MADE BY SEPROD MUST BE GOOD

Financial Ratio Analysis

Review Period 2007 2007-2009

For Tutor: Mr. Damien Francis

Group: EBBA3bPOM/FIN

Project Management Report

This assignment was authored by the following members of EBBA3POM/FIN double major group; Names Gerron Thomas Novlette Johnson-Williams Rose Bachan Lamar Hemmings Monea Hibbert Anna-Kaye Smith ID # 0601486 0703558 0704821 0701126 0704459 0500866

Project Time Line

Name of Member Gerron Novelette Lamar Rose Anna Monea Dates of Meetings July 19-21 July 19-21 July 19-21 July 19-21 July 19-21 July 19 Duration Total hrs 16 16 16 16 16 4 Place of Meeting BDO BDO BDO BDO BDO BDO Assigned Task Question 4&6 Question #5 Question #2 Question #3a,b Question #1 Question #3c

Members completed all task assigned on the specified dates and time duration listed. Please see Declaration of Authorship for member confirmation of co-authoring the project.

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Financial Statement Analysis 2007-2009

Table of Contents
Ratio Analysis ................................................................................................................................. 4 Trend Analysis vs. Common-Size Analysis .................................................................................... 7 Company overview ......................................................................................................................... 9 Business Segments ........................................................................................................................ 10 Social Corporate Responsibilities ................................................................................................. 10 Economic Outlook......................................................................................................................... 11 DETAILED TREND ANALYSIS ................................................................................................ 13 Profitability Ratios .................................................................................................................... 15 Market Value Ratios.................................................................................................................. 20 Asset Management Ratios ......................................................................................................... 23 Debt Ratios ................................................................................................................................ 27 Liquidity Ratios ......................................................................................................................... 34 Client Profile ............................................................................................................................. 40 Findings ......................................................................................................................................... 40 Action Plan .................................................................................................................................... 41

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Ratio Analysis
Purpose of Ratio Analysis
Financial Ratio analysis is a tool used to highlight the relationship between different accounting data over different time periods across different firms of similar industries. The information that is used in ratio analysis is derived from the companys annual, audited financial statements.

Value of Financial Ratios

Financial Ratios are generally used to establish financial trends in a company, it is a reliable way of making inferences about a companys financial position, its operations and most important its attractiveness as an investment. Financial Ratio Analysis proves to be a valuable tool as it attempts to analyze financial statements and extract information related to the strengths or weakness of a firm

Classification of Ratios
Financial ratio analysis groups the ratio into several categories which provide information on the varying facets of a company's finances and operations. An overview of some of the more popularly used categories of ratios is given below. Additionally, ratio analysis is essentially a comparison; one company may be compared with another to establish whether or not a company is operating viably in its industry.

Leverage/Debt Ratios which show the extent that debt is used in a company's capital structure. Liquidity Ratios which give a picture of a company's short term financial situation or solvency. Operational/Asset Management Ratios which use turnover measures to show how efficient a company is in its operations and use of assets. Profitability Ratios which use margin analysis and show the return on sales and capital employed. Solvency Ratios which give a picture of a company's ability to generate cash flow and pay its financial obligations. Market Value Ratios which give an insight into the companys attractiveness as an investment in terms of the rate of return on its shares.

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Financial Statement Analysis 2007-2009

Limitations of Ratio Analysis

Despite the usefulness of using ratios in financial analysis, particularly for identifying a companys weaknesses and strengths, there are limitations to their use which typically result from what is known as a creative accounting. Other factors are listed below. Creative Accounting This is the term to given to a practice of financial managers to compile or present a companys financial information in such a way that the ratios appear favorable. These methods range from disguising loans as leases and repaying loans at the end of a financial period and re-borrowing the amount in a subsequent period. These examples illustrate the manger who wants to remove the impression that his company is heavily financed by debt, which may deter investors. However, depending on the intent or impression that the manager wants to create, that manager may adjust his financial information to achieve that end. Simply put, financial managers can manipulate data which when used to arrive at a ratio, results in misleading information. Other Limitations of Ratio Analysis 1. In a companys first year of operation, there will be no comparative figures hence there would be no indication of whether or not a ratio is improving. 2. Comparisons about industry averages may not be as revealing as anticipated because a business may be affected by factors that are not common in the industry. 3. Ratios based on the historical costs of assets as opposed to the current cost may result in distortions in the Returns of Capital Employed Ratio. Undervalued assets will distort the ROCE and reduce the gearing ratio. 4. Ratios are influenced by the choice of accounting policy 5. Financial statements are subject to manipulation and so are the ratios based on the manipulated statements. 6. Inflation over a period may distort results and ratios. 7. Comparative study required: Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business. However, such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. may affect the future operations. 8. Ratios alone are not adequate: Ratios are only indicators, they cannot be taken as final regarding good or bad financial position of the business. Other things have also to be seen. 9. Problems of price level changes: A change in price level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company. The financial statements, 5|Page
Financial Statement Analysis 2007-2009

therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios. 10. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult. 11. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision. 12. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to interpreted and different people may interpret the same ratio in different way. 13. Incomparable: Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.

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Financial Statement Analysis 2007-2009

Trend Analysis vs. Common-Size Analysis

Definitions
Trend Analysis is a form of comparative analysis that is often employed to identify current and future movements of an investment or group of investments. The process may involve comparing past and current financial ratios as they relate to various institutions in order to project how long the current trend will continue. This type of information is extremely helpful to investors who wish to make the most from their investments. Trend analysis usually involves choosing one fiscal period as a base period and then expressing subsequent quantities as a percentage of the data associated with this base period. In the case of an income statement, changes in all items could be assessed in relation to the base period. Significant changes can then be investigated further. Note that trend analysis can be performed to determine changes in the number of physical units as well as dollar amounts. On the other hand, Common-size analysis (also called vertical analysis) expresses each line item on a single year's financial statement as a percent of one line item, which is referred to as a base amount. The base amount for the balance sheet is usually total assets (which is the same number as total liabilities plus stockholders' equity), and for the income statement it is usually net sales or revenues. By comparing two or more years of common-size statements, changes in the mixture of assets, liabilities, and equity become evident. On the income statement, changes in the mix of revenues and in the spending for different types of expenses can be identified. This approach facilitates identifying deviations in the components of statements by focusing on relative differences through time.

Features of Trend Analysis and Common-Size Analysis

Trend Analysis
In the case of a trend analysis all the given years are arrange in an ascending order. The first year is termed as the base year and all of the base years are taken as 100%. Items in the subsequent years are compared with that of the base year. If the percentages in the following years is above 100% it indicates an increase over the base year and if the percentages are below 100% it indicates a decrease over the base year. A trend analysis gives a better picture of the overall performance of the business. A trend analysis helps in analyzing the financial performance over a period of time. A trend analysis indicates in which direction a business is moving i.e. upwards or downwards. A trend analysis facilitates effective comparative study of the financial performance over a period of time.

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For trend analysis at least three (3) years financial is essential. The broader the base the more reliable is the data and analysis.

Common-Size Analysis
A common size statement analysis indicates the relation of each component to the whole. In case of common size Income statement analysis net sales is taken as 100% and in case of common size balance sheet analysis total funds available/total capital employed is considered 100%. It is used for vertical financial analysis and comparison of two business enterprises of two (2) years financial data. Absolute figures from the financial statement are difficult to compare but when converted and expressed as percentage of net sales in case of income statement and in case of Balance Sheet as percentage of total net assets or total funds employed it becomes more meaningful to relate. A common size analysis is a type of ratio analysis where in case of income statement sales is the denominator (base) and in case of Balance Sheet funds employed or total net assets is the denominator (base) and all items are expressed as a relation to it. In case of common size statement analysis the absolute figures are converted to proportions for the purpose of inter-firm as well as intra-firm analysis.

Limitations
Trend Analysis Trend analysis provides little insight into the root causes of variations. It fails to indicate what the entitys normal or benchmark position is. It can be undermined by frequent changes in financial reporting formats. It can be heavily influenced by the choice of the base fiscal period. Common Size-Analysis As with financial statements in general, the interpretation of common size statements is subject to many of the limitations in the accounting data used to construct them. For example: Different accounting policies may be used by different firms or within the same firm at different points in time. Adjustments should be made for such differences. Different firms may use different accounting calendars, so the accounting periods may not be directly comparable.

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Introduction
Company overview
History
Seprod Limited was incorporated in Jamaica in July 1940 and became a public company listed on the Jamaica Stock Exchange in 1985. Their principal activities include manufacturing and distributing edible oils and fats, corn products and other house hold consumer products. The company employs a direct labour force of over 370 persons, with a multiplicity of support labor. Seprod's corporate office is located at Felix Fox Boulevard. The Board of Directors is thirteen (13) in number and was chaired by Mr. Desmond Blades who died on September 9, 2009 and was succeeded by Mr. P. B. Scott on October 5, 2009. Mr. Byron Thompson is the Chief Executive Officer and Group Managing Director. Seprods main subsidiaries are:Caribbean Products Company Limited Industrial Sales Ltd International Biscuits Ltd Serge Island Dairies Ltd Jamaica Grain and Cereals Ltd Serge Island Farms Limited Belvedere Limited Golden Grove Sugar Co. Ltd

Mission Statement PROVIDE a sufficient quantity of good quality products at reasonable prices to our customers. MAINTAIN a good return on investments to our shareholders. PROVIDE our employees with reasonable remuneration and opportunities for personal development and job satisfaction. PERFORM the role of a good corporate citizen and contribute to the public welfare.

Competitive Landscape
The Jamaican Conglomerates and Holdings Industry of which Seprod is apart include major competitors. Competition in the market may be classified as Oligopolistic competition which can give rise to a wide range of different outcomes. In some situations, the firms may employ restrictive trade practices (collusion, market sharing etc.) to 9|Page
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raise prices and restrict production in much the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. Firms in the manufacturing selling and distribution part of the conglomerates and holdings industry, often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be actual communication between companies)for example, in this industries there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership. In other situations, competition between sellers in the industry can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. The competition in an oligopoly can be greater than when there are more firms in an industry if, for example, the firms were only regionally based and did not compete directly with each other.

Business Segments
Seprods manufacturing businesses performed well during the year 2007. The biscuit business which was added in September of 2007 made a useful contribution to the Groups profit. Milk production was disappointing as adverse weather conditions from Hurricane Dean followed by a protracted period of torrential rains impacted negatively on the animals. This resulted in a shortage of milk in the trade. All other areas performed well in terms of output, productivity and profitability. The distribution side which entails the merchandising of consumers goods continues to make useful contribution to the Groups profits posting improved performance over last year. During the year 2008 Seprods subsidiary companies experienced mixed results depending on the degree of vulnerability to the conditions which prevailed during the year. Overall all companies made positive contributions to the Groups profit. The year 2009 brought success for Seprod as the main business segment of manufacturing and distribution performed well. The manufacturing segments continued to record growth in bottom line. Profit from the distribution segment increased marginally due to intense competition which necessitated a reduction in margins as a strategy to protect market share.

Social Corporate Responsibilities

As one of Jamaica's high technology companies, Seprod strive to meet the needs of everyone and anticipate the aspirations of their consumers and customers to respond innovatively, creatively and competitively with the products and services which add value to their lives, thus living up to their motto "Made by Seprod....Must be Good". Seprod seeks to create and maintain an environment where every employee is provided the opportunity to 10 | P a g e
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develop to his or her maximum potential. They are committed to honesty and integrity in all relationships with suppliers of goods and services. They evaluate their suppliers on the basis of quality, price and service. Seprod's role as a good corporate citizen is underscored by its involvement in the community, the country at large and by its support of various charities, educational activities and civic organizations. These have included contribution to United Way of Jamaica, Title Sponsor of the Primary Schools Athletic Championship, sponsors of the Jean Pierre U16 Netball Championship 2009, hosts of a annual Scholarship Awards Function for children of employees who were placed in high schools for the academic year 2009-2010 by way of the Grade Six Achievement Test (GSAT), sponsorship of the Junior Achievement Programme, financial support to charities, service clubs and assistance to schools, to name a few. The Company recognizes community involvement as an important obligation and as a viable business objective. Their support of worthwhile community projects in areas where they operate generally improves the well being of the community, creating a better place for their employees to live and a better place for them to operate.

Economic Outlook
In the year 2007 The Seprod Group invested heavily to improve the efficiency of their production facilities. They continue to streamline their production to reduce waste with continuous improvement to their plants and training of employees to achieve greater output and improved productivity. They worked with their suppliers where possible to come up with new materials that will meet their specifications and result in reduced cost. Management was confident that these changes will help to control cost increases and to sustain an efficient operation going forward in the year 2008. Seprod ended the year 2008 in an uncertain economic environment due to the effects of the global recession. This unfortunately is continuing as they are not further constrained by the fact that they do not know when it will end nor do they know the ultimate impact on their business. However, they are undaunted by these uncertainties. They are confident in that they have long standing expertise and core competence in the business in which they operate. Their team has the experience of managing in difficult times so they are employing every technique that works during these times and they are positive that they will emerge equipped to move the company forward in the year 2009. The speed of the economic recovery and the likely extent remains uncertain in the year 2009, Seprod is some what cautious about the outlook in the short term. However, their management team is equipped with the requisite experience, knowledge and skill to manage in difficult times.

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In addition, they have excellent brands which offer good value proposition to attract, retain and even deepen relationships with customers. Therefore, they are confident good revenue and profit will be achieved.

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DETAILED TREND ANALYSIS

In an attempt to determine the feasibility of providing a loan to Seprod Ltd., The Company was assessed via the use of various financial ratios. The various ratios highlights strengths and weaknesses in the companys financial position and also provide opportunities to make comparisons with prior years performance and also comparisons with competitors in the manufacturing industry. The following ratios provided salient points relevant to the analysis of trends and movements in financial information. Profitability Ratios Shareholders Funds/Market Value Asset Management/Activity Ratios Debt Ratios Liquidity Ratios Despite the limitations of using ratios to analyze financial statements, the need still exist to use a standard, widely accepted means of comparing data and drawing general inferences. This however is flawed by the inability to acquire all the relevant information from the companys financial statement needed to calculate some ratios as due to the stipulation of updated International Accounting Standards, some calculations and information are irrelevant to the presentation of financial statements.

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Comprehensive Ratio Report

Table of Comprehensive Financial Ratios
Description Profitability Profit Margin Gross Profit Margin Operating Profit Ratio Return on Capital Employed Return on Total Assets Market Value Dividend Yield Earnings per Share Dividend Cover Price Earnings Ratio Market to Book Value Asset Management Debtor Turnover Days Sales Outstanding Creditor Turnover Payment Period Stock Turnover Stock Period Debt Ratios Times Interest earned Cash Flow Interest Operating Cash Flow To Sales Operating Cash Flow To Net Profit Gearing Debt Ratios Debt to Equity 11 51 13 29 7 41 11 35 15 24 7 54 9 38 11 32 5 74 0.02 1.96 5.6 7 1.38 0.03 1.82 4 10 1.56 0.04 2.86 4.4 6 1.33 16% 2% 15% 16% 16% 10% 23% 16% 29% 13% 16% 29% 23% 37% 18% 2007 2008 2009

24 17 0.06 0.37 0.07 0.2 0.24

51 29 0.03 0.34 0.07 0.22 0.28

89 68 0.1 0.65 0.11 0.24 0.32

Liquidity Current Ratio Quick ratio Operating Cash Flow to Current Liabilities

4.22 3.88 2.9 2.35 0.55 0.44

3.78 2.54 0.96

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Presentation of Financial Ratios

Profitability Ratios

Profit Margin
18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2007 2008 2009 2007 2008 2009

Fig 1.1 depicting Profit Margin Ratio for the years 2007-2009 Net Profit Margin Ratio The Net Profit Margin ratio calculated by taking the companys profit after tax as a percentage of its sales attempts to measure the overall profitability and hence it is very useful to company as if the net profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its investment which would be a major determinant behind the ability to secure a loan. The firms Net Profit Margin ratio reflects a 6% decrease in 2008, moving from 16% in 2007 to 10% in 2008. In 2009 however sales increased marginally by a similar 6%. The decrease in the net profit margin percentage was possibly due to a greater percentage change between 2007-2008 in expense with respects to increases in sales. The increase in 2009 could also be as a result of the marginal increase in sales mirrored with a slight decrease in expenses thus improving the companys profit after tax. Despite just a marginal 6% increase in the Net Profit margin Ratio, Seprod in comparison to other manufacturing companies listed on the Jamaica Stock Exchange has enjoyed satisfactory returns on investment after clawing through a rigid period of macro-economic situations such as the recession and implementation of the Jamaica Debt Exchange. 15 | P a g e
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Gross Profit Margin

30% 25% 20% 15% 10% 5% 0% 2007 2008 2009 2007 2008 2009

Fig 1.2 depicting Gross Profit Margin Ratio for the years 2007 s 2007-2009 Gross Profit Margin Ratio The Gross Profit Margin ratio remained at a constant 23% in 2007 and 2008. There was however an upward trend where the ratio showed a slight increase to 29% in 2009. A profit margin average of 25% means that for each dollar of sales that Seprod generates it is contributing 25cents to its net income. This tie in with gross profit margin, Seprod presumably has a healthy ties pricing strategy which is evident in both the Gross Profit and Net Profit Margin ratios. In cutthroat pricing industries such as manufacturing you would expect the profit margin much lower because of the heavy competition. We can interpret that Seprod either has exceptional products which loyal customers are willing to pay for, or due to economies of scale, scarce pay resources and the threat of entry in the unique areas of manufacturing Seprod has created the opportunities to achieve above average returns

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Operating Profit Ratio

25% 20% 15% 10% 5% 0% 2007 2008 2009 2007 2008 2009

Fig 1.3 depicting Operating Profit Ratio for years 2007 2007-2009 Operating Profit Ratio To further determine the companies effective use of a pricing strategy and operating efficiency, the Operating Profit Ratio which is the companies pre tax and finance cost profit pre-tax expressed as a percentage of sales, it is a measurement of what proportion of a company's at revenue is left over after paying for variable costs of production such as wages, raw materials, depreciation and other administrative/selling&distribution expenses. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. able This ratio is very essential in determining Seprods opportunity in an attempt to secure a loan. The companies Operating Profit Ratio saw an upward trend from 2007 where it was 15% or $0.15 before interest and taxes for every dollar of sales. In 2008 these figures increased marginal nterest by 1% to 16% but then took a 44% increase to 23% or $0.23 for every dollar of sales before interest and taxes are computed. This proves significant as the net profit margin ratio is affected margin by taxes and various interest expenses which might deter the true profitability potential of the company. Thus the operating profit ratio shows the firms true ability to earn from the resources employed.

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Return on Capital Employed

2009

2008

2007 2008 2009

2007

0%

10%

20%

30%

40%

Fig 1.4 depicting Return on Capital Employed for years 2007 apital 2007-2009 Return on Capital Employed The return on capital employed (ROCE) ratio, expressed as a percentage measure the percentage, company's ability to generate returns from its available capital base. By comparing net income to the sum of a company's debt and equity capital, we get a clear picture of how the use of leverage bt impacts a company's profitability. ROCE measurement is a more comprehensive profitability ofitability. indicator because it gauges management's ability to generate earnings from a co company's total pool of capital. Seprods ROCE ratio reflects a general upward trend between the years 2007 2007-2009. In 2007 the companies ROCE was 16%, which when compared to 2 other companies classified as manufacturing companies listed on the Jamaica Stock Exchange, Trinidad Cement Company and Salada foods who showed an average of 11% for TCC and 14% for Salada foods, can be classified as above industry average. The net income generated from capital employed in 2008 showed a percentage change of 81% moving significantly from 16% to 29%. In 2009 however significantly the percentage change was reduced, reflecting a 28% change moving from 29% to 37%. The significant increases in the companys ROCE are assumable as a result of the implementation of tight controls subsequently reducing expense thus increasing the net profit in 2008 and 2009.

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Return on Total Assets

2009 2007 2008 2008 2009 2007

0%

5%

10%

15%

20%

Fig 1.5 depicting Return on Total Assets for years 2007 2007-2009
Return on Assets

An indicator of how profitable a company is relative to its total assets is the ROA which gives an idea as to how efficient management is at using its assets to generate earnings. It is o calculated by dividing a company's annual earnings by its total assets assets. Seprods ROA shows a fluctuated movement between the 3 years. In 2007 the ROA was 16%, decrease by 3% to 13% in 2008 then making a marginal increase to 18% in 2009. The decrease in the firms ROA was of significant importance and could be highly contributed by the reduction of profits in 2008 as a result of macro economic factors such as the global recession. A macro-economic increase in the net profit and a marginal increase in the total investment reflected recovery for Seprod as the ROA displayed a percentage change of 38%.

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Market Value Ratios

Dividend Yield
0.045 0.04 0.035 0.03 0.025 0.02 0.015 0.01 0.005 0 2007 2008 2009 2007 2008 2009

Figure 1.6 depicting Dividend Yield for the years 2007 2007-2009 Dividend Yield Ratio Seprod Ltd. Dividend Yield Ratio reflected a normal yield curve which highlights a trend of consistent increases in the dividend the company pays out each year relative to its share price. Seprods Dividend Yield ratio increased by 1% each year, moving from 2% in 2007 to 3% in year, 2008 to 4% in 2009.

Earnings per Share

3.5 3 2.5 2 1.5 1 0.5 0 2007 2008 2009 2007 2008 2009

Figure 1.7 depicting Earnings Per Share for years 2007 2007-2009

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Earnings per Share The earnings per share is another measure of profitability and when compared with EPS of similar companies, it gives a view of the comparative earnings or earnings power of the firm. EPS ratio calculated for a number of years indicates whether or not the earning power of the company has increased. The EPS again affected by the economic conditions in 2008 fell from $1.96 in 2007 to $1.82 then made a significant increase moving up to $2.86 in 2009. An Earning per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio. In the manufacturing industry Seprod boast one of the highest EPS and is a major determinant in the market price of Seprods share.

Dividend Cover
6 5 4 3 2 1 0 2007 2008 2009 2007 2008 2009

Fig 1.8 depicting Dividend Cover for years 2007-2009 Dividend Cover The dividend cover ratio tells us how easily a business can pay its dividend from profits. In 2007 the firm was able to pay its dividend 5.6 times. This was as a result of the significant portion of the ratio been covered by a net profit figure 5.6 times the ordinary dividend reported in the firms financials. The reduction in the firms net profit and an increase in the firms ordinary dividend reduced the dividend cover to 4 times in 2008 and was marginally increased in 2009 by .4 times. Improvements in the firms net profit figure in 2009 also boosted the dividend cover 4.4 times.

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Price Earnings Ratio

2009 2007 2008 2008 2009 2007

10

Fig 1.8 depicting Price Earnings Ratio for years 2007 2007-2009 Price Earnings Ratio P/E ratio is the ratio of a company's share price to its per share earnings. Seprods P/E per-share ratio 7 in 2007 suggests that investors in the stock are willing to pay $6 for every $1 of earnings that the company generates. This figure grew to $10 in 2008 but fell to 7 in 2009. fell

Market to Book Value

1.6 1.55 1.5 1.45 1.4 1.35 1.3 1.25 1.2 2007 2008 2009

2007 2008 2009

Fig 1.9 depicting Market to Book Value ratio for years 2007 2007-2009

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Market to Book Value

Seprods Market-to-Book Value Ratio, reflects the ratio of the current share price to the Book book value per share. It measures how much the company is worth at present, in comparison with the amount of capital invested by current and past shareholders into it. Seprod Market to Book Value ratio since 2007 as also fluctuated moving from 1.38 in 2007 to 1.56 in 2008 and then 1.33 in 2009.

Asset Management Ratios

Debtor Turnover
9.2 9 8.8 8.6 8.4 8.2 8 7.8 7.6 7.4 2007 2008 2009 2007 2008 2009

Fig 2.0 depicting Debtor Turnover Ratio for years 2007 2007-2009 Debtors Turnover ratio Seprods Debtors Turnover Ratio indicates the velocity of debt collection of the firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. The preferred formula to calculate this ratio is the net credit sales divided by the average debtors. The information for credit sales as however been excluded from the annual statements for Seprod so we opted to use the sales over the debtors assuming all sales were on credit. The sales management of debtors was more efficient in 2008 and 2009 than in 2007 as the debtors turnover ratio reflects that debtors were turnover 8 times in 2007 and remained a constant 9 times between 2008 and 2009.

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Days Sales Outstanding

2009 2007 2008 2008 2009 2007

10

20

30

40

50

60

Figure 2.1 depicting Day Sales Outstanding for year 2007 2007-2009 Day Sales Outstanding Ratio The Day Sales Outstanding ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash. As previously explained the Asset previously Management Ratios are derived from the assumption that all sales and purchases are on credit thus quantifying the figures used from the Annual Statement. The DSO for 2007 was 51days, 2008 35 days and 2009 38 days. Measuring the quality of debtors in 2007 to 2009 and 2009 we quality could assume that management was too liberal and inefficient in credit collection as he took almost 2 months for the debtors to be turned over. The subsequent years however efficiency increased once again attributed to tight control policies. ed

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Creditor Turnover
16 14 12 10 8 6 4 2 0 2007 2008 2009

2007 2008 2009

Fig 2.2 depicting Creditors Turnover for years 2007 2007-2009 Creditors Turnover Ratio Seprods Creditors Turnover Ratio indicates the velocity of credit payment of the firm. In simple words it indicates the number of t times average creditors (payables) are turned over during ) a year. Creditors Turnover trend also showed fluctuations where creditors turnover period was on an average 13 times. 2008 amassed for the highest total of 15 times, 2007 13 and 2009, 11 times.

Payment Period
35 30 25 20 15 10 5 0 2007 2008 2009 2007 2008 2009

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Fig 2.3 depicting Payment Period Ratio for years 2007 .3 2007-2009 Payment Period (Days) The creditors turnover ratio represents the number of days taken by the firm to pay its creditors with relation to inventory purchases In 2009 Seprod took 34 days to pay its creditors a purchases. longer time period than 2008 which was approximately 24 days coming from an average 29 days in 2007. This situation enhances the cr credit worthiness of the company and also shows that the business is taking the full advantage of credit facilities allowed by the creditors.

Stock Period
80 70 60 50 40 30 20 10 0 2007 2008 2009

2007 2008 2009

Fig 2.4 depicting Stock Period Turnover Ratio for year 2007 2007-2009 Stock Turnover Ratio Seprods Stock Turnover Ratio indicates the number of time the stock has been turned over during the review period and evaluates the efficiency with which a firm is able to manage eview its inventory. This ratio indicates whether investment in stock is within proper limit or not. The Stock Turnover Ratio for Seprod reflects that stock was turned over a constant 7 times between 2007 and 2008. However an increase in the average stock met with a decrease in cost of sales in 2009 reduced the ratio to 5 times. The reduction in the ratio in 2009 could imply over investment in inventories or stock accumulation in relation to total investment. This could possibly be relation contributed via the acquisition of subsidiaries.

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Stock Turnover
8 7 turnover times 6 5 4 3 2 1 0 2007 2008 year 2009 2009 2007 2008

Fig 2.5 depicting Stock Turnover Ratio for year 2007 2007-2009 Stock Period Ratio This ratio reflects how long stock has been held or how quickly stock has been turned over. In 2007 the stock period ratio was 41 days starting an upward trend moving to 54 days in 2008 and 74 days in 2009.

Debt Ratios

Times Interest earned Interest Times

earned, 89 times 90 80 70 60 50 40 30 20 10 0 2007 2008 2009

2007 2008 2009

Fig 2.6 depicting Times Interest Earned ratio for years 2007-2009

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Times Interest Earned Seprods TIE ratio shows an upward trend moving from 24 times in 2007 to 51 times in 2008 then a significant increase to 89 times in 2009. This was as a result of constant increases in the operating profit of the firm and also marginal decreases in total fixed interest payments. T The Times Interest Earned ratio is very important from us the lender's point of view. It indicates the number of times interest is covered by the profits available to pay interest charges. It is an index of the financial strength of Seprod. Seprods increas increasing TIE ratio assures the lenders a regular and periodical interest income.

Cash Flow Interest

80 70 60 50 40 30 20 10 0 2007 2008 2009 17 29 2007 2008 2009 68 times

Fig 2.7 depicting Cash Flow Interest ratio for years 2007 2007-2009 Cash Flow Interest This ratio indicates the cash actually available to meet interest charges. In 2007, for every 1$ of interest there was $17 worth of cash to cover that interest charge. This figure increased in 2008 to 29 and a further 134% change in 2009 up to 64. The upward trend of this ratio signified upward once again the massive increase in cash flow gained from operating activities.

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Operating Cash Flow To Sales

2009 Operating Cash Flow To Sales, Ratio 0.1:1 2007 2008 2007 2009

2008

0%

2%

4%

6% Ratio

8%

10%

12%

Fig 2.8 depicting Operating Cash Flow to Sales ratio for year 2007 2007-2009 Operating Cash Flow to Sales This ratio compares Seprods operating cash flow to its net sales or revenues, which gives investors and creditors an idea of the company's ability to turn sales into cash. Seprods Cash flow to Sales ratio reflected a slight consistency where in 2007, Cash Flow from Operating Activities represented 6% of Sales, in 2008 this figure declined to 3% which could be possibly ented attributed to an increase in credit sales/receivables or a drastic drive towards reducing the creditors figures. In 2009 however there was a 202% change between the operating cas flow cash figures from 2008, this change spiraled the ratio to a 10% standpoint in 2009. It would be worrisome to see Seprods sales grow without a parallel growth in operating cash flow and as evident sales has been increasing constantly Positive and negative changes the company's terms constantly. of sale and/or the collection experience of its accounts receivable has shown up in this indicator.

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Financial Statement Analysis 2007 2007-2009

Operating Cash Flow To Net Profit

Operating Cash Flow To Net Profit, 0.65:1 2007 2008 2008 2009 2007

2009

0%

20%

40%

60%

80%

Fig 2.9 depicting Operating Cash Flow to Net Profit ratio for year 2007 2007-2009 Operating Cash Flow to Net Profit To measure the amount of cash flow generated from reported profits the operating cash flow to net profit ratio is used. This ratio is significant as it attempts to derive cash figures separate from other related income items. In 2008 a decline in this ratio was a str strong indicator of possibly cash flow problems. The 2007 Cash Flow to net Profit ratio reported that 37% of Net Profit was attributable to Operating Cash Flow. This figure declined to marginally to 34% but realized an over 100% increase to 65%.

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Financial Statement Analysis 2007 2007-2009

Gearing
0.12 0.1 0.08 0.06 0.04 0.02 0 2007 2008 2009 2007 2008 2009 Gearing Ratio , 0.11:1

Fig 3.0 depicting level of Gearing for years 2007 2007-2009 Gearing Ratio In an attempt to measure the proportion of Seprods total capital that has been borrowed or to demonstrate the degree to which Seprods activities are funded by owner's funds versus creditor's funds we utilize a gearing ratio which is a measure of the firms financial leverage. Seprods gearing ratio showed a constant trend of 0.07:1 in the years 2007 and 2008. The figure had a marginal increase to .11:1 in 2009. To assess the effectiveness of Seprods gearing ratio we effectiveness make a comparison to 3 companies classified under the manufacturing section on the Jamaica Stock Exchange. Jamaica Broilers gearing ratio for 2009 was 1.2:1 and in 2008 1.32:1, Salada Foods showed an average gearing ratio .5:1 for the years 2008 and 2009, Trinidad Cement Limited gearing ratio was 1.1:1 for 2009, 1.3:1 for 2008. Using these three companies assessing the 2009 period the average gearing ratio for 2009 is .9:1. Therefore despite the slight increase in Seprods Gearing Ratio which wouldve indicated an increased level of risk, we can assume that Seprods is adopting a low gearing ratio with respects to a sample chosen from the manufacturing industry.

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Financial Statement Analysis 2007 2007-2009

Debt Ratios
2009 Debt Ratio, 0.24:1

2008

2007 0 0.05 0.1 2007 2008 0.15 2009 0.2 0.25

Fig 3.1 depicting Total Debt Ratio for years 2007 2007-2009 Total Debt Ratio To determine the proportion of debt Seprod has relative to their assets. This is another measure that gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt debt-load. Seprod reflects an average debt ratio over the review erage period 2007-2009 of 0.22:1 which implies that for every 1 asset it is financed by 0.22 worth of 2009 debt and 0.78 worth of equity. Making another comparison to the industry using the 3 previous companies as examples the manufacturing industry average debt ratio is 0.44:1 which therefore manufacturing means Seprod in comparison to other company has been successful in managing their debts.

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Financial Statement Analysis 2007 2007-2009

Debt to Equity
0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2007 2007 2008 2008 2009 2009 Debt to Equity, 0.24:1 Debt to Equity, 0.28:1 Debt to Equity, 0.32:1

Fig 3.2 depicting Debt to Equity for years 2007-2009 Total Debt to Equity The Debt to equity ratio indicates the proportionate claims of owners and the outsiders against the firms assets. The purpose is to get an idea of the cushion available to outsiders on the liquidation of the firm. Seprod boast in 2007 a debt to equity ratio of 0.24:1, 2008 .28:1 and 2009 .32:1. As is evident the ratio has increased over the past few years and can be assumable a situation in which management is attempting to incorporate more debt in the financing of the business. If the debt used to finance increased operations makes advances, the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders.

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Financial Statement Analysis 2007-2009

Liquidity Ratios

Current Ratio
4.3 4.2 4.1 4 3.9 3.8 3.7 3.6 3.5 2007 2008

Current Ratio, 3.78:1

2007 2008 2009

2009

Fig3.3 depicting Current Ratio for years 2007 2007-2009 Current Ratio This ratio is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firms financial stability. Seprod boast a relatively high current ratio which is an indication that the firm is liquid and has the ability to pay its current obligations in time and when they become due. In 2007 Seprods current ratio was 4.22:1 which posits that the companys current assets where almost 4 times the amount of current liabilities. This figure decreased marginally in the subsequent years to 3.88:1 in 2008 and 3.78:1 in 2009. A decrease in the current ratio represents that there couldve been a 1 deterioration in the liquidity position of the firm which was possible as the inventory figure in the current liabilities had a large percentage change over the review period.

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Financial Statement Analysis 2007 2007-2009

Quick ratio

2009 2007 2008 2008 2009 2007

0.5

1.5

2.5

Fig3.4 depicting Quick Ratio for years 2007 2007-2009 Acid Test Ratio In order to get a more precise test of the firms liquidity position the exclusion of inventories from the liquidity ratio which will result in the formulation of the acid test ratio must be considered. The acid test ratio still identified Seprod position as highly liquid as the ratio in 2007 was 2.90:1 which ultimately states liquid current assets were almost 3 times greater than current liabilities. This figure trended downwards in 2008 to 2.35:1 but increased marginally in to 2009 to 2.54:1. The significance of the exclusion of the inventories from the test of liquidity is evident as the acid test ratios were reduced drastically. Hence inventories represented a large portion of Seprods current asset. This if not monitored properly could run the firm into liquidity ent problems as the inventories can be considered the least liquid of the current assets.

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Financial Statement Analysis 2007 2007-2009

Operating Cash Flow to Current Liabilities

1.2 1 0.8 0.6 0.4 3 0.2 0 0 0.5 1 1.5 2 2.5 3 3.5 Operating Cash Flow to Current Liabilities, 0.96: 1 1 2

Fig3.5 depicting Operating Cash Flow to Current Liabilities Ratio for years 2007 2007-2009 Operating Cash Flow to Current Liabilities ting In order to measure how well current liabilities are being covered by the cash flow generated from a company's operations, the operating cash flow ratio provides an opportunity for us to investigate how has the cash flow generated from operating activities has been used in flow settling short term debt obligations. The operating cash flow ratio can gauge a company's liquidity in the short term. Using cash flow as opposed to income is sometimes a better indication of liquidity simply because, as we know, cash is how bills are normally paid off. y Seprods operating cash flow to current liabilities ratio in 2007 was 0.55:1 or for every $1 of short term debt the company has raised $0.55 of cash flow from operating activities. In 2008 the ratio reduced to 0.44:1 but then increased to 0.96:1 in 2009. This increase could be as a result of the increase in the firms operating profits in 2009 which also affected an increase in the net cash flow from operating activities.

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Financial Statement Analysis 2007 2007-2009

Common Size Analysis Income Statement and Balance Sheet

PERIOD Amount 000

Current Assets Inventories Biological Assets Receivables Available-for-sale-investments Current Portion of Long Term Receviable Taxation Recoverable Cash & Bank Total Current Assets Non-Current Assets Fixed Assets Intangible Assets Available-for-sale-investments Investment in Associates Long Term Recivables Retirement Benefits Assets Biological Assets Deferred Tax Assets Total Fixed Assets Total Assets Liabilities & Stockholders Equity Current Liabilities Payables Current Portion of Long Term Receviable Taxation Payable Bank Overdraft Total Current Liabilities 681,568 165,135 309,458 1,427,412 213,270 1,021,887 997,781 414,603 16,990 275,402 4,367,345

2009 Amount 000

2008 Amount 000

2007

2009

2008

2007

1,333,459 981,999 403,599 264,185 16,351 380,186 3,379,779

794,994 813,551 172,637 245,715 16,351 489,793 2,533,041

15.45 2.31 11.06 10.80 4.49 0.18 2.98 47.28

17.76 0.00 13.08 5.38 3.52 6.56 5.06 51.36

12.17 0.00 12.50 2.64 3.76 0.25 7.50 38.78

2,580,809 44,679 1,243,086 828,708 21,300 149,933 370 4,868,885 9,236,230

2,128,771 52,019 684,840 1,116,357 15,900 129,565 606 4,128,058 7,507,837

1,866,885 59,360 741,271 1,211,579 24,100 95,630 649 3,999,474 6,532,515

27.94 0.50 13.50 0.00 8.97 0.23 1.62 0.00 52.72 100.00

28.35 6.81 15.05 0.00 0.00 4.34 38.64 1.02 54.98 100.00

28.58 0.91 11.35 0.00 18.55 0.37 1.46 0.01 61.22 100.00

515,926 106,231 249,333 871,490

426,754 91,618 81,167 599,539

7.38 1.79 3.35 0.00 12.52

6.87 1.41 3.32 0.00 11.61

6.53 1.40 1.24 0.00 9.18

1,156,161

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Financial Statement Analysis 2007-2009

Equity Share Capital Capital Reserve Retained Earnings Non Controlling Interest Non-Current Liabilities Long Term Recivables Deferred Tax Assets Retirement Benefits Obligations Total Total Equity & Liabilities Income Statement Revenue Cost of Goods Sold Gross Profit Finance & Other Operating Income Selling Eexpenses Administrative Expense Other Operating Expense Operating Profit Finance Cost Negative Goodwill Share of Results of Associates Profit Before Taxation Taxation Net Profit 2,185,901 (699,964) 1,485,937.00 9,495,060 (6,744,696) 2,750,364 756,239 (241,335) (1,019,715) (34,771) 2,210,782 (24,881) 1,435,462 (497,259) 938,203.00 9,257,660 (7,158,157) 2,099,503 520,064 (243,547) (874,836) (36,926) 1,464,258 (28,796) 6,189,984 (4,752,099) 1,437,885 409,072 (196,770) (679,864) (37,318) 933,005 (38,596) 138,048 202,612 1,235,069 (222,060) 1,013,009.00 100.00 -71.03 28.97 7.96 -2.54 -10.74 -0.37 23.28 -0.26 0.00 0.00 0.23 -7.37 15.65 100.00 -77.32 22.68 5.62 -2.63 -9.45 -0.40 15.82 -0.31 0.00 0.00 0.00 -5.37 10.13 100.00 -76.77 23.23 6.61 -3.18 -10.98 -0.60 0.15 -0.62 2.23 3.27 19.95 -3.59 16.37 561,287 720,575 5,696,919 7,571 561,287 764,021 4,550,042 561,287 849,264 3,844,996 6.08 7.80 61.68 0.08 0.00 6.86 4.27 0.72 87.48 100.00 7.48 10.18 60.60 0.00 0.00 4.88 4.47 0.79 88.39 100.00 8.59 13.00 58.86 0.00 0.00 6.28 3.26 0.84 90.82 100.00

633,255 394,262 66,200 8,080,069 9,236,230

366,302 335,295 59,400 6,636,347 7,507,837

410,094 212,735 54,600 5,932,976 6,532,515

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Financial Statement Analysis 2007-2009

STENO COMMERCIAL BANK FINAL REPORT AND ASSESSMENT for SEPROD LTD.

Seprod Ltd 3 Felix Fox Boulevard Kingston Jamaica. W.I Telephone: (876) 922-1220 Fax: (876) 922-6948

Submitted by: Gerron Thomas, Novelette Johnson-Williams, Rose Bachan, Lamar Hemmings, AnnaKaye Smith, Monea Hibbert. EBBA3POM/FIN

Date of Submission- 22/7/2010

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Financial Statement Analysis 2007-2009

Assessment
Client Profile

Client needs to secure a US$5 million loan to be used as financing for retooling of one of its processing plant
Findings

After conducting a thorough assessment of the firms financial position via the use of financial ratios the following issues were highlighted as major determinants behind awarding the loan to Seprod Ltd. The companys current situation with regards to profitability is very strong and improving, as when compared to various competitors in the market the ratios used to analyze their profitability presented strong results. This as increased investor confidence in the firm and has been reflected in the market price of the firms share increasing significantly over the review period. The financial ratios however suggest that despite the firms recovery from a volatile financial crisis there needs to be an aggressive attempt to increase the Return on Total Assets as this will further provide opportunities for the firm to gain of investment made by the shareholders. Increasing the returns on assets will also contribute to the overall profitability of the firm which should decrease any uncertainty with regards to the firm not being able to honor its debt obligations. Of key interest to the commercial bank are the results of the debt ratios. These ratios are the deciding factors behind the firm securing the loan. The firm currently boasts a very solid position in terms of paying its interest charges from their operating profit. This solidifies the choice of awarding the loan pending consistent payment of outstanding interest payments. The company is also in a satisfactory position with regards available cash flow to satisfy interest payments. This is further strengthened by the fact that the firms operating profit has been trending upwards which previews increased net income in the subsequent operating years. The firms level of gearing is also of major significance as after assessment of industry leaders the firm posits one of the least risky positions with respects to total financing of their business. The management of firms asset was assessed and the results proved satisfactory The firm should however look at reducing the average collection period for debtors as the payment of debts could influence the operating cash flow which subsequently affects the firms ability to make interest payments from operating cash flows. 40 | P a g e
Financial Statement Analysis 2007-2009

Management as also being very efficient in maintain the debt ratios and as a major prerequisite of the Steno Commercial Bank a firm which holds a excellent position with regards to debt management is qualified for a loan. This criterion along with the situation of profitability, asset management and liquidity influences the decision of the firm to award a loan. Other interesting findings also were the firms increasing inventory figures which need immediate attention. An increasing inventory could reduce the liquidity of the firm and can threaten the opportunities for the firm to honor short term debt obligations

Action Plan
The loan will be awarded to Seprod over a 10 year period at 10% per annum. The firms treatment of this loan will determine future business positions.

______________________________ Signature

ZAg{t

____________________________ July 27, 2010 Date

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Financial Statement Analysis 2007-2009