Financial Analysis And Comparison Of NADEC And Almarai
Financial Statement Analysis
The objective is to analyse the financial performance of two companies based in the same sector using ratio analysis along with analysis of financial statements for 2016 and 2017. The two companies that have been selected for this task are NADEC (National Agricultural Development Company) and Almarai. Both these companies belong to the dairy industry even though Almarai in the recent years has diversified into a food and beverage company with a significant chunk of the business from dairy segment. For comparing the financial performance of these two companies, ratio analysis along with financial statement analysis has been done. Additionally, capital structures of the two companies are compared and impact of this on the profitability and liquidity has been highlighted.
Financial Statement Analysis
In order to analyse the financial performance of the two companies in 2017 as compared to 2016, common size and common base income statement and balance sheet has been prepared for both the companies. These are analysed below.
Income Statement –NADEC
The relevant analysis has been indicated below (NADEC, 2018).
From the common size income statement, the drop in profit margins is apparent starting from the cost of sales which have increased by 200 basis points. Additionally, there has been a significant jump in the selling and distribution expenses which tend to lower the operating profit margin and net profit margin. Further, from the common base analysis of the income statement, it is apparent that there has been a dip in the sales revenue in 2017 by about 6.6% which along with diminishing profit margins has led to the decline in the bet profits by about 57.6% on a y-o-y basis.
Income Statement – Almarai
The relevant analysis has been indicated below (Almarai, 2018).
From the common size income statement, the key observation relates to expansion of profit margins at gross, operating and net level in 2017 as compared to the corresponding 2016 levels. At the operational level, the company has reaped savings with regards to selling & distribution expenses coupled with general & administrative expenses. Also, there has been a significant drop in the zakat and foreign income tax. From the common base income statement, it is apparent that there has been a revenue decline of about 2.8% in 2017 in comparison with 2016 figure. However, despite this drop in top line, the company on back of higher profit margins has managed to outgrow the absolute profit earned in 2016.
Ratio Analysis
Balance Sheet – NADEC
The relevant analysis has been indicated below (NADEC, 2018).
From the common size balance sheet, it is noticeable that inventories in 2017 have shown a significant jump. Further, there is a decrease in the long term loans taken by the company as there is preference towards short term funding owing to which the non-current liabilities have declined while the current liabilities have enhanced. The share of equity to the asset funding has also marginally declined to 34.81% in 2017 as compared to 35.11% in 2016. The asset increase in 2017 is primarily attributed to non-current assets and the corresponding increase has been witnessed in the current liability in 2017.
Balance Sheet – Almarai
The relevant analysis has been indicated below (Almarai, 2018).
Based on the common size balance sheet analysis, it is apparent that there has been a decrease in the current assets with regards to share in total assets primarily on account of the decline in the cash & cash equivalents. Also, in regards to the liabilities, in 2017, there has been a minor dip in share of non-current liabilities while the current liabilities have increased their share, hence ensuring no major change in equity contribution to asset funding. Further, there has been an increase of 9.25% in the balance sheet size of the company in 2017. The various items of current liabilities have shown significant increase on a y-o-y basis in 2017 as is evident from the common base analysis.
Ratio Analysis
The financial performance of the two companies has been analysed using ratio analysis as indicated below.
Profitability Ratios
The key profitability ratios for the two companies are listed below.
From the above profitability ratios, it is apparent that while the profitability of NADEC has declined in 2017 in comparison to the previous year i.e. 2016, the trend has been exactly opposite for Almarai which has improved the profitability in 2017 as compared to 2016. The drop in profitability for NADEC has been witnessed starting from the gross profit level and has continued to the net profit level (Damodaran, 2015). On the contrary, the profitability of Almarai has not only shown improvement in 2017 but the margins in general are significantly healthier in comparison to NADEC. One of the key reasons contributing to the same is the difference in product mix of the two companies since Almarai is a more diversified company both in terms of products as well as geographical reach. Also, it is quite possible that economies of scale may be reaped by Almarai owing to the significantly larger scale of operations in comparison with NADEC (Almarai, 2018).
Liquidity Ratios
The key liquidity ratios for the two companies are listed below.
The liquidity ratios provide an indication of the ability of the company to meet short term liabilities (Petty et. al., 2015). Based on the above ratios, it is apparent that there has been a slight deterioration in the liquidity ratios for NADEC in 2017 compared to 2016. However, these ratios have shown improvement for Almarai in 2017 over the previous year i.e. 2016. Otherwise also the liquidity ratios of Almarai are significantly superior to that of NADEC. Even though the inferior ratios of NADEC do raise some concern but considering the backing of Saudi government, liquidity crisis are highly unlikely going forward.
Solvency Ratios
The key solvency ratios for the two companies are listed below.
The solvency ratio provides an indication of the long term liquidity in the company and the ability to meet the outstanding debt liabilities (Parrino and Kidwell, 2014). The solvency ratios for NADEC have worsened in 2017 as compared to 2016. This is evident from the fact that interest coverage ratio has dropped significantly and is only 1.63. Further, the debt to equity ratio has marginally increased. With regards to Alamrai, even though there is a drop in the interest coverage ratios, the other ratios remain strong in 2017 when compared to 2016. Overall, the solvency ratios for Alamrai are significantly superior to NADEC and provide greater comfort to lenders (Brealey, Myers and Allen, 2014).
The efficiency ratios tend to highlight the efficiency of the operations and the asset usage. These ratios indicate deteriorating efficiency for NADEC in 2017 as compared to 2016. This is because there has been a decline in all the three ratios for NADEC. However, a similar trend is also visible for Almarai in 2017 when compared to 2016. However, the inventory turnover and receivables turnover for Almarai is superior in comparison to NADEC (Damodaran, 2015).
The capital structure essentially refers to the contribution of debt and equity to the asset funding. The capital structure for the selected two firms is summarised below.
From the above it is apparent that the higher proportion of debt is used for funding of assets by NADEC in comparison to Almarai. Thus,, the capital structure of NADEC has a higher than 50% proportion of debt in comparison to Almarai which has less than 50% of the total asset funding through debt (Petty et. al., 2015).
The capital structure is relevant owing to the underlying effect that it can have on the liquidity and profitability of the company. The effect on profitability is primarily though the interest costs which would be higher if the debt based funding is higher and preferred in comparison to equity based financing. On the other hand, a firm which has higher proportion of financing based on equity would have a lower interest cost and higher profitability (Brealey, Myers and Allen, 2014). The liquidity ratios would also be impacted considering the fact that a part of long term debt which ought to be discharged within one year is captured as current liabilities. Thus, a capital structure which is heavily based on debt would potentially create liquidity issues both in the short term and long term since the interest and debt repayments have to be met. This is not the case with equity based financing (Parrino and Kidwell, 2014).
Conclusion
Based on the above discussion, the common base and commons size income statement for the two companies clearly reflect the changing profit margins and also the underlying contributors. Additionally, the common base and commons size balance sheet for the companies highlights the key changes in the balance sheet in 2017 as compared to the previous year which can then be further analysed if required. The ratio analysis clearly highlights that Almarai is a superior company in comparison to NADEC based on the financial statements in terms of profitability, liquidity, solvency and efficiency. Further, the capital structure of NADEC deploys a higher proportion of debt in comparison with Almarai. Also, since debt funding requires interest payments and principal repayments, hence profitability and liquidity of the firm are impacted owing to which capital structure decisions are critical.
References
Almarai (2018), Annual Report 2017, [online] Available at https://www.almarai.com/wp-content/uploads/2018/04/Almarai-AR2017-ENG-web.pdf [Assessed November 20, 2018]
Brealey, R. A., Myers, S. C. and Allen, F. (2014) Principles of corporate finance, 6th ed. New York: McGraw-Hill Publications
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley, John & Sons.
NADEC (2018) Financial Statements 2017, [online] Available at https://www.nadec.com.sa/Portals/0/financial_statements/pdf/Financial%20Statements_31%20Dec%202017.pdf?ver=2018-05-01-090704-210 [Assessed November 20, 2018]
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. and Nguyen, H. (2015). Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education, French Forest Australia.