Part 1 — Company Profile
The Auckland-based a2 Milk Company (ATM) began trading openly shortly thereafter and currently lists on two exchanges (NZX and ASX). It was founded in 2000 specifically to produce food products without A1-type beta-casein. Today, this public corporation still works mainly on baby formula but also produces fresh milk and highly fortified milk powders; most of its profits come from Greater China, although Australia, New Zealand, North America, and others remain very important markets. As competition among infant-formula producers grows fiercer while formula-sales rules change continually, a2 Milk must upgrade its whole supply system while using brand fame already won wherever possible.
Headquartered in New Zealand, Fonterra Co-operative Group (FCG) is a farmer-controlled dairy cooperative whose stocks trade through a special-purpose vehicle listed on the NZX. Its accounting period ends on July 31. Founded in 2001, today's Fonterra reaches every corner of the globe, selling goods to over 100 nations while regarding Greater China as an important strategic direction. The cooperative performs three major kinds of activities: Ingredients & Raw Materials, Food Service Solutions, and Consumer Branded Products, owning famous trademarks such as Anchor and NZMP.
Synlait Milk (SML), based in New Zealand, is a dairy nutrition processor listed on both the NZX and ASX; its fiscal year ends on July 31. Founded in 2000 and located in Canterbury, the firm makes premium infant formula, dairy ingredients, culinary creams, and consumer dairy products under brands including Dairyworks. Bright Dairy is its major shareholder, while a2 Milk serves as a key investor and long-term primary customer. In recent years, it has faced elevated debt levels and operational pressures, planning to divest its North Island production assets.
Part 2 — Univariate Analysis: Current Ratio
The current ratio is calculated as current assets divided by current liabilities; hence, it measures a firm's liquidity position and its ability to meet short-term debts. Among the three companies over the five-year period, ATM had the highest level of liquidity consistently. Its current ratio declined sharply from 3.99 in 2021 to 2.66 in 2022 before recovering to 3.22 in 2025; nevertheless, it remained greater than two throughout every year presented.
FCG remained fairly liquid (current ratio ranging from 1.27 to 1.34) from 2021 through 2024 until reaching 1.60 in 2025. But SML suffered from an ongoing loss of liquidity altogether; its ratio decreased consistently from 1.45 in 2021 to merely 0.63 in 2024 before improving slightly to 0.68 in 2025. Remaining constantly below 1 means that existing resources cannot fully meet existing obligations and thus indicates insufficient operational cash flow along with weak immediate solvency.
Shifts in the current ratio may serve as an early warning signal if they move downward steadily over time, but by themselves these measures tell too little about operational cash flows, the collectability of current assets, and long-run financing. Relying solely on the current ratio will fail to anticipate trouble ahead, whereas applying multiple factors together according to some form of the Altman Z-score method does improve the chances of making valid predictions.
Part 3 — Multiple Discriminant Analysis (MDA): ROCE
According to data extracted from the companies' annual reports, the average ROCE over the five-year period from 2021 to 2025 was 26.48% for ATM, -0.98% for SML, and 9.6% for FCG. The consistently high average ROCE of 26.48% suggests that a2 Milk has generated strong and stable returns on its invested capital, reflecting efficient use of capital in generating operating profit. By contrast, Synlait has generally failed to generate a positive return on invested capital over the period.
The MDA output has significant limitations and should not be relied upon as a reliable predictor of financial failure: the sample size is too small (only three companies), the analysis considers only average current ratio and average ROCE, and there is no clear, objective standard for distinguishing financially healthy from unhealthy companies.
Part 4 — Altman's Z-score Analysis
Altman's Z-score combines five financial ratios to assess the likelihood of financial distress: Z = 1.2a + 1.4b + 3.3c + 0.6d + 1.0e, where a is working capital divided by total assets, b is retained earnings divided by total assets, c is operating profit divided by total assets, d is the market value of equity divided by total liabilities, and e is sales revenue divided by total assets. A Z-score below 1.81 indicates the distress zone, between 1.81 and 2.99 the grey zone, and above 2.99 the safe zone (Atrill, 2019).
| Year | ATM | Zone | SML | Zone | FCG | Zone |
|---|---|---|---|---|---|---|
| 2021 | 12.92 | Safe | 1.74 | Distress | 2.02 | Grey |
| 2022 | 6.86 | Safe | 1.93 | Grey | 1.91 | Grey |
| 2023 | 8.12 | Safe | 1.48 | Distress | 2.40 | Grey |
| 2024 | 9.60 | Safe | 0.68 | Distress | 2.33 | Grey |
| 2025 | 10.53 | Safe | 1.36 | Distress | 2.79 | Grey |
The a2 Milk Company (ATM) remained in the safe zone throughout the five-year period. Although its Z-score declined from 12.92 in 2021 to 6.86 in 2022, it subsequently increased to 10.53 by 2025. The consistently high scores reflect positive working capital, strong retained earnings and operating profitability, together with a high market value of equity relative to liabilities.
Synlait Milk (SML) shows the highest financial-distress risk among the three companies. Its Z-score was in the distress zone in four of the five years, declining to its lowest point of 0.68 in 2024, when SML also reported a NZ$182.1 million loss after tax, negative working capital and significant refinancing pressure. Although the score recovered to 1.36 in 2025 following restructuring, it remained below the 1.81 distress threshold.
Fonterra (FCG) remained in the grey zone throughout the five-year period, with Z-scores ranging from 1.91 to 2.79. The score improved to 2.79 in 2025, approaching the safe-zone threshold. However, FCG's results should be interpreted cautiously because its co-operative structure differs from a conventional listed company — its restricted share market and limited liquidity mean its share price may not accurately reflect the fair value of net assets.
Part 5 — Email Recommendation
To: Hannah
Subject: Investment Recommendation for New Zealand Dairy Companies
Based on the financial analysis of A2 Milk Company (ATM), Synlait Milk Limited (SML), and Fonterra Co-operative Group (FCG) from 2021 to 2025, ATM appears to be the most attractive investment choice among the three companies.
ATM demonstrates relatively stable overall financial health, maintaining a current ratio consistently above 2 over the five-year period. Its average return on capital employed (ROCE) was approximately 26.48%, significantly outperforming both SML and FCG, and its Altman Z-scores for all five years remained within the safe zone.
FCG ranks second in terms of financial stability, with a current ratio fluctuating between 1.27 and 1.6, though its Altman Z-score has consistently fallen within the grey zone. As a cooperative, its restricted share market may cause its stock price to not accurately reflect the fair value of net assets.
SML faces significant financial challenges. Its current ratio fell sharply from 1.45 in 2021 to 0.68 in 2025, and four out of five Altman Z-scores fell into the financial distress zone.
Given these results, ATM is the preferred investment target, followed by FCG — though investors should remain cautious about the limitations arising from FCG's cooperative structure. Both the MDA and Altman models rely on historical accounting data, so they should be combined with non-financial indicators to make better investment decisions.
Kind regards,
Group 20 Students
Part 6 — Non-Financial Indicators
Non-financial indicators have a significant, though non-determinative, impact on investment appeal. ATM benefits from strong brand equity, diversified supply chains, and geographic expansion advantages — though concentration in the Chinese market introduces some risk. SML possesses advanced nutritional manufacturing capabilities and B Corp certification, but recent manufacturing issues have led to additional costs, compounding operational risks. FCG is large in scale and serves diverse customers, yet its cooperative structure limits share liquidity and reduces comparability in equity valuation.
Critically, non-financial metrics are inherently subjective and inconsistently disclosed, making them difficult to fully quantify. They should complement rather than replace financial analysis. Final recommendation: integrating both financial and non-financial evidence, ATM is the optimal investment choice, followed by FCG, while SML ranks lowest due to dual pressures from operations and finances.
References
Atrill, P. (2019). Financial management for decision makers (9th ed.). Pearson.
The a2 Milk Company. (2021–2025). Annual reports. https://thea2milkcompany.com/results
Fonterra Co-operative Group. (2021–2025). Annual reports. https://www.fonterra.com
Synlait Milk Limited. (2021–2025). Annual reports. https://www.synlait.com/investors/