Financial Statement Analysis and Finance Performance: Agroproquim, C.A - Case Study Example

Agroproquim, C.A. Agroproquim, C.A. Introduction The case of Agroproquim, C.A. is under consideration in this report. The company has its business in the distribution of chemical products for the agricultural industry. The company despite of growth in sales is not able to maintain healthy cash position, which is resulting in delayed payments to suppliers and thus, affecting the ability of the business to keep up with its finances and also to meet the requirements of its sales. Moreover, there have been delays in the collection of the company’s accounts receivables which in effect combined with other factors is making the financial and business position of the company weak. The current situation has led to refusal of additional financing from Banco Oriental. In this report the company’s financial position has been evaluated. For this purpose, in this report cash flow statement for the last year 2008 has been prepared to determine cash flow from operations, investment, and finance activities. In addition, the report also includes financial ratio analysis along with presentation of various key performance indicators which have been derived for the assessment of the company’s financials. Cash Flow Statement for the Year 2008 2007 2008 Bs 000s Bs 000s Net Income 146 173 Net Cash Variation Amortization 22 32 Net Changes in Current Assets and Liabilities Accounts Receivable (452) (1,171) Inventories (160) (1,050) Accounts and Bills Payable to Suppliers 560 1,195 Accumulated Expenses 6 60 Operating Cash Flow 122 (761) AGROPROQIUM C.A. (80) (284) (Acquisition)/Sale of Corporate Investments (400) - Investment Cash Flow (480) (284) Dividends (110) (149) Increase in Capital - - Short-term Borrowings 127 1,460 Long-term Debt Banco Oriental (40) (40) Long-term Debt Betacourt 400 (200) Financing Cash Flow 377 1,071 Net Cash Variation 19 26 Cash Beginning of Period 85 104 Cash End of Period 104 130 Difference - - Equity Beginning of Period 1,008 1,044 Net Income 146 173 Dividends (110) (149) Equity End of Period 1,044 1,068 Difference - - Dividends paid in the year 2008 are calculated by determining the difference adding up equity at the beginning of period and net income and deducting equity at the end of period. CASH FLOW 2007 2008 Operating Cash Flow 122.00 (761.00) Investment Cash Flow (480.00) (284.00) Financing Cash Flow 377.00 1,071.00 The above table indicates very weak position of the company as it can be noted that the company’s operations are generating major cash outflows in the year 2008 as compared to the inflow in the year 2007. The company’s short term borrowing has been increased by Bs. 1,460,000 in 2008, which could lead the company into solvency issues if it continues to fail to generate positive cash flow from its operations as repayments of principal amount along with interest will become a difficult proposition for the company. Financial Ratio Analysis 2006 2007 2008 LIQUIDITY Current Ratio 1.9 1.3 1.0 Acid Test 0.8 0.7 0.5 Working Capital 822 560 92.0 DEBT Total Assets/Equity 2.2 3.2 5.4 EBITDA/Interest 2.5 1.9 1.8 Total Debt 1.7 2.1   INTEREST RATIO EBITDA/Interest 2.5 1.9 1.8 Operating Cash Flow/Interest N/A 1.4 (1.9) PROFITABILITY Gross Profit/Sales 30% 28% 28% Operating Profit/Sales 7% 8% 8% Net Profit/Sales 2% 2% 2% Net Profit/Total Assets 6% 4% 3% Net Profit/Equity 14% 14% 16% EBITDA/Sales 7% 8% 8% EBITDA/Total Activo 18% 17% 12% GROWTH Variation in Sales N/A 19% 30.0% Variation in Total Assets N/A 49% 75.4% Variation in Total Liabilities N/A 87% 109.0% Variation in Equity N/A 4% 2.3% ACITIVITY / EFFICIENCY Turnover Accounts Receivables (Days) 43 60 93 Turnover Inventory (Days) 88 84 124 Turnover Accounts Payable (Days) 39 73 124 Cash Turnover 92 71 70 Sales/Assets 2.62 2.1 1.55 (Note: The highlighted ratio is not complete because the name of the ratio is incomplete) Liquidity The company’s liquidity position is ascertained by three different measures of performance. It can be noted that the company’s liquidity position is deteriorating in the past three years. The current ratio which had values of 1.9 and 1.3 in 2006 and 2007 respectively has decline to value of just 1.0 in 2008. Although, this is still close to 1 which is a good indicator of liquidity. But by looking at the composition of the company’s current assets it is clear that the company is holding a large value of inventory which is reflected from the values attained for acid test ratio. This ratio has values less than 1 in all past three years and it is just 0.5 in 2008. This could lead to serious liquidity issues for the company as it is not able to generate sufficient cash flows and in case of any obligation settlement requirements the company could face liquidation or bankruptcy. Capital Structure Capital sturucture/leverage: compare short term and long term debt. How could the debt structure be improved?: one paragraph discussion Dividend Payout Analysis The company’s dividend payout ratio, which is calculated as the fraction of the net income paid as dividend to the company’s shareholders, has increased from 75% in 2007 to 86% in 2008. The resultant retention of the company has reduced from 25% in 2007 to 14% in 2008. This is one indicator of low cash holding by the company as it is paying very high levels of dividends payouts in both years instead of retaining these funds for improving the position of the company’s financial books and also maintaining continuous relationship with its suppliers. The company can delay or avoid paying to shareholders for coming periods in order to attain a higher cash level. Sustainable Growth The company’s sustainable growth is the measure of its ability to operate without increasing its financial leverage. It is calculated using the following formula; Return on Equity x (1-Dividend Payout Ratio) Return on Equity Dividend Payout Ratio Sustainable Growth Rate 14% 75% 11% 16% 86% 14% The company’s sustainable growth rates for 2007 and 2008 are obtained as 11% and 14%. This is maximum growth that the company can achieve from its internal financing. However, when these ratio values are compared with variations in sales it is clear the company is experiencing more than ordinary growth in its sales and therefore, in order to meet its business requirements it must borrow from external sources, which is not being approved by Banco Oriental. Operating efficiency and activity: one paragraph discussion on operating efficiency. Operating performance and profitability: provide the profitability indicators and DuPont analysis: present a one paragraph discussion of your analyses and the indication of the firm’s returns on capital, equity, and assets. 1. 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