A detailed analysis of golden agri corporation - Free Essay Example

In this project it is mentioned about Golden Agris background, the area in which it operates its competitive strength and its competitors. A detailed analysis of the company s financial analysis is showed through ratio analyses, which will help to asses Michael who is an investor whether to buy Golden Agri s share. A detailed analysis is showed based on company s last three year from 2006 to 2008 annual report, which will give useful information about company s current market position and its position in near future. Background Golden Agri-Resources Ltd (GAR) is a Singapore based investment holding company and its prime activity is to cultivate and harvest oil palm trees, processing crude palm oil (CPL) and palm kernel (PK) from fresh fruit bunches and making consumer products from CPL like cooking oil, margarine and shortening. It also deals in management of real estate and consultancy services ( Goldenagri Web (2010) 10th Marchv 2010). It also provides additional services such as chartering services, services in port loading, storage and packaging and transportation services. It was listed on Singapore Stock Exchange in the year 1999. The company operates in two different divisions that are Indonesia Agri business and China Agri business. In the year 2009 company made a profit of $ 2,294 million (Businessweek Web (2010) 12th March 2010). Mission The company aims at giving highest standards of quality through continuous innovation and technology. The company also aims giving its returns to the society and community. It believes in sustainable palm oil cultivation it through sustainable environment. It puts its promises into action to gain trust of the shareholders and the employees. It emphasis on continuous improvement so as to get best result, and it always comes up with new ideas and products to gain productivity and growth. Products and its Customers Golden Agri has variety of Branded Products under its belt. It produces bulk products from palm oil facilities for instance crude palm oil, palm kernel oil, cocoa butter substitute and many more which they provide to end-customers, hotels, cafes and industrial market. In Indonesia it has around 11 brands and provides products like cooking oil, margarine, butter oil substitute, shortening, special fats and frying fats. It has around 8 brands in China and provides products such as cooking oil, margarine, shortening and butter oil substitute (Goldenagri products Web (2010) 12th March 2010). Market competition Golden Agri s major competitors are Anglo-Eastern Plantations, M.P. Evans Group PLC and Wilmar. All the three has its vast operations in Malaysia and China but Wilmar which is currently Asia s largest Agribusiness group is a strong competitor of Golden Agri. Golden Agris competitive strength lies in its way it operates its business, which is by vertically-integrated operations, which means a part of production process is expanded across several diffe rent market segments. Due to economies of scale the company has an advantage of highly efficient operations. Company s management systems and experienced and versatile management team has helped the company in its growth, and to gain competitive advantage (Answers Web (2010) 11th March 2010). Strengths and weaknesses: Strengths: ? Enormous production being carried out, leads to economies of scale ( low cost). ? Highly qualified and experienced team. ? Less competition in market. ? In-house research carried out in institute. Weaknesses: ? Being lead to high cost due to push strategy. ? As production depends on nature it affects growth of palms. ? Common Currency fluctuation as they deal in international markets. ? Strong government influences in homecountry. Financial Statement Firm uses financial statement to indicate the financial performance of the company. Financial statements are used in relation to business accomplishments. The financial s tatement includes income statement, balance sheet, and cash flow statement. Income statement shows the company s direct expenses (salary, depreciation etc) and income. It also shows the company expenses in attaining earnings per share. Balance sheet shows the amount of assets and liabilities the company possess. Balance sheet is normally used by company to measure the liquidity of company. Cash flow statement only records cash items no credit items are recorded in this statement. The cash-flow statement can be vital in determining whether or not a corporation has sufficient cash to compensate its bills, handle expenses, and acquire assets (wisegeek web (2003-2010), 14th march 2010) Ratio Analysis: [A] Liquidity ratio: This ratio suggests the company s capability to pay off the short term liabilities. It can be achieved by dividing total cash out of short term liabilities. It shows how liquid the company is. To calculate Liquidity Ratio, Company has to refer to Balance sh eet. This ratio includes working capital, current and acid test ratio (Advfn web(1999-2010), 2nd march 2010). 1. Working capital: Current Assets Current Liabilities. It measures the company s efficiency and financial ability to repay the short term liabilities (Investopedia web(2010), 4th march 2010). 2006 2007 2008 $424,000-$347,916. $763,817-$517,790 $707,481-$547,989 = $76,084 = $246,027 = $159,492 Interpretation: In 2007, firm has increased their paying obligation approximately thrice compared to previous year; this may be due to increase in their current assets and marginal increase in the liabilities. While in 2008 it again decreases due to falling in amount of cash they had. 2. Current ratio: Current Assets / Current liabilities. The higher the ratio the more liquid the company is. It shows the amount of assets the company has to reimburse their short term obligations (Investorwords web (2010) 5th march 2010). 2006 2007 2008 $424,000/$347,916 $763,817 / $517,790 $707,481/ $547,989 = 1.21:1 = 1.47:1 = 1.29:1 Interpretation: In 2007, Golden Agri have realised that they have enough solvency in the company to pay their current liabilities. Figures above shows that company has $1.47 to pay their $1 liability, in fact it is higher amongst three years. 3. Quick (Acid test) ratio: Quick Assets (Current assets- Inventories) / Current Liabilities. It is a more conservative ratio that the current and working capital. It excludes the inventory that has left at the end of the financial year. It excludes the type of current assets that are not easily converted into the cash. 2006 2007 2008 ($424,000 $144,174) / $347,916 ($763,817-$311,534) / $517,790 ($707,481- $248,084) / $547,989 $279,826 / $347916 $452,283 / $517,790 $459,357 / $547,989 = 0.80:1 = 0.87:1 =0.83:1 Interpretation: Above figures are concern, Golden Agri have not realise the major difference in their quick test ratio. Firm has $0.87 li quid asset to pay their $1 of quick liabilities, although it gets decreased in following year. Overall liquid position is just above satisfactory level. [b] Credit Risk Ratio: Total Liabilities / Total assets. This ratio is more of a concern about the long term risk of the creditors. It is assumed that the total assets should be more than the total obligations in order to pay its debts. 2006 2007 2008 $1,064,066 / $2,985,362 $1,631,604 / $5,012,814 $2,118,677 / $6,825,507 = 35.64% = 32.54% = 31.04% Interpretation: As long as long term is concerned, the higher total asset more the company able to pay their debt. Comparing 2006, 2007 and 2008, as the year progresses the percentage declines, so company has enough of the assets to pay debt in long term. [B] Profitability ratios: This ratio suggests how profitable company is. For calculation, firm has to refer to the Income statement (profit loss account). This ratio enables the investors and lenders to decide fo r their benefit. We can say that is being divided in two sub sections, Margins and returns. Margins suggest the company s ability to translate the sales into the profits. Return illustrates the amount of return the company able to give their shareholders (Bizfinance Web (2010) 7th march 2010). It includes Gross profit rate, net income rate, and earnings per share, PE ratio and some more. 1. Gross profit rate: Gross profit / Net sales (Turnover) A profit margin ratio indicates that amount of earnings, required to pay fixed costs and profits, which is generated from revenues. Lower the ratio means the company is unable to control their production cost. Although this might be a good ratio for comparing against its competitors (bizwiz). 2006 2007 2008 $269,814 / $1,129,587 $658,348 / $1,873,352 $876,117 / $2,985,948 = 0.23 or 23% = 0.35 or 35% = 0.29% or 29% Interpretation: Gross profit rate for the year 2007 and 2006 are 35 and 29% respectively. This means out of $ 100 dollars company spends, it generates them profit of $35 in 2007 and $29 in 2008. Out of this the company has to pay their taxes and operating expenses, as a result corrective measure should be taken to improve. 2. Net Income Rate: Net income / Net sales. This ratio shows the percentage of net profit the company make after deducting taxation. The more the net income rate the higher the company profit appears to be. 2006 2007 2008 $539,531 / $1,129,587 $1,274,375 / $1,873,352 $1,418,645 / $2,985,948 = 0.4776 or 47.76% = 0.6802 or 68.02% = 0.4751 or 47.51% Interpretation: Net income had declined after 2007. This suggests that out of $100 the company spends company is generating $68.02 and $47.51 in 2007 and 2008 respectively. Net income is after deducting taxes. Firm needs to work on it. 3. Earnings per share (EPS): Net income / Shares outstanding. This is most important measurement in profitability ratio. This measurement suggests the power of company to generate the money. The higher the Earnings per share the higher the value of share (Investing web (2008) 8th march 2010). 2006 2007 2008 $5.42 $12.21 $13.86 Interpretation: This ratio shows the earnings of the company from the total issue of share in the market. This measure shows us rise in earnings per share from 2006, 2007 and highest in 2008. Company is doing healthy in stock market. 4. Price Earnings Ratio: Current Market price per share / EPS Based on this Measurement investor can determine whether to invest in the company or not. Ratios decided above only analysed as per the books of accounts, but P/E ratio is based on current market price of share and gets to know the amount of Profit Company can generate. This also shows future performance of company. 2006 2007 2008 $78.61 / $5.42 $66 / $12.21 $46 / $13.86 = $14.50 = $5.40 = $3.31 Interpretation: This ratio shows that company has lowest current market price which is in 2008. This will not attract more investors because this measurement needs to be consider by investors when they invest 5: Return On Investment: Return / Average amount invested. Now this is based on return the shareholder gets on the amount they invested. Return on investment measures the company ability to generate the profit and provide investors with better result for their valuable investment. 2006 2007 2008 $539,531 / $351,831.5 $1,274,375 / $817,662.5 $1,418,645 / $1,273,659 = 153.34% = 155.85% = 111.38% Interpretation: After considering this measurement of return the company might lose their investors, due to decrease in amount of return on investment. The company need to decrease direct expense and increase their net profit to overcome this situation. 6. Return on total assets: operative income / average total assets. 2006 2007 2008 $777,556 / $2,564,072.5 $1,757,968 / $3,999,088 $1,986,316 / $5,919,160.5 = 0.3032 or 30.32% = 0.4395 or 43.95% = 0.3355 or 33.55% Interpretation: Golden Agri generation of return on total asset is at quiet satisfactory level. As this measurement will not much affect the decision of investor to invest or not. 7: Return on Equity: Net income / Average owner s equity. This measurement indicates that amount of return shareholders achieves on their invested funds. This has a lot to consider from shareholder s side of view. The higher percentage of return the more are the chances of investors attraction towards company. 2006 2007 2008 $539,531 / $1,647,603.5 $1,274,375 / $2,651,253 $1,418,645 / $4,044,020 = 32.74% = 48.06% = 35.08% Interpretation: This indicates that during year of 2006 the company on every equity shares of $100 has earned $32.74 but at the current the company has earned more if we see that in the year 2008 the company earned $35.08. This ratio reflects the character of the management in general and this current year ratio provide valuable guidance to an investor. So, we c an say that the ratio controls the market value of a company s equity share. Conclusion: All the above ratios are calculated based on past records. No ratio is based on current market condition except one. The company really has satisfactory liquidity position; able to pay debt is short term as well as in long run. While considering to the profitability ratio, figures Shows Company is able to generate supplementary profit compared to last years. Return on investment, current market price, return on total assets and return on equity is not appalling. If we carefully consider all ratios, most of ratios are fluctuating in 2007 and 2008, and our findings suggest that liquidity and profitability along with all returns has a probability to enhance. Not ignoring all non financial factors. Recommendations: We would like to suggest Mr. Michael brown to purchase some of the share based on our conclusion and see if company improves then Mr Brown can procure more. Perform all this a fter considering all non financial factors, as some of the non financial factors have uncertainty which can result in losses (customer preferences, Nature).