ratio analysis of national foods

BAHRIA UNIVERSITY, ISLAMABAD

Title of Report: Ratio Analysis (2013-2014)

Company: National Foods Limited

Program: MBA-2B

Subject: Financial Management

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Group members

o Waqas Khan 01-120111-069

o Asim Mehmood 01-122142-008

o Awais Bilal 01-122142-010

o Muhammad Bilal 01-122142-036

o Muhammad Furqan 01-122142-037

o Raja Hasnain Tahir 01-122142-049

Submitted to

Sir Abdullah Hafeez

Submission date

26th May 2015

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Table of Contents

Business profile:.............................................................................................................................................3

RATIOS CALCULATION............................................................................................................................5

LIQUIDITY RATIOS....................................................................................................................................5

Current Ratio..............................................................................................................................................5

Quick Ratio................................................................................................................................................5

ASSETS MANAGEMENT RATIOS............................................................................................................6

Inventory Turnover in day.........................................................................................................................6

Fixed Assets Turnover...............................................................................................................................7

Total Assets Turnover................................................................................................................................8

Days sales Outstanding (Average Collection Period)................................................................................9

Payable Turnover in days.........................................................................................................................10

Receivable Activity (Receivable Turn Over Ratio).................................................................................11

Profitability Ratios.......................................................................................................................................12

Net Profit Margin.....................................................................................................................................12

Gross Profit Margin.................................................................................................................................13

Return on Investment...............................................................................................................................15

Return on Equity......................................................................................................................................16

COVERAGE RATIO...................................................................................................................................17

Interest Coverage Ratio............................................................................................................................17

MARKET VALUE RATIOS.......................................................................................................................18

Earnings per Share...................................................................................................................................18

Price per Earning Ratio:...........................................................................................................................18

Book Value per Share..............................................................................................................................20

Market / Book Ratio.................................................................................................................................21

DEBT MANAGEMENT RATIOS..............................................................................................................22

Debt to Equity Ratio:...............................................................................................................................22

Debt to total asset.....................................................................................................................................23

Gearing ratio............................................................................................................................................24

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Company’s introduction

National Foods began its journey in 1970 as a Spice company, with a revolutionary product that

popularized the concept of having clean, healthy food. National foods’ initiatives were, to make

food that is hygienic, reduce time spent in the kitchen by women, foster health and contribute

towards personal attractiveness, so that people who use our products would be able to experience

a more rewarding life-style.

This was long before the phrase ‘Corporate Mission’ had even been invented. However, our

founder’s philosophy remains unchanged over time. Even if their language and the notion of

only women doing the housework have become outdated, in this age of rapidly changing

lifestyles, fuelled by the rampant development of technology; consumers are compelled to alter

their eating habits. National Foods responds to this challenge of developing innovative food

products based on convenience and quick preparation in line with modern lifestyles and yet

retains traditional values through its diverse collection of food products.

In a history that now crosses three decades, National Foods’ success has been influenced by the

major events of the day – economic boom, depression, wars, changing consumer lifestyles and

technological advancements. Even after three decades the company’s focal point still remains on

customer’s needs through product development in line with the changing market trends.

Business profile:

NFL has successfully established itself as a multinational company with an independent

subsidiary. National foods started its operations in Dubai last year, catering to the Middle Eastern

Market. We have now further expanded this structure with subsidiaries in Canada, (national

epicure limited) and United Kingdom, (national foods Pakistan UK limited) catering to the North

American and European markets respectively. We have also appointed a regional representative

at each of these offices, ensuring that the focus remains on these specific high potential regions.

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National Foods Limited

National Foods Canada Office And Hub National Food Uk Office

UAE National Foods DMCC

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RATIOS CALCULATION

LIQUIDITY RATIOS

Current Ratio

Current 2014

Current Assets $ 3,652,481.00 1.38884152

7Current Liabilities $ 2,629,876.00

Current 2013

Current Assets $ 3,139,234.00 1.28359484

4Current Liabilities $ 2,445,658.00

This ratio determines short term debt paying ability. For paying 1 dollar of liability how much a

company have short term assets? If liabilities are rising faster than assets, ratio will fall. If we

compare both years ratio is increased in 2014. Although Current liabilities have increased but

current assets have raised faster than liabilities.

This is favorable for company Means Company has more now to meet short term debts.

This is favorable because of company have more stock in trade and trade debts as compare to

last year. Also company has done more investments in different banks like HBL, MCB and ABL.

Investments are in money market funds and cash funds and investment in high yield schemes,

which raised company’s current assets in 2014.

Quick Ratio

Quick Ratio 2014

Current Assets-INV 3652481-2226562 1425919.0 0.

54Current Liabilities 2629876

2,629,876.0

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0

Quick Ratio 2013

Current Assets-INV 3139234-1912425

1,226,809.0

0 0.

50

Current Liabilities 2445658

2,445,658.0

0

Significance:

Quick ratio relates the most liquid assets to current liabilities. Inventory is removed from current

assets. Quick ratio is a measure of firm’s ability to payoff short term obligation without relying

on sale of inventories. Usual guideline for quick ratio is 1. If we compare both years which are

below 1 Means Company is in critical situation to pay its short term debts.

Favorable or Unfavorable:

This is in both years, unfavorable for company, because company has a lot of inventories in both

years.

How to improve/Suggestions:

To improve it, company should use Just in time approach (JIT) for inventory, also company

should do forecasting for future production so that inventory level should be controlled.

ASSETS MANAGEMENT RATIOS

Inventory Turnover in day

Inventory Turnover in day 2014

(Inventory*Days in year) 2226262*365 812585630

128.6524142

COGS 6316132

6,316,132.00

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Inventory Turnover in day 2013

(Inventory*Days in year) 1912425*365 698035125 124.905453

3COGS 5588508 5588508

Significance:

This ratio shows that how long does a company tales to covert its inventories into Accounts

Receivables through sales.


National Foods Limited were converting its inventories into A/R in 125 days in 2013, but the

time duration in 2014 for the conversion of inventories in to A/R increased to 129 days in 2014,

which is unfavorable to the company as their performance seems to be low than that of in 2013.

Reasons:

NFL have an immense increase in inventories in 2014 that that of in 2013, despite of the fact that

they have increased their sales in 2014 but yet their conversion of inventories is relatively slower

compared to the performance of 2013. As we can see in their financial statements that they have

more inventory than that of in 2014, it took more time to convert it into the sales to become A/R

(or cash) , this shows not good enough asset management of the company in 2014 in comparison

to 2013 performance.

Suggestions:

NFL can manage their inventory turnover in days ration by following the given suggestions.

1. Produce goods as demanded by following the JIT (just in time) approach.

2. Concentrate more on their advertisement or MARKETING strategies to make them more

effective so that their sales increase which will eventually improve their inventory

turnover ratio as well as their profitability would also be increased.

Fixed Assets Turnover

Fixed Assets Turnover 2014

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Annual Sales 9725258

7.312399998Total Fixed Assets 1329968

Fixed Assets Turnover 2013


7.661396485Total Fixed Assets 1115458

Significance:

This ratio tells how company is efficiently using its fixed assets to generate sales. If we compare

the figures of both years output is almost same. In 2013 NFL generated 7.66 of revenue per 1

rupee of its net fixed asset and 2014 it generated 7.31 rupee per 1 rupee of net fixed asset. In

2014 ratio is slightly lower.

Favorable or Unfavorable

Its unfavorable for the company.

How to improve/ Suggestions:

To improve it, company should:

Utilize its fixed assets properly and efficiently

Train labors

Dispose-off useless assets

Do more sales

Total Assets Turnover

Total Assets Turnover 2014


1.951903171Total Assets 4982449

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Total Assets Turnover 2013


2.008598037Total Assets 4254692

Significance:

This ratio tells that how efficiently a company is utilizing its total assets to generate sales. If we

compare both years, it tells that in 2013 for every one rupee of total assets, 2 rupee of sales is

generated whereas the figure in 2014 is lower than 2013.


This is unfavorable for the company.



Increase in revenue by doing more sales through high promotion

Dispose-off or liquidate useless assets

Lease assets instead of buying them

Efficient utilization of assets

Accelerate accounts receivable

Better inventory management through Just in Time approach

Days sales Outstanding (Average Collection Period)

Average Collection Period 2014

Receivables * days in year

796624*36

0 29.4886408

2Annual Sales 9725258

Average Collection Period 2013

Receivables * days in year 652142*36 27.47157197

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0


Significance:

This ratio tells that how efficiently a company is receiving its receivables of credit sales and the

figure tells the number of days that receivables are collected.


If we compare both years DSO in 2013 company was efficient as compare to 2014 which is

unfavorable.

How to improve/ Suggestions

To improve it:

Company should not do credit sales in red areas

Credit period decreased like from 30 days to 20 days

Enhance operations of collection department

Discounts policy to debtors on early payment

Payable Turnover in days

Payable Turnover in day 2014

(A/P*Days in year)1372410*365

500,929,650.0079.30956003

Annual purchases 6316132

6,316,132.00

Payable Turnover in day 2013

(A/P*Days in year) 1331561*365 48601976586.96771392

Annual purchases 5588508 5588508

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Significance

This ratio tells a company's average payable period. Days payable outstanding tells how long it

takes a company to pay its invoices from trade creditors, such as suppliers. If the number of days

increases from one period to the next, this indicates that the company is paying its suppliers more

slowly, and may be an indicator of worsening financial condition.


If we compare both years ratio has fallen in days in 2014 means company is paying more quickly

to its creditors. This is favorable for company. This is favorable because

Reasons

Company has more purchases in current year i.e. 2014

Company has efficient operation of payable department

Company’s sales are more which lead the company to pay its payables more quickly

Company is getting discounts on early payments

Receivable Activity (Receivable Turn Over Ratio)

=>Annual Sales/Accounts Receivable

Receivable Activities 2014

Annual sales

9,725,258.0012.00650618

Receivables

809,999.00

Receivable Activities 2013

Annual sales

8,545,966.00

12.77725681

Receivables

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668,842.00

Significance

This ratio shows the ability of the company that how many times the company is turning its

Accounts Receivables into cash in a year.


In 2013 NFL was converting its accounts receivables into cash 12.77 times in the year, which

declined to 12.00 times in 2014 which mean company is now efficiently collecting its

receivables as compare to previous year, although it’s in line with the last year but a bit

performance has increased.So this is favorable.

Reasons & Suggestions

As the receivables are increased during the period to it will take more time to recover the cash

from the creditors. In 2013 the receivable were Rs. 668,842/- which increased, as the sales were

increased by 13.8% which is by the way good for the company, to Rs. 809,999/- in 2014 which is

a massive increased in receivables, so it will take more time to recover the accounts receivable

from the creditors.

The company can improve this ration by making new strategic policies regarding sales made on

credit basis, as well as give the customers different offers that make them make the payments at

the earliest such as “n/10” & “n/30” i.e. if the customer will pay the full amount, NFL will

provide it a 10% discount & if the payment period is more than 30 days than company would not

give any discount on payment.

Profitability Ratios

Net Profit Margin

Net 2014 2014

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Margin

Net Income

704,9420.072485686 7.248568624

Sales

9,725,258.00

Net Margin 2013 2013

Net Income

665,2640.077845383 7.784538342

Sales

8,545,966

Significance:

This ratio tells how much profit you’re getting from your sales after deducting all expenses.

Creditors and investors use this ratio to measure how efficiently a company coverts sales into net

income so that dividends and loans can be paid.


If we compare both years, company’s performance is decreased in 2014. Reasons behind it could

be high costs like interest, tax and depreciation. So this is unfavorable for company.


A company should do

Efficient expense management

optimal capital structure

COGS should be minimum through efficient production.

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Gross Profit Margin

Gross Margin 2014 2014

Gross Profit

3,409,126.0

00.350543502

Sales

9,725,258.0

0

Gross Margin 2013 2013

Gross Profit

2,957,4580.346064798

Sales

8,545,966

Significance

This ratio tells the profit of firms relative to sales. It measures the efficiency of firm’s operational

performance and how products are priced. Here ratios are almost same in both years but there is

a slight difference. This ratio tells company’s performance and is constant and increasing.


This ratio is favorable in 2014 as its increasing, because more sales were done.

How to improve/Suggestions

If a company wants to improve it, it should

Increase selling price without increasing cost of goods sold

Reduce cost of goods sold without changing your selling price

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Increasing your sales volume without increasing cost of goods sold and without lowering

selling price

Look for ways to reduce ‘product or delivery’ costs so that net income should be more

Find alternate, cost-effective ways to get your products or services to customers

Identify effective ways to add value that customers will pay for – so you can raise prices

more than the cost of the value added

Company should differentiate itself so it can stop competing on price

Return on Investment

Return on

Investmen

t 2014 2014

Net Income $704,942.00

0.141485041 14.14850408

Total Assets

$4,982,449.0

0

Return on

Investmen

t 2013

Net Income

$

665,264.00

0.156360084 15.63600843

Total Assets

$4,254,692.0

0

Significance:

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This ratio tells overall earnings on investment/assets, means how efficiently company is utilizing

its assets to generate income.


In 2014 company’s ROI has decreased by 1% and it’s unfavorable for the company or is bad

indicator for company.


To improve it, company should

Dispose-off its useless assets

Efficient expense management

Reducing Cost of Goods Sold

Increase revenue

Minimize production costs

Return on Equity

Return on Equity 2014

Net Income $ 704,942.000.319279067 31.92790674

Total Equity $ 2,207,918.00

Return on Equity 2013

Net Income $ 665,264.000.398660792 39.86607916

Total Equity $1,668,747.00

Significance:

This ratio tells rate of return on common stockholders’ investment. It measures the efficiency of

a firm at generating profits from each unit of shareholders equity. If we compare both years,

there is a big difference.


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In 2014 ROE has decreased which is unfavorable for the company because company has issued

too many shares to common stockholders but earnings were not earned. Reasons behind it could

be inefficient expense management.



Enhance its operating efficiency to increase profit margin and return on sales

Do effective expense management

Utilization of assets efficiently

Paying less taxes, as taxes can have negative impact on company’s return on equity

COVERAGE RATIO

Interest Coverage Ratio

Interest

Coverag

e 2014 2014

EBIT 1,119,844

12.79631598Interest 87,513

Interest

Coverag

e 2013 2013

EBIT 1,053,895 14.

08Interest 74,832

Significance:

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Interest Coverage Ratio indicates the capacity of an organization to pay its interest obligations.

Generally, companies would aim to maintain interest coverage of at least 2 times. Lower than 1.5

times may suggest that fluctuations in profitability could potentially make the organization weak

to delays in interest payments. This ratio tells that number of times a company could make

interest payments on its debt with its EBIT. Company’s failure to meet its interest payment

usually results in default.


If we compare both years, in 2013 ratio of 14 means that company is earning enough to make

interest payments 14 times whereas this ratio has declined in 2014. So this is unfavorable for

company.


Company should do more sales

Company should use less debt

Company should use retained earnings to finance its operations and assets.

MARKET VALUE RATIOS

Earnings per Share

Earnings per share 2014

Net Income 704942

13.6081308Number of shares

outstanding 51803

Earnings per share 2013

Net Income 665264

12.84219061Number of shares

outstanding 51803

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Significance:

It measures the amount of net income earned per share of stock outstanding. In other words, this

is the amount of money each share of stock would receive if all of the profits were distributed to

the outstanding shares at the end of the year.


If we compare both years company has more EPS in 2014 as compare to 2013. This is favorable

for company because of following reasons:

In 2014 company has more net income after deducting all of the expenses

Company did good expense management

Company did good sales which lead to high net income

Addition of other income

Price per Earning Ratio:

=> Market Price Per Share / Earnings Per Share

Price Earnings Ratio 2014

Market Price per share 33024.12280702

Earnings per share 13.68

Price Earnings Ratio 2013

Market Price per share 28521.90622598

Earnings per share 13.01

Significance

This ratio is a valuation of company’s current share price to its per share earnings.This show the

willingness of the investors that how much they are ready to pool in their investment in the

company.

Here in NATIONAL FOODS LTD. investor is willing to pay Rs. 1/- to earn Rs. 21.91/- in 2013

that increased to Rs. 24.12/- per rupee the investor is willing to pay.

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2014 statements show that NFL has inclined to 24.12 which is favorable to the company.

NFL has improved their P/E ratio by almost 10.09% & this much increase in this ratio makes the

investors to expect a very higher rate of return because the company is earning a significantly

increased amount of earnings over the period.

Reason

Moreover following are some of the major reasons that help NFL to improve its P/E ratio are as

follows

Sales were increased through Effective Cost Management that lead towards higher Net profit

relative to 2013 in 2014that eventually increased the value of EPS due to which their Good Will

increased which increased its stock price in the market so the P/E ratio increased in 2014 by

10.09%.

Book Value per Share

=> Common Equity/Number of Common Shares outstanding

Book Value per share

Common Equity 220791842.62143119

Number of share outstanding 51803

Book Value per share

Common Equity 166874732.21332741

Number of share outstanding 51803

Significance

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Book value per share indicates the dollar value remaining for common shareholders after all

assets are liquidated and all debtors are paid.In simple terms it would be the amount of money

that a holder of a common share would get if a company was to liquidate.

NFL has a good reputation in the market that makes its less vulnerable as it’s has a strong good

will. Even this break up ratio gives a clear look to its image.

This ratio is basically used by the shareholders of the company to see that what they will get if

the company has to be liquidated. This shows the level of safety to their investments in the

company.


In 2013 their break up ratio was Rs 32.21/share which was good enough & still they managed to

improve it by 5.834% & made it 42.62 Rupees per share. This gives the shareholders satisfaction

of their investments, so it is favorable for the company as the investor feels safe with its

investments in the NFL.

Reason

The company is earning good profits which is an indicator that they are using their assets

effectively & efficiently to generate more sales than the previous year, which lead them to

improve their good will in the market so that the price of its stocks increased, which means that

they have maximized the wealth of their shareholder which is one of the major reasons of firms

existence.

Market / Book Ratio

=>Market Price / Book Value per Share

Market to Book Ratio

Market Price 3307.742843735

Book Value per Share 42.62

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Market to Book Ratio

Market Price 2857.077228706

Book Value per Share 40.27

Significance

The ratio of a stock market price to its book value gives another indication that how investors

regard the firm. In NFL case as it is earning high rate of return on its assets in 2014 i.e. 7.743

which means that for 1 rupee you are investing in NFL, you will get 7.743 rupees in return than

investing in the market, & as its M/B ratio in 2014 is higher than that of its previous ratio in 2013

i.e. 7.077, that show an increment which is a good indicator in investors sight.


It is favorable for the company because it is showing a growing trend from 2013 to 2014 with a

percentage change of 9.48%. This mean the investors are looking forward for more returns as

their investments is secured.

Reasons

The major reasons for this improvement are given as follows:

NFL has increased their sales from Rs. 8,545,966,000/- to Rs. 9,725,258,000/- from 2013 to

2014 respectively, which indicates that they have a good marketing strategy plan which has

helped them increasing their annual sales which ultimately lead them to earn more profits, which

showed an effect on their good will in the market so that their stock price increased from

Rs.285/share to Rs. 330/share.

DEBT MANAGEMENT RATIOS

Debt to Equity Ratio:

Debt to equity 2014 2014

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Total debt 27745311.25

Shareholders’ equity 2,207,918.

Debt to equity 2013 2013

Total debt 25859451.55

Shareholders’ equity 1668747

Significance:

Debt to equity ratio tells that how much creditors will finance firm against Rs 1 provided by the

shareholders. This ratio tells about the capital structure of a firm means how much financing a

firm gets from issuing bonds (debts) and how much from Stocks (shares). If a firm raises funds

from, it has to pay interest and if it raises funds through equity, it has to pay dividend. So an

optimal level is capital structure should be used.


It is unfavorable for the company as their credibility has decline from Rs 1.55 to Rs1.25, because

shareholders equity is increased by more proportion than debt in 2014. This means that now the

creditors have to pay Rs 1.25 against Rs 1 by the stock holder rather than Rs 1.55

Suggestions:

This ratio is very critical and important because it tells us how much the creditors have to pay

against each Rs 1. There should be some nominal mixture of both debt and equity as both have

their perks and demerits.eg if the debt or the leverage is too high it will give you a tax shield yet

the more debt you have the more interest payments against the debt you have to pay. Same goes

for equity, the more equity you have the more dividends you have to pay against it.

Debt to total asset

Debt to

total assets 2014

Total debt 2774531 0.556 55.6%

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Total assets 498,2449

Debt to total assets 2013

Total debt 2585945

0.6077 60.78%

Total assets

425,4692

Significance:

This ratio tells the percentage of frame asset that is financed by its creditor.


It is favorable in 2014 in respect of the investor the company’s assets are supported 60.78% in

2013 and 55.6% in 2014.as investor seek lower debt ratio because the lower the ratio the greater

cushion against creditors losses in the event of liquidation

How to improve/ Suggestions

o Additional/ New Stock Issue: The Company can issue new or additional shares

to increase the cash flow.

o Debt / Equity Swap: By implementing a debt / equity swap, a company can

make a debt holder an equity shareholder in the company. This will cancel the

debt owed to him and in turn, reduce the debt of the company and improve the

ratio.

o Lease Assets: The Company can sell its assets and then lease them back. This

will induce a cash flow that can be used to pay off some debts.

o Increase the Sales: The Company can focus heavily on increasing the sales but

without any increase in overhead expenses. The increase in sales can be used to

reduce the debt and improve the debt to total asset ratio.

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Gearing ratio

*Total Capitalization=Long Term Debt+S.H. Equity.

Gearin

g ratio 2014

Long term debt 144,655

0.06148 6.14%Total

capitalization

144655+220791

8

Gearin

g ratio 2013

Long term debt 140,287

0.0775 7.75%Total

capitalization

140,287+166874

7

Significance:

This ratio tells the proportion of assets invested in business that are financed by Long term

borrowings, means how much long term debts like bonds and debentures are used to finance a

firm’s total assets. If the ratio is higher, it means firm is on risk. More than 1 ratio, tells that

company has more debts than capital which is not good for the company as it leads to problems

especially company gets bankrupt.


So it is favorable.The equity in 2014 was much higher as compared to the 2013 as well as there

is a bit difference in the long term debt as compared to 2013.that is the reason that the gearing

ratio has decreased.

How to improve/Suggestions:

How to reduce gearing ratio:

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Sellshares.

The board of directors could authorize the sale of shares in the company, which could be

used to pay down debt.

Convert loans.

Negotiate with lenders to swap existing debt for shares in the company.

Increase profits.

Use any methods available to increase profits, which should generate more cash with

which to pay down debt.

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ratio analysis of national foods

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