Golden Agri-Resources Ltd - Case Study Example

Accounting Table of Contents Table of Contents 2 Introduction 3 Strengths and weaknesses of GAR 5 Recommendation 10 Reference 11 Introduction Golden Agri-Resources Ltd (GAR) ranks second among the world’s oil palm plantations, in terms of planted area and has the “largest total land bank”. The company was enlisted on the Singapore Exchange Securities Trading Limited in the year 1999. In Indonesia GAR has a total planted area of roughly 427000 hectares. Along with plantation it operates three refineries, 34 mills for processing of palm oil and six kernel crushing plants. The primary activities of the company include harvesting and cultivating oil palm trees, processing the bunch of fresh fruit to make palm kernel oil and crude palm oil CPO), refining of CPO into products like margarine, cooking oil and shortening. GAR has its operations in China, with refinery facilities located in the provinces of Zhuhai and Ningbo (Golden Agri-Resources Ltd-a, n.d.). Palm oil production facilities of GAR produces a bulk of products like palm kernel, crude palm oil, palm kernel oil, olein, palm kernel meal, stearin, soybean oil, cocoa butter substitute and soybean meal. Besides this the company also produces refined products like margarine, shortening, cooking oil, butter oil substitute, fats for restaurants, cafes, hotels and industrial markets (Golden Agri-Resources Ltd-b, n.d.). The company has the reputation of being the ‘one stop shop’ supplier. As a result of economies of scale the operations of the company are highly efficient. It has a strong brand presence in Indonesia with the two leading cooking oil brands Kunci Mas and Filma under its name. In its aim of emerging as the most profitable and largest integrated oil-palm-based company it has outlined a set of missions which include- Achieving the highest quality standards. Maintaining integrity Maximizing the shareholders value Ensuring returns to community and society. Setting new trends through innovation. (Golden Agri-Resources Ltd-c, n.d.). GAR practices ‘corporate social responsibility’ in all its operations. In today’s competitive business environment a business cannot overlook its responsibility towards the society. Business is no more limited to being a profit-making machine rather it has to concentrate on other activities other than reaping profits. As a part of CSR, the practices of GAR include environmental management, zero burning; zero waste; adherence to the environmental rules; providing educational facilities; extending healthcare facilities; development of infrastructure etc. Strengths and weaknesses of GAR Financial Statements- Financial statements are summarized, written records that help in analyzing the financial health of the company. Such statements are prepared mostly on an annual basis except for the income statement that is prepared either on a monthly or on a quarterly basis (Illinois Department of Commerce and Economic Opportunity, n.d.). These statements give an insight into the performance of the business activities. The financial statements comprise of three interrelated reports- Balance Sheet or Statement of financial position Income Statement Cash Flow Statement (Brandler, 1994: 1). The Balance Sheet of the company gives information about the amount that the company owes to the external parties as well as the amount that is owed to the company. In the Income Statement the expenses and the revenues of the company are recorded to find out the profit or loss arising from the business operations. Cash Flow Statements present the sources, application and cash balance. The above statements present a brief picture of the profit position of the business entity. These statements combined above, gives a bird’s company’s financial strength or weakness. Uses- The financial statements are accessed both by the external as well as internal parties. The internal users are the managers and the employees; and the external users include the shareholders, lenders, analysts, government etc. Managers take the help of financial statements while making financial operational and investment decisions. The debt and equity amounts in the Balance Sheet along with the interest coverage ratios guide the management of the company to decide the ideal debt position of the company. Other than the financial decisions, the company also needs the financial report to decide its investment plan for other companies. If the management of the company wishes to acquire a stake in another company then it can assess the financial strength of the investment from the profitability position of the desired investment (Washington State University-a, n.d.). The financial statements also facilitate in computation of the ratio which can be compared with the past figures to check for any variations or improvements. An inter-industry comparison of the ratios gives an idea about the position of the company in the industry. Analysis of GAR’s financial strength and weakness- The financial performance of GAR has varied over the years as is evident from the analysis of its financial ratios. In terms of profitability the operating profit margin of the company has declined in 2008 as compared to the previous year. GAR reported an operating profit margin of 68.83%, 93.8% and 66.5% for the years 2006, 2007 and 2008 respectively. This margin was therefore the highest in 2007 after which it fell significantly in the following year. Despite an increase in the revenue from nearly US$ 1873 million in 2007 to US$ 2985 million in 2008 the company could not sustain the profitability of the previous year (Golden Agri-Resources Ltd-d, 2008; Golden Agri-Resources Ltd-e, 2007). This is partly due to a rise in the cost to sales ratio of the company. The ratio was 0.65 in 2007 and rose to 0.71 in the immediate year. Besides this there was a sharp rise in the selling expenses of the company that attributed to the low operating profit margin in 2008. A fall in this margin over the previous year indicates that the company has not been able to manage its operating costs efficiently which resulted in a fall in the operating profits. The net profit margin which is expressed as Net Profit/ Sales or Revenue measures the efficiency of the company in managing the administrative costs. GAR reported a net profit margin of 28%, 37.68% and 30.14% in the years 2006, 2007 and 2008 (Golden Agri-Resources Ltd-f, 2006). This shows that the net profit margin has reduced over the last three years. There was a rise in this margin in 2007 but it fell in the next year. This is mainly due to huge foreign exchange losses incurred by the company in 2008. The amount of this loss was nearly US$ 3.5 million in 2007 and this amount rose to nearly US$ 34 million in the following year. This had a considerable impact on the net profit amount and resulted in a fall in the net profit margin despite a rise in the revenues. The Current ratio measures the liquidity position of the company. It is expressed as Current Assets/ Current Liabilities and is an indicator of short-term business solvency (Brigham and Ehrhardt, 2008: 125). Ideally this ratio must be 2 but this may vary across the industries. The current ratio of GAR for the years 2006, 2007 and 2008 is 1.21, .47 and 1.29 respectively. In terms of liquidity the position of the company has not changed much. This ratio was high in 2007 and dropped marginally in the following year due to a rise in the current liabilities. In this year there was a rise of nearly 17 percent in the short term loans from approximately US$ 262 million in 2007 to US$ 309 million in 2008. The debt equity ratio of GAR is 0.55, 0.48 and 0.45 for the years 2006, 2007 and 2008 respectively. This has reduced over the years. This is mainly due to a rise in the total equity of the company that has nearly doubled as compared to 2006. The debt-equity ratio of the company indicates that the company puts equal emphasis on both the sources of funding. In the last two years the company has been aggressive in its use of debt in the capital base as is evident from the total debt position that has doubled from nearly US$ 1064 million in 2006 to US$ 2118 million in the year 2008. A company must be careful while using excessive debt as this can financially bind the company in the form of fixed interest obligations. From this viewpoint the capital base of the company appears to be ideal as GAR has efficiently used both debt and equity. The return on equity (ROE) is a measure of the wealth created by the company for its shareholders. Considering the risk that the shareholders take in extending capital to the business a high return serves as a reward for bearing the risk. The ROE of GAR was 28%, 37% and 30% for the years 2006, 2007 and 2008 respectively. The company earned the highest return, on the equity employed in the business in 2007. This fell in the following year. A company that earns high ROE is attractive to the investors. Therefore the performance of GAR in this respect is more or less stable. It has managed to generate significant returns for its shareholders. The Return on Asset (ROA) depicts the efficiency with which it uses the asset base. It gives an indication about the amount of earnings generated by the business from the invested amount of capital. From this ratio the investors get an idea about how effectively the management is converting the available resources to generate net income. The ROA of GAR is 18%, 25% and 21% for the years 2006, 2007 and 2008 respectively. This is fairly good as the ratios have remained almost stable over the years. In 2008 there was a rise in the total assets of the company and this was accompanied by a corresponding rise in the net profit amount. This ratio fell in 2008 as the increase in the amount of assets did not correspond with the increase in the amount of net profit earned by the business. The company must try to reduce its costs for earning higher returns on the assets deployed in the business. The inventory turnover ratio measures the rate with which the inventory is converted into sales. A high ratio indicates efficiency in selling and a low ratio indicates higher amount of unsold inventory. GAR had an inventory turnover ratio of 5.96, 3.90 and 8.50 for the years 2006, 2007 and 2008. This ratio has increased steadily over the years, indicating that the management of the company is able to generate high revenues for the business. This is a very positive sign as a rise in the sales volume and a fall in the level of inventory raises business profits. Together with this there is a fall in the storage costs adding to the company’s profitability. The asset turnover ratio of the company explains the relationship that exists between assets and sales. A higher asset turnover ratio indicates optimum asset utilization. For GAR this ratio has increased over the years. The asset turnover ratio of the company was 0.38, 0.37 and 0.43 for the years 2006, 2007 and 2008 respectively. A rise in the ratio indicates that the company is effectively utilizing its asset base for generating sales (Washington State University-b, n.d.). Recommendation An analysis of the financial ratios reveals the financial strengths of the company. GAR has generated sufficient amount of returns for its shareholders as is evident from the returns generated over the last three years. The revenue of the company moved up significantly in the year 2008 when most of the businesses were trying to cope with the global financial crisis. This highlights the financial strength of the company. However the rise in the revenue was not in accordance with the rise in the profitability as indicated by the profitability ratios. This is mainly due to ineffective management of costs bringing into view the weakness of the company’s management. However other than the profitability, the financial performance of the company is sound if other parameters such as turnover ratios are taken into account. It has shown a significant acclivity over the last three years. From the viewpoint of returns and turnover the company appears to be a good investment opportunity. So Michael can invest in the shares of the company. Reference Brigham, F.E. Ehrhardt, C.M. 2008. Financial management: theory and practice. Cengage Learning. Brandler, J. 1994. How to use financial statements: a guide to understanding the numbers. McGraw-Hill Professional. Golden Agri-Resources Ltd-a. Company Overview. No date. About us. March 24, 2010. . Golden Agri-Resources Ltd-b. Products and Brands. No Date. Our Business. March 24, 2010. http://www.goldenagri.com.sg/index.php?page=products-and-brands Golden Agri-Resources Ltd-c. Visions and Values. No Date. About us. March 24, 2010. . Golden Agri-Resources Ltd-d. Annual Report 2008. 2008. March 24, 2010. . Golden Agri-Resources Ltd-e. Operations Review. 2007. March 24, 2010. . Golden Agri-Resources Ltd-f. Annual Report 2006. March 24, 2010. . Illinois Department of Commerce and Economic Opportunity. WHAT ARE THESE STATEMENTS?. No date. A Simple Guide to Your Company’s Financial Statements. March 24, 2010. . Washington State University-a. Users/Demanders of Financial Statements Information. No date. Financial Analysis revised. March 24, 2010. . Washington State University-b. Total Assets Turnover. No Date. Ratio Analysis Techniques. March 24, 2010. < http://cbdd.wsu.edu/kewlcontent/cdoutput/TR505r/page38.htm>. Annexure-    (in US$’000) (in US$’000)  (in US$’000)   2008 2007 2006         Current Assets 707481 763817 424000 Current Liabilities 547989 517790 347916 Current Ratio 1.29105 1.47515 1.21868         Net Profit 1418645 1274375 539531 Revenue 2985948 1873352 1129587 Net Profit margin (%) 47.5107 68.0265 47.7636         Operating Profit 1986316 1757968 777556 Revenue 2985948 1873352 1129587 Operating Profit Margin (%) 66.5221 93.8408 68.8354         Total Debt 2118677 1631604 1064066 Total Equity 4706830 3381210 1921296 Debt to equity ratio 0.45013 0.48255 0.55383         Net Profit 1418645 1274375 539531 Total Equity 4706830 3381210 1921296 Return on equity (%) 30.1401 37.6899 28.0816         Net Profit 1418645 1274375 539531 Total Asset 6825507 5012814 2985362 Return on Asset (%) 20.7845 25.4223 18.0725         Cost of Sales 2109831 1215004 859773 Inventories 248084 311534 144174 Inventory turnover ratio 8.5045 3.90007 5.96344         Revenue 2985948 1873352 1129587 Total Asset 6825507 5012814 2985362 Asset turnover ratio 0.43747 0.37371 0.37838 Read More