Financial Analysis for Fujairah Cement Industries - Case Study Example

Financial Analysis: Fujairah Cement Industries Student’s Name University Name 1.0 Introduction & Company Profile Fujairah Cement Industries is a publicly listed company founded in 1979 in the Emirate of Fujairah. The company’s headquarters is in Dibba town where it has its largest plant facility. The facility has a capacity to produce 500,000 M.T of clinker with a cement grind machine of 800,000 tons per annum (Fujairah Cement Industries, 2016). The company’s main product is cement that is labeled by the popular name: Fujairah Cement, which has continued to enjoy a significant level of premium presence within the UAE and such other foreign-based markets as AGCC; Middle East: Africa; India and Bangladesh (Fujairah Cement Industries, 2016). It is important to note that Fujairah Cement is a household name considering that it is engaged in the generation of high quality and excellent service within the construction field. The focus of this paper is conducting a company analysis; in relation to ratios; common size and Du Point, in order to establish the strengths and weaknesses of the organization and thereafter come up with suggestion from a financial analyst point of view. 2.0 Ratio Analysis 2.1 Liquidity Ratios Year/Ratios 2013 2014 2015 Current Ratio = current assets/current liabilities 455,335,960/483,005,149 =0.94 479,336,640/434,301,623 =1.1 429,814,518/338,822,523 = 1.27 Quick ratio= current assets- inventories / current liabilities 455,335,960-292,503,998/483,005,149 =0.33 479,336,640-295,507,123/434,301,623 =0.42 429,814,518-228,449,329/338,822,523 = 0.59 Analysis As it can be seen from the chart-1 below, current ratio increases within the three-year period from 0.94 to 1.27 in the period between 2013 and 2015 respectively. The same ratio pattern can be perceived with quick ratio that increases from 0.33 to 0.59 in the period between 2013 and 2014. The increase in these ratios indicates that the company’s ability to meet its short term commitments even without the use of current stock; has indeed improved overtime. This is an indication that Fujairah has been able to strengthen its current assets level in order to counter possible short-term obligations from suppliers. Chart-1 2.2 Efficiency Ratios Year/Ratios 2013 2014 2015 Total Asset Turnover= Sales/Total Assets 588,220,340/1,721,005,239 =0.34 615,499,320/1,732,959,507 = 0.35 612,207,552/1,734,750,246 = 0.35 Receivables turnover= sales/ accounts receivables 588,220,340/141,689,108 = 4.15 615,499,320/161,917,850 =3.80 612,207,552/168,639,094 =3.63 Inventory turnover= Cost of Goods Sold/Inventory 571,204,326/292,503,998 =1.95 559,617,603/295,507,123 =1.89 536,932,115/228,449,329 =2.35 Day’s sales inventory= inventory/cost of goods sold*365 292,503,998/571,204,326*365 =186 days 295,507,123/559,617,603*365 days = 192 days 228,449,329/536,932,115*365 days = 155 days Analysis The company’s total asset turnover ratio increases significantly within the three-year period from 0.34 to 0.35 in 2013 and 2015 respectively. The insignificant improvement in the ratio is an indication that the company is facing management-related problems thereby affecting its ability to generate sales from the existing asset-base. This might be attributed to poor management policies in relation to replacement of worn-out assets like production equipment. The receivables turnover ratio has decreased over the three-year period from 4.15 to 3.63 in 2013 and 2015 respectively. The decrease in the ratio is a clear indication that the company has lost its capacity to quickly collect cash on products sold on credit terms. This has the effect of reducing its overall capacity to execute day-to-day business operations due to lack of sufficient cash resources. The inventory turnover ratio increases from 1.95 to 2.35 in the period between 2013 and 2015 respectively. The increase in the ratio value of the firm is an indication that it is making enough efforts to translate the existing stocks to revenues. This might be attributed to perfect pricing policies and marketing campaigns over the period for its products. It is likely that the firm has adopted affordable pricing model for most of its cement product in most markets for which it operates thereby ensuring to post significant amounts of revenues. The day’s sales inventory increases from 182 days to 192 days in the period between 2013 and 2014 and later drops down to 155 days in 2015. The decrease in the ratio is an indication that the company has made efforts to ensure the sale of its stock in order to cut down on storage and management costs. This is a healthy attribute as it helps the company to accumulate enough cash flow resources needed in conducing daily business operations. The chart-2 below shows the performance of these ratios within the three-year period. Chart-2 2.3 Long-term Solvency Ratios Year/Ratios 2013 2014 2015 Total Debt Ratio= Total Equity/Total Assets 925,608,417/1,721,005,239 =0.54 951,382,237/1,732,959,507 =0.55 1,002,031,062/1,734,750,246 = 0.58 Debt-to-equity ratio= total debt/total equity 217,638,613+298,610,279 /925,608,417 = 0.56 278,710,169+222,693,330 /951,382,237 =0.53 380,392,675+240,475,991 /1,002,031,062 =0.62 Analysis The company’s total-debt ratio increases slightly within the three-year period from 0.54 to 0.58 in 2013 and 2015 respectively. Despite the slight increase in the ratio, the ratio still sits way below the recommended standard value. It means that Fujairah is making efforts to fund its assets-base using a small percentage of debt funds in order to cut down on unnecessary interest expenses for the borrowings. The debt-to-equity ratio also increases within the period from 0.56 to 0.62 in 2013 and 2015 respectively. Despite the increase, the ratio is still favourable and shows the healthy position of the firm since it means that capital structure of the company is made up more of equity as opposed to borrowings and loans. The Chart-3 below shows the movement of these ratios within the three-year period. Chart-3 Profitability Ratios Year/Ratios 2013 2014 2015 Profit Margin= Net income/Sales (12,190,025) /588,220,340 = (0.0207)*100% (2.07%) 25,773,820 /615,499,320 = 0.042*100% = 4.2% 50,648,825/612,207,552 = 0.082*100% =8.2% ROA= Net income/ Total assets (12,190,025)/ 1,721,005,239*100% = (0.71%) 25,773,820/ 1,732,959,507*100% =1.49% 50,648,825/ 1,734,750,246*100% =2.92% ROE= Net Income/ Total Equity (12,190,025) / 925,608,417*100% = (1.32%) 25,773,820/ 951,382,237*100% = 2.71% 50,648,825/ 1,002,031,062*100% = 5.05% The company’s profit margin ratio increases significantly within the three-year period from -2.07% to 8.2% between 2013 and 2015 respectively. The increase is a healthy and positive indication for the company’s performance. It means that the firm has ensured to make efforts to retain a substantial level of its earnings from the costs involved in conducting sales over the years. This might be attributed to its overall pricing and marketing strategies in relation to how it sells its cement in both local and overseas market altogether. The return on assets ratio also increases from a negative value of 0.71% to 2.92% in the period between 2013 and 2015 respectively. This is a clear indication that the company has made sure to come up with strategies of ensuring to generate substantial sales revenues from its underlying asset-base. There has also been a tremendous increase in return on equity ratio from -1.32% to 5.05% in the period between 2013 and 2015 respectively. The increase in the ratio value is an indication that firm has ensured to come up with stringent policies meant to maximize on the use of the shareholders’ equity to post enough profits. 3.0 Du Pont Analysis ROE= net profit margin * asset turnover* equity multiplier Whereby; Operating efficiency is measured by the net profit margin component; asset use efficiency by the total asset turnover and financial leverage component measured by equity multiplier. The entire analysis is thus portrayed as follows; ROE= (net income/sales) * (sales/assets) * (assets/shareholder’s equity) As at 2015: ROE= [50,648,825/612,207,552]*(612,207,552/1,734,750,246)* (1,734,750,246/1,002,031,062) = 0.08*0.35*1.73 = 0.05 From the computations above, it can be seen that the low value of the Du Pont is as a result of a low net profit margin value and a high equity multiplier making it a risky affair due to a high leverage position. The low value is attributed to low profit margin increase within the three-year period given that it made losses in 2013 financial period. 4.0 Common Size Analysis Income Statement Year/ Item 2013 % 2014 % 2015 % Revenue 588,220,340 100% 615,499,320 100% 612,207,552 100% Cost of Sales 571,204,326 97.1% 559,617,603 90.9% 536,932,115 87.7% Selling and Distribution expenses 1,743,451 0.3% 2,096,482 0.3% 1,963,781 0.3% General and administrative expenses 9,302,574 1.6% 10,198,229 1.6% 13,551,291 2.2% Amortization of extraction and concession rights 4,693,828 0.8% 4,693,828 0.8% 4,693,828 0.8% Finance cost 14,913,314 2.5% 14,591,733 2.4% 17,111,088 2.8% Other Income 1,447,128 0.2% 1,472,375 0.2% 12,693,376 2.1% Balance Sheet Analysis Year Item 2013 % 2014 % 2015 % Total non-current assets 1,265,669,279 73.5% 1,253,622,867 72.3% 1.304,935,728 75.2% Total Current assets 455,335,960 26.5% 479,336,640 27.7% 429,814,518 24.8% Total Assets 1,721,005,239 100% 1,732,959,507 100% 1,734,750,246 100% Non-current Liabilities 312,391,673 347,275,647 393,896,661 Current liabilities 483,005,149 434,301,623 338,822,523 Total liabilities 795,396,822 100% 781,577,270 100% 732,719,184 100% Total Shareholder’s Equity 925,608,417 100% 951,382,237 100% 1,002,031,062 100% Share capital 355,865,320 38.4% 355,865,320 37.4% 355,865,320 35.5% Statutory reserve 142,498,511 15.4% 145,075,893 15.2% 150,140,776 15% Voluntary reserve 222,536,002 24% 222,536,002 23.4% 222,536,002 2.2% Retained earnings 204,708,584 22.1% 227,905,022 23.4% 273,488,964 27.3% 4.0 Weaknesses & Strengths One of the company’s strength rests with the fact that it has been able to balance its solvency position especially in regards to the use of debt funds. It has been noted that Fujairah Cement Industries has taken enough efforts to reduce the level of borrowings as a source of capital and as a form f funds used in purchasing of major capital assets within the company. Subsequently, the company’s liquidity position seems to be growing stronger by the day. This is a positive indication given that it is likely to meet most of short-term obligations in due time thereby preventing possible collapse of day-to-day business operations as a result of short supply of raw materials. However, it can be noted that not all is well with the company especially in relation to its earnings. It can be noted that there non-optimal use of assets base to generate enough sales revenues and this might be attributed to poor management policies. It can also be attributed to ineffective marketing and pricing strategies for its cement products across its markets both locally and on international platforms. Conclusion To sum the analysis above, it can be noted that Fujairah Cement Industries is doing good in terms of its solvency and liquidity position with the three-year period between 2013 and 2015. However, the company seems not to be doing so well in terms of profitability and efficiency given that most of its resources are not being used optimally to generate enough profits and earnings for the entire period. As a financial analyst, I’d suggest that a potential investor that has already purchased stocks with the company to continue holding them since there are efforts being made by the management to leverage the situation and in future there will be enough returns. References Fujairah Cement Industries. (2014). 2013/14 Annual report. Retrived from https://www.adx.ae/English/News/Pages/20150222081926697-FCI-EN.PDF Fujairah Cement Industries. (2015). 2014/15 Annual report. Retrieved from http://www.fujairahcement.com/wp-content/uploads/2016/05/FINAL-FS-FCI-YE-2015-FS-ENGLISH.pdf Fujairah Cement Industries. (2016). About Us. Retrieved from http://www.fujairahcement.com/company-profile/ Read More