Financial Statement Analysis of Fonterra Brands Lanka Pvt Ltd (2016-2020)

 

1)    Introduction

From Fonterra SL they manufacture and export a wide range of products including Milk powders, low/non-fat milk powder, fortified milk powder for kids and Adults, Fresh milk, flavored Milks, Yoghurts and many more. They have both powder and liquid manufacturing capabilities and manufacture over 80,000 Metric tons per year. Fonterra SL is the most efficient powder manufacturing plant across the Fonterra footprint.

Fonterra at a glance:

- Fonterra Globally is the World’s leading exporter of dairy foods

- Generate over a third of international dairy trade

- Operating in more than 140 countries

- Home of Australia and New Zealand’s most loved dairy brands.

- Fonterra Brands Lanka is the Largest Consumer Dairy foods company in Sri Lanka.

Financial analysis is the process of assessing a company's performance in relation to its industry and economic environment in order to make a choice or make a recommendation. Financial analysts' opinions and recommendations frequently concern giving capital to businesses—specifically, whether to invest in the firm's debt or equity instruments, and at what price. A debt securities investor is concerned about the company's ability to pay interest and repay the amount borrowed. An equity securities investor is a firm owner with a residual interest who is concerned about the company's ability to pay dividends and the chance that its share price will rise.

Overall, financial analysis is concerned with determining the company's potential to produce a return on its capital that is at least equivalent to the cost of that capital, to successfully expand its activities, and to create sufficient cash to satisfy obligations and pursue opportunities.

The information obtained in a company's financial reports is the starting point for fundamental financial analysis. These financial reports include audited financial statements, regulatory-required supplementary disclosures, and any accompanying (unaudited) management commentary. Basic financial statement analysis, as taught in this reading, lays the groundwork for the analyst to better comprehend information gleaned from sources other than financial reports.

2)    Horizontal Analysis

Horizontal analysis is used in the review of a company's financial statements over multiple periods. It is usually depicted as percentage growth over the same line item in the base year. Horizontal analysis allows financial statement users to easily spot trends and growth patterns. Horizontal analysis shows a company's growth and financial position versus competitors. Horizontal analysis can be manipulated to make the current period look better if specific historical periods of poor performance are chosen as a comparison.

Income Statement	2016% Change	2017% Change	2018% Change	2019% Change	2020% Change
Revenue from sale of goods	(8.73)	11.82	6.27	(1.43)	0.84
Cost of goods sold	(12.85)	17.69	8.21	(1.04)	0.80
Gross profit	10.80	(10.32)	(3.22)	(13.63)	10.14
Other operating income	(7.64)	(28.57)	1.05	(52.60)	(31.87)
Selling and marketing expenses	1.44	(8.82)	1.56	(9.37)	(6.61)
Distribution expenses	(16.43)	(5.98)	4	(1.92)	(14.08)
Administrative expenses	(3.43)	(4.03)	7.78	(11.45)	8.02
Other operating expenses	(19.68)	(6.82)	19.76	(3.25)	(2.58)
Share of (loss)/profit of equity accounted investees	(18.18)	(87.04)	1057.14	25	(76)
Profit before net finance costs and tax	51.91	(21.73)	(76.61)	(96.18)	266.29
Finance income	(53.85)	88.89	(32.35)	(30.43)	(13.33)
Finance costs	(7.18)	(24.76)	12.85	(1.14)	(22.11)
Net finance costs	(3.67)	(28.86)	17.18	0.48	(22.45)
Profit/(loss) before tax	119.81	(17.92)	(79.87)	177.92	128.5
Tax expense	19.51	(79.59)	110	321.43	1.13
Profit/(loss) after tax	64.82	(10.67)	(73.69)	208.67	8.93
Loss attributable to non-controlling interests	73.82	(9.38)	(69.89)	92	(43.75)
Profit/(loss) attributable to equity holders of the Co-operative	(40)	(54.17)	127.27	152.04	18.80
Profit/(loss) after tax	64.82	(10.67)	(73.69)	208.67	8.93

 

3)    Vertical Analysis

Vertical analysis is a method of financial statement analysis in which each line item is shown as a percentage of the base figure. It is most commonly used within a financial statement for a single reporting period. The vertical analysis formula translates each item in the income statement and the balance sheet into a percentage of total sales and total assets respectively.

Income Statement	2016	2017	2018	2019	2020
Revenue from sale of goods	100%	100%	100%	100%	100%
Cost of goods sold	78.88	83.03	84.54	84.91	84.98
Gross profit	13.57	16.32	15.26	14.93	15.10
Other operating income	0.21	0.28	0.45	0.38	0.31
Selling and marketing expenses	2.52	3.11	2.85	2.82	2.72
Distribution expenses	2.18	2.24	2.78	3.01	2.38
Administrative expenses	3.67	3.82	4.04	3.56	4.12
Other operating expenses	1.55	1.66	1.45	1.98	1.86
Share of (loss)/profit of equity accounted investees	0.23	0.38	0.25	0.54	0.27
Profit before net finance costs and tax	5.98	6.64	6.25	5.53	6.32
Finance income	0.03	0.11	0.08	0.04	0.06
Finance costs	1.28	1.78	1.85	2.02	1.56
Net finance costs	1.35	1.32	1.45	1.75	1.50
Profit/(loss) before tax	4.27	4.45	4.78	3.25	4.82
Tax expense	0.62	0.88	0.82	0.78	0.86
Profit/(loss) after tax	2.71	2.76	3.55	2.45	3.25
Loss attributable to non-controlling interests	0.10	0.15	0.09	0.18	0.13
Profit/(loss) attributable to equity holders of the Co-operative	3.11	3.45	3.58	4.56	3.38
Profit/(loss) after tax	2.71	2.76	3.55	2.45	3.25

 

4)    Ratio Analysis

Ratio analysis compares line-item data from a company's financial statements to reveal insights regarding profitability, liquidity, operational efficiency, and solvency. Ratio analysis can mark how a company is performing over time, while comparing a company to another within the same industry or sector.

4.1 liquidity & Efficiency

Liquidity ratios tell whether the company's current assets are sufficient to cover current liabilities. For example, the current ratio simply compares all current assets and current liabilities. On the other hand, turnover ratios assess how efficiently the company's resources are being used.

Ratio	2016	2017	2018	2019	2020
Working Capital	1093000000	1351000000	832000000	764000000	2306000000
Current Ratio	1.50	1.29	1.16	1.15	1.43
Acid-test Ratio	2.15	2.45	1.83	0.94	0.77
Accounts Receivable Turnover	5.42	4.25	4.85	4.18	3.69
Merchandise Turnover	3.27	4.56	4.12	4.38	4.74
Total Asset Turnover	0.72	0.84	0.51	0.63	0.57
Days Sales Inventory	103.18	137.89	165.74	208.32	347.48
Day’s Sales Uncollected	58.21	65.75	87.91	95.15	91.02

 

 

4.1.1        Working Capital

Working Capital = Current Assets – Current Liabilities

Working capital assesses a company's ability to pay its current liabilities with its current assets, giving us an indication of the subject’s short-term financial health, capacity to clear its debts within a year, and operational efficiency.

According to the graph 2016-2019 the working capital is varied. But after 2019 the working capital of the company is increased.

 

4.1.2        Current Ratio

Current Ratio = Current Assets/Current Liabilities

The current ratio is a liquidity ratio that assesses a company's capacity to pay short-term or one-year obligations. It explains to investors and analysts how a firm might use current assets on its balance sheet to pay off current debt and other obligations.

The current ratio is decrease in 2016-2018 and again increased towards 2020.

 

4.1.3        Acid-test Ratio

Acid-test Ratio = Quick Assets /Current Liabilities

The acid-test ratio compares a company’s “quick assets” (cash and accounts receivable) to its current liabilities.

Ideally, a business should have an acid-test ratio of at least 1:1. A company with less than a 1:1 acid-test ratio will want to create more quick assets. It can do this by offering discounts to increase sales, collecting on accounts receivable (possibly offering special terms for early payment) or asking shareholders to invest more cash in the company.

In 2016-2018, the company have more than 1 value of acid ratio. But after 2018 it is decreased. So after 2018 the company has less than 1 value of acid ratio. Therefore, they want to create more quick assets.

 

4.1.4        Accounts Receivable Turnover

Accounts Receivable Turnover = Sales on Account /Account Receivable

Accounts receivable turnover is the number of times per year that a business collects its average accounts receivable. Accountants and analysts use accounts receivable turnover to measure how efficiently companies collect on the credit that they provide their customers.

 

4.1.5        Merchandise Turnover

Merchandise Turnover = Cost of Goods Sold /Average Inventory

Inventory turnover is the rate that inventory stock is sold, or used, and replaced. The inventory turnover ratio is calculated by dividing the cost of goods by average inventory for the same period. A higher ratio tends to point to strong sales and a lower one to weak sales.

 

4.1.6        Total Asset Turnover

Total Asset Turnover = Revenues/Average Total Assets

Asset turnover is the ratio of total sales or revenue to average assets. This metric helps investors understand how effectively companies are using their assets to generate sales. Investors use the asset turnover ratio to compare similar companies in the same sector or group.

 

 

 

4.1.7        Days Sales Inventory

Days Sales Inventory = (Ending Inventory/ Cost of Sales) x365

The days’ sales of inventory (DSI) is a financial ratio that indicates the average time in days that a company takes to turn its inventory, including goods that are a work in progress, into sales.

The days’ sales inventory of this company is increased in 2016-2020 regularly.

 

4.1.8        Day’s Sales Uncollected

Day’s Sales Uncollected = (Trade and Other Receivable/ Net Sales) x 365

Days' sales uncollected is a liquidity ratio that is used to estimate the number of days before receivables will be collected. This information is used by creditors and lenders to determine the short-term liquidity of a company.

 

4.2      Solvency Ratio

A solvency ratio measures how well a company's cash flow can cover its long-term debt. Solvency ratios are a key metric for assessing the financial health of a company and can be used to determine the likelihood that a company will default on its debt.

Ratio	2016	2017	2018	2019	2020
Debt Ratio	32.31%	35.96%	41.52%	43.28%	45.84%
Equity Ratio	67.69%	64.04%	58.48%	56.72%	54.16%
Times Interest Earned	32.45	40.35	48.29	24.37	11.25

       

4.2.1        Debt Ratio

Debt Ratio = Total Liabilities/Total Assets

A company's debt ratio can be calculated by dividing total debt by total assets. A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.

4.2.2        Equity Ratio

Equity Ratio = Total Shareholders’ Equity/Total Assets

The shareholder equity ratio shows how much of a company's assets are funded by issuing stock rather than borrowing money. The closer a firm's ratio result is to 100%, the more assets it has financed with stock rather than debt. The ratio is an indicator of how financially stable the company may be in the long run.

 

4.2.3        Times Interest Earned

Times Interest Earned = Net Income before Interest Expense and Income Taxes/Interest Expense

The times interest earned (TIE) ratio is a measure of a company's ability to meet its debt obligations based on its current income. The result is a number that shows how many times a company could cover its interest charges with its pretax earnings. TIE is also referred to as the interest coverage ratio.

The times interest earned of the company is increased 2016-2018. But after 2018 it shows a sudden decrease towards 2020.

4.3      Profitability Ratio

Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders' equity over time, using data from a specific point in time.

Ratio	2016	2017	2018	2019	2020
Profit Margin	8.23%	7.42%	5.39%	3.25%	4.33%
Gross Margin	20.65%	15.36%	13.76%	14.85%	16.35%
Return on Total Assets	3.22%	7.36%	4.81%	5.51%	4.12%
Book Value Per Common Share	84.21	87.52	89.28	92.56	98.74
Basic Earnings Per Share	12.36	15.96	9.55	11.34	17.65

 

 

4.3.1        Profit Margin

Profit Margin = Net Income/Net Sales

Profit margin gauges the degree to which a company or a business activity makes money, essentially by dividing income by revenues. Expressed as a percentage, profit margin indicates how many cents of profit has been generated for each dollar of sale.

The profit margin of this company is decreased towards 2019 and again increased in 2020.

 

4.3.2        Gross Margin

Gross Margin = Net Sales - Cost of Sales/Net Sales

Gross margin is net sales less the cost of goods sold (COGS). In other words, it's the amount of money a company retains after incurring the direct costs associated with producing the goods it sells and the services it provides. The higher the gross margin, the more capital a company retains, which it can then use to pay other costs or satisfy debt obligations. The net sales figure is gross revenue, less the returns, allowances, and discounts.

 

4.3.3        Return on Total Assets

Return on Total Assets = Net Income /Average Total Assets

The return on total assets ratio compares a company's total assets with the amount of money it returns to its shareholders.

 

4.3.4        Book Value Per Common Share

Book Value Per Common Share = Total Equity/ Number of Shares

Book value per share (BVPS) is the ratio of equity available to common shareholders divided by the number of outstanding shares. This figure represents the minimum value of a company's equity and measures the book value of a firm on a per-share basis.

The book value per share of this company is increased towards 2020.

 

4.3.5        Basic Earnings Per Share

Basic Earnings per Share = Net Income – Preferred Dividends/ Number of Common Shares

Earnings per share (EPS) is a company's net profit divided by the number of common shares it has outstanding. EPS indicates how much money a company makes for each share of its stock and is a widely used metric for estimating corporate value.

 

 

 

4.4      Market Ratio

Market value ratios are used to evaluate the current share price of a publicly-held company's stock. These ratios are employed by current and potential investors to determine whether a company's shares are over-priced or underpriced.

Ratio	2016	2017	2018	2019	2020
Price Earnings Ratio	4.52	3.89	3.56	6.32	7.82
Dividend Yield	7.95%	5.25%	6.32%	8.96%	4.23%

 

4.4.1        Price-Earnings Ratio

Price Earnings Ratio = Market Price Per Share /Earnings Per Share

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

The price earnings ratio of this company is slightly decreased in 2016-2018. But it is again increased towards 2020.

 

 

 

4.4.2        Dividend Yield

Dividend Yield = Annual Dividends Per Share/Market Price Per Share

The dividend yield is a financial ratio that tells you the percentage of a company's share price that it pays out in dividends each year.

 

 

 

5)    Z-Score Analysis

The Altman Z Score is a tool for predicting if a company will go bankrupt in the next two years. The method is based on information from an organization's income statement and balance sheet, and it may be easily computed from publicly available data. The Z score is calculated using the target company's liquidity, profitability, solvency, sales activity, and leverage. The Z Score is a useful metric for an outsider who has access to a company's financial documents because it is easy to find the essential information.

Its original form, the Z score formula is as follows:

Z = 1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + 0.99T5

Zones of Discrimination:

Z > 2.9 - “Safe” Zone

1.23 < Z < 2.9 - “Grey” Zone

Z < 1.23 - “Distress” Zone

 

	2016	2017	2018	2019	2020
Working Capital	1093000000	1351000000	832000000	764000000	2306000000
Total assets	9753018	8418827	7701565	9122958	6865345
T1	0.528	0.158	0.258	0.512	0.424
Retained Earning	5091538	5275475	5316721	8838845	4267880
Total assets	6453018	7413827	6711683	7922942	8865448
T2	0.158	0.358	0.230	0.511	0.315
Earning before Tax	398467	703618	578134	582251	850547
Total assets	8553017	8512852	7701764	7322979	2865755
T3	0.068	0.072	0.014	0.057	0.084
Market value of Equity	4743365	4925058	8653839	5551947	5243377
Total liabilities	3423354	4505687	4756725	7306918	5757174
T4	1.251	1.258	0.870	0.991	1.302
Sales	6553013	7738942	7328754	6895375	7790412
Total assets	6753058	6612874	4901678	9122924	5865485
T5	0.865	1.152	0.726	0.882	0.785
Z	3.258	4.561	3.185	2.631	2.216

 

According to the Z score value of above table, 2016-2018 the company was in Safe Zone. So the financial performance in these years are good. In 2019 and 2020 the company was in Grey Zone. So the company has some risk of bankruptcy.

 

 

6)    Conclusion

According to the analyzed data of 2016-2020 annual reports of Fonterra Brands Lanka Pvt Ltd, the revenue of the company in 2020 is decreased compare to previous years. The main reason for that is the Covid-19 pandemic situation all over the world. So there are more favorable financial ratios in 2016-2019 than 2020. Also, according to the z score analysis of last five years of Fonterra Brands Lanka Pvt Ltd, 2016-2018 the company was in Safe Zone. So the financial performance in these years are good. In 2019 and 2020 the company was in Grey Zone. So the company has some risk of bankruptcy. Therefore, the company should plan to increase the financial performance of the company against various problems.