Xavier University- Ateneo de Cagayan

School of Business and Management

Coralles St. Cagayan de Oro, 9000

A Financial Statement Analysis Report on:

Limketkai Sons, Inc.

Submitted by:
Mia Grace Ausmolo
Michelle Ann Mabao
Zaira Comodas
John Christian Abragan
Arbby Pamela Alcoran
Bea Carmella Filasol
Caryl Grace Altomera
Marchelette Maique
Dara Jay Macabinlar

Submitted to:
Mark Anthony Jamis

MARCH 13, 2017

 I. Background

Limketkai Sons, Inc. (the Parent Company) was incorporated in the Philippines
and was registered with the Philippine Securities and Exchange Commission
(SEC) on March 25, 1966 to engage in the development, maintenance and
operation of commercial shopping centers and restaurants, and all business
related thereto such as operation of amusement centers and cinema theaters
and real estate sales and development. The Parent Companys registered
address, which is also its principal place of business, is at Limketkai Corporate
Office, Limketkai Center, Cagayan de Oro City.

Being a Parent Company, among its subsidiaries are: Limbros Enterprises, Inc.,
Limketkai Hotel and Resort Corporation, Limketkai Manufacturing Corporation,
Eastmin Food Chain Corporation, Westmin Food Chain Corporation, Southmin
Food Chain Corporation, Normi Food Chain Corporation, and Cenmin Food
Chain Corporation.

II. Scope and Limitations

The analysis focuses on Limketkai Sons Inc., which is the parent company.

On the creation of the problem, the proponents focused on . . .

III. Horizontal Analysis
A. Balance Sheet
B. Income Statement
IV. Vertical Analysis
A. Balance Sheet
B. Income Statement
 V. Problem
( COMPUTATION TABLE)

When running through the financial statements, no major problem arises

at first glance. The only ratios that were unfavorable were the TIE ratio, liquidity
ratios, and some asset turnovers as shown in the table. Concerning the tie ratio,
it has decreased from 1.8x(2010) to 1.7x(2011).
(TIE GRAPH)

TIE Ratio
1.82

1.8
1.8
1.78

1.76

1.74

1.72

1.7
1.7
1.68

1.66

1.64
2010 2011

TIE Ratio Trendline

This is due to the increase in interest expense (denominator) by 9.19% as

shown in the horizontal analysis. However, the analysts believe that the slight
decrease in interest coverage is immaterial since the Parent company normally
maintains flexibility in funding by keeping committed credit lines available.

Regarding the liquidity ratio, we see that the company has a negative
working capital which was due to the borrowing of Loans Payable, but this is not
a problem since revenues generally came from investment in properties which
are the commercial properties held for lease by the company. They do not earn
much on their inventory of Real Estate as no sale incurred during the
comparative years. Moreover, as negative working capital occurs, long-term debt,
which was secured from local banks, were also used to finance these working
capital requirements.

Current Ratio
1.4 1.29

1.2

1 0.93

0.8

0.6

0.4

0.2

0
2010 2011

Current Ratio Trendline

Therefore, the company had used an aggressive financing policy, wherein

some permanent and temporary current assets were finance by short-term debt
and the rest by long-term debt. This allows the company to take advantage of the
lower interest rate of short-tem loans payable, which is a range between 2.1% to
5.8% given the fact that the yield curve would be upward sloping. Furthermore, in
the long-term, the Philippines Interest Rate is projected to trend around 5.00
percent in 2020, according to the econometric model as forecasted below:
 The 3rd issue to tackle on is asset management. There is decrease in fixed
asset turnover and total asset turnover. Accounts that increased the assets would
be cash (by 37.4%), investment in properties (by 3.72%) and property and
equipment (by 133.33%). Low asset turnover would be normal in this industry
since in the short-term perspective, newly acquired assets mentioned would still
be in the process of development, especially since Limketkai undergoes various
expansion and renovation every year, which started from the early 2000s. During
the comparative years, most recent expansions include the new East Concourse
and East Annex building which now houses high-end fashion and lifestyle shops.
Nevertheless, in the long-term perspective, investments now would result to
developed properties that would generate more earnings in the future.

As financial analysts, the proponents had found an issue concerning loans

payable and long-term debt. A risky action that the company does is the
borrowing of various debts to pay for other advances, which is understandable
since business is all about survival. However, what the company had failed to do
is to grab the opportunity of debt restructuring. Debt restructuring is actually a
method used by companies with outstanding debt obligations to alter the terms of
the debt agreements in order to achieve some advantage. Failure to do this
actually resulted to higher cost of interest, but what the analysts emphasized is
the opportunity cost involved which is the loss from forgoing restructuring
concerning interest rate and not the interest expense itself since a reasonable
amount of interest expense would always be expected in this line of business.
Facts of the case would include information regarding the following:
During 2011, as shown above, the company had availed another (short-term)

loan and had used the proceeds to pay the outstanding one (P265 million) and
the newly borrowed loan (P965 million) which would result, to a balance of P 430
million in the loans payable account in 2011. It was also this year where he had
availed a 15- year and a 2-year long-term debt for various improvements and
mall redevelopment projects. Only P 112, 952,197 was allocated for the payment
of long-term debt.
What the proponents mean concerning the issue is that the company had
been paying the Loans payable balance when he could have 1 st paid the
outstanding loans payable and used the proceeds to pay some of the long-term
debt since it bears greater interest. Interest comparisons are shown below:
INTEREST %
2011 2010
COMPARISON
Loans Payable 2.1-5.8% 4.0-6.8%
Long-term Debt
15 yr. loan 6.14%-6.27% 6.14%-6.27%
10 yr. loan 5.77%-6.40% 5.77%-6.40%
15 yr. loan 7.06% -
2 yr. loan 6% -
He should have prioritized the payment of debts bearing greater interest.
Furthermore, because he has the capacity to pay for some of the long-term
debts, he could have entered into a 1 year loan renewable agreement with the
bank concerning the conditions of his long-term debt. From the beginning, he
should have negotiated the long-term debts; that if he is capacitated, then he
may opt to pay for the principal, but the debt shall continue to be long term as
stretched resulting to no pre-termination penalties. The opportunity cost here
would be the difference in the interest rates that could have been versus the
rates that actually, it may be a small matter, but interest cost resulting from these
rates would be millions; it is an opportunity loss to the company.

VI. Recommendations

The proponents suggest several solutions which includes the following:

1) Prioritize debts with higher interest rates. (opt to pay them first)
..
2) Opt for a 1 year loan renewable agreement
Do not stretch to a long-term period those long-term loans with smaller
principal amounts. Instead, negotiate these to a bank and opt for restructuring. A
1 year loan renewable would mean lower rate of interest between 4.8%-5% as of
now, but never higher than a long-term loan. Amortized payment must be settled
in one year; after the term, excess of the balance thereof must be fully paid or
renewal of loan happens. 6 months before the term, payer must analyze if he is
capacitated to pay the loan, if he does not have enough funds, then he may
buffer to other banks and scout them to buyout the outstanding loan.

3) SEARCH good ways to pay off debt