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Accounting, Finance, SPSS
Statistics Project
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Financial Ratios Analysis of Al-Watania Poultry Company (Statistics Project Sample)


Financial Analysis of Al-Watania Poultry Company


Financial Analysis of Al-Watania Poultry Company
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Financial Analysis of Al-Watania Poultry Company
1 Introduction
Al-Watania Poultry Company produces 575,000 chicken and 1,000, 000 eggs per day, which is taken to the markets in Saudi Arabia and six other nations within the region (French & Narayanan, 2015). Its closest competitors include Fakieh Poultry Farms and Almarai Poultry Farms. This report is an analysis made on the company’s statement as an attempt to find out the status of its financial competence and present advisory support where applicable. The period considered for this analysis runs from the 2nd Quarter of 2013 to the 1st Quarter of 2014. The following postulations are also made. That, currency conversion ratio from EGP to SAR is 0.47932 representing the spot rate as of 28th November 2015 (The Money Converter, 2015). The ratio analysis is done as follows: at the end of the period, across the four Quarters, vertically against the sales figure at the end of the period, and in comparison to the poultry industry standards in Saudi Arabia.
2 Financial Ratios
Four significant rates that affect different areas are used. That is, liquidity ratios, profitability ratios, efficiency ratios, share valuation ratios and lastly, leveraging ratios.
* Liquidity Ratios
Liquidity analysis takes into consideration the current ratios, quick ratios, and cash ratios. These ratios are helpful in assessing the company’s preparedness in meeting the short-term obligations as and when they are called. Hence, these rates are most likely to be considered by Al-Watania's creditors and vendors who will be interested in its ability to meet their demands every time that they come knocking. In the 1st Quarter of 2014, the proportion of the current assets of the company when compared to the current liabilities was 0.3588 (Decipha, 2014). This ratio means that for every 1 SAR of the current liability owed by the company to suppliers, there was 0.36 worth of SAR available as security.
The situation gets even more adversarial when quick ratios are considered. That is, even after an adjustment is made to eliminate the less liquid aspects of the current assets, the situation remains below the satisfactory levels. In other words, when consideration is made to use in entirety the very liquid and readily convertible resources as the fallback assets against short-term liabilities, then the situation worsens. There will only be 34.6% of the current obligations available as assets that can meet the short-term risks (Decipha, 2014). Once again, this figure trails far behind the figure advised by Thacker, who insists that current ratio should be 1 (Thacker, 2015). Then, when consideration is made for cash only, the rate paints an even bleaker picture. There will only be 7.57% worth of resources available as security against the short-terms financial risks (Decipha, 2014). Trend-wise comparison shows that the performance and abilities of Al-Watania were much superior in the 2Q of 2013 with 50.5% of the current assets being retained against current liabilities (Decipha, 2014).
* Profitability Ratios
These measures assess At-Watania’s ability to create returns. The measures
Preferred in this instance are ROA, ROE, and the Net Profit Margin. Company stakeholders who are most likely to be interested in these figures are the existing investors and the prospective investors. An analysis as at the end of the period shows negative performance. The company posted negative profit returns of -4.44% on the business assets as at the end of the period (Decipha, 2014). Likewise, the company returns in the same period as gauged against equity investments balances were a negative of -44.18%. Net Profit Margins too were way below what is acceptable with -6.64% being registered after adjusting all the expenses and incomes for the period.
Further comparisons across the Quarters reveal a mixed trend. Return on company assets were negative in the 1st Quarter with -3.6172% being posted, followed by a further decrease to -3.7859% in the second Quarter, before improving to -2.8678% in 3rd Quarter, and finally dropping again to -4.4354% in the last Quarter (Decipha, 2014). The trend was the same with the ROE and Net Profit Margin. The Net Margin Ratio that pits net returns against the sales figures best captures vertical financial analysis (Decipha, 2014). Apparently, the -6.6395% performance in the fourth Quarter (1Q 2014) shows that the expenses outstripped the incomes in the same period. The negative performance was not limited to Al-watania alone as even the industry average’s ROA in the fourth Quarter was a negative of -4.2532% (Decipha, 2014). Nonetheless, these companies on average were much superior to Al-Watania as their postings, though negative represented relatively lower rates of losses.
* Efficiency Ratios
They assess the efficiency of a corporation. That is, they will test the ability of the Al-Watania's workforce team in creating efficient and effective internal mechanisms. In this case, asset turnover, inventory turnover, account receivable turnover, and accounts payable turnover are considered (Decipha, 2014). Company assets generated 0.6681 worth of sales for every single SAR invested in them in the final Quarter. Also, the company managed to turn over its inventory at least 22.6348 times (Decipha, 2014). This figure, when compared to the industry average of 18.4578, reveals a relatively superior performance. Then, the accounts receivable turnover was 5.0823 a figure that is almost at par with the sector average of 4.9871 (Decipha, 2014). On the other hand, the accounts payable turnover was 0.6819 a figure that was way below that of the industry of 0.7881.
Trend-wise, the rate of asset turnover increased from 0.6423 in the first Quarter to an all time higher figure of 0.6681 showing a trend of improved performance (Decipha, 2014). Nonetheless, the trend portrayed by the rate of stock turnover had dropped from an all-time high of *31.15 to an all-time low figure of *22.63 showing a comparatively decreased ability in disposing of inventory (Decipha, 2014). That is, despite maintaining superiority over industry average, this performance, in general, showed a trend of decreasing efficiency. In a similar way, the pattern portrayed by the rate of accounts payable showed a decreasing trend that can only be attributed to improving terms of credit with the suppliers of its commodities.
* Company’s Stock Price Evaluation
These ratios are most significant to investors. They help existing shareholders and potential investors to grasp with much ease the ability of the company concerning value addition per 1 SAR invested (Decipha, 2014). In this part, P/E ratios, P/S, and P/B ratios are given preference. In the fourth Quarter, the P/E ratio was a negative of -17.0216% representing indigent performance. Even so, this performance represents an increase from the two immediate prior Quarters except the first Quarter where the performance of P/E was highest at -15.5325% (Decipha, 2014).
On the other hand, P/B ratios portray a very positive outlook. With a P/B ratio of 7.5207 in the fourth Quarter, it can be said that the market had priced the company’s value 7.5207 times higher than what was its real worth as at the date of share issuance (Decipha, 2014). It is even more encouraging because the trend is increasing. Then, P/S or Price-per-share to sales-per-share ration shows a positive figure of 1.1302 in the fourth Quarter. It displays the valuation placed on each SAR of Al-Watania’s revenues by the market. When compared to the industry average of 1.2432, it is found out that the valuation of Al-Watania's sales is lower, or it is comparatively undervalued (Decipha, 2014).
* Leveraging Ratios
These ratios portray the level of riskiness in investing in a given company. Banks, investors and other classes of financial institutions mostly use them to gauge the abilities of a business in meeting long-term obligations. Debt to Employed Capital ratios in the fourth Quarter was 45.1221% meaning that for every 1 SAR employed as capital 0.451221 represented a loan or a debenture (Decipha, 2014). When compared to the industry average of 44.5676% it is seen that Al-Watania was relatively riskier than a majority of the companies within the poultry industry. That is, most of its counterparts have lesser amounts of debt as part of the business capital making them less risky (Decipha, 2014).
3 Explanations
* Liquidity ratios: in the fourth Quarter, the situation portrayed was adverse as it painted the picture of a company that was almost financially constrained. It lacked the necessary comfort and flexibility regarding the meeting its short-term financial obligations and exploiting upcoming short-term economic prospects. That is, while holding everything else constant, it can be said that the Al-Watania showed a precarious position and that could easily make it difficult for it to meet its supplier and creditor obligations should they all come calling at once. In accordance to Thacker (2015), a typical current ratio should be 1.5-a figure that is four times the ratio that was posted by Al-Watania. The quick ratios and cash ratios also portray poor performance.
Trend-wise assessment too shows a declining trend. That is, holding other factors steady; it presents a picture of a company that either has been increasing the proportion of its short-term debts against short-term assets or has been decreasing the percentage of its short –term assets across time. In other words, to this extent, liquidity risk has been increasing across the past four Quarters.
* Profitability ratios: The possible explanation for the weak performances can be that Al-Watania had invested heavil...
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