Horizontal Common size analysis

Financial statement analysis of “Rakhat” JSC

Industry: confectionery manufacturing

About Rakhat

Rakhat JSC is one of the largest manufacturers of confectioneries in the Kazakhstan with its history of 70 years (since 1942).

About 35000 people work at the «Rakhat» JSC. Production facilities are located on the two sites- in the Almaty and in the Shymkent cities.

As of today the assortment of «Rakhat» JSC includes more than 250 items of various confectioneries. Currently products of «Rakhat» are presented not only on the local market, but quite beyond of the borders of the Kazakhstan: in the territories of Russia, Uzbekistan, Turkmenistan, Tajikistan, Kyrgyzstan, Germany, China and Afghanistan as well.

In 2013 LOTTE Confectionery the leading confectionery company in Soth Korea acquired a majority shares of «Rakhat» JSC.

In this work the analysis was made using 2 methods:

· Horizontal common-size analysis: it compares each amount with a base amount for a selected base year. We took 2012 as a base year.

· Ratio analysis: we have calculated ratios for: liquidity, borrowing capacity, profitability ratios and special group of ratios that are interesting for investors.

As we do not have confectionery industry average ratios for Kazakhstan, we have decided to compare the ratios found in ratio analysis with the closest competitor in this industry. JSC «Bayan Sulu» was identified as the most suitable to compare with. Even though this company is smaller in size, as it operates in the same industry and has vast history and brand name as well, we think the comparison will be acceptable.

Horizontal Common size analysis

This horizontal analysis allows us to track changes in financial management over time to determine whether the corporation’s financial management is getting better or worse, as well as where the changes are being experienced.

Income statement

The horizontal trend analysis shows that there is a general trend towards increase in many items. However, the main concern is on Net income, which is decreased in 3 years.

The main reason seems to be a Sales figure. We see that the sales and COGS increased in both years, however in 2013 the Sale only slightly increased (by 6%), moreover COGS increased (by 9%) more than sales. It led to decreased number of gross profit in 2013. The sale figure showed better results in 2014, as its gross profit increased.

General&Administrative and distribution costs have risen in both years. Other income of the company increased dramatically (by 73%) in 2013 and slightly (by 21%) in 2014. The increasing cost figures also had its impact on decreasing net income, again because of small increase in sales in respect to cost.

Operating income of “Rakhat” company has dropped drastically (by 22%) in 2013 and has grown slightly (by 15%) in 2014.

From the analysis we can notice that the financial expenses decreased sharply in both years. On the other hand there is a substantial increase in financial income figure (by 182% in2013 and by 823% in 2014), because of increase in interest income on deposit accounts.

The income before tax has decreased to around 22% in 2012, and increased only for 5% in 2014.

Overall, as a result of all above-mentioned items changes, net income figure showed worse results in comparison with base year 2012.

As it is a manufacturing firm the cost of sales often represents the major expense in the income statement. Therefore, the decreased Net income may be the result of the weak sales, and bigger increases in COGS and other cost items.

The empty parts cannot be found as there are negative results or no results.

Balance sheet

The horizontal trend analysis shows us that all the non-current assets items have increased, except for interest-free loans to employees, which decreased by 50% in 2014. Company provides interest-free loans to its employees, however they have decided to decrease those loans in 2014. There is also substantial increase in prepayments paid on long-term assets. No information related to the reasons of increase about prepayments paid on long-term assets was found in the annual report.

The total currents assets have risen in 2 years. The inventory account has slightly increased, whereas accounts receivables, advance payment of income tax and prepayments have dropped dramatically. The cash and cash equivalents have also rise by around 150-160%, the main cause is increased amount of cash on current bank accounts.

The analysis indicates that authorized and reserve capital have not been changed during 3 years was the same at amount of 900000000 KZT and 180000000 KZT respectively. The retained earnings increased in 2 years. Thus, total equity has risen by 8% in 2013 and by 20% in 2014.

Even though deferred tax liabilities decreased by 20%, long term liabilities have slightly increased, because of the presence of new account named employee benefit obligations, which are presented as the payments for some employees for their labor contributions for company, paid only after some minimum employment period.

Accounts payable account increase sharply in 2013 by 200% and by 100% in 2014. The advances received and other liabilities also have increased in comparison with base year. As a result we see that short-term liabilities have risen in total by 42% in 2013 and 39% in 2014.

The empty parts cannot be found, as there are negative results or no results.

The total liabilities and equity amount have increased as a result of above-mentioned changes.

All in all, the horizontal trend analysis showed us that the base year 2012 was more successful for the company compared to future 2 years.

The main negative impact on profitability in the intervening period had low rates of increase in sales, probably including the background of the development of competition.

Low rates of increase in sales accompanied by a substantial increase in production costs and an increase in distribution costs. Rising prices for cocoa beans, sugar, nuts and other ingredients are not produced either in Kazakhstan or in the countries of the Customs Union- a key for the confectionery industry raw materials.

We can assume that these costs are" Rakhat "expanded on the background of the positive processes of modernization of management and distribution, initiated by the new shareholders of the company focused on business expansion.

In this case, creating a base for further growth and increase market share can have a positive impact on the results of future periods

Ratio analysis

Here, we will compare the financial ratios of two companies: JSC “Rakhat” and JSC “Bayan Sulu”.

JSC “Bayan Sulu” is one of the largest confectionery production companies of the Republic of Kazakhstan, located in city Kostanai. Factory is founded in December, 1974 and pleases buyers with the most delisious and high quality production more than forty years.

Large, constantly extending line of high-quality production of JSC "Bayan Sulu” offers confectionery for all tastes. Company produces about 200 product names.

The ratios were divided into 4 groups.

Liquidity ratios

Rakhat

Bayan Sulu

The ratios indicating the liquidity through accounts receivables are misleading. Because, there is no information about cash and credit sales in the Rakhat company’s annual report, as well as in Bayan Sulu company’s annual report. Their accounts receivable amount is substantially less than in Bayan Sulu, as we use total sales in calculations the numbers are not telling us the true results and it is hard to compare them.

Current ratio

The current ratio is mainly used to give an idea of the company's ability to pay back its current liabilities with its current assets. The higher the current ratio, the more capable the company is of paying its obligations, as it has a larger proportion of asset value relative to the value of its liabilities. We see that Rakhat has higher ratio than Bayan Sulu, however it seems to be mainly because of Account receivables ratios, which we could not find correctly. Because inventory ratios are better for Bayan Sulu.

Inventory turnover

Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over a period

We may see that Bayan Sulu has slightly higher turnover than Rakhat. Overall, as we have only two companies to compare, we can say that this is close to average figure for both.

Date: 2015-12-24; view: 877