Financial Statement Analysis of Dutch Lady

I. INTRODUCTION Dutch Lady Milk Industries Berhad (â€Å"Dutch Lady Malaysia†), a company established in 1963, is currently leading in the business of quality branded dairy in Malaysia. The company, whose holding company is Royal FrieslandCampina–a Dutch multinational corporation, one of the largest milk companies in the world- was the first milk company in Malaysia to be listed on Bursa Malaysia, the local Stock Exchange in 1968.Being the leading producer and seller of quality dairy products and fruit juices for home and export market (such as Infant formula, many types of milks, yoghurt and fruit juice drinks), Dutch Lady Malaysia has a strong consumer following and represented by strong brands (such as Dutch Lady, Frisolac, Completa, Omela, Friso, and Joy). In addition, it was the first company in the world to introduce a growing up milk powder specifically formulated for children from ages one to three (known in Malaysia as Dutch Lady 123 and Dutch Lady 456) and is the largest purchaser of local fresh milk from the Veterinary Services Department.The company receives strong support from its holding company. It also believes in product innovation and commitment to its consumers, which lead it to a constant efforts to improve its processes in order to serve its customers with high quality nutritious products. The company gives prime considerations to Quality Control and Quality Assurance. It has continually received accreditation of ISO 9001 since 1995. In terms of food safety, it applies HACCP (Hazard Analysis Critical Control Point) System to all its plants.Meanwhile, for its Environmental Management System it has in place ISO 14001 and OHSAS 18001 (Occupational Health and Safety Assessment Series). The Company’s products are all halal-certified. With factory located in Petaling Jaya that employs 600 Malaysians, Dutch Lady Malaysia made an annual revenues of RM692 million in 2009. Currently, Dutch Lady Malaysia is leading in the market o f key milk categories such as UHT milk, Sterilised milk and Growing-Up milk. II. PERFORMANCE RATIOS II. 1. Liquidity Ratio Liquidity ratio refers to ability of company to meet its short term obligation. There are eight types of liquidity ratio: . | Working Capital Ratio = Current Assets – Current Liabilities| | 2009| 2010| 2011| | = 193,784 – 96,855= 96,929| = 234,244 – 106,261=127,983| = 324,466 – 135,309= 189,157| 2. | Current Ratio = Current AssetsCurrent Liabilities| | 2009| 2010| 2011| | = 193,78496,856=2 :1| = 234,244106,261 =2. 2 :1| = 324,466135,309 =2. 39 :1| 3. | Acid Test Ratio = Quick AssetsCurrent Liabilities| | 2009| 2010| 2011| | = 136,23296,855=1. 4 :1| =161,522106,261 =1. 52 :1| =230,978135,309 =1. 7 :1| 4. | Account Receivable Turnover = Sales on AccountAverage Accounts Receivable| | 2009| 2010| 2011| = 691,847(94,369+122,858)/2=6. 36 times| = 696,625(75,176 + 94,369)/2=8. 22 times| = 810,647(36,714 + 75,176)/2 =14. 56 times| 5. | Invent ory Turnover = Cost of Goods SoldAverage Inventory| | 2009| 2010| 2011| | = 462,510(57,552+74,902)/2= 6. 98 times| = 447,961(72,722+57,552)/2=6. 88 times| = 506,175(93,448+72,722)/2=6. 09 times| 6. | Days Sales Uncollected = Ending Accounts Receivable(Debtor Turnover Ratio) Net Sales| | 2009| 2010| 2011| | =94,369691,847 x 365=49. 7=50 days| =75,176696,625 x 365=39. 3=39 days| =36,714810,647 x 365=16. 5=16 days| 7. Days’ Sales in Inventory = Ending InventoryCost of Goods Sold| | 2009| 2010| 2011| | =57,552462,510 x 365=45 days| =72,722447,961 x 365=59 days| =93,448506,175 x 365=67 days| 8. | Total Assets Turnover = Net SalesAverage Total Assets| | =691,847(280,990+288,570)/2=2. 42 times| =696,625(307,490 +280,990)/2=2. 37 times| =810,647(398,514+307,490)/2=2. 30 times| The increasing amount of working capital shows that Dutch Lady Milk Industries Berhad is able to continue their operations and it has sufficient cash flow to satisfy both short term debt and upcoming expenses.D utch Lady Milk Industries Berhad experiences an increasing self-support through its growing current assets compared to its current liabilities. The current ratio and quick ratio of Dutch Lady Milk Industries Berhad is more than ideal ratio. The increasing percentage of both ratios is indicating Dutch Lady Milk Industries Berhad has the ability to pay its current obligations in time. From account receivable turnover, in 2011 shows that Dutch Lady Milk Industries Berhad converts 14. 56 times from account receivable into cash. In 2009 and 2010, the sales movement from account to cash is not quite good because above 12 times.However, as we can see from inventory turnover from 2009-2011, indicating that Dutch Lady Milk Industries Berhad inventory management techniques in 2010 and 2011 are less efficient as compared to that in 2009 because productions selling is less frequently and make the number of inventory increase. The decline in the total of days’ sales uncollected from 2009 to 2011 shows that Dutch Lady Milk Industries Berhad has an effective accounts payable procedures. It would benefit Dutch Lady Milk Industries Berhad because they would get cash faster from their customers.The days sales in inventory measures the liquidity of inventory, the operating cycle time for Dutch Lady Milk Industries Berhad in 2009 is shorter than 2010 and 2011, they only need 45 days, 22 days faster than in the 2011. Technically total asset turnover shows how many times company can generate revenue from every dollar asset that they have, it measures the efficiency of assets in producing sales. In 2009, Dutch Lady Milk Industries Berhad can use their assets efficiently compared to the year 2010 and 2011. II. 2. Solvency Ratio It measures the ability of firm to survive in the long run.There are 4 types of solvency ratio: 1. | Debt Ratio = Total Liabilities Total Assets| | 2009| 2010| 2011| | =101,005280,990x 100=35. 9 %| =110,018307,490x 100= 35. 7 %| =139,360398,514x 100=34. 9 %| 2. | Equity Ratio = Total Equity Total Assets| | 2009| 2010| 2011| | = 179,985280,990=64% | =197,472307,490=64. 2% | =259,154398,514=65% | 3. | Debt to Equity Ratio = Total LiabilitiesTotal Equity| | 2009| 2010| 2011| | =101,005179,985=56. 1%| =110,018197,472=55. 7%| =139,360259,154=53. 7%| 4. | Times Interest Earned = Net Income before Interest Expense and Income ExpenseInterest Expense | | 2009| 2010| 2011| = 82,031 1=82 times| = 89,2210=0 times| = 139,368 919=152 times| Based on the table above, Dutch Lady Milk Industries Berhad has favorable debt ratio. There is a decline of percentage from 35. 9% (2009) to 34. 9% (2011), indicating that they has a good strategy in reducing company’s assets that are contributed by creditors. Equity ratio shows that they have tendency to depend more on the owner for financing. Consequently, it is considered as a good result for the investors as long as the company earns good profits and maintains its performance.Debt to Equity Ratio has decreased from 56. 1% to 53. 7% in 2009 and 2011 respectively, which means that in 2011 for 1 RM of Dutch Company owned by the shareholders, they owe 53. 7 cent to creditors. This is a good indicator that the company is not facing a risky situation as its business does not rely the financing on debt. The investors, therefore, may find the company as a promising firm to invest. II. 3. Profitability Ratio It is used to assess a business’s ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time.There are 4 types of profitability ratios: 1. | Gross Profit Margin = Net Sales – Cost of Sales Net Sales| | 2009| 2010| 2011| | =691,847-462,510691,847= 33%| =710,588-447,961710,588=36%| =810,647-506,175810,647=37%| 2. | Operating Profit Margin = Net Income Net Sales| | 2009| 2010| 2011| | =82,031691,847=12%| =89,221710,588=12. 5%| =139,368810,647=17%| 3. | Return on Total Assets = Net IncomeAverage Total Asse ts| | 2009| 2010| 2011| | =60,400(280,990+288,570)/2=21. 21 %| =63,887(307,490+280,990)/2=21. 71 %| =108,082(398,514+307,490)/2=31. 1%| 4. | Return on Common Stockholders’ Equity = Net Income – Preferred DividendsAverage Common Stockholders’ Equity| | 2009| 2010| 2011| | =60,400-0(179,985+161,585)/2=35. 37 %| =63,887-0(197,472+179,985)/2 =33. 85 %| =63,887-0(197,472+197,472)/2 =32. 35 %| Based on the graph above, we can see the percentage of gross profit margin has been increasing over the last three years. It is a good sign for a company, as it is considered as a sign of healthy and growing company. Dutch Lady Milk Industries Berhad is able maintain their inflow and outflow.It is able to make a reasonable profit on sales by keeping its overhead costs in control. Operating profit margin ratio increases from 12% (2009) to 17% (2011), showing that Dutch Lady Milk Industries Berhad has a great management skill and operating efficiency. However, there is a decline i n the percentage of return on total assets from 21. 50% to 20. 78% in 2009 and 2010 respectively. This reveals that year 2010 is less profitable. Return on assets (RoA) declines from 21. 50% to 20. 78% in 2009 and 2010 respectively. This could be an indicator that Dutch Lady Milk Industries Berhad has spent much assets to do business.If they have to pay a lot in order to maintain these assets, it will decrease the RoA even lower since the maintenance costs will decrease their earnings. In 2011, however, we can see in the table that there is an increase to 27. 12%. This indicates that they required less assets on that year. A high or low RoE needs to be interpreted in the context of a company's debt-equity relationship. The rise percentage of RoE (Return on Equity) above RoA shows that Dutch Lady Milk Industries Berhad takes a financial leverage. In 2010, by taking on debt, Dutch Lady increased its asset than to the cash that came in.It may be sign that management is using leverage t o increase profits and profit margins. So, debt amplifies RoE in relation to ROA. II. 4. Market Prospect Ratio For Dutch Lady Milk Industries Berhad, the market prospects can be observed from Earnings per Share, Price-Earnings Ratio and Dividend Yield. 1. | Basic Earnings per Share (EPS) = Net Income – Preferred Dividends Weighted-Average Common Shares Outstanding| | 2009| 2010| 2011| | = 60,400,000-064,000,000= 99. 40 cent | = 63,887,000-064,000,000= 99. 80 cent | = 108,082,000-064,000,000= 168. 90 cent| 2. Diluted Earnings per Share| | 2009| 2010| 2011| | There were no diluted earnings per share for the company| There were no diluted earnings per share for the company| There were no diluted earnings per share for the company| 3. | Price-Earnings Ratio (PE) = Market Price per ShareEarnings per Share| | 2009| 2010| 2011| | = 1162 cent99. 40 cent= 11. 69 times| = 1754 cent99. 80 cent=17. 58 times| = 2340 cent168,90 cent=13. 85 times| 4. | Dividend Yield = Annual Dividends per ShareMarket Price per Share| | 2009| 2010| 2011| | = 65. 63 cent1162 cent=5. 65%| = 72. 50 cent1754 cent=4. 3%| = 72. 50 cent2340 cent=3. 1%| The improvement of basic EPS for Dutch Lady Milk Industries Berhad from 99. 40 cent in 2009 to 168. 90 cent in 2011 is an indication that the company can generate its share to gain better profit every year. Diluted earnings per share is illustrated the assumption of the worst case scenario, it means if the company announce any dilution it will decrease the equity position in every issuance of additional shares. Diluted earnings per share seen as a bad thing for the shareholders because it will reduce the amount of the basic EPS that belongs to their stock.Thus, no diluted EPS in Dutch Lady Milk Industries Berhad can be interpreted that there were no reduction of the basic earnings per share for every share issued. For Dutch Lady Milk Industries Berhad, the PE ratio from 2009 to 2010 is increasing because the market price per share in 2010 is h igher than that in 2009. Market price per share indicates how much the price that market stock is willing to pay or sell for the share. Therefore, when the market price is going up, it means that the stock is quite appreciated, more demand that is willing to buy rather than to sell. Whereas, PE ratio from 2010 to 2011 decreased from 17. 8 times to 13. 85 times because of the firm’s earnings per share rises. In this case, however, the investors who already had share in Dutch Lady Milk Industries Berhad are recommended to hold their stocks, because the market price tends to rise. For long-term outlook, keeping the shares is still better then selling them. However, PE ratio is not the only information to be considered in carrying out stocks investment. Thus, no diluted EPS in Dutch Lady Milk Industries Berhad can be interpreted that there were no reduction of the basic earnings per share for every share issued.The dividend yield by Dutch Lady Milk Industries Berhad is declining from 5. 65% in 2009 to 3. 1% in 2011, because the rise of its market stock price. If the dividend yield increases because the market stock price is fall, it will make investors unhappy. High yields can be a sign of an unsustainably high dividend. Some investors perceives that dividends are important and usually their interest is in receiving a steady return each year. The Dutch Lady stockholders seem to be less concerned with the dividends. For them, the important things are the stock price appreciation and capital gains.III. RECOMMENDATION 1. Improve a long operating cycle ratio. Dutch Lady Milk Industries Berhad should increase collection efforts on accounts receivable to ensure timely payment from customers, for example are frequent billing or increased collection calls and correspondence. They can decrease unused inventory by putting on sales or selling overstock products to resellers. Negotiate for more favorable payment terms with creditors to give the company more time to pay bills without incurring late payment penalties or additional interest. . Increase the liquidity of inventory Dutch Lady Milk Industries Berhad should evaluate their sales, because the operating cycle in inventory take longer time than the previous year. If the sales not improving and only in a steady condition, it will increase inventory, and occurs loss for the company, because their product will be expired. To solve this problem, they can expand to the new market/export, increase their sales with promotion and advertisement. Brand awareness is important to encourage customer buy the product.If they success improving the sales, the company not only will generate more profit but also have a less inventory. 3. Manage total asset turnover efficiently. The efficiency of total asset in producing sales decreased from 2009 to 2011. Dutch Lady Milk Industries Berhad should allocating their resource and update technology to maximize the utilization of asset. Furthermore, they also have the depreciation of current assets, before the book value of their current asset decreasing they can improve human resource/labor competencies to use the asset efficiently. 4. Improving the price earnings ratio.This ratio reflected confidence of the shareholders to buy and keep Dutch Lady stock, and will attract more big investors. If the company can maintain their supply towards the market demand in the stock market, and also maintain the earnings per share by increasing net income, it will increase the price earnings ratio. Because the higher price earnings ratio means the more opportunity for Dutch Lady to grow. This improvement can support point 2 of the recommendations, the more they can keep the big investors happy, the more opportunity Dutch Lady to expand the market. IV. CONCLUSIONSThe increasing amount of working capital shows that Dutch Lady Milk Industries Berhad is able to continue their operations and it has sufficient cash flow to satisfy both short term debt and upcoming expenses. The company does not seem to face any risk of being unable to meet its current obligation. However, Dutch Lady Milk Industries Berhad has problem in the management of inventory system, the production capacity is exceed than the ability to sell their product. Solvency ratio shows that Dutch Lady Milk Industries Berhad prefers to finance their business from owner’s equity instead of debt.This is a favorable condition for investors as their investments are not put in risky situation. This is also a favorable for creditors, as the company provides them with a safety and security by its ability to quarantee that it is able to pay off all the loans. Market prospect ratio is used to evaluate market growth of the company because this ratio estimates company’s prospect and risk in earning reinvestment and distribution to the shareholders. Dutch Lady Milk Industries Berhad can be a good target for big investors as it is able to improve their market share every year.Th e improvement of basic EPS for Dutch Lady Milk Industries Berhad reveals the company’s ability to generate its shares to gain better profit every year. In terms of performance in profitability, Dutch Lady Milk Industries Berhad has demonstrated good performance in profitability. The company has been able to improve its gross margin over the last three years as shown in graph above. The RoE tells common shareholders how effectively their money is being employed. ——————————————– [ 2 ]. Loth, R. Profitability indicator ratios: return on equity.Retrieved November 16, 2012, from http://www. investopedia. com/university/ratios/profitability-indicator/ratio4. asp#ixzz2CMaaeQwt [ 3 ]. Data obtained from Dutch Lady Milk Industries Berhad Annual Report 2009, 2010, and 2011. [ 4 ]. Draker, P. P. Financial Ratio Analysis. Retrieved November 11, 2012, from http://educ. jmu. edu/~drakep p/principles/module2/fin_rat. pd [ 5 ]. eHow. What Does the Dividend Yield Tell the Investors. Retrieved November 14, 2012, from http://www. ehow. com/facts_5192566_dividend-yield-tell-investor_. html