Both the financial and business analysis below were based on data and information gathered with reference to the attached appendix (Appendix ).
Financial Performance Analysis
All figures were extracted from annual reports and the relevant extracts of balance sheet, Income statement and Statement of changes in equity are provided in analyzing each of the ratios and in Appendix in more detail. Further the detailed calculations of following ratios by using spread sheet techniques are also provided in Appendix.
In analyzing the company's financial performance, I would be using the following financial ratios:
Profitability Ratios
Liquidity Ratios
Efficiency Ratios
Gearing Ratio
Investors' Ratios
Profitability Ratios
Profitability is concerned with how successful the management of a company has been in generating profits. Profitability ratios are important in assessing a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time (Investopedia 1, 2008).
Revenue - Figure 1
Overview
As seen in Figure 1, there has been a steady growth in revenue throughout the three years. This can be a positive sign in terms of revenue, but it is necessary to compute profitability ratios for deeper analysis.
The ratios used to analyse Bairaha Farm PLC's profitability are:
Gross profit Margin
Net profit margin
Return on Capital Employed
Asset Turn Over
Margin Trends
Financial Year 2008-2009
Financial Year 2009 had shown deterioration in both gross profit margin and net profit margin as compared to FY 2008. The gross profit margin decreased to 9.93% from 12.92%, and the net profit margin decreased to almost 1% from 3%.The main factors of these lower margins were as follows:
High oil prices had led to increase the cost of feed grains and had adversely affected the cost of number of other inputs. The inflation of 28% at its peak had also increased the cost of production as well as a reduction on spending of the limited income of consumers. This means there had been an increase in variable costs which led to deteriorate the gross profit.
The cost of production of poultry products had also increased due to an increase in feed prices. This is because there had been a progressive increase in the cess on imported maize.
Another major factor of decrease in gross profit was the lack of pricing powers of the company as there had been a price control on chicken by the government.
On the other hand apart from the increment in finance cost resulted by lease, it is also noticeable that in FY 2009 the company had spent almost double of distribution expenses which had been incurred in FY 2008. They had established further distribution outlets in the country.
Financial Year 2009-2010
From the above trends it is clear that both gross profit margin and net profit margin had tremendously improved. Gross profit margin had risen to 17.54% in FY 2010 from 9.93% in FY 2009, and net profit margin had increased to 5.33% in FY 2010 from 1.36% in FY 2009. This is an outstanding performance in terms of profit in comparison with the previous year.
The improvement in the two ratios is mainly because of the following factors:
There had a sound global environment when compared to the previous year. Further the overall reason of achieving an outstanding performance in FY2010 could be that the country's situation returns to normalcy after three decades of conflict.
Due to end of the war, the demand for poultry products had risen considerably and there is potential for further growth in demand particularly in Northern and Eastern province in Sri Lanka.
Since the government has had been encouraging the local cultivation of maize, there had a reduction of the maize's price. This had resulted a decrease in the variable costs and a higher gross profit margin.
However, the company had spend almost double of distribution expenses which had been incurred in FY 2009. It can be highlighted that the company use to spend a lot in distribution and this can be regarded as a positive indicator for future growth to meet the expected demand.
Return On Capital Employed (ROCE)
ROCE is the most important ratio as it measures the overall performance of the organization. It reflects the relationship between profits earned by an organization and the size of the organization, ie, the capital employed by the organization. ( ACCA GTG P3 )
The company's ROCE had dropped almost by 5% from FY 2008 to FY 2009. This is mainly because of deterioration of the net profit as discussed above. For this drop in ROCE, it is unreasonable to say that the company is inefficient to manage the business to generate the profits from the available resources. This is because the major change is due to the downturn of global economy faced by the whole world and the reduced return might have a long term benefit as per the management.
It is interesting that the company was able to increase ROCE almost by 13% from FY 2009 to FY 2010. Since then, this can be regarded as strong indication that the company has the capability of managing the business by generating profits from the available resources by ignoring of any uncertain economic conditions. However, sometimes this (weak performance when coping with uncertain economic condition) can mean that the company doesn't have effective and efficient risk management system. This will be discussed further when analyzing the business performance of the company.
Liquidity Ratios
Liquidity ratio refers to the ability of a firm to meet its short term maturing obligations. The more liquid a firm, the better it is able to meet its short-term obligations or current liabilities. ( Cleverley, 1989).
The current ratio and Quick ratio is the most commonly used liquidity ratios. However, if the inventories don't fluctuate drastically during the period under review, current ratio and the quick ratio would almost have the same trend. The diagram below shows ratios and the difference of the trends due to inventories.
Financial Year 2008-2010
The three financial year period under review had shown consistent improvements in terms of both the current ratio and quick ratio. However it is clear that during FY 2008 the company had a problem in meeting its short-term obligations since the current assets are lower than current liabilities. Further in this year the company might have used the conversion of some of its inventories into cash to settle the current liabilities.
Since the company's liquidity is just marginal over the three year period, one may argue that it might have raised the possibility of default and bankruptcy. But, from the above trend it is clear that both ratios are improving year by year expecting stronger capability to pay its short-term obligations in future as upcoming years are expected to be more favorable in short term investments and returns. In addition, the company enjoys strong goodwill with its bankers since becoming a public listed company. The following were the major factors of the variations of the both ratios.
There had been no income tax payable in both FY 2009 and FY 2010 where as in FY 2008 there was income tax payable of LKR 4.5 Million which had resulted to deteriorate both the current ratio and quick ratio.
There had been no income tax receivable in FY 2008 where as in FY 2009 and FY 2010 there was income tax receivable of LKR 12 Million and 10.5 Million respectively.
Efficiency Ratios
This includes:
Inventory turnover period
Debtors Collection period
Creditor Payment period
I would be discussing all the efficiency ratios together with the help of the following diagram, under FY 2008-2009 and FY 2009-2010.
Financial Year 2008-2009
There had been a reduction of inventory turnover period form 34 days in FY 2008 to 32 days in FY 2009. It is not surprising to see a reduction of inventory holding period in a poor performed year due to economic downturn. It is because the revenue as well as cost of sales had increased considerably in FY2009. This would increase denominator and might be the reason of lower inventory holding period.
Debtor's collection period for both FY 2008 and FY 2009 is the same of 56 days. Bairha Farm PLC seems to be able to collect its debts from its receivables on time since the average credit terms for debtors are 60 days. Even if there had an increase in revenue of 24% from FY 2008 to FY 2009, the company was able to maintain the debtors collection period at the same level. This indicates that there was an effective credit scheme and debt collection management, particularly during the year 2009.
Most of the companies intend to take long time period to settle its debt with their suppliers. Bairha Farm PLC had taken more than the ideal standard of 90 days to pay its creditors in FY 2008, ie, 92 days. However in the next year, FY 2009, this had reduced to 80 days. This indicates that even if their creditor payable had been increased, the company's very much focusing on the company's reputation and the supplier relationship by paying them on time.
Financial year 2009-2010
The inventory turnover period had reduced by 7 days to from FY 2009 to FY 2010. The trend shows a decline over the three year period which could mean that the company's focus on investments on distribution is worthwhile. The faster you sell the products, the lesser inventory holding period. This indicates Bairaha Fram PLC is effectively managing its stock control and more aggressive marketing campaigns which would reduce the storage and other costs associated with.
As per my view, this reduction of inventory turnover period is because of the unprecedented demand that was created by the emergence of peaceful environment and the conduct of two major elections.
As discussed above the company is comfortable of collecting its receivables in time. The debtors' collection period is reduced from 56 days in FY 2009 to 49 days in FY 2010. Bairaha Farm PLC has good relationship with its customers. Credit screening and age analysis seem to be carried out regularly before the credit is provided to the customers.
Creditors' payment period had reduced consistently which was very efficient. The increase of the current ratios (discussed above) had great impact on the company's ability for making the creditor's payment more quickly. This consistent reduction of creditor's payment period can be a competitive advantage in future as the demands are expected to grow further. Thus suppliers will be more reliable and can be coped with huge demand with good suppliers' relationship.
Gearing ratio
A general term describing a financial ratio that compares some form of owners' equity (or capital) to borrowed funds. Gearing is a measure of financial leverage demonsatrating the degree to which a firm's activities are funded by owners' funds versus creditors funds. (Investopedia 2, 2008)
I would be using Debt to equity ratio and the definition used here for debt encompasses both short-term and long-term debts. It is because the company had borrowed much for short term and since it is obliged to pay them outsiders it is an important determinant of risk.
Financial Year 2008-2009
The company's equity remained the same in FY 2008 and FY 2009 except the profits earned in FY 2008 and retained for FY 2009. However the total liabilities in FY 2009 had some of the changes. This includes additional long-term borrowings of LKR 44.9 Million. However, debt to equity ratio had not increased from FY 2008 to FY 2009 because of considerable reduction in short term borrowings. Therefore these two years debt to equity ratio is almost same.
It is important to consider that Bairaha Farm PLC had relied much on borrowings in acquisition of its non-current assets and to manage its working capital in FY 2008 and FY 2009, and therefore it cannot be regarded as highly solvent in this period.
Financial Year 2009-2010
Unlike the previous two years, debt to equity ratio in FY 2010 is very positive towards the outsiders (lenders) of the firm. Lenders want shareholders to invest and risk their share of proportionate investments. Therefore since the debt to equity ratio is less than 1, the financial position can be regarded as highly solvent in FY 2010.
The favorable of debt to equity ratio is mainly because of a reduction in Long-term borrowing of LKR 39.5 Million and a fall of short-term borrowing by LKR 25.5 Million, from FY 2009 to FY 2010. Furthermore, the outstanding performance in terms of profit and the surplus revaluation of non-current assets were also facts to this positive turn. It is likely that the company could maintain the gearing level consistent in future as there is potential for increase in the share value and the profits as well.
Investors' Ratio
Shareholder ratio is most commonly used by anyone interested to invest in a company. They indicate how well a company is performing in relation to the price of its shares and other related items including dividends and numbers of shares in issue (wood and Sangster, 2002).
I would be analyzing the following investment ratios:
Earnings Per Share (EPS)
Dividend Per Share
Earnings per Share
EPS represents the amount of profits attributable to each ordinary share or, in other words, what each share has generated in profits. This ratio calculates the earnings an organisation makes per share. Investors are interested in knowing the size of their share in the total earnings of the organisation. They are keen to know the current EPS as well as the future EPS to plan whether to continue investing in the organisation or to search for other investment options. ( ACCA GTG P3)
Financial Year 2008-2009
As discussed above under the profitability ratios, the company's profit had dropped in FY 2009. Due to this reduction, the profit attributable to ordinary shareholders had fallen by LKR 64.3 Million from FY 2008 to FY 2009.
It was only this fact that had created a lower EPS since there had been no additional share issuance or disposal during the year. This fall in EPS has created huge concern to shareholders about any further investment in future.
However, it is important to highlight that the EPS had dropped mainly because of one-time event, where the company had lost the pricing power and the global economic downturn had also resulted the cost of production. This can be true as FY 2010 showed very good improvement in terms of EPS (See below).
Financial Year 2009-2010
The EPS had increased from 1.26 in FY 2009 to 5.28 in FY 2010. This increase is 5 times more than the EPS in FY 2009. There had been no additional share issuance in this year too. So, it is definite that the enormous improvement in EPS is due to high demand for chicken products which had resulted unexpected huge profit available for distribution. The reason for this high demand is already discussed under profitability ratios.
The shareholders, who had concerned about drop of EPS in FY 2009, would be happy with the performance and eager to invest further in upcoming years. The potential investors will also increase as the increase in EPS leads to high market capitalization.
According to the CEO's review in the annual report 2009/10, the government has set targets of per capita doubling within 5 years and tourists arrivals targeted to reach 2.5Mn by 2016 from a current 500,000. Therefore the rising demand from local consumers as well as from tourists will have potential of very positive impact to EPS in future.
Dividend per Share
Dividend per Share is calculated as the dividend paid during the year divided by number of ordinary shareholders.
Financial Year 2008-2010
As per the above diagram, there had an increasing trend of Dividend per share from FY 2008 to FY 2009. This was because; the company had not paid any dividend during FY 2008. At first, the company thought of not distributing any dividend in FY 2009 too, due to its poor performance. Even though there had a decline in profit in FY 2009, dividends of LKR 16,000,000 had been paid. This was for the purpose of motivating the current as well as prospective investors towards the company.
The trend of dividend per share shows a decline from FY 2009 to FY 2010. However, this doesn't indicate it would de-motivate the shareholders as the company only paid an interim dividend. The dividend per share is calculated as Interim dividend divided by number of ordinary shares. It is important to consider that paying an interim dividend is an indication of strength in terms of profitability. It is likely that the final dividend per share of FY 2010 may be the same of FY2009, if the company is intending to have high profit retention ration for expansion of business to meet the future demand.
Business Performance Analysis
The business performance of Bairha Farm Plc ( Company) over a three year period from 1st April 2008 to 31st March 2010 been assessed using the chosen business techniques as follows:
Porter's Five Force Model
SWOT analysis
Porters' Five Force Model
Porter's five forces model is a popular useful framework with wich to analyze industry attractiveness. Industry attractiveness refers to how easy a business will find to make it to make reasonable profits. (Opentution.com)
Competitive rivalry within the industry
According to the department of Censu and Statistics (http://www.statistics.gov.lk/home.asp) there are approximately 154,000 poultry farms in the country. Since the expected growth of demand for chicken is increased and the government releases the pricing power, Bairaha Farm PLC could face an intense competition from the companies like Three Acre Farms PLC which sells their products under the famous brand name of "Prima". Such companies may be focused more on selling broiler farming and processed chicken in the future, as a strategy of expanding this segment further to achieve the higher market share.
However, as the Bairaha Farm PLC is only focused on broiler farming and processed chicken, there is a competitive advantage over the competitors. So they have already adopted a strategy of differentiating their products. This includes introducing a range of pre-cooked marinated products in attractive new packaging. This range includes wings, drumsticks, thighs and whole leg. In addition, currently the company is expanding its business by increasing the production to meet the upcoming demand and spending more on distribution as a marketing strategy.
So it is clear that there is a perfect competition in the poultry industry in Sri Lanka, where Bairaha Farm PLC has to continue in analyzing competitors' performance and should apply benchmarking techniques before every business strategy.
However, a direct comparison regarding the performance of the company and its competitors was not carried out as the major competitor's financial statements have been prepared as at 31st December ( therefore FY 2010 annual report is not available), and the competitors are not in one line business like Bairaha Farm PLC.
Potential Entrants
Potential entrants may be sitting on the edge of the industry and since there is high expected profit that can be made, they might interest to enter the industry and the market. It is, nevertheless, difficult for a new entrant to enter the poultry industry particularly to the production of chickens because of the following barriers to the entry.
A high cost of capital investment is needed to establish in the industry,
Strict legal requirements of maintaining hens and cocks,
Cost and expertise needed to maintain the health of hens and cocks.
Huge uncertainty of diseases which might lead to bankruptcy of a new entrant,
Unexpected decision by government of controlling the price of chickens and its ban due to diseases,
Competitive large companies which are well established in the industry might chase the new entrant way.
However the need of increase in production might create small scale business to enter a niche market with a focused differentiated strategy. This may only occur if existing companies are unable to distribute to a particular area of market within couple of years.
Threat of Substitutes
As per the below pie-chart there is large population of poultry which will definitely reduce the the threat of other substitutes. Even though there are some substitutes for chicken in Sri Lanka, chicken meats and eggs have become the preferred staple in most homes. So as the chicken is the widely eaten protein source in Sri Lanka, the most close substitutes such as fish is not consumed in preference to chicken.
But it is important to highlight that as per fisheries statistics in the Fisheries ministry websites, (http://www.fisheries.gov.lk/Data/Fisheries 2009 Web.pdf), the marine fish caught and fish production in sri lanka have an increasing trend till last year. This indicates that there is a huge demand for fish as well.
The main substitutes available of land live species are illustrated in the below pie-chart.
Source: The department of Census and Statistics (http://www.statistics.gov.lk/home.asp)
The bargaining power of Customers
In every business transaction, if the consumers are buying large volumes of products their bargaining power will be higher than a small day to day business transaction. If the customers are powerful they can exert pressure on quality, prices and delivery times.
Since there is a perfect competition in the poultry industry, it is likely that the bargaining power of customers can very high. The following factors are considered to understand the bargaining power of customers.
There is unlikely that customers may replace any substitute products for chicken even if the chicken is not available for the bargained price. This because there is less substitutes used in the market in which the company carry its business.
The company's customer base is wide and majorities of them are individual customers with low purchase volume. But some of the large customers like supermarkets buy the products of Bairaha Farm PLC where they have a powerful bargaining power.
The brand name "BAIRAHA" is very famous in Sri Lanka. This results low bargaining powers of customers.
As there is potential increase in competition, Bairaha Farm PLC should enter with the long term contracts with major customers, especially when supplying internationally. They should also build some extra costs in order to keep the existing customers in place.
The bargaining power of suppliers
Currently Bairaha Company acquires Cobb breeder chicks from its sister company, Fortune G-P Farms (Lanka) Ltd and the supplier of grandparent chicks is now Cobb-Vantress Inc of USA. (http://investnow.lk/2010/09/12/bfl-bairaha-farms-markets%E2%80%99-number-one-value-gem-in-sri-lanka-future-plans-and-outlook/1758/).
Cobb-Ventress Inc is a supplier of many other international breeding farms. This means that the company is not a key customer to Cobb-Ventress Inc and hence their bargaining power would be increased. Furher is is important to higjlight that Fortune G-P Farms Ltd ( Bairaha Farm) is the only company of sri lanka who are supplied by Cobb-Vantress Inc.
However as there are various suppliers available for the market, the company can establish a long term contract with the supplier which would reduce the supplier pressure. In over all the supplier would have strong bargaining power as the suppler is internationally well established company.
http://www.cobb-vantress.com/Distributors/DistributorList.aspx
SWOT Analysis
Strengths
Profitable and financially Strong Company: The aggressive marketing team of the company had been able to improve sales every year. The company is having increasing profit trend except for FY 2009 which is due to external pressures such as price control by government. The company's balance sheet particularly for FY 2010 is very strong. The declinig trend of gearing is expected to decline further in future.
Effective management team and staffs: Bairha Farm PLC has a strong and very effective management team and staffs who would assist in achieving its strategic objectives. At all levels staff training is emphasized in order to develop key competencies. Management systems are structured in such a way to ensure that all personnel performing the tasks affecting food quality and safety are suitably skilled. The company had achieved many wards in the industry which indicates the capability and competencies of management team and its staffs. (file:///C:/Users/roxy/Desktop/AHMED%20STUFF/%23BFL%20is%20expanding%20their%20business%20now!%20%C2%BB%20Investnow.lk%20%C2%BB%20Sri%20Lanka%27s%20Only%20Online%20Investment%20Forum.htm)
Strong and famous Brand name: The brand name "BAIRAHA" printed in every packages of the products are been set in the minds of the customers too. Most of the supermarkets in Sri Lanka have large number of whole chicken packed under this brand name. Because of this strong brand customer, sometimes, only think of bairaha when they buy chickens.
Weaknesses
Vulnerable to external economic condition: As discussed under financial analysis, there is a high risk when the company copes with external economic condition and external factors. This is because the marginal performance of FY 2009 was due to the company's vulnerability in performing in such condition.
Opportunities
Government support: The relaxation of government rules and reduction of the power of price control will enable the company to boost the profit and add a premium to the price through differentiation.
"The main challenge faced by the Company and the Group was the Government's resistance for price increase as the Government desired to control price of chicken," Yakooth Naleem chief executive of Bairaha Farms, a listed firm told shareholders in the annual report.
"However, after a prolonged delay a satisfactory price increase was eventually granted in February 2010."
Bairaha said the state also relaxed its controls on maize after the crisis in the poultry industry.
(http://www.lankabusinessonline.com/fullstory.php?nid=1883452348)
New demand from Northern and Eastern Provinces: There is Potential rise in demand for chicken products from local consumers after the end of the war. Additionally, as per the government there is further demand for tourists in upcoming years.
" Infact, at recent discussions that the industry has been having with Dr.PB.Javasundara, Secretery to the Ministry of Finance and Economic Development, the latter urgued the industry to double the production within five years in view of the anticipated increase in the number of tourist arrivals, development activities that have been taking place and the expected increase in per capita income". Chairmans Review - Bairaha Farm PLC Annual Report 2009/10.
Threats
Intense Competition: The analysis of porter's five forces showed that there would be intense competition in future. In the long run, the high competition can lead to cut down prices and to change the business strategy such as cost leadership. This is because perfect competition in the long run should be beneficial for customers either by differentiation of the products or lower price of chicken. This will depend on the strategy of dealing with the completion in the industry.
Unexpected government suspension and rare disease for hens and cocks: Due to the nature of the business, there is uncertainty of keeping live stock. This is because in case of any rare disease (which is very frequent in South Asia) will bring the whole or part of the sock empty. There is also threat of a government ban of factories if the process could unintentionally harm the environment. Recently, one of their factory has been suspended the production for court order on a complaint of vapor emissions and discharge of treated water that could affect the environment. (http://www.thepoultrysite.com/poultrynews/14332/sri-lankan-poultry-firm-defiant-in-face-of-court-order)
CONCLUSION AND RECOMMENDATIONS
I have analyzed the financial and business performance of Bairaha Farm PLC (Company) over a three year period starting from 1st April 2008 to 31st March 2010. The analysis and findings are discussed in section three.
For the three year period, the overall financial performance of the company was satisfactory. The profitability of the company was outstanding for FY 2010 while the major concern was the deterioration of performance for FY 2009. This decline of profit in FY 2009 was mainly due to the price control of chicken by the government and the economic downturn.
The company managed to improve its liquidity position from FY 2008 to FY 2010. The ratio analysis shows that the liquidity position in FY 2008 was unsatisfactory as it was lower than the ideal standard of 1. However at present the company is able to pay short term obligations from current assets and as there is an increasing trend the company's liquidity position is satisfactory.
The company's is efficient managing the stock and paying the suppliers on time. In addition, the above findings show that there is proper debt collection management established in the company. It is important to highlight that the company is very much focusing on reducing the long term borrowings, and as a result their gearing is low.
The company is seemed to have a potential growth in foreseeable future as the market is growing further. The company's EPS is fantastic for FY 2010 and since the demand is increasing and the government releases the power of price control the company is worth of investment.
The Porter's five force analysis implies that there is intense competition in the industry and the competition can be increased further in the future due to the extra production needed to meet upcoming demand.
The company is having competitive advantage over others because of strong brand name and as they are focusing only on chicken sales. However the main weakness of the company is inability of coping with external business factors like economic recessions and government policies. The risk of rare diseases and government ban due to carelessness to the environment is to be considered too. Currently the company's one of production is suspended for a court order. However the company says that this will not affect the company's performance in upcoming years as there are enough stock in place.
Therefore, in short, the company is recommended for a more effective and efficient risk management system, and to adopt flexible short term and long term business strategies considering the risks identified. Further the company should carry out more value adding activities and, when relevant, can adopt a cost saving strategy so that they could maintain a satisfactory performance even facing any unexpected external factors like price control by governments.
