In ACCA, so far during F level papers, I seldom come across questions that need to analyse and evaluate the business and financial performance of an organization which means it has beenleft out/overpassed from studies.Even if there is; it is still not the main focus of the paper.
This topic is very interesting as we get to know about an organization's performance. We will be able to know the real and recent performance of the organization which is not only on the surface. Investors will tend to only check whether the organization is making profit or making loss, if it is making a profit means it is a good company; this should not be the way as the figure can be deceiving.
This topic can be very helpful in teaching me how to analyse and evaluate an organization in depth if Iwere to be an investor, accountant, consultant or any career in the future. I can apply the lesson learnt and experience that I have gained in my career.
Reasons for choosing Top Glove are:
My mother owns a saloon and she has many customers from Top Glove. From them, I get to know that Top Glove is a very big company with a total of 11,000 employees. They have too many orders that the employees will need to work overtime almost every day. After doing some research I got to know that Top Glove is the world's largest rubber glove manufacturer. From that I assume Top Glove is a very successful company and therefore I have the interest towards this company's performance. By choosing a company that I have known for a long time and that I am interested in would ease me in doing the project.
Another reason is Malaysia is well known for our rubber, the qualities of rubber we produce are good and recognized world-wide. Rubber is a very useful product as it can produce many sub-products. Being the most renowned listed company around the world, Top Glove would be able to provide me all sorts of experimental information. This will make my project more compact, solid and resourceful.
Top Glove has a direct competitor which I have also known few years ago which is Hartalega Holdings Berhad. This is a strong competitor for Top Glovefor it ranks number two in Malaysia. Hence I will have tocompare and contrast both these companies with sufficient analysis and evaluation.
Project objectives:
I wanted to find out more about Top Glove's recent performance. I would love to know how their trend of performance is and why they perform in such a way. This will answer many of my questions and doubts towards Top Glove.
In my research work, I would want to find out what is the best way to analyse, evaluate and interpret a company. As an accountant, we are not a bookkeeper, analyzing, evaluating and interpreting are more important for us.
I would also want to find out, what kind of performance is best for the company. How do we know that the performance is good or bad? Why sometimes even if the company is making a profit, but still some commentors commented that the company is not performing well?
In short, the project objective is to improve my understanding on analysis and evaluation of the business and financial performance of an organization.
Research questions:
My main research question will be -- Is Top Glove a successful company? If it is, I would like to know how they have come to this stageand to understand their management system. The reasons of their success are a key point which can benefit me a lot now and later in the future.
SWOT Analysis
In this strongly competitive world, every company has rivals to compete with. The only way to survive and succeed in the market is to become the most outstanding company with distinctive managing system, SWOTanalysis. Basically, SWOT analysis is a very crucial technique that is often used in business management to identify the strengths and weaknesses of a company, to spot opportunities available in the market and to determine threats faced among the industries. The analysis of strengths and weaknesses are for internal control, while opportunities and threats are external controls. That is why SWOT analysis has another name which is internal-external analysis.
From the point of view of a company, SWOT analysis helps the company to carve a sustainable niche in the industries. In other words, SWOT analysis is capable to show the strengths of the companies and uncover opportunities ahead for expansion of the business. It also makes the company understand the weakness of the business so that possible threats may be figured out and be solved. In a long term, the company's business will be able to distinguish themselves from other competitors by setting creative strategies using SWOT analysis, and turn out to be successful in the market.
Strength
Strengths can be tangible or intangible. Strengths can also be referred as advantages, which also indicate what advantages a company has over the other competitors. A company which can perform better than the other competitors is also considered as one of the strengths. Furthermore, being able to maintain lower cost of production also wins the other companies because cost is one of the most important factors in a business. Lower cost indicates higher net profit, which the profits can expand the business by doing investments or doing other projects that will yield even more profits. By doing this over and over again, the business is expected to grow quicker than the other rivals. In this report, Top Glove Corporation is being selected as the company, their strengths are as follows:
This company has the largest market share in glove industry, which is also considered as the largest glove company in the world. This is because a total of 185 countries are importing Top glove's product every year.
Top Glove is a company that produces good quality gloves which earns them good reputations since its establishment in year 1991. Top glove is able to produce good quality gloves because every employee in Top glove has been trained professionallyaccording to their training programs before they work.
Top Glove is a company that has been doing activities that rebate the societies. They have been giving out charities from the profits and scholarships for educations to the needy over the years. These also help the company to gain good image and respects from customers because they ensure they are contributing to the societies and corporate social responsibility whenever they are capable to do so.
Over the years, Top glove has earned numerous awards such as Frost & Sullivan 2009, Best Brands Manufacturing - Rubber Gloves 2007 - 2008 By The Brand Laureate, Asia Pacific Entrepreneurship Awards (APEA) 2008 Entrepreneur of the Year 2008 By Enterprise Asia, Anugerah Kecemerlangan Industri 2007, and SME Platinum Award 2007 By SME Association of Malaysia.
Renowned reputation is also Top Glove's strength. "Thanks to our good name and good references, some even pay us in advance, before we ship off the gloves. This is our strength," Tan Sri Lim Wee Chai revealed on an interview. (Star Publications (M) Bhd, 2012)
Weakness
Weakness analysis is used to identify the weaknesses that stop the business from growing and they have to be eliminated or minimized. The main purpose of this analysis is to understand the limitations of the business and overcome it with good solutions. Weakness means the reverse of strengths; other companies are probably doing better in some ways that prevents our business from growing smoothly. This kind of weakness has to be conquered by figuring out what the rivals have which you lack of. Other than that, weakness also indicates that the business does not meet the standard that it was expected to achieve. For example, machinery which is expected to last for ten years ended up for eight years only. This is a scenario of inefficiency of control. Furthermore, lack of financial supports isalso one of the weaknesses of a company. To run a business, liquidity of cash flow is extremely important in order to be able to solve any emergencies with the cash reserved. To overcome this matter, credit management has to be taken into considerations. Turnover days for trade receivable and trade payable has to be managed and planned well to ensure good liquidity of cash flow. As for Top Glove Corporation, they do have weaknesses too despite the success.
They have a comparably harder straight line work cell layout to divide the work equally among the workers compared to U-shaped work cell layout. Unevenly work divided among workers may cause performance level of employees to drop because of the imbalanced workload at fixed salary. Workers who work more will feel unfair and hence perform badly during working hours. Attitude of the workers is very important in order to enhance the flow of productions.
A large company like Top Glove Corporation certainly has many employees working for them. With a total of 11000 employees working in the same factory, it is undoubtedly hard to manage the human relation due to small number of supervisors.
Another weakness of Top glove is that the safety of the employees in the factory is not guaranteed. There is only one main gate for entry and exit in this large factory, every one's lives will be at risk once accidents happen. Top glove should be aware of the safety of employees by creating more emergency exits for the labours just in case.
Opportunity
Opportunities are available from external factors. A company that knows how to grab the opportunities at the right time will be able to improve their business by executing more strategies and plans for better profitability. Examples of opportunities are availability of better technology and machinery, government support in researches, new discoveries of a different market or even followupofthe latest trend to produce products.
Top Glove as the research target has the opportunity to save cost because of the recycle law advocated by Malaysia government. Disposable raw materials are required to be recycled for reuse of materials.
Top glove enjoys economies of scale for being the largest global glove maker and hence it creates barriers for new entrants into this industry. This is the opportunity for Top glove to expand its business with the saved cost since it has not much close rivals due to high entry barriers.
Top glove is currently under the opportunity to increase its total production volume by 10 percent because of 52 production lines expanding in coming August. A total of 4.8billion extra of gloves will be produced with the extra production lines which will lead to a total amount of 45.1billion pieces of glove production per annum. This plan is expected to improve the profitability of the company as more productions indicate more profits.
Threats
Threats take place in a company due to unstable external environment that affects the business's profitability. Threats may occur in different forms such as technologies improvement and competitiveness of close rivals. Threats are uncontrollable and unpredictable because the company could not possibly manipulate the economy or the technologies in the industry. Likewise, threats are not necessary to be external factors but also internal factors. Liquidity of cash flows can also be one of the threats faced by the company because poor liquidity of cash flows leads to difficulties in paying creditors. However, threats can normally be detected by looking at the weakness of the company and lock onto any possible problems in the future. Companies are expected to improve their performance by upgrading their technologies or enhancing their credit management to keep up to the current business environment. Therefore, proposals have to be presented in order to eliminate threats. Taking Top Glove Corporations as an example, they somehow face different kinds of threats that might affect the profitability of the business.
The minimum wages law set by Malaysia government. Top glove is expected to give a minimum wages of RM900 to all workers in the company. This has become a challenge for Top glove due to the higher amount of total salary to be paid, which leads to higher cost and lower profits. Top glove might have to think of a way to cut cost from other departments in order to stabilize the cost. 'The policy will likely to cause the glove producer's labour cost to rise by some 50%', chairman Tan Sri Lim Wee Chai said (Star Publication (M) Bhd, 2013).
Top glove is now facing a major threat which is the decline of USD currency rates because 98% of the transactions are dealing in USD. Although it is still making profits with the fall of USD currency rate, its real value of profits is not as high as it was shown. (Redundant?)To mitigate this threat, Top Glove has used plain vanilla forwards contracts to hedge its US dollar receivables (Star Publications (M) Bhd, 2012).
Increase in price of latex, which is one of the most important raw materials for the gloves, up to 60% of its production costs, has become a threat to Top Glove since year 2011. This increment is undeniably a challenge to a low cost high quality production company like Top Glove. However, downgrading the quality of the gloves because of higher cost of latex is not a wise decision as it will affect the reputation of the company. Top glove probably can enhance their raw materials efficiency by minimizing the mistakes made by workers when producing gloves. This solution can keep both quality and profit of the company stable in the industry.
"I would, however, say that the biggest challenge in this sector is hiring the right people," Lim said in an interview with Star Publications (M) Bhd. He said he preferred non-smokers and people who have a healthy BMI as they can be transformed into a more productive workforce.
Profitability
Profitability ratios:
Top Glove
Hartalega
2012
2011
2010
2012
GP margin
16.6%
11.4%
21.1%
31.9%
NP margin
9.9%
6.5%
14.5%
27.9%
ROCE
17.2%
11.2%
26.2%
38.7%
Top Glove's GP margin has increased from 11% to 17%. This is because of the high demand for natural rubber and nitrile gloves from both the emerging and developed markets (Top Glove Corporation Berhad 2012, p.29). Comparatively, Hartalega has 31.9% GP margin which is higher than Top Glove. The main reason is Hartalega has higher pricing power than Top Glove as supply higher end products and less volatility in nitrile prices means easier to adjust prices. Whereas Top Glove has lower pricing power as customers in the powdered latex segment is more prices sensitive and high volatility in latex prices makes it difficult to adjust. (CLSA, 2012)
Secondly, Top Glove's margin has also improved to 10%. Operating Cost of Top Glove doesnot increase a lot as compared to their sales revenue. It is due to the European debt woes and China's slowing economy reduced the demand of the rubber hence caused the 'average latex price in FY2012 tumbled 21.4% to RM 7.19/kg from RM 9.15/kg in FY2011', reported by Bursa Community (2012). Comparatively, Hartalega's NP margin of27.9 % is higher than Top Glove, which is also the highest in the industry. This is due to the implementation of minimum wage of RM 900, Hartalega has the least workers therefore it doesn't impact much on Hartalega whereas Top Glove has 11000 workers that causes them to have higher cost of production and causing the NP margin to be lower (Focus Malaysia, 2013).
Top Glove's ROCE has also improved by 55%; this is due to the strong growth of the sales revenue. Despite the ongoing economic crisis in Europe, demand of rubber gloves from Europe has not been affected as rubber gloves are deemed as basic necessities since the healthcare standards in these markets have improved (Top Glove, 2012). Top Glove's all expansion and acquisitions, including the 'acquisition of 95% equity stake in PT Agro Pratama Sejahtera', rubber plantation land in Indonesia, are internally financed, no additional loan and borrowings have incurred according to the SOFP of Top Glove (Top Glove, 2012). That means the increase in ROCE is all because of the increase in Sales Revenue. Comparatively, Hartalega has 38.7% ROCE, which is very much higher than Top Glove, this is because Hartalega has the best class technological capabilities and the most efficient production lines which manage to produce significant amount of gloves for sales. (CLSA, 2012)
Liquidity
Liquidity ratios:
Top Glove
Hartalega
2012
2011
2010
2012
Current ratio
3.0
3.1
3.4
4.4
Quick ratio
2.3
2.4
2.6
3.3
Current ratioof Top Glove has fallen from 3.1 to 3.0 this is very minor and stable compared with 2010, from 2010 to 2011 is a slightly more fall, the possibly reason will be the acquisition of the 10k ha of raw plantation land in Indonesia which has cost Top Glove RM30m, this was financed internally and not loan was taken, therefore the current ratio fall (CIMB Research Pte Ltd, 2011). Comparatively, Hartalega has 4.4 current ratio which is higher than Top Glove, this is because of Hartalega has most of its automation in place, Hartalega does not need to install anymore automation whereas Top Glove just wanted to increase the installation of robotic arm stripping, auto counting and stacking machines all these will cause the current ratio of Top Glove to be lower compared with Hartalega (Focus Malaysia, 2013).
Top Glove has quick ratio of the minimum level of 1, for all the 3 years, which shows that there is no sign of overtrading. However this might shows that Top Glove may not be efficiently using its current assets or its short-term financing facilities. This may also indicate problems in working capital management (Business Resource Software, 2013).Hartalega has higher liquidity ratio mainly due to a measured selldown of its majority stake (The Edge Communications Sdn Bhd, 2012). The declaration of a 1-for-1 bonus and 1-for-5 free warrants issue has boost in trading liquidity of Hartalega (Maybank Investment Bank Berhad, 2012).
(Check until here this time, hehe)
Investor's ratios
Investor's ratios:
Top Glove
Hartalega
2012
2011
2010
2012
Gearing ratio
3.4%
4.1%
3.3%
8.5%
Div yield (%)
2%
6%
5%
12%
2012
2011
2010
2012
DPS (sen)
12.99
14.00
14.29
11.98
EPS (sen)
33
18
40
28
PE ratio
16.14
26.57
15.01
14.38
Dividend cover (times)
2.6
1.3
2.8
0.6
Top Glove and Hartalega's positive trend in dividend payments is noteworthy since few companies in the Medical Equipment & Supplies industry pay a dividend. Top Glove's DPS growth ranked highest relative to its industry peers while their EPS growth is in-line with the industry average (The Financial Times Ltd, 2013 a). Comparatively, Hartalega's EPS growth ranks highest in its industry (The Financial Times Ltd, 2013 b). Top Glove has higher EPS than Hartalega this shows that Top Glove is better in generating income to its shareholders.
From the balance sheet, it looks very healthy as the net cash is 5.3%, or
Efficiency ratios
Efficiency ratio:
Top Glove
Hartalega
2012
2011
2010
2012
Inventory turnover ratio
17.6
18.7
20.1
14.9
AR collection period
43.7
44.5
43.4
42.2
AP payment period
22.1
21.3
23.4
17.0
Based on the graph above, Top Glove inventory turnover ratio has been decreasing from 20.1 in year 2010 to 17.6 in year 2012. This indicates they had been working out on this to find out a solution to greater efficiency in their marketing strategies and also their production lines. Although the slight decrease doesn't seem significant, it could save them from high holding stock cost. However, Hartalega seemed to have a lower inventory turnover ratio of 14.9, it might due to higher demand of nitrile glove or Hartalega doesn't produce as much gloves compared to Top Glove, hence having lower level of stock to clear.
Top Glove has at least 43 days of AR collection period, which is longer than its AP payment period for the 3 years period. They will be able to do this without having any financial difficulties is because of their sound balance sheet and the ability to generate strong cash flows to pay off their payables before collecting the debt from their receivables. Comparatively, Hartalega is the same on FY2012, it has 42 days AR collection period and 17 days AP payment period, which is almost one month lead time. The slight difference which is not material indicates that both companies are performing the same strategies in collecting receivables. AR collection period must be managed wisely to prevent low liquidity for late collection and prevent customers to apply bargaining power due to many competitors out there.
Top glove's AP payment period had been fluctuated in between 21.3 to 23.4 in 3 years period, stopping at 22.1 in year 2012, which is an increment of 0.8 compared to year 2011. This minor change of payment period should not affect the credit worthiness of the company. Although both companies' AR collection periods are similar, AP payment periods are quite different though. Hartalega appears to have a lower AP payment period which probably gains themselves creditability from suppliers as it is favourable to their suppliers to clear their debts as quick as possible. However, this also shows that Hartalega didn't fully utilize the period given by suppliers to clear payment, which may lead to cash flow trouble to the company.
Recommendations:
Minimum wage ïƒ automation
