Ratio Analysis of National Foods
-
Upload
zaka-ul-hassan -
Category
Documents
-
view
221 -
download
0
description
Transcript of Ratio Analysis of National Foods
BAHRIA UNIVERSITY, ISLAMABAD
Title of Report: Ratio Analysis (2013-2014)
Company: National Foods Limited
Program: MBA-2B
Subject: Financial Management
0 | P a g e
Group members
o Waqas Khan 01-120111-069
o Asim Mehmood 01-122142-008
o Awais Bilal 01-122142-010
o Muhammad Bilal 01-122142-036
o Muhammad Furqan 01-122142-037
o Raja Hasnain Tahir 01-122142-049
Submitted to
Sir Abdullah Hafeez
Submission date
26th May 2015
1 | P a g e
Table of Contents
Business profile:.............................................................................................................................................3
RATIOS CALCULATION............................................................................................................................5
LIQUIDITY RATIOS....................................................................................................................................5
Current Ratio..............................................................................................................................................5
Quick Ratio................................................................................................................................................5
ASSETS MANAGEMENT RATIOS............................................................................................................6
Inventory Turnover in day.........................................................................................................................6
Fixed Assets Turnover...............................................................................................................................7
Total Assets Turnover................................................................................................................................8
Days sales Outstanding (Average Collection Period)................................................................................9
Payable Turnover in days.........................................................................................................................10
Receivable Activity (Receivable Turn Over Ratio).................................................................................11
Profitability Ratios.......................................................................................................................................12
Net Profit Margin.....................................................................................................................................12
Gross Profit Margin.................................................................................................................................13
Return on Investment...............................................................................................................................15
Return on Equity......................................................................................................................................16
COVERAGE RATIO...................................................................................................................................17
Interest Coverage Ratio............................................................................................................................17
MARKET VALUE RATIOS.......................................................................................................................18
Earnings per Share...................................................................................................................................18
Price per Earning Ratio:...........................................................................................................................18
Book Value per Share..............................................................................................................................20
Market / Book Ratio.................................................................................................................................21
DEBT MANAGEMENT RATIOS..............................................................................................................22
Debt to Equity Ratio:...............................................................................................................................22
Debt to total asset.....................................................................................................................................23
Gearing ratio............................................................................................................................................24
2 | P a g e
Company’s introduction
National Foods began its journey in 1970 as a Spice company, with a revolutionary product that
popularized the concept of having clean, healthy food. National foods’ initiatives were, to make
food that is hygienic, reduce time spent in the kitchen by women, foster health and contribute
towards personal attractiveness, so that people who use our products would be able to experience
a more rewarding life-style.
This was long before the phrase ‘Corporate Mission’ had even been invented. However, our
founder’s philosophy remains unchanged over time. Even if their language and the notion of
only women doing the housework have become outdated, in this age of rapidly changing
lifestyles, fuelled by the rampant development of technology; consumers are compelled to alter
their eating habits. National Foods responds to this challenge of developing innovative food
products based on convenience and quick preparation in line with modern lifestyles and yet
retains traditional values through its diverse collection of food products.
In a history that now crosses three decades, National Foods’ success has been influenced by the
major events of the day – economic boom, depression, wars, changing consumer lifestyles and
technological advancements. Even after three decades the company’s focal point still remains on
customer’s needs through product development in line with the changing market trends.
Business profile:
NFL has successfully established itself as a multinational company with an independent
subsidiary. National foods started its operations in Dubai last year, catering to the Middle Eastern
Market. We have now further expanded this structure with subsidiaries in Canada, (national
epicure limited) and United Kingdom, (national foods Pakistan UK limited) catering to the North
American and European markets respectively. We have also appointed a regional representative
at each of these offices, ensuring that the focus remains on these specific high potential regions.
3 | P a g e
4 | P a g e
National Foods Limited
National Foods Canada Office And Hub National Food Uk Office
UAE National Foods DMCC
5 | P a g e
RATIOS CALCULATION
LIQUIDITY RATIOS
Current Ratio
Current 2014
Current Assets $ 3,652,481.00 1.38884152
7Current Liabilities $ 2,629,876.00
Current 2013
Current Assets $ 3,139,234.00 1.28359484
4Current Liabilities $ 2,445,658.00
This ratio determines short term debt paying ability. For paying 1 dollar of liability how much a
company have short term assets? If liabilities are rising faster than assets, ratio will fall. If we
compare both years ratio is increased in 2014. Although Current liabilities have increased but
current assets have raised faster than liabilities.
This is favorable for company Means Company has more now to meet short term debts.
This is favorable because of company have more stock in trade and trade debts as compare to
last year. Also company has done more investments in different banks like HBL, MCB and ABL.
Investments are in money market funds and cash funds and investment in high yield schemes,
which raised company’s current assets in 2014.
Quick Ratio
Quick Ratio 2014
Current Assets-INV 3652481-2226562 1425919.0 0.
54Current Liabilities 2629876
2,629,876.0
6 | P a g e
0
Quick Ratio 2013
Current Assets-INV 3139234-1912425
1,226,809.0
0 0.
50
Current Liabilities 2445658
2,445,658.0
0
Significance:
Quick ratio relates the most liquid assets to current liabilities. Inventory is removed from current
assets. Quick ratio is a measure of firm’s ability to payoff short term obligation without relying
on sale of inventories. Usual guideline for quick ratio is 1. If we compare both years which are
below 1 Means Company is in critical situation to pay its short term debts.
Favorable or Unfavorable:
This is in both years, unfavorable for company, because company has a lot of inventories in both
years.
How to improve/Suggestions:
To improve it, company should use Just in time approach (JIT) for inventory, also company
should do forecasting for future production so that inventory level should be controlled.
ASSETS MANAGEMENT RATIOS
Inventory Turnover in day
Inventory Turnover in day 2014
(Inventory*Days in year) 2226262*365 812585630
128.6524142
COGS 6316132
6,316,132.00
7 | P a g e
Inventory Turnover in day 2013
(Inventory*Days in year) 1912425*365 698035125 124.905453
3COGS 5588508 5588508
Significance:
This ratio shows that how long does a company tales to covert its inventories into Accounts
Receivables through sales.
Favorable or Unfavorable:
National Foods Limited were converting its inventories into A/R in 125 days in 2013, but the
time duration in 2014 for the conversion of inventories in to A/R increased to 129 days in 2014,
which is unfavorable to the company as their performance seems to be low than that of in 2013.
Reasons:
NFL have an immense increase in inventories in 2014 that that of in 2013, despite of the fact that
they have increased their sales in 2014 but yet their conversion of inventories is relatively slower
compared to the performance of 2013. As we can see in their financial statements that they have
more inventory than that of in 2014, it took more time to convert it into the sales to become A/R
(or cash) , this shows not good enough asset management of the company in 2014 in comparison
to 2013 performance.
Suggestions:
NFL can manage their inventory turnover in days ration by following the given suggestions.
1. Produce goods as demanded by following the JIT (just in time) approach.
2. Concentrate more on their advertisement or MARKETING strategies to make them more
effective so that their sales increase which will eventually improve their inventory
turnover ratio as well as their profitability would also be increased.
Fixed Assets Turnover
Fixed Assets Turnover 2014
8 | P a g e
Annual Sales 9725258
7.312399998Total Fixed Assets 1329968
Fixed Assets Turnover 2013
Annual Sales 8545966
7.661396485Total Fixed Assets 1115458
Significance:
This ratio tells how company is efficiently using its fixed assets to generate sales. If we compare
the figures of both years output is almost same. In 2013 NFL generated 7.66 of revenue per 1
rupee of its net fixed asset and 2014 it generated 7.31 rupee per 1 rupee of net fixed asset. In
2014 ratio is slightly lower.
Favorable or Unfavorable
Its unfavorable for the company.
How to improve/ Suggestions:
To improve it, company should:
Utilize its fixed assets properly and efficiently
Train labors
Dispose-off useless assets
Do more sales
Total Assets Turnover
Total Assets Turnover 2014
Annual Sales 9725258
1.951903171Total Assets 4982449
9 | P a g e
Total Assets Turnover 2013
Annual Sales 8545966
2.008598037Total Assets 4254692
Significance:
This ratio tells that how efficiently a company is utilizing its total assets to generate sales. If we
compare both years, it tells that in 2013 for every one rupee of total assets, 2 rupee of sales is
generated whereas the figure in 2014 is lower than 2013.
Favorable or Unfavorable
This is unfavorable for the company.
How to improve/ Suggestions:
To improve it, company should:
Increase in revenue by doing more sales through high promotion
Dispose-off or liquidate useless assets
Lease assets instead of buying them
Efficient utilization of assets
Accelerate accounts receivable
Better inventory management through Just in Time approach
Days sales Outstanding (Average Collection Period)
Average Collection Period 2014
Receivables * days in year
796624*36
0 29.4886408
2Annual Sales 9725258
Average Collection Period 2013
Receivables * days in year 652142*36 27.47157197
10 | P a g e
0
Annual Sales 8545966
Significance:
This ratio tells that how efficiently a company is receiving its receivables of credit sales and the
figure tells the number of days that receivables are collected.
Favorable or Unfavorable
If we compare both years DSO in 2013 company was efficient as compare to 2014 which is
unfavorable.
How to improve/ Suggestions
To improve it:
Company should not do credit sales in red areas
Credit period decreased like from 30 days to 20 days
Enhance operations of collection department
Discounts policy to debtors on early payment
Payable Turnover in days
Payable Turnover in day 2014
(A/P*Days in year)1372410*365
500,929,650.0079.30956003
Annual purchases 6316132
6,316,132.00
Payable Turnover in day 2013
(A/P*Days in year) 1331561*365 48601976586.96771392
Annual purchases 5588508 5588508
11 | P a g e
Significance
This ratio tells a company's average payable period. Days payable outstanding tells how long it
takes a company to pay its invoices from trade creditors, such as suppliers. If the number of days
increases from one period to the next, this indicates that the company is paying its suppliers more
slowly, and may be an indicator of worsening financial condition.
Favorable or Unfavorable
If we compare both years ratio has fallen in days in 2014 means company is paying more quickly
to its creditors. This is favorable for company. This is favorable because
Reasons
Company has more purchases in current year i.e. 2014
Company has efficient operation of payable department
Company’s sales are more which lead the company to pay its payables more quickly
Company is getting discounts on early payments
Receivable Activity (Receivable Turn Over Ratio)
=>Annual Sales/Accounts Receivable
Receivable Activities 2014
Annual sales
9,725,258.0012.00650618
Receivables
809,999.00
Receivable Activities 2013
Annual sales
8,545,966.00
12.77725681
Receivables
12 | P a g e
668,842.00
Significance
This ratio shows the ability of the company that how many times the company is turning its
Accounts Receivables into cash in a year.
Favorable or Unfavorable
In 2013 NFL was converting its accounts receivables into cash 12.77 times in the year, which
declined to 12.00 times in 2014 which mean company is now efficiently collecting its
receivables as compare to previous year, although it’s in line with the last year but a bit
performance has increased.So this is favorable.
Reasons & Suggestions
As the receivables are increased during the period to it will take more time to recover the cash
from the creditors. In 2013 the receivable were Rs. 668,842/- which increased, as the sales were
increased by 13.8% which is by the way good for the company, to Rs. 809,999/- in 2014 which is
a massive increased in receivables, so it will take more time to recover the accounts receivable
from the creditors.
The company can improve this ration by making new strategic policies regarding sales made on
credit basis, as well as give the customers different offers that make them make the payments at
the earliest such as “n/10” & “n/30” i.e. if the customer will pay the full amount, NFL will
provide it a 10% discount & if the payment period is more than 30 days than company would not
give any discount on payment.
Profitability Ratios
Net Profit Margin
Net 2014 2014
13 | P a g e
Margin
Net Income
704,9420.072485686 7.248568624
Sales
9,725,258.00
Net Margin 2013 2013
Net Income
665,2640.077845383 7.784538342
Sales
8,545,966
Significance:
This ratio tells how much profit you’re getting from your sales after deducting all expenses.
Creditors and investors use this ratio to measure how efficiently a company coverts sales into net
income so that dividends and loans can be paid.
Favorable or Unfavorable:
If we compare both years, company’s performance is decreased in 2014. Reasons behind it could
be high costs like interest, tax and depreciation. So this is unfavorable for company.
How to improve/ Suggestions:
A company should do
Efficient expense management
optimal capital structure
COGS should be minimum through efficient production.
14 | P a g e
Gross Profit Margin
Gross Margin 2014 2014
Gross Profit
3,409,126.0
00.350543502
Sales
9,725,258.0
0
Gross Margin 2013 2013
Gross Profit
2,957,4580.346064798
Sales
8,545,966
Significance
This ratio tells the profit of firms relative to sales. It measures the efficiency of firm’s operational
performance and how products are priced. Here ratios are almost same in both years but there is
a slight difference. This ratio tells company’s performance and is constant and increasing.
Favorable or Unfavorable
This ratio is favorable in 2014 as its increasing, because more sales were done.
How to improve/Suggestions
If a company wants to improve it, it should
Increase selling price without increasing cost of goods sold
Reduce cost of goods sold without changing your selling price
15 | P a g e
Increasing your sales volume without increasing cost of goods sold and without lowering
selling price
Look for ways to reduce ‘product or delivery’ costs so that net income should be more
Find alternate, cost-effective ways to get your products or services to customers
Identify effective ways to add value that customers will pay for – so you can raise prices
more than the cost of the value added
Company should differentiate itself so it can stop competing on price
Return on Investment
Return on
Investmen
t 2014 2014
Net Income $704,942.00
0.141485041 14.14850408
Total Assets
$4,982,449.0
0
Return on
Investmen
t 2013
Net Income
$
665,264.00
0.156360084 15.63600843
Total Assets
$4,254,692.0
0
Significance:
16 | P a g e
This ratio tells overall earnings on investment/assets, means how efficiently company is utilizing
its assets to generate income.
Favorable or Unfavorable
In 2014 company’s ROI has decreased by 1% and it’s unfavorable for the company or is bad
indicator for company.
How to improve/ Suggestions:
To improve it, company should
Dispose-off its useless assets
Efficient expense management
Reducing Cost of Goods Sold
Increase revenue
Minimize production costs
Return on Equity
Return on Equity 2014
Net Income $ 704,942.000.319279067 31.92790674
Total Equity $ 2,207,918.00
Return on Equity 2013
Net Income $ 665,264.000.398660792 39.86607916
Total Equity $1,668,747.00
Significance:
This ratio tells rate of return on common stockholders’ investment. It measures the efficiency of
a firm at generating profits from each unit of shareholders equity. If we compare both years,
there is a big difference.
Favorable or Unfavorable
17 | P a g e
In 2014 ROE has decreased which is unfavorable for the company because company has issued
too many shares to common stockholders but earnings were not earned. Reasons behind it could
be inefficient expense management.
How to improve/ Suggestions:
To improve it, company should:
Enhance its operating efficiency to increase profit margin and return on sales
Do effective expense management
Utilization of assets efficiently
Paying less taxes, as taxes can have negative impact on company’s return on equity
COVERAGE RATIO
Interest Coverage Ratio
Interest
Coverag
e 2014 2014
EBIT 1,119,844
12.79631598Interest 87,513
Interest
Coverag
e 2013 2013
EBIT 1,053,895 14.
08Interest 74,832
Significance:
18 | P a g e
Interest Coverage Ratio indicates the capacity of an organization to pay its interest obligations.
Generally, companies would aim to maintain interest coverage of at least 2 times. Lower than 1.5
times may suggest that fluctuations in profitability could potentially make the organization weak
to delays in interest payments. This ratio tells that number of times a company could make
interest payments on its debt with its EBIT. Company’s failure to meet its interest payment
usually results in default.
Favorable or Unfavorable
If we compare both years, in 2013 ratio of 14 means that company is earning enough to make
interest payments 14 times whereas this ratio has declined in 2014. So this is unfavorable for
company.
How to improve/ Suggestions:
Company should do more sales
Company should use less debt
Company should use retained earnings to finance its operations and assets.
MARKET VALUE RATIOS
Earnings per Share
Earnings per share 2014
Net Income 704942
13.6081308Number of shares
outstanding 51803
Earnings per share 2013
Net Income 665264
12.84219061Number of shares
outstanding 51803
19 | P a g e
Significance:
It measures the amount of net income earned per share of stock outstanding. In other words, this
is the amount of money each share of stock would receive if all of the profits were distributed to
the outstanding shares at the end of the year.
Favorable or Unfavorable
If we compare both years company has more EPS in 2014 as compare to 2013. This is favorable
for company because of following reasons:
In 2014 company has more net income after deducting all of the expenses
Company did good expense management
Company did good sales which lead to high net income
Addition of other income
Price per Earning Ratio:
=> Market Price Per Share / Earnings Per Share
Price Earnings Ratio 2014
Market Price per share 33024.12280702
Earnings per share 13.68
Price Earnings Ratio 2013
Market Price per share 28521.90622598
Earnings per share 13.01
Significance
This ratio is a valuation of company’s current share price to its per share earnings.This show the
willingness of the investors that how much they are ready to pool in their investment in the
company.
Here in NATIONAL FOODS LTD. investor is willing to pay Rs. 1/- to earn Rs. 21.91/- in 2013
that increased to Rs. 24.12/- per rupee the investor is willing to pay.
20 | P a g e
Favorable or Unfavorable
2014 statements show that NFL has inclined to 24.12 which is favorable to the company.
NFL has improved their P/E ratio by almost 10.09% & this much increase in this ratio makes the
investors to expect a very higher rate of return because the company is earning a significantly
increased amount of earnings over the period.
Reason
Moreover following are some of the major reasons that help NFL to improve its P/E ratio are as
follows
Sales were increased through Effective Cost Management that lead towards higher Net profit
relative to 2013 in 2014that eventually increased the value of EPS due to which their Good Will
increased which increased its stock price in the market so the P/E ratio increased in 2014 by
10.09%.
Book Value per Share
=> Common Equity/Number of Common Shares outstanding
Book Value per share
Common Equity 220791842.62143119
Number of share outstanding 51803
Book Value per share
Common Equity 166874732.21332741
Number of share outstanding 51803
Significance
21 | P a g e
Book value per share indicates the dollar value remaining for common shareholders after all
assets are liquidated and all debtors are paid.In simple terms it would be the amount of money
that a holder of a common share would get if a company was to liquidate.
NFL has a good reputation in the market that makes its less vulnerable as it’s has a strong good
will. Even this break up ratio gives a clear look to its image.
This ratio is basically used by the shareholders of the company to see that what they will get if
the company has to be liquidated. This shows the level of safety to their investments in the
company.
Favorable or Unfavorable
In 2013 their break up ratio was Rs 32.21/share which was good enough & still they managed to
improve it by 5.834% & made it 42.62 Rupees per share. This gives the shareholders satisfaction
of their investments, so it is favorable for the company as the investor feels safe with its
investments in the NFL.
Reason
The company is earning good profits which is an indicator that they are using their assets
effectively & efficiently to generate more sales than the previous year, which lead them to
improve their good will in the market so that the price of its stocks increased, which means that
they have maximized the wealth of their shareholder which is one of the major reasons of firms
existence.
Market / Book Ratio
=>Market Price / Book Value per Share
Market to Book Ratio
Market Price 3307.742843735
Book Value per Share 42.62
22 | P a g e
Market to Book Ratio
Market Price 2857.077228706
Book Value per Share 40.27
Significance
The ratio of a stock market price to its book value gives another indication that how investors
regard the firm. In NFL case as it is earning high rate of return on its assets in 2014 i.e. 7.743
which means that for 1 rupee you are investing in NFL, you will get 7.743 rupees in return than
investing in the market, & as its M/B ratio in 2014 is higher than that of its previous ratio in 2013
i.e. 7.077, that show an increment which is a good indicator in investors sight.
Favorable or Unfavorable
It is favorable for the company because it is showing a growing trend from 2013 to 2014 with a
percentage change of 9.48%. This mean the investors are looking forward for more returns as
their investments is secured.
Reasons
The major reasons for this improvement are given as follows:
NFL has increased their sales from Rs. 8,545,966,000/- to Rs. 9,725,258,000/- from 2013 to
2014 respectively, which indicates that they have a good marketing strategy plan which has
helped them increasing their annual sales which ultimately lead them to earn more profits, which
showed an effect on their good will in the market so that their stock price increased from
Rs.285/share to Rs. 330/share.
DEBT MANAGEMENT RATIOS
Debt to Equity Ratio:
Debt to equity 2014 2014
23 | P a g e
Total debt 27745311.25
Shareholders’ equity 2,207,918.
Debt to equity 2013 2013
Total debt 25859451.55
Shareholders’ equity 1668747
Significance:
Debt to equity ratio tells that how much creditors will finance firm against Rs 1 provided by the
shareholders. This ratio tells about the capital structure of a firm means how much financing a
firm gets from issuing bonds (debts) and how much from Stocks (shares). If a firm raises funds
from, it has to pay interest and if it raises funds through equity, it has to pay dividend. So an
optimal level is capital structure should be used.
Favorable or Unfavorable
It is unfavorable for the company as their credibility has decline from Rs 1.55 to Rs1.25, because
shareholders equity is increased by more proportion than debt in 2014. This means that now the
creditors have to pay Rs 1.25 against Rs 1 by the stock holder rather than Rs 1.55
Suggestions:
This ratio is very critical and important because it tells us how much the creditors have to pay
against each Rs 1. There should be some nominal mixture of both debt and equity as both have
their perks and demerits.eg if the debt or the leverage is too high it will give you a tax shield yet
the more debt you have the more interest payments against the debt you have to pay. Same goes
for equity, the more equity you have the more dividends you have to pay against it.
Debt to total asset
Debt to
total assets 2014
Total debt 2774531 0.556 55.6%
24 | P a g e
Total assets 498,2449
Debt to total assets 2013
Total debt 2585945
0.6077 60.78%
Total assets
425,4692
Significance:
This ratio tells the percentage of frame asset that is financed by its creditor.
Favorable or Unfavorable
It is favorable in 2014 in respect of the investor the company’s assets are supported 60.78% in
2013 and 55.6% in 2014.as investor seek lower debt ratio because the lower the ratio the greater
cushion against creditors losses in the event of liquidation
How to improve/ Suggestions
o Additional/ New Stock Issue: The Company can issue new or additional shares
to increase the cash flow.
o Debt / Equity Swap: By implementing a debt / equity swap, a company can
make a debt holder an equity shareholder in the company. This will cancel the
debt owed to him and in turn, reduce the debt of the company and improve the
ratio.
o Lease Assets: The Company can sell its assets and then lease them back. This
will induce a cash flow that can be used to pay off some debts.
o Increase the Sales: The Company can focus heavily on increasing the sales but
without any increase in overhead expenses. The increase in sales can be used to
reduce the debt and improve the debt to total asset ratio.
25 | P a g e
Gearing ratio
*Total Capitalization=Long Term Debt+S.H. Equity.
Gearin
g ratio 2014
Long term debt 144,655
0.06148 6.14%Total
capitalization
144655+220791
8
Gearin
g ratio 2013
Long term debt 140,287
0.0775 7.75%Total
capitalization
140,287+166874
7
Significance:
This ratio tells the proportion of assets invested in business that are financed by Long term
borrowings, means how much long term debts like bonds and debentures are used to finance a
firm’s total assets. If the ratio is higher, it means firm is on risk. More than 1 ratio, tells that
company has more debts than capital which is not good for the company as it leads to problems
especially company gets bankrupt.
Favorable or Unfavorable
So it is favorable.The equity in 2014 was much higher as compared to the 2013 as well as there
is a bit difference in the long term debt as compared to 2013.that is the reason that the gearing
ratio has decreased.
How to improve/Suggestions:
How to reduce gearing ratio:
26 | P a g e
Sellshares.
The board of directors could authorize the sale of shares in the company, which could be
used to pay down debt.
Convert loans.
Negotiate with lenders to swap existing debt for shares in the company.
Increase profits.
Use any methods available to increase profits, which should generate more cash with
which to pay down debt.
27 | P a g e