Upload
bashair-abdulsalam
View
309
Download
0
Embed Size (px)
Citation preview
Yanbu Cement Company 1
YANBU CEMENT COMPANY
Bashier Abdulsalam as
A team work
commercial bank management
4th January, 2015
Yanbu Cement Company 2
TABLE OF CONTENTS
1. Purpose of the project................................................................................................................ 3
1.1. Details about the loan application ........................................................................................ 3
3. Financial Statement Review:...................................................................................................... 6
3.1. Balance Sheet:.................................................................................................................... 6
3.2. Income Statement ............................................................................................................... 9
4. Financial Ratio Analysis .......................................................................................................... 13
1. Business Customer’s Control over Expenses: ........................................................................ 13
2. Operating Efficiency ........................................................................................................... 14
3. Marketability of Customer’s Products or Services: ................................................................ 15
4. Coverage Ratios: ................................................................................................................. 16
4. Liquidity Ratios: ................................................................................................................. 17
5. Profitability Indicators: ........................................................................................................ 18
6. Financial Leverage Ratios:................................................................................................... 19
5. Loan Decision ........................................................................................................................ 21
6. Conclusion ............................................................................................................................. 21
REFERENCES........................................................................................................................... 22
Yanbu Cement Company 3
1. Purpose of the project
The project is part of the Commercial Bank Management II Module wherein the
students will be able to apply the course learning into evaluating a loan application. It is
aimed at providing students a first-hand experience of evaluating a loan application based on
the financial statements provided by a company. Through the use of relevant ratio analysis,
the student will carry out thorough due diligence of the financial records to assess the
viability of extending credit the company.
As an outcome of the project, the students will be able to decide on whether the
company can be extended a line of credit for expansion purposes in order to increase its
market presence and sales. Yanbu Cement Company is the chosen company for the project,
the last 3 years (2013, 2012 and 2011) audited financial statements will be analysed for the
purposes of arriving at the loan decision.
1.1. Details about the loan application
Yanbu Cement Company is seeking a loan for SR75, 000,000 from “A Bank”. The
credit is required for a period of 18 months from the date it is approved; in other words,
Yanbu Cement Company will pay the principal loan amount of SR75, 000,000 and the
accumulated interest of SR380, 000 in stipulated instalments to the bank by the end of the 18
month period (YCC, 2013).
Yanbu Cement Company has a loan with another bank that will be paid off at the end
of the current fiscal year, the amount of SR15, 000,000 was taken for a period of 15 years.
Yanbu Cement Company needs to pay back to the concerned bank SR15, 380,000 at the end f
the maturity of 15 years. This will cover the principal amount and long term debt of
instalments (YCC, 2013).
Yanbu Cement Company 4
2. Introduction of Company
Yanbu Cement Company (YCC as it will be referred hereafter) was established in
1977 about 70 kilometre north-west from the sea port of Yanbu Al Bahr in the Western
region of Saudi Arabia. It started commercial operations in 1979, two years after being
commissioned. The company has expanded its production capacity from the time it was
established of 3000 tonnes clinker per year to 3.8 million tonnes clinker installed capacity
serving the markets of the Western region of Saudi Arabia. The company is amongst one of
the largest ISO 9002 certified cement company in the Kingdom. In addition to this, the
company is ranked within the top 50 companies in the country. The board members are HRH
Prince Mishaal bin Abdul-Aziz Al-Saud, Deputy Chairman Suliman Al-Rajhi, Executive
Board Member Abdul-Raouf AbouZinada and Director General, Dr. Ahmed Zugail (YCC,
2013).
The company is the largest cement producer in the Western region of the country and
is the 4th largest in the Kingdom with a market share of 12% local dispatches. The expansion
projects of YCC have enabled it to meet increasing market demand and its operating at a 85-
100% capacity utilization. The company is also exploring options to refurbish its old plants
and this will provide it additional milling lines at much lower costs (YCC, 2013).
The company has been very adaptive in expanding its production capacity based on
the market demands. Saudi Arabia has witnessed an economic boom. There are nearly SR33
billion worth of projects that have been commission to meet the development needs of the
country, there is a huge demand for cement for these projects. In addition to this, the country
has also embarked on the expansion of the Holy Mosque in Makkah over a period of 5 years
that will require a steady stream of cement supplies (Husein, 2013).
Yanbu Cement Company 5
The company has a paid up capital of SR1.575 billion and operates with a net profit of
SR821 million in the financial year ending 2013. There is no change in its paid up capital
based on its Q3 2014 interim reports that were published on Tadawul. For the period of
9months ending 2014 compared to 2013, its gross profits has dropped from SR714 million to
SR643 million that is due to a drop in sales and this has led to a drop in net income from
SR661 million to SR 609 million; however for the 3month period ending September 14
versus 13, its performance has been better in terms of improving its bottom line profit. Its
gross profits went up from SR156 million to SR181 million, its net income went up from
SR139 million to SR162 million, despite a net sales drop. This indicates that its operating
efficiencies are increasing and it is making better returns on assets (YCC, 2014).
Figure 1: Net Income Statement for YCC
Source: http://www.bloomberg.com/quote/YNCCO:AB
Yanbu Cement Company 6
3. Financial Statement Review:
3.1. Balance Sheet:
The financial statements that are the balance sheet and income statement are the most
important statements that can reveal the performance of the company. One can just look at
the total assets and liabilities and their performance.
Reviewing the asset base of the company, there has been a slight decline in the total
assets in 2013 and this has been due to sales and non-commissioning of old lines. The
reduction has resulted in a slight drop in net sales but the company has improved its net
income from the sale of the asset.
Figure 2: Current and Total Assets
Upon reviewing the total liabilities of YCC, it is observed that the company that
liabilities of YCC has dropped significantly from SR1.68 billion in 2011 to SR0.99 billion in
2013. This implies that the company is self-sufficiency in its performance has improved
significantly. This has resulted in a reduction of its total base of liabilities and equity, as
Equity has remained constant in 2013 over 2012. It can be observed that the company is
Yanbu Cement Company 7
reducing its reliance on external debt to finance its operations, and this is a positive sign as
the overall net profit from this strategy should improve in the long run.
Figure 3: Liabilities and Current Liabilities
Yanbu Cement Company 8
Table 1: Balance Sheet:
Yanbu Cement Company 9
3.2. Income Statement
The income statement provides information about the regular business expenses and
the also reflects the revenue. It also provides information about the cost of goods sold, the
administrative expenses and all other miscellaneous expense and income. The most important
thing to look at is the organizational sales revenue
The statement reveal that the sales of YCC has been growing steadily, there was a
huge increase from 2011 to 2012 of 32%, but a relatively smaller increase in sales from 2012
to 2013 of 9%.
Figure 4: Sales Revenue
In reviewing the cost of goods sold, there is an increase and that is in relation to sales
but on further review, it is evident that the cost of goods sold as a percentage of total sales is
reducing. This means that the company is reducing costs. From 51% COGS to Sales in 2011,
it has dropped to 45% in 2013 and this is a good progress.
Figure 4: Cost of Goods Sold
Yanbu Cement Company 10
The total expenses have also been increasing, this is logical as the company’s sales in
increasing. It is vital to understand the reason for the increase in expenses, and when they are
reviewed against the sales, it is observed that they have gone up slightly from 2.8% as Total
Expenses to Sales in 2011 to 3.1% in 2013. The reason for its increase is the increase in
financial charges in 2012 and 2012 over 2011.
Figure 5: Total Expenses
Yanbu Cement Company 11
In order to really understand whether the company is performing well, it is important
to review the net income. There has been a significant growth on the net income of YCC. It
has grown 88% in 2013 over 2012 as compared to 73% in 2012 over 2011.
Figure 6: Net Income
Yanbu Cement Company 12
Table 2: Income Statement
SAR (M) % SAR (M) % SAR (M) %
1,620.30 1,496.50 1,132.30
1,620.30 100% 1,496.50 100% 1,132.30 100%
735.5 45% 705.2 47% 577.5 51%
884.8 55% 791.3 53% 554.7 49%
37.8 2% 33.8 2% 30.4 3%
37.8 2% 33.8 2% 30.4 3%
847 52% 757.5 51% 524.3 46%
-12.6 -1% -11.9 -1% -0.3 0%
-12.6 -1% -11.9 -1% -0.3 0%
0.2 0% 0.6 0% 0.9 0%
6.9 0% 2.4 0% 29 3%
841.5 52% 748.7 50% 553.8 49%
0.1 0% 0.6 0%
0.9 0%
0.9 0%
841.6 52% 750.2 50% 553.9 49%
16.4 1% 24.5 2% 19.2 2%
-3.9 0% -5.2 0% -5.4 0%
825.2 51% 725.7 48% 534.7 47%
821.3 51% 720.5 48% 529.3 47%
821.3 51% 720.5 48% 529.3 47%
All Values in SR Millions31/Dec/13 31/Dec/12 31/Dec/11
NET INCOME
NET INCOME TO COMMON EXCLUDING EXTRA
Other Unusual Items, Total
Insurance Settlements
EBT, INCLUDING UNUSUAL ITEMS
Zakat
Minority Interest in Earnings
Earnings from Continuing Operations
Interest Expense
NET INTEREST EXPENSE
Currency Exchange Gains (Loss)
Other Non-Operating Income (Expenses)
EBT, EXCLUDING UNUSUAL ITEMS
Gain (Loss) on Sale of Assets
TOTAL REVENUES
Cost of Goods Sold
GROSS PROFIT
Selling General & Admin Expenses, Total
OTHER OPERATING EXPENSES, TOTAL
OPERATING INCOME
Revenues
Yanbu Cement Company 13
4. Financial Ratio Analysis
The loan officer will carry out a detailed analysis of YCC financial performance
based on the 7 main ratio classes. The ratios will reveal the financial health and performance.
1. Business Customer’s Control over Expenses:
Three ratios will be used to understand how well YCC manages its expenses, how
effectively YCC is able to manage its expenses vis-à-vis its earnings. This test will also cover
how the expenses are covered from its source of revenues, are the going up or down. Another
test is how well the business covers its financing expenses; this is vital information for the
loan officer.
I) Cost of Goods Sold / Sales: Looking at the data from 2011 to 2013, a 3 year period, the
cost of goods sold is going down progressively. This is a good sign that YCC is managing its
cost of goods effectively, implying that its performance is improving.
II) Selling, Administrative, Other Exp / Sales: Over a 3 year period from 2011 to 2013, the
expenses are declining as a percentage of sales. It was stagnant in 2012 to 2013, but overall
it’s performing well in managing its expenses.
III) Interest Expense / Sales: YCC has increased its financing cost as it took a loan in 2012,
however, from 2012 to 2013, its cost is going down, this implies that its covering its
financing costs effectively, its revenues can cover the cost of financing effectively.
Expense Ratios 2013 2012 2011 Trend
Impact on
Performance
Yanbu Cement Company 14
Cost of Goods Sold / Sales 45.4% 47.1% 50.9% Positive
Selling, Administrative, Other
Exp / Sales 2.3% 2.3% 2.7% Positive
Interest Expense / Sales 0.78% 0.79% 0.03% Positive
Table 3: Expense Ratio
2. Operating Efficiency
How well is YCC managing its operations is analysed through the operating ratios by
the loan officer of the bank. Three different ratios will be used to analyse the operational
YCC
I) Annual COGS / Average Inventory or Inventory T/O Ratio: The inventory turnover
ratio is used to understand how many times YCC is able to turn around its inventory. It’s a
mixed performance, as there was a significant increase from 2011 to 2012 and that was
positive; however YCC inventory turnover ratio dropped versus its 2012 and even dropped
lower than its 2011 ratio. This is not a positive sign as it implies that a lot of capital is tied up
in inventory. It can also send a wrong signal of a poor demand for its products, thus the loan
officer can ask for further clarification on the subject. Maybe the firm increased its output
from its capacity increase, its sales increased and thus it was required to keep more inventory
levels.
II) Net Sales / Total Assets: The turnover of total assets is going up over the 3 year period,
and this is a very positive sign. YCC is using its assets better and better over the 3 year period
in the business. This means that its investment in capacity expansion is being utilized. The
impact of effective utilization of assets and its increasing trend has a positive impact on the
performance.
Yanbu Cement Company 15
III) Net Sales / Fixed Assets: The turnover of fixed assets is also increasing and this measure
is a reflection of how effectively the firm is using its fixed assets to generate sales revenue.
The fixed assets are essentially the land, plant and machinery.
Efficiency Ratio 2013 2012 2011 Trend
Impact on
Performance
Annual COGS / Average
Inventory
1.53X
2.18X
1.89X Negative
Net Sales / Total Assets
0.38X
0.32X
0.25X
Positive
Net Sales / Fixed Assets
0.49X
0.44X
0.32X Positive
Table 4: Efficiency Ratio
3. Marketability of Customer’s Products or Services:
The marketability ratios determine how effectively YCC is able to manage its total
cost of goods sold. It provides information about the bottom line of the company. There are
two ratios that are used to determine this
I) Gross Profit Margin (Net Sales – COGS) / Net Sales: The gross margin percentage has
been going up, the loan officer can infer that the company is increasing its sales and at the
same time it is improving the cost of goods sold, meaning that it is controlling the cost of the
gods sold effectively. From 49% in 2011, it has improved it to 55% in 2013. The impact on
the performance of the company is positive.
Yanbu Cement Company 16
II) Net Profit Margin: Net Income after Tax / Net Sales: The net profit margin is a
measure of the actual revenues that YCC has left after meeting all is operating expenses
including financing costs. From 2011, it can be observed that YCC has improved from 47%
in 2011, 48% in 2012 and 51% in 2013. As a loan officer, this is positive performance by
YCC management in improving the overall efficiency of the company.
Marketability Ratio 2013 2012 2011 Trend Impact on
Performance
Gross Profit Margin (Net
Sales – COGS) / Net Sales 55% 53% 49% Positive
Net Profit Margin: Net
Income after Tax / Net Sales 51% 48% 47% Positive
Table 5: Marketability Ratio
4. Coverage Ratios:
The coverage ratio provides the loan officer information regarding how effectively
YCC covers its creditors; i.e. institutions that extend credit to the organization. It measures
the financial ability of the organization to cover its financing costs.
I) Interest Coverage: Income before int. & taxes / Interest Payments: In 2011, YCC
didn’t have any significant liability, the organization took a loan in 2012 and that is why the
coverage dropped significantly in 2012 over 2011. In 2013, the trend is declining and this is
positive sign of YCC ability to cover its credits costs.
Coverage Ratios: 2013 2012 2011 Trend
Impact on
Performance
Yanbu Cement Company 17
Interest Coverage: EBIT /
Interest Payments
66X 63X 1855X Positive
Table 6: Coverage Ratio
4. Liquidity Ratios:
Liquidity ratios reveal how well the organization is managing it assets for achieving
the objectives of the company. There are 3 different ratios that the loan officer can use to
determine whether YCC is utilizing its assets effectively in business operations.
I) Current Ratio: Current Assets / Current Liabilities:
Current ratio measures how effectively YCC covers its short term liabilities like the debts and
trade payables through its own short term assets like cash on hand, finished goods inventory
and trade receivables. It is observed that YCC is able to meet its current liabilities with its
current assets. Over the last 3 years, it was increasing from 2011 to 2012 but it declined in
2013, however, it is still better than 2011. It was 1.79X in 2011, it increased to 2.40X in 2012
and slightly dropped to 1.95X in 2013 and this was still better than its 2011 coverage. The
impact is positive on the performance of YCC. Anything below 1 is a cause of concern for a
business, as it is closer to 2, it reflects a healthy business performance.
II) Acid Test Ratio: Current Assets – Inventory / Current Liabilities: The difference
between current ratio and acid test ratio is the exclusion of inventories in current assets often
companies rely heavily on their inventories to cover their current liabilities and this can be
deduced from the difference gap between working capital ratio and acid test ratio. If the ratio
is closer to one, it means that without inventories, the current liabilities just cover the current
liabilities. It was better in 2011 and has steadily declined. As far as it is above 1, it is still a
positive sign.
Yanbu Cement Company 18
III) Net Working Capital: Current Assets – Current Liabilities: It is apparent from the
net working capital that YCC has enough funds to cover its working capital requirements. It
has been growing from 2011 but spiked in 2012. The 2013 value of 504SRM is still greater
than its 2011 and thus is positive sign.
Table 7: Liquidity Ratios
Liquidity Ratios: 2013 2012 2011 Trend
Impact on
Performance
Current Assets / Current
Liabilities 1.95X 2.40X 1.79X Positive
Current Assets – Inventory /
Current Liabilities
1.04X 1.80X 1.27X Negative
Net Working Capital: Current
Assets – Current Liabilities
504.05 758.32 465.89 Positive
5. Profitability Indicators:
The profitability ratios are used to determine whether the business is profitable or not,
it looks at its earnings before tax and after tax. Tax in Saudi Arabia refers to Zakat. There are
2 ratios that will be used to determine the profitability of the business.
I) Before Tax Net Income / Total Assets, Net Worth or Total Sales: The pre-tax return on
net worth is an indication of profit before tax against its total net equity. The trend is going up
from 2011 to 2013. This indicates a positive performance of YCC by its management
II) After Tax Net Income / Total Sales: The Return of YCC of its net earnings as a ratio of
its total sales is going up. The company is making more money from 2011 to 2013 where it
Yanbu Cement Company 19
has increased from 46.7% to 50.7%, this is a strong performance where it has improved its
performance by 4% points in just 3 years.
Table 8: Profit Ratios
Profit Ratios 2013 2012 2011 Trend Impact on
Performance
Before tax net income / Net
Equity
25.4% 22.5% 19.3% Positive
After tax net income / Total
Assets 19.0% 15.3% 11.6% Positive
After tax net income / Total
Sales 50.7% 48.1% 46.7% Positive
6. Financial Leverage Ratios:
The financial leverage ratios will determine the financial leverage of YCC through the
use of 3 different ratios. Leverage ratios aim at determining how the business is using its
credit policies and debt to manage its assets.
I) Leverage Ratio: Total Liabilities / Total Assets: The leverage ratio is indicative of YCC
reducing its dependency on liabilities and debt. The declining trend is an indication that YCC
is reducing its liabilities depending on the assets. This is a positive sign for the loan officer as
it reflects the ability of the firm to adhere to their commitment to pay back their long term
financial commitments.
II) Debt Equity: Total Liabilities / Net Equity: When there is a high debt equity ratio, it
implies that the business is heavily reliance on debt to finance its operations. For YCC, it has
Yanbu Cement Company 20
dropped by nearly half from 0.59X in 2011 to 0.30X in 2013. This is a significant
improvement of the business reliance on debt and a good sign of an improvement in
performance.
III) Debt to Sales Ratio: Total Liabilities / Net Sales: Debt to sales ratio of YCC for the
past 3 years has been declining this is positive sign and reflects that YCC is not depending on
its debt to finance its sales. It was a high 148% in 2011and dropped to 91% in 2012 and in
2013 its only 62%. This is a strong indicator of a good performance of YCC and reflects that
its debts are covered significantly by the sales of the company.
Leverage Ratio 2013 2012 2011 Trend Impact on
Performance
Leverage Ratio: Total
Liabilities / Total Assets
23.1% 29.0% 36.9% Positive
Total liabilities/Net Equity 0.30X 0.41X 0.59X Positive
Debt to Sales Ratio: Total
Liabilities / Net Sales
61.6% 91.1% 148.8% Positive
Table 9: Leverage Ratios
Yanbu Cement Company 21
5. Loan Decision
Based on the financial statements submitted by YCC for the preceding 3 years and a
detailed ratio analysis, YCC has a strong base. It has progressively increased its capacity to
meet market demands and thus maintained its market presence. It is the 4 th largest cement
producer in the country. The company ratio analysis has reveal that YCC will not have any
challenges paying back its loan once it is issued; it has the ability of covering all its interests
that will be due on the loan amount as well. Thus the decision is to grant YCC the loan.
6. Conclusion
The course and projected has enables us to review a company’s financial statement in
detail through relevant ratio analysis that reveal information that is not evident in the
financial statements. The ratios that are used to carry out the due diligence are based on
different parameters and also reveal information about different aspects of the business. In
addition to looking at the ratios, it is also advised to look at the performance of the company
in its industry and the economy overall as this will give an insight on the long term success of
the firm and thus can provide loan officers in banks to take the most correct decision on
whether to extend credit to a firm or not. Often business depend on external finances thus
exposing them volatility in the face of changing market conditions, ratios are able to reveal
Yanbu Cement Company 22
how well a company has financed its operations and whether it has the ability to cover its
commitments to its stakeholders.
REFERENCES
Husein, A. (2013). Construction and projects in Saudi Arabia: Overview. Retrieved January
1, 2015, from www.practicallaw.com/construction-mjg
YCC. (2014). Financials - Q3-2014. Retrieved December 30, 2014, from
http://www.yanbucement.com/financials.html
YCC. (2013). Yanbu Cement Company Profile. Retrieved December 28, 2014, from
http://www.yanbucement.com/profile.html