitamins in
the previous six months, as had 62% of
expectant mothers, 44% of women in
general and 31% of men (Roy Morgan
Research 2012). McLean’s ability to maintain
M

4. 4
sales growth in 2010 shows it did a better job
in regard to market reaction to its product
over the bigger players in the industry which
was in large part due to McLean’s
transparency reporting and ethical sourcing
company standards. In March 2013, 7.4
million (42%) Australians aged 18+ bought
vitamins within a 6 months period as
reported by Roy Morgan Research (2013).
Market Expectations
The Vitamins and dietary supplements
market grew by 9% in 2012, reaching sales of
$1.8 billion. The popularity of vitamin and
supplement products in Australia has
provided a high penetration rate amongst
consumers. The vitamins and dietary
supplements category expected to see
constant value sales rise at a 3% CAGR (or
year-over-year growth rate of an investment
over a specified period of time) over the
forecast period of 2013. Consumers
continued to value their health over this
period, which led to continued product
purchases (Euromonitor 2013).
Competitors
Australia’s market is dominated by a few big
players, including the long-time industry
leader, Blackmores, accounting for 17% of
sales in 2012 and was the leading brand in
Australian vitamins and dietary
supplements. Blackmore Ltd.’s offerings
have broad retail distribution across the
country and throughout the world
(Euromonitor 2013). With a well-respected
and trusted brand name, Blackmores was
voted Australia’s most trusted vitamins and
dietary supplements brand for the last 5
years according to Reader’s Digest (2013).
GNC and Vitamin Shoppe Inc. are two of
McLean’s direct competitors with McLean
coming close to matching in terms of size
and sales. Other competitors are
PharmaCare, which owns a number of
brands including Nature’s Way, and Swisse,
and which in 2013 spent around $50m (or
approximately 30% of its revenue) on
marketing and in-
store promotions,
showing growth in
advertising in the
vitamins and
supplements category
(Rourke 2013).

5. 5
Profitability
Sales Growth
Trends in health and wellness in Australian
society and consumers seeking to pre-emptively
avoid illness are two factors impacting Australian
diets’ turn to supplementation. Strong sales up
$80m from 2012 and $140m from 2011 have
provided a growth rate in sales of 2.7% and 2%,
respectively. In 2012, the vitamin market grew
9.6 per cent over 2011 figures. Profitability took
a small but significant hit in 2011 due to the company’s preparation for sales growth in 2012 and
coming years.
Operating Margin and Overhead to Sales
Operating Margin can be affected by several
things (for example, material or labor costs), but
because these items are a part of the day-to-day
decisions managers make, operating margin can
also be seen as an evaluation or measure of
managerial flexibility and competency,
particularly during tough economic times, as
McLean experienced in late 2000s. Operating
Margin was affected by a high increase in Overhead to Sales in 2011 up 4.1% from 2010. This was
due to an increase in advertising expense as the company competed for market share as growth
for the industry was predicted at 9% in 2012. Overhead to sales increased 4 out of the last 5 years
with 2013 being the first year to not see an increase. McLean is starting to get a hold on its
overhead expenses as the opening of new stores becomes more standardized. In the future this
could be an issue if the company decides to pursue international expansion, meaning it will have
to have a more dynamic approach and consider a larger number of factors.
7.0% 6.6%
9.2%
11.3%
2010 2011 2012 2013
Sales Growth
18.4% 18.0%
12.9%
16.8%
22.1%
2009 2010 2011 2012 2013
Operating Margin

6. 6
Gross Margin
Gross Margin has remained considerably high, albeit slightly reduced from 78% to 75% in the
past 5 years. This figure is outstanding in the industry- 49.5% in 2013 down from 54.7% in 2010-
due to McLean’s ability to keep cost of sales at an ultimate minimum through building its strong
relationship with suppliers with long-term supply agreements while focus has been on driving
sales volume. Gross Margin must be high enough to cover the company's expenses plus allow for
a reasonable amount of profit, which McLean has shown quite capable of managing.
Return on Investment (ROI)
ROI improved for the past 2 years from 4.8% to
7.6% from 2012 to 2013, respectively. The return
of ROI to the same figure in 2012 as in 2010,
demonstrates how a poor year in sales with
increasing costs can deteriorate profitably based
on how a company employs its equity. The
comeback was due to higher increase in sales
while cost of sales remained consistent from the previous year and operating costs increased
only slightly. This improvement comes as a relief from the dissatisfactory result in 2011 of 2.5%.
This proved that McLean needs to work on employing a strategy for maintaining earnings when
forecasting a year of low sales growth, preparing for expansion or facing increased industry costs.
Return on Capital Employed (ROCE)
ROCE paints a clear picture of the improved efficiency and profitability of McLean’s capital
investments. With an ROCE of 10.5%- up from 5.8% in 2011- McLean is creating value whereas in
2011, value was clearly destroyed. McLean’s recent increased profitability, specifically in 2012
and 2013, can be partly attributed to the heightened demand of supplement products as
preventative methods to avoid illness and the move to focus on health and wellness as the baby
boomer generation ages. In recent years there has also been an overall cultural focus on health,
wellness and fitness. NPBIT’s increase of $84m to $174.5m from 2011 to 2013, respectively,
shows the improved generation of return by each dollar of operating income.
4.5% 4.8%
2.5%
4.8%
7.6%
2009 2010 2011 2012 2013
ROI

7. 7
Liquidity
Quick Ratio (Acid Test)
With a quick ratio of 2.09 in 2013, the lowest
figure in the 5 year analysis period, McLean
has experienced no difficulty in meeting its
current financial obligations with its
available quick funds at hand. Quick Ratio or
Acid Test shows how fast the short term
asset can be to cover or pay back short term
liability if needed. Although McLean has
reduced from previous years, meaning
assets are working harder, they are still well above industry average and need to work on
collecting accounts receivable to be able to make use of that money in a profitable investment.
Working Capital
Working Capital has followed a similar trend as the quick ratio in that it has decreased from a
startling 4.12 in 2009 to 2.79 in 2013. Working Capital ratio is useful in telling us whether the
business can support itself with its current assets despite its current liabilities. The improvement
in Working Capital demonstrates that McLean is utilizing its assets more effectively than 5 years
ago but there are indeed opportunities to capitalize future benefits with further improvement.
McLean is still quite above the industry average of 1.6 in 2013. However, with increasing sales
and costs, McLean will need to employ assets to work harder than previous years and particularly
remain cautious of cash in the bank.
412% 432%
361%
395%
279%
328% 339%
291%
322%
209%
2009 2010 2011 2012 2013
Working Capital & Acid Test
Working Capital Acid Test

8. 8
Gearing
McLean’s overall increase in gearing for the
last 5 years- 32.9% to 37.6%- demonstrates
that the company is increasing its financial
leverage thus risk, albeit slowly. The highest
increase in long term debt occurred from
2012 to 2013 when McLean invested in new
retail outlet leases and a distribution center,
showing the company’s confidence in
sustaining increasing sales growth, with
control over costs, and ability to cover its debt. With the increase in direct online sales, McLean’s
decision to open more retail stores signals a possible plan to increase its gearing in order to take
on new projects or future expansion. Thus, McLean faces the decision of increasing their
borrowing in preparation for a market move. Such increase in risk could create hesitation from
investors and lenders who were comfortable with McLean’s risk aversion.
Interest Cover
McLean’s current interest cover of 279% means it has the profitability to sufficiently cover over
2 and a half times the amount of its current finance cost. A drop in 2011 to 1.68 was a warning
sign as PBIT was reduced due to low sales growth and increased costs- both in sales and
overhead- and long term debt increased with forecasted growth in the coming years led to new
building leases of 5 years with the option to renew the lease for two additional 5-year terms.
32.9%
32.2%
34.2% 34.1%
37.6%
2009 2010 2011 2012 2013
Gearing

9. 9
Activity/Efficiency
Total Asset Turnover
McLean’s asset turnover ratio is lower than industry standard and has not increased much- 38%
to 43% from 2009 to 2012, respectively. This ratio indicates how efficiently all the company’s
assets, both current and non-current, generate revenue by measuring how quickly a company
turns over its asset through sales (Collier 2013). Although the company’s total assets has
increased over the past 5 years, so has their sales. However, the company has increased the
amount of money tied up in fixed assets for each unit of sales compared to previous years.
McLean saw its first reduction in current assets, a big drop in cash, from 2011 to 2012 and an
increase in non-current assets for the same period, with a big increase in plant, property and
equipment. There is room and need for improvement in this area which can be accomplished
through more effective management in current assets, especially cash and inventory, and non-
current assets, ensuring that the money invested in fixed assets such as plant, property and
equipment is in line with the company’s growth strategy and being used to their full capacity.
Days Sales Outstanding
McLean has significantly improved its days sales outstanding (DSO) from 70 to 55 days from 2009
to 2013, respectively which puts it right in line with the industry average of 55, considering 30-
day trading terms. The average collection period is a variation of receivables turnover and is can
be used to evaluate the effectiveness of the company's credit and collection policies as well as
minimizing bad debts (Collier 2013). There is a high cost in carrying receivables. With an interest
rate of 10%, McLean is paying $1.762K in interest expense per day on total annual receivables
compared to that of $2.215k per day in 2011. The reduction in expense payment is due to
McLean’s ability to cut down on annual receivables by looking into the credit approval process
and by being more cautious of who they extend credit. To further reduce DSO, which will improve
cash flow, McLean should look into their receivables management process regarding invoicing
and collections as the company saw an increase in provisions in 2013, likely due to an inability to
collect debt or of customers’ inability to pay their debts.

10. 10
Inventory Turnover
McLean’s efficiency in turning its inventory has improved over the past 5 years from 2.1 to 2.8
with days inventory of 129 for 2013. The industry average is 4-5 times per year so McLean could
improve their inventory turnover by developing better relationships with key suppliers. Since
McLean purchases products directly from suppliers at high volume and low cost, a solution could
be to buy more frequently and in smaller quantities and to negotiate to pay the same cost.
Further, if McLean can differentiate between its fast moving and slow moving products it could
work with suppliers to forecast and plan necessary order requirements. Creating supplier
relationships could also help McLean in the future to possibly share costs with suppliers or gain
their support in product development ideas, Research and Development (R&D) or even
marketing ideas on new products.
Days Purchase Outstanding
McLean has worked to pay its suppliers more quickly, which is important to the business-supplier
relationship, by having strong accounts payable management. Longer Days Purchase Outstanding
(or DPO) could be more beneficial as the lag time in DPO is good for working capital and free cash
flow, however, it should not come at the risk of upsetting suppliers. Thus, the number of days
has reduced from 122 to 92 over the past 5 years which still is beneficial for the company
financially but also has the added benefit of making suppliers happy which helps strengthen the
key business-supplier relationship, potentially helping in future business transactions.

11. 11
Four areas impacting cash flow:
1. Cash flow from operating activities
 There was a $41.45m increase in cash flow from operating activities from 2012 to
2013, the biggest increase over the past 5 years. This increase was the result of a
significant increase in cash receipts and receivables.
2. Cash flow from investing activities
 In 2011, McLean made a careful investment of $66m in new stores. The
investment was successful. Therefore, there was an additional investment of
$231.3m in 2013 for new store leases which was in preparation for expansion for
a higher expected sales growth based on increased consumer spending trends in
health and nutrition.
3. Cash flow from financing activities
 McLean increased its long term debt borrowing by $175m over the 5 year period
due to the expected growth. Within the next 2 years, McLean should expect the
new stores to begin to turn a profit and contribute to the repayment of the
financing. Dividend payout increased in 2013 three times the amount paid in 2011
due to the high increase in profit. However, in 2011, dividends paid was
significantly lower due to investments in preparation for growth and expansion
which was recovered in 2012 and surpass the dividends paid in 2010.
4. Net Cash Flow
 McLean had positive net cash flow until 2013, significantly reducing cash, which
was due to an increase in gearing.

12. 12
Shareholder Returns
Shareholder Return Ratios- 5 years
2013 2012 2011 2010 2009
Dividend per share $ 0.057 $ 0.035 $ 0.017 $ 0.033 $ 0.030
Dividend payout ratio 40.0% 40.0% 40.0% 40.0% 40.0%
Dividend yield 4.6% 2.9% 2.0% 4.1% 4.7%
EPS $ 0.143 $ 0.087 $ 0.043 $ 0.082 $ 0.076
P/E Ratio 8.8 13.8 19.6 9.7 8.6
Analysis:
Issued capital remained consistent over the 5 year period at 550,000 shares per year. McLean’s
commitment to shareholders has shown in the decision to maintain the dividend payout ratio
constant at 40% over the 5 years, which has been possible due to the overall increase in profits.
Dividend per share increased from $.03 to $.057 from 2009 to 2013, with a slightly negative
variation in 2011, for reasons previously mentioned. The market value per share doubled from
2009 while the dividend yield fluctuated and actually saw a decrease in 2011, only returning to
almost the same yield in 2013 as 2009.
Earnings per share was at its highest for McLean in 2013 over the 5 year period at $.143 which
means that for every $1 invested, McLean is returning $.143 per share as profits.
Since earnings took a hit in growth in 2011, price to earnings (P/E) ratio more than doubled- to
19.6. However, as earnings grew in 2012, P/E reduced to 13.9 and further to 8.8 in 2013 even as
the market share price increased. Competitors had a P/E ratio between 15-20 as of 2013. This
means McLean is relatively cheap for the sector, which could attract some investors who are
interested to see a return, given the expected further growth of the Australian supplement
market.

13. 13
Recommendations to the Board of Directors
The following recommendations should be considered by McLean’s Board of Directors to ensure
sustainability and growth for the company:
 Focus should be on employing assets to work harder in alignment with company growth
strategy. Accounts receivable needs to be analyzed to increase collection more quickly to
be able to capitalize on re-investment.
 Growth focus in Southeast Asia as the emerging Asian middle class could exploit offshore
operations possibilities.
 As demand increases for bigger discounts and cheaper prices which lead to lower profit
margins, focus needs to shift to supplier relationships to increase inventory turnover and
potentially help to share costs in the future.
 To support international expansion, McLean would benefit by having a more dynamic
management structure focused on exploiting growth potential which would result in
further value creation and ROI for shareholders.
 With expansion into the Asian pacific market, franchising could be a potential opportunity
for increasing profits and market share.

14. 14
Final Remarks
The trends of health and nutrition are driving consumer spending resulting in increasing demand.
Future growth and profitability depend on McLean’s adaptation of business strategy and on
product innovation, effective merchandising, and competitive pricing. The benefits of increasing
in scale could be to gain advantages in purchasing, distribution, finance, and marketing. However,
focus should remain on providing superior customer service, offering unique products, serving a
local market, and further leveraging online sales. McLean will need to adapt to lower margins in
the future, and should review its cost structure to protect its current margins which are currently
better than industry average. However, with continuous pressure on the Australian dollar and
the increasing cost in goods, McLean will have to prepare a future of lean operations to continue
increasing its sales growth and market share to compete as the industry loses its borders.

15. 15
Reference
 Collier, P. M. 2012, Accounting for Managers: Interpreting accounting information for
decision-making. 4th edition. Chichester: John Wiley.

16. 16
Bibliography
 Euromonitor International 2013, Vitamins and Dietary Supplements in Australia, Country
Report, viewed 3 April 2014, http://www.euromonitor.com/vitamins-and-dietary-
supplements-in-australia/report
 Reader’s Digest 2013, Australia’s Most Trusted Brands 2009-2013, viewed 3 April 2014,
http://www.readersdigest.com.au/australias-most-trusted-brands
 Roy Morgan 2012, Vitamin market in Australia looking healthy with 7 million customers,
Roy Morgan Research, Press Release, viewed 3 April 2014,
http://www.roymorgan.com/findings/finding-1738-201304290027
 Rourke, Alison 2013, Vitamins Take Australia, The Guardian, viewed 3 April 2014,
http://www.theguardian.com/world/2013/jun/11/vitamins-take-australia-hollywood-
names

17. 17
INCOME STATEMENT 2013 2012 2011 2010 2009
Sales 790,000 710,000 650,000 610,000 570,000
Cost of sales 25.0% 24.0% 24.0% 23.0% 22.0%
Cost of sales 197,500 170,400 156,000 140,300 125,400
Gross profit 592,500 539,600 494,000 469,700 444,600
Selling & admin expenses 418,000 420,000 410,000 360,000 340,000
Net Profit before interest & tax 174,500 119,600 84,000 109,700 104,600
Interest expense 62,500 51,106 50,000 45,000 45,000
Net profit before tax 112,000 68,494 34,000 64,700 59,600
Less income tax 33,600 20,548 10,200 19,410 17,880
Net profit after tax 78,400 47,946 23,800 45,290 41,720
Less dividend paid 31,360 19,178 9,520 18,116 16,688
Retained profits 47,040 28,767 14,280 27,174 25,032
McLean Ltd.

18. 18
STATEMENT OF FINANCIAL POSITION 2013 2012 2011 2010 2009
Current Assets
Cash 91,032 166,147 142,120 139,216 126,322
Receivables 118,000 120,000 120,000 115,000 110,000
Inventories 70,000 65,000 63,000 70,000 60,000
Total current assets 279,032 351,147 325,120 324,216 296,322
Non-Current Assets
Property, plant & equipment 1,262,261 1,113,166 1,095,366 1,016,990 1,004,710
Intangibles 300,000 200,000 200,000 200,000 200,000
Total non-current assets 1,562,261 1,313,166 1,295,366 1,216,990 1,204,710
Total assets 1,841,293 1,664,313 1,620,486 1,541,206 1,501,032
Current Liabilities
Payables 50,000 49,000 50,000 45,000 42,000
Provisions 50,000 40,000 40,000 30,000 30,000
Total current liabilities 100,000 89,000 90,000 75,000 72,000
Non-current liabilities
Long-term debt 625,000 511,060 500,000 450,000 450,000
Provisions 80,000 75,000 70,000 70,000 60,000
Total non-current liabilities 705,000 586,060 570,000 520,000 510,000
Total liabilities 805,000 675,060 660,000 595,000 582,000
Net assets 1,036,293 989,253 960,486 946,206 919,032
McLean Ltd.

19. 19
Equity 2013 2012 2011 2010 2009
Issued capital (550,000 @ $1) 550,000 550,000 550,000 550,000 550,000
Retained earnings 486,293 439,253 410,486 396,206 369,032
Total equity 1,036,293 989,253 960,486 946,206 919,032
Number of shares 550,000 550,000 550,000 550,000 550,000
Market value per share $1.25 $1.20 $0.85 $0.80 $0.65
McLean Ltd.

20. 20
STATEMENT OF CASH FLOWS 2013 2012 2011 2010
Cash flow from operating activities
Cash receipts 792,000 710,000 645,000 605,000
Cash payments - 604,500 - 588,400 - 544,000 - 497,300
Interest paid - 62,500 - 51,106 - 50,000 - 45,000
Income tax paid - 33,600 - 20,548 - 10,200 - 19,410
Net cash from operating activities 91,400 49,946 40,800 43,290
Cash flow from investing activities
Payments for property, plant & equipment - 249,095 - 17,800 - 78,376 - 12,280
Net cash used in investing activities - 249,095 - 17,800 - 78,376 - 12,280
Cash flow from financing activities
Proceeds from borrowings 113,940 11,060 50,000 -
Dividends paid - 31,360 - 19,178 - 9,520 - 18,116
Net cash from/used in financing activities 82,580 - 8,118 40,480 - 18,116
Net increase/(decrease) in cash - 75,115 24,027 2,904 12,894
Cash at beginning of year 166,147 142,120 139,216 126,322
Cash at end of year 91,032 166,147 142,120 139,216
McLean Ltd.

21. 21
RATIOS 2013 2012 2011 2010 2009
ROI 7.6% 4.8% 2.5% 4.8% 4.5%
ROCE 10.5% 8.0% 5.8% 7.9% 7.6%
Operating margin 22.1% 16.8% 12.9% 18.0% 18.4%
Gross margin 75.0% 76.0% 76.0% 77.0% 78.0%
Overhead to sales 52.9% 59.2% 63.1% 59.0% 59.6%
Sales Growth 11.3% 9.2% 6.6% 7.0%
Working capital 279% 395% 361% 432% 412%
Acid test 209% 322% 291% 339% 328%
Gearing 37.6% 34.1% 34.2% 32.2% 32.9%
Interest cover 279% 234% 168% 244% 232%
Asset turnover 43% 43% 40% 40% 38%
Days sales outstanding 55 62 67 69 70
Inventory turn 2.8 2.6 2.5 2.0 2.1
Days purchases outstanding 92 105 117 117 122
Dividend per share $0.057 $0.035 $0.017 $0.033 $0.030
Dividend payout ratio 40.0% 40.0% 40.0% 40.0% 40.0%
Dividend yield 4.6% 2.9% 2.0% 4.1% 4.7%
EPS $0.143 $0.087 $0.043 $0.082 $0.076
P/E Ratio 8.8 13.8 19.6 9.7 8.6
McLean Ltd.