Financial statement analysis , Financial Management

Case Study based on Financial Statement Analysis of Hatsun Agro Private Limited

The financial statements can be analysis of HAPL can be analyzed based on the set of key ratios as mentioned in the end of the document. This ratio is compared with Heritage Foods India ltd, which is a competitor for HAPL in the dairy segment. This comparison helps in identifying the strengths and weakness of HAPL.

 

Table 1 Liquidity Ratios for HAPL

Rs. Crore 

2006

2007

2008

Current Ratio

0.94

0.81

1.16

Quick Ratio

0.63

0.45

0.61

 

Table 2 Liquidity Ratios for Heritage Foods India Limited

Rs. Crore 

2006

2007

2008

Current Ratio

2.41

2.68

1.99

Quick Ratio

1.53

1.51

1.35

 

The current ratio of HAPL had been consistently below for the last five years except the year 2008. But for the competitor Heritage Foods India Limited the current ratio is almost 2.2 on average. The quick ratio of HAPL has fallen in the last two years due to their increase in production capacity and inventory pile up, in view of their expansion plans.

The low current ratio of HAPL is mainly due to the product line in which they operate - Milk and Milk products. As HAPL, the primary revenue generating product is Milk, which does not have huge life cycle in terms of raw material, work-in progress or finished goods inventory. Since milk is perishable item and the shelf life is less than a week, and it is clearly seen in the company's inventory turnover ratio.

Table 3 Inventory Turnover Ratio of HAPL

Rs. Crore 

2006

2007

2008

Inventory Turnover Ratio

38.84

25.75

15.48

Inventory Turnover in Days

9

14

23

Sales

549.54

588.2

867.69

Milk (% of Sales)

69.02%

69.68%

63.27%

Ice - Cream (% of Sales)

6.49%

6.13%

5.15%

Milk Products (% of Sales)

24.49%

24.19%

31.58%

 

Hence almost in 9 days they are able to sell the inventory at HAPL till year 2006. Now the company's inventory turnover is rising to 23 days. This clearly gives a pattern on the low current ratio as well as the increase in the last year. The company is able to purchase the raw material in credit i.e. milk is procured, processed and sold to the customer, the same money is used to repay the supplier. Hence the company need not spend own cash in paying the suppliers. Hence HAPL was able to maintain a low current ratio and still improve their sales. This shows the company had a good working capital management.

In the last year the company's inventory turnover increase to 23 days and also the current ratio increased to 1.16. This is clear indication of the company's change in the operations. The sales of HAPL for the year 2008 increased by 47%, but of which 32% was contributed by milk products and where this clearly indicates the product portfolio is changing for HAPL. This gives the reason for the increase in the inventory turnover days increase to 23 days. Milk products have high inventory period unlike milk, and hence the company is bound to use own money and hence the increase of current ratio also. For the competitor the current ratio average of 2 is very high in this dairy industry. This shows the competitor is using up more cash in working capital management. The product portfolio of Heritage is different where their sales is contributed by milk with only 15% and remaining sales generators are butter and skimmed milk. Hence the inventory turnover day for Heritage Foods is averaging to 43 days. Hence the working capital management of HAPL is really good till the year 2008, where they are able to manage with a low current ratio.

Table 4 Debt Equity Ratio

Rs. Crore 

2006

2007

2008

Hatsun Agro

2.99

2.33

2.62

Heritage Foods India Limited

0.26

1.51

1.35

 

Table 5 Times Interest Earned Ratio


2006

2007

2008

Hatsun Agro

4.33

5.08

5.95

Heritage Foods India Limited

61.88

5.85

1.90

 

The debt equity ratio of HAPL is high compared to its peer who is also in the same dairy industry. This clearly indicates the financing source of HAPL. Most of the source of funding for HAPL is through debts rather than equity. Also the times interest earned for HAPL is constantly above 4 times and hence the company has the potential to repay the debts regularly. This can bring down the

Heritage Foods has drastically increased its fixed assets in the last two years. For which fund is sourced mainly through debt. Seeing the huge increase in Debt to equity ratio of the peer company, and also a fall in the times interest earned, interest repayment will be a problem for the company if it does not able to increase its sales This will bring down the credit rating if continued, where in future, the company may not be able source funds through to take loans.

 

 

Du-Pont Analysis (ROA)

HAPL over the last 3 years has shown a steady growth in its sales revenue and profits. The profitability of HAPL over the last three years can be analyzed using profitability financial ratio Return on Assets (ROA). Last three years there has been a consistent increase in the return on assets for HAPL.

Table 6 Return on Assets

 

2006 

2007 

2008 

Hatsun Agro Products Ltd.

2.66

4.67

7.74

Heritage Foods (India) Ltd.

11.43

0.18

0.33

 

The return on assets could be further analyzed based on the asset utilization ratio and profit margin. This will help in identifying the company's main driver for the profitability - Volume or profit margin.

Table 7 Profit Margin


2006 

2007 

2008 

Hatsun Agro Products Ltd.

0.8

1.4

2.00

Heritage Foods (India) Ltd.

4.5

0.09

0.16

 

Table 8 Asset utilization (Sales / Total Assets)


2006 

2007 

2008 

Hatsun Agro Products Ltd.

331

322

327

Heritage Foods (India) Ltd.

231

157

166

 

The Profit Margin of HAPL for the last three years has increasing at a minimal rate, but still overall the company operates at a very low profit margin. Heritage Foods is also having very thin profit margins. The asset utilization for the HAPL is increasing consistently and clearly indicates the company's major driver is Sales turnover. In comparison with the peer this data leads to the understanding that the dairy industry is managed with a very thin profit margin and the Sales volume of the company is which improves the profitability of the company and in turn adds value to the shareholders. For Heritage foods, the decline in the asset utilization is clearly the reason for the fall in profitability.

Also in the year 2005 there was a fall in the profit margin for the company and its peers. Milk procurement faced challenges due to intensified competition in milk procurement and severe droughts in South India. This resulted in shortage of milk and exorbitant increase in milk procurement prices.  As per the directors report of Heritage foods India Limited, the selling price of fat related milk products prices declined by 19% during the period. This is the major reason for the fall in the operating margins for the companies. HAPL has improved its profitability after the decline in the year 2005.

From the above Du Pont analysis, we can conclude milk industry is completely running with low profit margins. This is true because, milk is a very basic need for the people and with the number of players industry there is no way a company can survive with high profit margin. The sales penetration of milk is which helps in increasing the profitability for the company.

 

Table 9 Return on Equity


2006 

2007 

2008 

Hatsun Agro Products Ltd.

13.9%

21.7%

35.4%

Heritage Foods (India) Ltd.

18.2%

0.5%

0.8%

 

The return on equity for HAPL is abnormally high in the last year at 35.4%, which is not the usual case for a diary industry. This sudden increase is due to the increase in exports for HAPL, which has helped in increased sales and earnings. Whereas the returns of HeritageFoods are very low in the last years due to the huge Capex they have made in formation of retail stores. The new expansion costs have pulled down the ROE of Heritage Foods.

Table 10 Fixed asset turnover ratio


2006 

2007 

2008 

Hatsun Agro Products Ltd.

4.11

4.10

4.95

Heritage Foods (India) Ltd.

5.22

3.01

2.79

 

The fixed asset turnover for HAPL averages at around 4, which is very low for a milk selling company. For milk processing and dairy company there exist no huge infrastructure, but for HAPL the fixed assets are in the form of Plant and machinery. About 70% of the fixed is plant and machinery, and mostly for processing milk products and ice cream. The company is still to make more money out of the milk products and ice cream, through penetration as they will have better profit margin than milk.

Seeing the P/E ratio of HAPL is 7.3 as on 20th January 2008. This shows the market expects a good growth rate on the company and that is mainly due to their improved sales and dividend payout. From Zero dividends in the year 2006, the company has announced 35% dividend in the year 2008, where the earning have almost tripled in this period. This growth helps in maintaining a PE ratio of 7.3. The PE ratio of Heritage foods is 182, this is mainly due to the decrease in the earnings but compensated with huge expansion plans in the last two years in retail segment. With the above ratio analysis the way finance is sourced by HAPL, its product portfolio, sales drivers and other business information.


Key Ratios of HAPL and its Competitor

Financial Ratios - Hatsun Agro Products Ltd.


2006

2007

2008

Current Ratio

0.94

0.81

1.16

Quick Ratio

0.63

0.45

0.61

Debt-Equity Ratio

2.99

2.33

2.62

Times Interest Earned Ratio

4.33

5.08

5.95

Inventory Turnover Ratio

38.84

25.75

15.48

Fixed Assets Turnover Ratio

4.11

4.10

4.95

Profit Margin (%)

0.8%

1.4%

2.0%

ROE (%)

13.9%

21.7%

35.4%

 

Financial Ratios - Heritage Foods (India) Ltd.


2006

2007 

2008

Current Ratio

2.41

2.68

1.99

Quick Ratio

1.53

1.51

1.35

Debt-Equity Ratio

0.26

1.51

1.35

Times Interest Earned Ratio

61.88

5.85

1.90

Inventory Turnover Ratio

8.79

6.46

10.97

Fixed Assets Turnover Ratio

5.22

3.01

2.79

Profit Margin (%)

4.5%

0.1%

0.2%

ROE (%)

18.2%

0.5%

0.8%

 

 

Posted Date: 7/13/2012 8:30:04 AM | Location : United States







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