Introduction
Financial analysis enables investors to assess a firms performance over time and relative to other firms in the industry. By expressing the financial performance in standardized ratios, investors can determine the most profitable and secure firm to invest in irrespective of the differences in size of the comparable firms (Zorn et al., 2018). In addition, financial analysis enables investors to assess both the short-term and long-term potential performance of the firm, the size of agency risks, and to assess the market value of the firm. Investors use this information to determine whether to invest in the company, the investment horizon, and to estimate the potential returns expected from these investment. This project compared the financial performance of Agthia Group and Foodco Holding company over the last three financial years.
The financial analysis will employ five key ratios to evaluate the performance of the two firms. Firstly, the liquidity ratios will be used to determine the ability of these firms to finance their short term obligations. These include the current, quick, and cash ratio, and the net working capital to total assets (Osadchy et al., 2018). Secondly, the report will use the profitability ratios to determine the management’s ability to generate returns from the total assets. The profitability ratios include gross, operating and net margins. In addition, the profitability ratios also include the ratio of net income to total assets and owners’ funds. Thirdly, the report will assess the asset utilization ratios including the asset turnover, inventory days, payable days, receivable days, and cash conversion cycle. These will indicate the management’s effectiveness in utilizing assets to generate sales and cash flows for the company. Fourthly, the report will evaluate the leverage ratios that include the debt to equity, debt to assets, and interest coverage ratios. These ratios assess the firm’s capital structure, its ability to finance the annual interest obligations from the operating capital, and the firm’s exposure to agency risks. Lastly, the report will calculate the market-related ratios that assess the performance of the share in the stock market. These ratios will be assessed based on their magnitude, trend, and comparison with the direct competitors.
Company Overview
Agthia Group
Agthia was founded in 1978 by royal decree (Agthia, 2021). The company’s main mission was to boost food security in the UAE. Since then, the company expanded its reach to more than 30 countries in the region and beyond. It is now listed in the Abu Dhabi Securities Exchange (ADX) under the ticker the AGTHIA (Agthia, 2021). The company key markets include UAE, Saudà Arabia, Kuwait, Oman, Egypt, and Turkey, and employes more than 5,900 people.
In April 2011, the company announced plans to become the market leader in the Middle East, North Africa, and Pakistan (MENAP) region in the food and beverage market by year 2025 (Agthia, 2021). The plan was pegged on developing new products, enhancing efficiency, and boosting capacitt to reach a larger market. The management aims to achieve growth by updating priorities markets, expanding into value-added categories, and increasing profit margin. These developments will ensure the creation of the largest income in the period.
Agthia plans to increase cost savings by AED 200 million annually by harnessing synergies and simplifying its business processes. In addition, the company will improve trade and working capital efficiency, optimize operations, adopt lean production and procurement administration, and enhance efficiency in supply chain management (Agthia, 2021). In the management intends to develop strategic alliances for distribution and marketing to reach wider markets at low average cost. Consequently, long-term stockholders stand to gain from expected creation of sustainable competitive advantage.
Foodco Holding
Foodco was established by royal decree in 1979 as Abu DhabiNational Foodstuff Company. Since its founding, the company has grown to become one of the largest food products conglomerate in the UAE (Foodco Holding PJSC, 2020). Foodco’s diversification strategy has seen the company expand to other industries including retail, packaging, catering, restaurant, and related sectors supported by a committed team composed of 500 workers. The group now includes four independent subsidiaries including FoodCo LLC, Oasis, Sense Gourmet, and Dana (Foodco, 2021). The company took advantage of its strategic location, access to large and growing markets, and strong regulatory framework to become one of the most valuable firms in the region. Foodco Holding’s Board of Directors oversees the management of the whole group, determines the acquisitions and divestirtures needed to achive competitive advantage, and performs the due diligence functions before investing in a firm. Foodco board aims at promoting the best corporate governance practice to all firms under the framework of Foodco Holding. The goal is to offer support for their main objectives to all Foodco Holding subsidies and ensure that they are adequately resourced and effectively administered.
Financial Analysis
Financial analysis examines the financial performance and ratios based on the financial statements. These financial statements include the income statement and the balance sheet. On the one hand, the income statement lists the revenues and expenses incurred in a fiscal period. Any excess of revenue over expenses is indicated as a net income. On the other hand, the balance sheet lists the assets, liabilities, and owners funds used to finance the business. It classifies the assets based on their liquidity, and liabilities based on the duration expected before they fall due. Lastly, the balances reflected in these two financial statements are used to calculate ratios for detailed assessment of the firms performance.
Liquidity Ratios
Liquidity ratios indicate the proportion of the most liquid assets relative to the short term liabilities. Table 1 shows the liquidity ratios for the two companies.
Table 1. Liquidity Ratios
Agthia maintained a high current ratio over the last three years. The high ratio indicated that the company could pay for maturing obligations using its current assets. However, a significant proportiton of its current assets comprised of inventory, which could not be liquidated easily within a short notice. Consequently, the firm’s quick ratio indicates that the total current liabilities exceeded the current assets when inventory is excluded. Nevertheless, the quick ratio remained high during the period, and was sufficient to maintain the firm’s liquidity position at a desirable level. In addition, the cash ratio indicated that Agathia had sufficient cash balances to pay for its maturing obligations. The company’s total working capital comprised of more than a quarter of its total assets. Consequently, the company maintained sufficient working capital to finance its operating and financing activities in the short term.
FoodCo had a lower current ratio compared to Agthia. Its low current ratio reflected its maintenance of low inventory levels relative to the total current assets. As a result, the current and quick ratios did not differ by a significant margin over the last three years. However, the total cash balance was very low relative to the current liabilities, thereby presenting significant risk of missing short-term debt repayment obligations. Besides, the company’s net working capital was a small percentage of the total assets. Therefore, Foodco was more exposed to short-term liquidity risks compared to Agthia, its closest competitor.
The optimal level of liquidity is not fixed. However, firms operating in the food retail and related industries often have a high current and quick ratio due to maintenance of high inventory levels, large cash balances, and receivables. Nonetheless, both Agthia and Foodco faced no significant risk of liquidity, as the companies can raise additional short-term financing from the financial markets.
The capacity of a corporation to use its current assets to repay its short-term obligations is calculated using the short-term solvency ratios such as the current asset ratio while using the most liquid assets, without selling its stocks or obtaining further funding, and the liquidity ratio is calculated only by using cash and equivalents. With a current ratio of less than one, the firm cannot meet all its short-term commitments with the resources to deal with, whereas the ratio equals or exceeds one is regarded as typical and acceptable. As regards quick ratio and cash, closer than one and higher are deemed desirable.
The current liquidity ratio evaluates the capacity of a firm to pay short-term bonds or debt within a year. It shows analysts and investors how a business may improve its balance sheet of current assets to meet the debt and other due requirements. The current ratio is usually acceptable in accordance with the specific industry or somewhat higher. A lower current ratio than the average of the industry may show a higher likelihood of difficulty or default. Similarly, when a firm has a very high current relationship compared to its peer groups, management is not permitted to efficiently use its assets. This current ratio is dubbed “current,” as it includes all current assets and liabilities, unlike other liquidity measures. Sometimes the current ratio is known as the capital ratio.
The quick ratio is an indication of the short-term liquidity situation of a firm and assesses the capacity of a company with its liquid assets to fulfill its short-run commitments. As it demonstrates the capacity of the firm to utilize its near-currency assets immediately to satisfy its current liabilities, its acid test ratio is also called. An ‘acid test’ is an expression of slang for a fast test to provide immediate findings.
Current assets, minus current liabilities, are defined as working capital. Current indicates that in one year, the asset is converted to cash or is utilized. Liability will also be discharged during the year. Investment analysts commonly use the computation of working capital to assess the performance of the management and operations of a firm. Working capital can assist investment analysts in measuring and comparing operating performance among companies. A firm with a positive measure of working capital can pay off short-term obligations resources. That’s an excellent idea to ponder.
Similarly, a firm with low capital cannot satisfy current assets based on short-term obligations. The networking capital proportion is a proportion of total assets. Current assets minus current liabilities are calculated divided by total assets. Then this amount is based on the formula to reach the final ratio. A high ratio is seen as a strong signal, and a low ratio is seen as a sign of weakness.
The cash factor is a ratio of the liquidity of a firm, especially the cash-to-cash balance of the company and its current obligations. The cash ratio The statistic assesses the capacity of a firm, such as marketable securities, to repay its longstanding debt using cash or near-cash resources. This information is useful when creditors assess how much money they would be prepared to loan to a firm if any. In the worst-case situation, the cash ratio is almost like a signal that the company’s worth is going to leave the business. It informs creditors and experts about the worth of total current assets that can quickly become cash and what proportion of current obligations the firm might cover.
Long Term Solvency or Financial Leverage Ratios
The leverage ratios indicate the firm’s capital structure. Table 2 shows the various leverage ratios for the two firms.
Table 2:Long-term Solvency Ratios
The leverage ratios indicate the various proportions that comprise the firm’s long-term capital. The ratios show the proportion of debt and equity in the capital structure. From Table 2, Agthia’s debt ratio increased over the last three years owing to the issuance of additional bonds. However, most of the firm’s debt comprised of current liabilities as indicated by the ratio of long-term debt to capital. Notably, long-term debt comprised of 9% of the total assets, which was very low leverage. Even so, the times interest earned ratio remained low due to the high finance charges relative to the firm’s operating income. Nevertheless, Agthia faced minimal agency risks based on its low proportion of debt to equity, which increased slightly to 0.40 in the year 2020.
Foodco’s debt to total assets ratio increased over the last two years. In addition, its proportion of long-term debt to total assets increased, which indicated the firm’s increased reliance on borrowed funds to finance its assets. Despite this increase in borrowed funds, the company’s interest coverage ratio improved over the last three years, which reflected its enhanced ability to pay for finance costs from its operating income. However, Foodco’s debt to equity ratio increased to more than 1.33. Therefore, the value of debt exceeded the shareholders funds used to finance the firm’s assets. Given the firm’s record of operating losses, a high proportion of debt relative to equity raises the company’s agency risks. Therefore, investors at Foodco face higher agency risks compared to Agthia.
The leverage and the accompanying arrangements of a firm are measured by long-term solvency, such as the overall debt ratio. In particular, the total indebtedness of a company against its total assets, the long-term equity debt ratio as the measure of how much the assets are funded using its equities, the periods of interest earned as a measure of a firm’s ability to pay long-term indebtedness interest on long term debts from the year’s earnings before interest and tax (EBIT), and the cash coverage rate as the earnings before interest, tax, depreciation, and amortization (EBITDA). More debt is funded, more interest earnings and the cash coverage ratios are deemed desired; thus, the more extended the overall debt ratios and the longer the debt ratio, the greater the financial risk.
The Asset Management or Turnover Ratios
Asset turnover ratio indicates the management’s prowess in utilizing company assets to generate sales. Table 3 shows the efficiency ratios for the last three years.
Table 3: Asset Management Ratios
Agthia maintained high asset turnover over the last three years. The inventory turnover ratio and the inventory day sales are an indication of how often a firm can sell its stock throughout a year or how else a business may take days to sell its stock in an entire round (Šimonová et al., 2019). A lower ratio might imply weak sales and excess inventory, which vary between companies because of the nature of the inventory, and the policy of inventory management has a significant influence on the ratios.
Furthermore, the turnover of receipts and the days of sales in receivables is an indication of how often, in credit sales or other ways, a firm was able to recover all its obligations from debtors. A low ratio implies that the company’s debt collection from the consumers is inefficient or its sales are strongly reliant on credit, whereas a more significant rate is preferable. Moreover, a measure of the efficiencies in using their fixed assets and total assets in generating sales is the turnover for fixed assets and the turnover of all assets.
Profitability Ratios
Profitability ratios indicate the management’s ability to generate profit, increase revenue, and manage expenses. Table 4 shows the profitability ratios for the last three years.
Table 4: Profitability Ratios
The ability of a company to generate profit from business and convert sales into distributable profits is analyzed using different profitability ratios such as net profit margin. The percentage of sales revenue transformed into net income after all expenditures, the income on assets, net income percentage, and the return on equity; it is ideal for increasing all these ratios.
Market Value Measures
Market value measures evaluate the firm’s stock price relative to its earnings and dividends. Table 4 shows the market measures
Agthia maintained a high dividend payout ratio over the last three years. This high payour strategy signaled to investors that the management was confident of strong performance over the forthcoming years. As a result, investors paid more for a unit of earnings in the company as indicated by the price to earnings ratio. In the last year, investors paid 46.14 AED for each unit of earnings in the company, compared to 8.22 in 2018 (Foodco Holding PJSC, 2018). In contrast, Foodco retained its entire profit in 2020, resulting in a 0% dividend payout. As a result, investors viewed the company has having limited potential for growth, thereby reducing its price to earnings ratio over the last three years. In 2020, the investors paid only 7.09 AED for each unit of earnings in the company.
The company’s stock market value measurements are analyzed with the value for money ratio. The income by share is a measure of a firm’s net earnings divided by the shareholder number. It shows the worth of a firm for its shareholders and serves as a profitability indicator for a company, and thus influences the market value of its shares. For both new and present investors, higher EPS is desirable. The price-income ratio, on the other hand, is a measure of the stock price of a firm as regards its per-share income. It is one of the most commonly utilized methods in stock research used to determine a company’s stock value by investors and analysts. It also shows if the inventory price of a firm is overpriced or undervalued.
Agthia Financial Summary
Agthia Group PJSC’s sales climbed 21% to AED1.32B for the six months ending 30 June 2021. AED67.9M increased net revenue by 61 percent. Revenues indicate an increase in the Food category between AED172.3M and AED465M. Other net income (expansion) / income increased to AED22.9M (income) from AED1.6M, financial expenditure decreased to AED7.7M by 5% (expense). AED0.08 totaled dividends per share.
Foodco Holding Financial Summary
FoodcoHolding PJSC sales grew to AED84.2M from AED36.6M for six months ending on 30 June 2021. AED39.1M was net income against AED36.8M loss. Revenues indicate an increase of the freight forwarding and warehousing sector from AED717K to AED2M, which remains unchanged at AED17.5M for investment properties. Net revenues reflect a 52% reduction in financing costs to AED6.5M (expense).
Conclusion
A number of elements influence investor choices, including the aim of achieving short- to medium- and long-term targets, risk appetites, and options for investors. The investment objective has to be established in order to ensure the highest return and the attainment of investment objectives in the best feasible way. After identifying the goal and aim of making an investment, investors seek opportunities to research and compare many options and finalize their most appropriate and promising option.
Financial analyses of different liquidity, efficiency, and financial indicators help nearly anyone, as they cover all the essential components of a financial state and the performance of a firm that is looking for opportunities for future investors. Economic reporting evaluates economic trends, sets financial policies, creates long-term business strategies, and identifies investment ideas or companies. An analyst analyzes a firm’s financial records carefully – its income statement, balance sheet, and cash flow report. Investors and other decision-making considerations can use this information.
Agthia began in 1978, when His Highness, the late founder of the United African States, Sheik Zayed bin Sultan Al Nahyan, laid the foundations of the Agthia Group (Agthia, 2021). Since then, his task in the UAE has become an incredible journey through eight categories to increase food security and sell products to more than 30 countries. Foodco was created in 2006 to address the changing diversity of the company which was formed in 1979 in Abu Dhabi by His Altesse Sheik Khalifa bin Zayed Al Nahyan, President of the United Arab Emirates (Foodco), and which currently has the banner of Abu-Dhabi National Foodstuff Company (Fooodco) (Foodco Holding, 2021). The Foodco business is continually developing; excellence in expansion and development is backed by a devoted team of about 500 people, covering the food, retail, packaging, food, catering, and other areas.
A firm is able to redeem its short-term liabilities by using its current asset to repay its short-term solvency ratios, such as the current asset ratio, without selling its inventories or receiving any further financing. In contrast, cash and equivalents alone are used to determine the liquidity ratio. With a current ratio of less than one, the company cannot fulfill the resources to handle all its short-term undertakings, although the ratio is often equal to or greater than one. With relation to quick and cash, it is regarded ideal to be closer to one and higher.
The proportional size of a balance between finances and accounting is established by two data points, depending on the financial records of a firm. A large number of standard ratios are often used for accounting and analyze the general financial condition of a firm or organization. Several financial performance factors categorized the financial ratios. In terms of current, fast, and networking capital ratio, Agthia has strong liquidity. However, the cash relationship is different from Foodco Holding. In the light of the annual trends, Agthia’s liquidity ratio is floating and might suggest a management strategy change as an investment in long-term advantages is stepping up. On the other side, Foodco Holding has had an under-in 2018 and 2020 roller coaster path over the years. This is a result of a single event or signals a rapid shift in strategy; a gradual rise in liquidity is a favorable indicator of its financial health.
For the six months ending 30 June 2021, revenues of Agthia Group PJSC increased to AED1.32B by 21 percent. Net revenues grew by 61% for AED67.9M. Revenue shows that between AED172.3M and AED465M, the food category increases. Other net revenue (enhancement)/revenue grew by AED1.6M to AED22.9M (revenue), while financial expenditure dropped by 5% to AED7.7M (expense). Dividends for each share totaled AED0.08.
For six months ended 30 June 1921, the sales of FoodcoHolding PJSC increased to AED84.2M from AED36.6M. The net income for AED39.1M was lost for AED36.8M. Revenue is indicative of an increase in the transport and storage of freight between AED717K and AED2M, which stays stable for investment properties at AED17.5M. The 52% reduction in AED6.5M finance expenses is reflected in net sales (expense).
Studying and comparing the organization’s data, Argthia attracts much more attention, explaining and telling all my plans for the future. Their website provides a straightforward and user-friendly interface that clarifies the organization’s big intentions, while Foodco Holding has an old and straightforward website that, although functional, rejects the user and future investor when studying the materials. Considering all the ratios discussed above and the tables created in the appendix, Argthia appears to be a more favorable investment destination because it has much higher liquidity. Most of its assets are funded by its funds and have more favorable management ratios. Therefore, it is recommended to potential investors for future consideration when investing in the real estate sector.
References
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Foodco Holding. (2021). Welcome to foodco holding. Foodco-Uae.Com. Web.
Foodco Holding PJSC. (2020). Report of the board of directors and consolidated financial statements. Foodco-Uae.Com. Web.
Foodco Holding PJSC. (2018). Consolidated financial statements. Foodco-Uae.Com. Web.
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