Financial Statements and Performance of Ridley Ltd - Case Study Example

Executive summary This report provides an analysis the various aspects of Ridley’s performance. The analysis starts with a brief summary of the activities carried out by the company by being a supplier of various animal nutrition solutions in Australia and Thailand. The report also analyses the company’s composition of the board including their gender, education, career history, remuneration among other factors. The company is also analyzed in terms of corporate governance and the purpose of external audit at Ridley’s. The report then analyses the various financial performance ratios before analyzing the shareholding of its four largest shareholders. Finally, the report concludes stating that the company’s financial health is sound based on the financial reports as well as the calculations of financial ratios. Table of Contents Executive summary 1 Summary of the company 3 Board of directors 4 Corporate governance 7 Financial statement analysis of Ridley for 2016 10 Investors 11 The overall financial health of the Ridley Ltd 12 Conclusion 12 References 13 Summary of the company Ridley is a major participant in Australia’s agricultural industry mainly involved in the animal feeds production sector. Ridley Corporation is Australia’s giant maker of high performance solutions for animal nutrition. The company manufactures a variety of world- standard solutions for pig, dairy, fowls, sheep, horse, pet food, and laboratory and fisheries industries using Australian sourced cereal grains with an aim of ensuring production of world-class solutions. The company offers such brands as Rumevite, Barastoc, Cobber and Primo (Ridley, 2017,pp.5). The company has also established subsidiaries in Thailand and has various business units including Monogastric, Ruminant, Packaged products, Aquafeeds, supplements and rendering business unit. All the company’s animal feeds are sold in terms of either pellets, meals, blends concentrates or premixes, block and loose lick supplements form depending on the type of animal they are intended for. The company’s financial performance is sound and has been improving steadily over the years. The company registered its third successive record core business result, up from $50.4 million earnings before interest and tax to $53.7 million. On the other hand, the company’s net profit has increased from $16, 586, 000 in 2013, 17,613,000 in 2014 and $25,743,000 in 2015 to $27,206,000 in 2016. The company’s key financial ratios such as returns on shareholders’ funds, earnings per share among others have also been improving since 2013 which is an indication of the company’s financial stability. In conclusion, it is clear that Ridley is a leading employer in Australia both in terms of offering direct employment opportunities as well as being a leading domestic consumer of Australian grown cereal grains while supporting in animal productions in terms of offering feeding solutions. Board of directors Name Gender Education Career History Remuneration Current Board position Shareholding Dr. Gary Weiss Male LLB (Hons) and LLM (Dist.) degrees from University of Wellington, New Zealand and JSD from Cornell University, New York Has extensive experience in international capital markets and is a director of many public and private companies including Ariadne Australia Ltd, Guinness Peat Group, Premier Investments Ltd, and Tag Pacific Ltd among others. Appointed to Ridley board in June 2010 and appointed Chair on 1st July 2015 150,000 shares Independent non-Executive Director and appointed Chair $175,000 Tim Hart Male He holds a BSC, MM (T), MMkting, Med from Melbourne University, PGOIPS from oxford university and also holds FAICO and FAIM certifications. He is the previous CEO of Sugar Australia and Sugar New Zealand and previously held managerial positions with SCA Hygiene Australasia, Carter Holt Harvey, ACI Plastics Packaging, Amcor Limited as well as Pasminco Ltd. He is a director with Isignthis Limited. He became Ridley designate CEO on 2nd April 2013 and was a Board member and as CEO and Managing director on 1st July 2013. 28,262 Chief Executive Officer and Managing Director $1,659,991 Patria Mann Female She holds BEc CA FAICO and is a member of Institute of Chartered Accountants and a fellow of the institute of Company Directors. She is currently a non-Executive Director of Event Hospitality & Entertainment Limited, Allianz Australia Limited, Bellamy’s Australia Limited and Perpetual Superannuation Limited. She is a former partner with KPMG and also a seasoned director. She is also experienced in auditing and investigations management of risk as well as governance. 96,625 Independent Non-Executive Director $95,000 Professor Robert Van Barneveld Male Holds bachelor of Agricultural Science majoring on Animal production and a PHD from the University of Queensland on Animal Nutrition and is a member of FAICO Appointed to the board in June 2010 and is the group CEO and Managing Director of the Sunpork Group (Ridley, 2017). He is also a board member at Pork CRC Ltd and Rose worthy Piggery Pty Ltd. He is the deputy chair of Autism CRC Ltd and chair of Social Skills Training Pty Ltd and is an assistant professor in the University of England’s school of environmental and rural science 58,900 Independent Non-Executive Director $101,135 Ejnar Knudsen Male He is a certified Financial Analyst He is CEO of AGR Partners, LLC. He has 20 years’ experience investing in and managing food and agricultural companies. Previously executive vice president of Western Milling and spent 10 years in New York operating a loan portfolio, equity investments as well as corporate advisory services. He is previously A former passport Capital’s Agriculture Fund and Carton Capital co-Portfolio manager 703,286 He represents the interest of 19.73% Shareholder AGR LLC and AGR Partners, LLC. $85,000 David Lord Male MBA (Executive) MEBS, Drad. Oip. Business management from Monash University. Joined the board in April 206 and enjoyed a senior management career in consumer products and agribusiness and was president and Chief Operating Officer of Saputo Dairy Division and CEO and CEO of Warmbool Cheese and Butter Factory Company Limited (WCB) from 2010-2015. He is previous CEO and managing director of Parmalat Australia between 2002 to 2009. 18,200 Independent Non-Executive Director $14,820 Characteristics of the board summary The current Ridley’s board is composed of five men and one woman who have strong educational background as well as career experience and hence they are well suited to run the company. In managing the Ridley, the directors are guided by the Ridley’s board charter which outlines the responsibilities of the board. The responsibilities include; i) Establishing the company’s strategic direction as well as financial objectives and monitoring their implementation by the management and employees on behalf of the shareholders. ii) The board is charged with monitoring of whether the organization is complying with the various accounting standards, the corporations act, ASX and other federal or state legislations and ethical standards that the community expects. iii) The board appoints and reviews the performance of the managing director and the CEO iv) The board is charged with establishing and monitoring Ridley’s code of conduct and the corporate governance recommendations while ensuring the company is managed in an ethical and open manner (Gerald, 2008, pp. 350). v) Establishes and maintains a policy and procedure for effective risk management for the company vi) Establishing committees as well as their charters and monitors compliance of the committees with the charters vii) Taking responsible steps for ensuring that all financial reports produced by the company give accurate information. viii) The charter also guides the board in the manner to act ethically and in the shareholders and company’s best interests in carrying out their responsibilities. The charter also lays out requirements for disclosure by directors, their powers and their specific responsibilities as a board. Corporate governance i) Key recommendations of the ASX CGC These are laid down in the table below; Principles Recommendation Lay solid foundations for management and oversight i) The entity ought to disclose the board and management’s respective roles and responsibilities as well as the matters specifically reserved for the board and those it can delegate to the management. ii) Undertaking appropriate research prior to appointing anyone or presenting a candidate to the shareholders to be elected as a director as well as providing the shareholders with every material information in their possession which is likely to influence the decision on whether to re-elect the person to the board. iii) Having a written agreement with individual directors and senior management on terms of engagement. iv) The company secretary being accountable directly to the board to ensure the board functions properly. v) Having a policy on gender diversity and how gender diversity is to be achieved. vi) A process be put in place for evaluating the board’s, its committees and individual directors performance for each period (Kpmg.com, 2017,pp. 19) vii) Having and disclosing a process for periodic evaluation of senior executive’s performance. Structure the board to add value i) The board of a listed entity should have a nomination committee ii) Having and disclosing a Board skills matrix on the mix of skills and diversity the board has and it aims at achieving in its membership. iii) Disclosing the names of directors the board considers to be independent directors and the interest’s nature association, relationship and position that does not compromise such independence and the period each director has served iv) The board to be majorly composed of independent directors v) The chairman of the board not to be the organization’s CEO vi) Putting in place an induction program for new directors and opportunities for professional development and skills and knowledge improvement. Act ethically and responsibly i) Having in place a code of conduct for all Safeguard integrity in corporate reporting i) Establishing an audit committee of at least three independent members and chaired by an independent member and not the board’s chair. ii) Ensuring the board receives declarations from CEO and CFO on their opinion on financial records of the company being properly maintained an in compliance with appropriate accounting standards and giving a true and fair view of the company’s financial position and performance before they approve the entity’s financial reports for any financial period. iii) Ensuring attendance at the AGM of the external auditor to answer questions arising from the audit Make timely and balanced disclosure i) A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities Respect the rights of security holders i) A listed company should respect the rights of its security holders by providing them with appropriate information and facilities to allow them to exercise those rights effectively Recognize and manage risk i) A listed entity should establish a sound risk management framework and periodically review the effectiveness of the framework Remunerate fairly and responsibly ii) A listed company should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract retain and motivate high quality senior executives and to align their interests with the creation of value for security holders (Safari and Wise, 2015, pp. 8). ii) Ridley’s auditor is KPMG iii) During the year, the auditors received remuneration amounting to $ 451,580 of which $342,058 related to audit and review of financial reports while $109,522 related to other assurance, taxation and due diligence services. iv) The role of the external audit function is that of expressing an opinion on the company’s financial report on the basis of the audit they conduct in accordance to the relevant auditing standards. The auditors are ought to comply with relevant ethical requirements that relate to audit engagements and also plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. In other words, the external audit function serves to review the entity’s financial statements to ensure they are true and fair account of past financial performance and current financial position. This may be achieved by the auditor doing their work ethically and in accordance to the relevant auditing standards and regulations (Ojo and Digabriele, 2013, pp. 23). The cooperation of the entity in providing all the required materials (evidence and support documents) is also vital in ensuring that the external audit effectively carries out its function. However, the ability to achieve the function of the external audit will be hampered if the auditor does not do his/her work ethically and in accordance with the relevant auditing standards. In addition, if the auditor does not get the required cooperation from the entity’s management or the board or if the auditor’s independence is compromised, the external audit may not achieve its function. Financial statement analysis of Ridley for 2016 Ratio Current ratio Current assets/current liabilities= $228,503,000/167,085,000=1.37 1.37 Quick ratio (Current assets-Inventories)/Current Liabilities= ($228,503,000-87,683,000)/167,085,000= 0.84 0.84 Inventory turnover Cost of goods sold/average inventory =$832,329,000/(87,683,000+81,703,000)/2 = 9.83 9.83 times Accounts receivable turnover Net credit sales/Average accounts receivables= $912,561,000/112,352,000 = 8.12 (Nuhu, 2014, pp. 107) 8.12 times Asset turnover Net sales /Average total assets =$912,561,000/(484,850,000+476,553,000)/2=1.90 1.90 times Debt to equity Total liabilities/Shareholders equity =$236,966,000/247,884,000 = 0.96 0.96 Gross profit margin Gross profit/Sales =$80,232,000/912,561,000= 8.79% 8.79% Profit margin Net profit/Net sales= $27,606,000/912,561,000= 3.03% 3.03% Return on assets Net income/Average total assets= $27,606,000/(484,850,000+476,553,000)/2 =5.74% 5.74% Return on equity Net income/Shareholders equity = $27,606,000/247,884,000= 11.14% 11.14% Brief comment on Ridley’s; i) Liquidity –the company’s liquidity is sound and there is no threat for liquidity problems in the short run. The company’s current ratio is 1.37. However, the company needs to make more efforts in reducing the amount of assets it holds in inventory as the quick ratio is 0.84 meaning that it might get into liquidity problems if those owed demand payment in a very short notice such that it is not able to convert the inventory into cash (Babalola and Abiola, 2013, 135). ii) Efficiency- The Company’s efficiency is sound. However, the company may need to take up steps to improve the efficiency by ensuring the inventory is turned over more frequently as it is only turned over 9.83 times. Efforts also needs to be put in to correct the receivables faster to improve the accounts receivables turnover from the current 8.12 times. iii) Solvency- the Company’s solvency looks sound since it has less debt than its equity. However, efforts should be made to ensure no more debt is accrued as this may bring the company into solvency issues. iv) Profitability- both the company’s profit margin and net profit margin are very low. As such, steps needs to be taken to address the high cost of production in a bid to improve profitability. A similar case applies to returns on assets although the return on equity looks good at 11.14%. Investors . The following Ridley investors hold over 60% of the issued capital of the company i) Citicorp Nominees Pty Limited hold 90,723,694 shares or 29.47% shareholding ii) J P Morgan Nominees Australia Limited hold 51,662,769 shares or 16.78% shareholding iii) HSBC Custody Nominees (Australia) Limited hold 32,282,414 shares or 10.49% shareholding iv) National Nominees Limited hold 24,453,695 shares or 7.94% shareholding The significance of their ownership stake in Ridley is that they have the ability to control the company’s strategic and financial direction as they are the majority shareholders and hence are able to influence the decisions made by the shareholders whether at the board or shareholders level. This is because decisions are passed through voting in companies and the more shareholding one has, the more voting rights they have. As such, they just need to lobby one another to pass policies they deem right for the company. Furthermore, they are represented in the company’s boards of directors by virtue of their large shareholding and hence they are able to influence how the company is run and managed through the board of directors to ensure that their investment in the company is always put into prudent use. In addition, they get to enjoy the greater part of the company’s returns. The overall financial health of the Ridley Ltd Ridley’s financial performance has been improving over the years. A look at the company’s financial statements reveal that the company’s financial performance for the current year has improved from the previous year’s performance. On the other hand, the management report by the directors indicates that the company’s financial health has been improving over the years (Donai, 2014, pp. 27). For instance, the company’s operating profits in 2016 was a $3 million improvement from the 2015 performance of $51 million. The company’s cash flows are also positive. The above analysis of the company’s financial performance aspects of liquidity, efficiency, solvency and profitability also give an indication of a financially sound company. As such, it can be concluded that the company’s overall financial health is sound and the company can expect to perform well even in the future. Conclusion This report has analyzed the various aspects of Ridley’s performance. The company has been found to observe the various recommendations on corporate governance with the exception of gender diversity. The role of the external audit has also been analyzed. The company’s financial ratios have also been analyzed while the largest four investors have been found to hold over 60% of the company’s shareholding. Thus, it has been argued that they have an opportunity to control the company’s strategic direction. The various aspects of the company’s financial performance have also been discussed. It has thus been concluded that based on the financial statements, the directors’ reports and the calculated ratios, the company is in good financial health and the trend can be expected to continue into the future. References Gerald, W2008, The analysis and use of financial statements, New York, John Willey & Sons, pp.348-380. Ridley, 2017, Ridley: Annual report 2016, Ridley, pp. 1-100 Nuhu, M2014, Role of ratio analysis in business decisions: A case study NBC Maiduguri plant, Journal of Educational and Social Research, vol.4, no. 5, pp. 105-119. Donai, J2014, Practice management: Look to financial statements before you leap, Hearing Journal, vol. 67, no. 2, pp. 26-28. Kpmg.com, 2017, ASX Corporate governance principles and recommendations, KPMG, pp. 1- 44 Safari, M&, Wise, V2015, Compliance with corporate governance principles: Australia evidence, Australian Accounting, Business and Finance Journal, vol. 9, no. 4, pp. 1-15. Babalola&, Abiola, R2013, Financial ratio analysis of firms: A tool for decision making, International Journal of Management Sciences, vol. 1, no.4, pp. 132-137. Ojo, M&, Digabriele, J2013, Objectivity and independence: The dual roles of external auditors, Journal of forensic & Investigative Accounting, vol.6, no.2, pp. 1-25. Read More