Financial Analysis of Mondi Group - Case Study Example

Financial analysis of Mondi Group Task Table of Contents Introduction 3 Mondi Group 3 Profit and Cash flow 5 Gearing ratio 11 Growth and valuation ratios 12 Efficiency ratios 13 Conclusion 14 List of References 16 Appendix 1: figures used in ratio calculations 17 Appendix 2: Ratio Formulas 18 Appendix 3: The ratios 19 Introduction Stakeholders rely on the information provide in the financial statements for decision-making purposes. A portion of the stakeholders, especially those that provide funds to the company are interested in knowing how their funds are being managed. For that reason, it is necessary that companies present the financial statements periodically. The presentation of the financial statement is not only to meet the needs of stakeholder but also to comply with various laws and requirements set by the governing authorities such as the IFRS and the Company law. The paper seeks to present the financial analysis of the financial statement of Mondi Group using ratios such as the profitability ratios, liquidity ratios, efficiency ratios and gearing ratios. The analysis intends to uncover how the financial position of Mondi Group has transformed over a four – year period (2011 – 2014). In addition, the essay will provide analyses on how well Mondi Group manages its working capital. The analyses are as done below. Mondi Group The company was founded in 1967 in South Africa. It is headquartered in Johannesburg, South Africa. Anglo American PLC, formerly owned the company. In the 90s, the company implemented expansion strategies that involved a series of acquisitions of foreign companies both in Central and Western Europe. In the year 2007, the Mondi group separated from its mother company, Anglo American PLC. It implemented a strategy that saw its shares listed on two stock exchange markets (Johannesburg Stock Exchange and London Stock Exchange). It should be noted that the dual listing strategy of the company is structured as follows: the primary listing of the company is on the Johannesburg Stock Exchange for Mondi Limited while the listing on the London stock exchange is a premium listing for Mondi PLC (Annual Report: Mondi Group 2012; 2014 pp. 1-7). The primary activity of Mondi group is the production of paper and packaging products that serve more that 100,000 purposes. The company has production operations in 30 nations across the globe. The location of the company’s primary operations is in central Europe, South Africa, and Russia. By the end of 2012, the company’s employees grew to 25,700 people. The company produces the following products: packaging paper, uncoated fine paper, industrial bags, release liner, corrugated packaging, and extrusion coatings. In addition, the company supplies advanced films and hygiene products and innovative packaging solutions for the consumers (Annual Report: Mondi Group 2012; 2014 pp. 1-7). The primary purpose of Mondi group is the creation of packaging solutions for the customers and creating value for the shareholders. The company has a goal to achieve a 13% return on capital employed. The achievement of the goals rests on the four strategic pillars formulated. The four pillars are as follows: first, the achievement of leading market positions. Second, the maintenance of a high-quality, low-cost asset base. Third, to achieve growth through customer-focused development. Last, to continually focus on performance (Annual Report: Mondi Group 2012; 2014 pp. 1-7). The first pillar – achieve a leading market position- ensures that the company secures leading markets by continually delivering quality core packaging and uncoated fine paper to the fastest growing markets. The second pillar – the maintenance of high-quality, low-cost asset base – ensures that the company’s investment strategy restores quality at a reduced cost. For instance, targeting fast-growing markets such as the Russia, Eastern Europe, and South Africa signifies the company’s focus on achieving low-cost, high-growth strategy. The third pillar- growth through customer-focused development – ensures that the company considers the customers interest and requirement while producing. The pillar delivers customer satisfaction, creates customer loyalty and delivers growth to the company. Last, continued focus on performance – the company continually monitors its internal process to ensure the improvement of the processes and thus, achieve efficient and effective operations (Annual Report: Mondi Group 2012; 2014 pp. 1-7). Profit and Cash flow The company’s profit is arrived at by subtracting expenses from the revenues. On the other hand, the net cash flows are determined by subtracting cash outflow from cash inflow. The formula for determining the profit is different from that used to determine net cash flow. Therefore, the difference is the first explanation why the figures are always dissimilar. Second, the profit of the company indicates the long-run financial stability of the company, whereas the cash flow indicates the short-run financial stability of the company. A business that incur losses for a long period faces the risk of bankruptcy. Similarly, companies that cannot meet their short-term obligations (more cash outflow than inflow) faces the risk of bankruptcy. The profits are used to meet long-term obligations such as the repayment of the long-term loan. However, the cash flows are used to meet the company’s short-term obligations (The difference between Cash flow and profit 2015 par. 1-22 ). Third, the profit and loss account shows the revenues and expenses that relate to the primary activities of the company. For instance, concerning the Mondi Group, revenue are generated by selling the packaging and other primary products. The expenses are those that relates to the production process. On the other hand, cash flow statement shows any instance involving cash inflow or outflow regardless of whether such movement of cash relates to the primary activities of the company. For instance, owner’s withdrawals lead to cash outflows but are not treated as expenses since they do not relate to the primary activities of the company. Consequently, such transactions are not recorded in the profit statement, but the cash flow statement (The difference between Cash flow and profit 2015 par. 1-22 ). Last, the difference between the cash flow and the profit is brought about by the fact that transactions that do not involve actual cash such as the depreciation expenses are recorded in the profit and loss account. Depreciation expenses are referred to as “paper expense” and thus are not recorded in the cash flow statement since they do not involve an actual cash outflow. Based on the financial statements of the Mondi Group, below is a table indicating both the profit and cash flow from the operating activities for the year 2011 to 2014 (The difference between Cash flow and profit 2015 par. 1-22 ). Year 2011 2012 2013 2014 € million € million € million € million Net profit 400 279 414 497 Net Cash Flow 834 740 911 929 Difference -434 -461 -497 -432 Based on the above table, the cash flow from the company’s operating activities is higher than the net profit over the four-year period. Consequently, the difference is negative as shown in the table. That indicates that the company’s secondary activities generate more cash than the primary activities. The trend indicates that the both the net profit and the cash flow declined in the year 2012 and after that steadily increased over the remaining period. Profitability ratios (Kindly Put the cursor on the trend nodes to view the figures.) Net profit margin- this ratio shows how well a company manages its operating expenses such as the administrative costs and interests on debt. The higher the ratio, the lower the operating expenses of the company. The graph below shows the ratios for Mondi group. Based on the graph, the ratios are below 8% for the entire period, which indicates a high level of the company’s costs. The ratio decreased in 2012 and steadily increased over the remaining period. The trend is possibly caused by a decrease in the net profit in 2012 and a steady increase over the remaining period. The analysis indicates a the inability of the company to manage the cost of operations. Therefore, it is justified to mention that the company’s value creation effort is dwarfed by the high level of operating costs (Khan & Jain 2007, 6-40). Operating profit margin- the ratio shows the level of a company’s profitability after meeting the operational and costs related to sales. It also shows the capability of a company to service the cost of capital and pay taxes. A higher operating profit margin signifies a higher capability of the company to pay interest and taxes. The graph below shows the ratios for Mondi group. The trend of the ratio shows a steady decrease in 2012 and 2013, followed by an increase in 2014. The ratios are below 15%. It indicates a high level of the company’s operating expenses. It also indicates the inability of the company to reduce the operating costs. The trend is possibly caused by a decrease and an increase in the company’s operating profit (Khan & Jain 2007, 6-40). Gross profit margin- the ratio shows the level of a company’s profitability after meeting the costs related to sales (cost of goods sold). It also shows the capability of a company to meet the relevant operating costs. A higher gross profit margin signifies a higher capability of the company to meet the operating costs. The graph below shows the ratios for Mondi group. The trend of the ratio shows a decrease in 2012 and a steady increase over the remaining period. The trend of the ratio is possibly influenced by a decrease in the net profit in 2012 and a steady increase over the remaining period. From the graph, the company’s gross profit is fairly high. The level of the ratio indicates that the company’s ability to manage the costs of sales are reasonably effective (Khan & Jain 2007, 6-40). Return on Assets- this ratio measures the return on profit from investments made in the company’s total assets. The graph below represents the ratios over the four-year period. Based on the above graph, the return on assets of Mondi group for the four-year period decreased in 2012 and steadily increased over the remaining period. The graph shows that the returns are below 8%. The possible reason for the fluctuation is the similar trend in the profit levels as in the ratio. The rate of return generation is low. As a result, the company should increase the utilization rate of the total assets in order to further increase the return in the future (Najjar 2013, pp. 3-5). Return on equity- this ratio measures the proportion of a company’s profits attributed to the shareholder’s equity. The return on equity for Mondi group is as shown in the graph below. Based on the graph, the return on equity decreased in 2012 and steadily increased over the remaining period. The increase is possibly attributed to a decrease and an increase in the company’s net profit for the period. Based on the analysis, the return on equity is fairly attractive (Najjar 2013, pp. 3-5). Liquidity ratios Current ratio- this ratio measures the ability of the business to meet its current obligations using the current assets. , it is advisable for the ratio of current assets to current liability to be 2: 1. Concerning Mondi group, the ratios are as represented in the graph below Based on the graph, the current ratios are more than one. The graph shows an increasing trend. The increase in the current ratio over the period is possibly attributed to the increase in the current assets over the period. The ratio clearly shows that the company is liquid enough to settle its short-term obligations using the current assets during both years sufficiently. (Sarngadharan & Kumar 2011, pp. 121-135). The Quick Ratio or Acid Test – the ratio is concerned with immediate liquidity, therefore, ignores the inventory. It measures the company’s ability to settle the short-term commitments using highly liquid assets. A highly liquid asset is that which is easily converted into cash. A company is considered financially healthy if this ratio is 1. Concerning Mondi group, the ratios are as shown on the graph below. The graph shows a zig-zag trend over the four-year period. The fluctuation is possibly due to the fluctuation in both stock and current liabilities in a similar direction as the ratio. The ratio is below 1 for the four periods (Bowhill 2008, pp. 265-284). Gearing ratio The capital gearing – the ratio indicates the proportion of fixed charge capital in the capital structure of a firm. Concerning Mondi Group, the gearing ratios are as presented in the graph below. Based on the graph above, the capital gearing of Mindo group sharply increased in 2012 and steadily declined over the remaining period. The possible reason for the trend is a sharp increase and a steady decrease in the company’s long-term loan. Despite the fluctuations, the gearing level of Mondi group is below 40%, which indicates a low gearing level. Therefore, Mondi group is unlikely to default on its long-term obligations (Bowhill 2008, pp. 265-284). Growth and valuation ratios Dividend cover – this ratio indicates the number of times that dividends can be paid from earnings per share. The higher the ratio, the greater the ability of a company to pay its dividend from the EPS. The dividend cover for Mondi Group is as shown in the graph below. Based on the graph, the dividend for the company decreased in 2012 and steadily increased over the remaining period. The possible cause of the fluctuation is the fluctuation in the net profit other than the ordinary dividend. The ordinary dividend steadily increased over the period, which is unlike the trend of the dividend cover. The increase in the dividend cover signifies a strong financial performance of the company (Currie 2011, pp. 100-120). Earnings per share – the companys basic EPS for the year 2011 to 2014 are shown in the figure below. The ratio shows the amount of earnings to every share held. EPS is another criterion for measuring the company’s profitability. That is, the higher the ratio, the higher the company’s profitability. Based on the graph, EPS for Mondi decreased in 2012 and steadily increased over the remaining period. The possible reason for the trend is a similar fluctuation in the company’s net profit. An increase in the EPS shows an increase in the company’s profitability level. Therefore, the financial performance of Mondi Group is strong (Currie 2011, pp. 100-120). Efficiency ratios Inventory day turnover – the ratio is used to measure the period it takes the company to hold the stock for sales. It measures how long the inventory stays in the warehouse before being sold. A higher inventory day turnover means that the company held the inventory for a long period before sales. The opposite statement is correct. The table below shows the trend of the ratios over the four-year period. Based on the above table, the ratio increased in 2013, decreased in 2013, and increased in 2014. The possible cause of the variation in the inventory day turnover is the fluctuation in the cost of sales and the inventory(Currie 2011, pp. 100-120). Working capital It is determined using the following formula: current assets – current liabilities. In order for Mondi Group to be able to effectively and promptly meet its current obligations and efficiently run the day-to-day operating activities, there must be sufficient liquid assets. The company maintains a sufficient level of cash and cash equivalent for funding the working capital needs. Besides cash and cash equivalent, the company’s working capital comprises accounts receivable, inventory and short-term securities. Based on the financial statements, the working capital of Mondi Group for the four-year period is presented in the graph below. Based on the graph, the working capital for 2011, 2012, 2013 and 2014 are (in million euros) 368, 416, 570, and 658. The working capital shows an increasing trend over the four-year period. The increase is possibly due to a more than proportionate increase in the current assets than current liabilities (Scherr 1989, pp. 5-9). Conclusion Based on the ratio analysis above, the working capital of Mondi group is sufficient enough to run the company’s operation. The gearing level of the company is below 38% for the entire period, which indicates low debt level. Both EPS and the dividend cover show an increasing trend signifying an increasing profitability of the company. The current ratio indicates that the liquidity position of the company is strong since the current obligations can be met satisfactorily. However, the following are suggested: first, the company should improve the utilization rate of the total assets to increase the revenue generation, thus profit. Second, the cost management strategy should be adjusted to reduce the administrative costs, thus increase the company’s profitability. Concisely, the financial condition of Mondi Group is strong. List of References Annual Report: Mondi Group 2012, viewed 6 May 2015, http://www.mondigroup.com/desktopdefault.aspx/tabid-429/ Annual Report: Mondi Group 2014, viewed 6 May 2015, http://www.mondigroup.com/desktopdefault.aspx/tabid-429/ Bowhill, B 2008, Business planning and control: integrating accounting, strategy, and people, Wiley, Chichester, England. Currie, M 2011, The search for income: an investors guide to income-paying investments, Harriman House Ltd, Hampshire, England. Khan, M. Y., & Jain, P. K 2007, Financial Management, Tata McGraw-Hill, New Delhi. Najjar, N.J. 2013, "Can Financial Ratios Reliably Measure the Performance of Banks in Bahrain?", International Journal of Economics and Finance, vol. 5, no. 3, pp. 152-163. Sarngadharan, M., & Kumar, R. S 2011, Financial analysis for management decisions, Wiley, NY. Scherr, Frederick C 1989, Modern Working Capital Management: Text and Cases, Prentice Hall, Englewood Cliffs, NJ. The difference between Cash flow and profit 2015, viewed 5 May 2015, http://www.bizfilings.com/toolkit/sbg/finance/cash-flow/cash-flow-and-profit.aspx Appendix 1: figures used in ratio calculations Appendix 2: Ratio Formulas Appendix 3: The ratios Read More