FANMILK GHANA LIMITED

BUSINESS FINANCE 1
GROUP ASSIGNMENT

REPORT ON THE PERFORMANCE OF FANMILK GHANA

LIMITED FOR THE PERIOD 2005 TO 2008

BY
SEGLAH BRIGHT SENANU 10242012
ANTWI FRANCIS 10245280
LUKUTOR REDEEMER 10151099
DUGBARTEY DORNU STEPHEN 10252714
GODWIN M. ALIFO 10246078

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CONTENTS
INTRODUCTION 2

ANALYSIS

 PROFITABILITY RATIOS 3

 LIQUIDITY RATIOS 5

 MANAGEMENT ACTIVITY RATIOS 7

 DEBT MANAGEMENT RATIOS 9

 MARKET VALUE RATIOS 11

APPENDIX 12

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INTRODUCTION
FanMilk Ghana limited is one of the companies in the food processing industry
that produces refrigerated ice cream and a fruit drink. It stands to meets its
customers expectation, gives value for its investors and shareholders as well as
the requirements of other stakeholders.

Fanmilk Ghana limited has been performing very well in the buying and selling
market as well as the stock market over the years.

This report seeks to give a fair view about fanmilk’s performance over the period
from 2005 to 2008 based on its financial statements.

© Copyright reserved October, 2009

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ANALYSIS

TABLE 1.0 PROFITABILITY RATIOS

  2005(%) 2006(%) 2007(%) 2008(%)

GPM 45.7 47.4 46.64 48.04
NPM 11.27 10.12 10.6 12.82
ROA 22.3 17.9 18.37 21.47
ROCE 38.6 27.52 26.91 31.75
ROE 40.84 29.8 28.1 32.9
GMU 84.15 90.24 91.48 92.46
BEP 30.76 24.35 25.33 28.57
Details of the above ratios can be found under appendix

100
90
80
70 GPM
60 NPM
ROA
50
ROCE
40 ROE
30 GMU
BEP
20
10
0
2005(%) 2006(%) 2007(%) 2008(%)

Fig 1.0 The above diagram shows the profitability ratios from 2005 to 2008

WHERE:

GPM GROSS PROFIT MARGIN

NPM NET PROFIT MARGIN

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ROA RETURN ON ASSETS

ROCE RETURN ON CAPITAL EMPLOYED

ROE RETURN ON EQUITY

GMU GROSS MARK UP

BEP BASIC EARNING POWER

The company experiences ups and downs in the entire performance of its activities over the
years. There has been a tremendous increase in both sales revenue and cost of sales. These
increases may be due to increase in selling prices, sales mix, production cost or wastage of
materials. The GPM increased from 45.7% in 2005 to 48.04% in 2008, the proportionate
increase in total revenue does not much with that of total assets employed.

GPM increased to 47.4 in 2006 and by a margin in 2007. This same period experiences a
simultaneous decrease in the NPM to 10.6% in 2007. The decrease was caused by an increase in
the company’s operating expenses without a proportionate increase in the sales revenue.

In 2007 sales revenue increased but this does not much with that of cost of sales hence the
decrease in the GPM to 46.64%. This may be due to insufficient sales outlets to increase market
share, varying GPM per unit of products in the company’s product mix, or high cost of
production.

ROA and BEP suffered a dramatic decrease in 2006. ROA decreased from 22.3% to 17.9% whiles
BEP also decreased from 30.16% to 24.35%. Even though the company suffered this decrease,
the tax and interest obligation remains fairly constant throughout the whole period. The
decrease in both ratios signifies that the return for year 2006 does not meet the tremendous
increased investment in total assets.

Equity shareholders may not be happy with the performance of the company even though in
the short run the company is making higher profit margins. This is because a decrease in the
company’s return on equity will discourage them to increase their investment. This could be
seen in year 2006; ROE decreased drastically from 40.84% to 29. 8%. This decrease was due to a
significant increase in fixed assets without an immediate increase in sales revenue in 2006. ROE
increased in 2007 from 28.1% to 32.9% in 2008 as a result of the increase in return on assets.

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TABLE 2.0 LIQUIDITY RATIOS

  2005 2006 2007 2008
CuR 0.93 1.17 3.15 3.09
QR 0.19 0.53 2.42 2.45
CaR 0.12 0.4 0.68 0.83
Details of the above ratios can be found under appendix

WHERE:

CuR CURRENT RATIO

QR QUICK RATIO

CaR CASH RATIO

3.5

2.5

2
CuR
QR
1.5
CaR

0.5

0
2005 2006 2007 2008

Fig 2.0 The above diagram shows the liquidity ratios from 2005 to 2008

Current Ratio: The 2005 level of 0.93 times is a bad position to be in from a creditor standpoint.
This means that even in the rare situation of FanMilk being able to convert all its current assets
into cash it still cannot fully honour its short term obligations. There was however a marginal
improvement in this ratio in year 2006 and a sharp rise in 2007. This increase can be attributed

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to the massive investment in assets which translated into an increase in sales and consequently
increased the debtors (asset) figure.

Quick Ratio/Acid Test Ratio: The quick ratio is a more important test of a firm’s ability to
honour short term liabilities without including the value of unsold stock. This reasoning is
critical because the entire stock in trade may not be sold anyway, as well it may lose value and
since that cannot be accessed it is good to eliminate completely.

FanMilk’s 2005 stand of 0.19 is a terrible financial position for a firm to be, this however grew
at relatively the same rate with the Current Ratio both in 2006 and 2007 through to 2008. This
also means FanMilk kept a stable proportion of inventory.

Cash Ratio: The Cash Ratio which is indicative of FanMilk ability to meet short term obligation
with cash was initially too weak. This is dangerous for creditors because other assets are not so
easy to convert into cash for payments. Cash being able to cater for only 12% of short term
obligations (i.e. 2005) is not a good sign for creditors.

From the ratios, although the cash ratio increased over the years, the firm still lacks enough
cash required to meet its current liabilities. With this trend creditors might not be willing to give
more credit facilities to the firm.

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TABLE 3.0 MANAGEMENT ACTIVITY RATIOS

  2005 2006 2007 2008
IT 3.46 4.17 3.88 4.2
IHP 105.49 87.53 94.07 86.9
RTR 25.85 25.78 39.76 75.26
PTR 2.94 2.9 3.25 3.64
ACP 14.12 14.16 9.18 4.85
APP 124.15 125.86 112.31 100.27
TAT 1.68 1.73 1.77 1.98
Details of the above ratios can be found under appendix

140

120

100
IT
IHP
80
RTR
PTR
60
ACP
APP
40 TAT

20

0
2005 2006 2007 2008
Fig. 3.0 The diagram below shows the trend of activity ratios from 2005 to 2008

WHERE

IT Inventory Turnover
IHP Inventory Holding Period
RTR Receivables Turnover Ratio
PTR Payables Turnover Ratio

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ACP Average Collection Period

APP Average Payables Period
TAT Total Assets Turnover

Analysis:
The Inventory Turnover of FanMilk has not been encouraging over the four years even though
there were slight increases. Inventory Turnover ratio increased from 3.46 in 2005 to 4.17 in
2006, which indicates that the frequency of restocking sold out stock has increased. Also, the
Inventory Holding Period fell drastically from 105.9 days in 2005 to 87.53 days in 2006 showing
that FanMilk has reduced the period of holding stock which is an indirect relationship with the
Inventory Turnover. In subsequent years, the Inventory Turnover fell in 2007 to 3.88 but rose
again to 4.2 while the Inventory Holding Period rose to 94.07 in 2007 but later fell to 86.9 in
2008. There has been an average decrease in the Inventory holding Period of the company
throughout the period but this decrease in not enough to meet industrial average.

The Receivable Turnover Ratio which shows how quickly the firm can collect from debtors
decreased drastically from 75.26times in 2005 to 39.76times in 2006 whiles the Average
Collection Period also slightly increases from 4.85 days in 2005 to 9.18 days in 2006 which
shows that the time interval within which FanMilk receives payment from debtors has
increased. Apparently, it took the firm extra 4.33 days to collect debt in 2006 than in 2005. In
2006 the Receivable Turnover Ratio decreased from 39.76times in 2006 to 25.85times in 2008
and an Average Collection Period from 9.18days in 2006 to 14.12days in 2008. This is a bad sign
indicating that the company’s debtors are facing financial trouble and must change their credit
policy.

The payables turnover ratio over the years although not signifying any good reputation for the
company keeps reducing; it reduced from 3.64times in 2005 to 3.25times in 2006 through to
2.94times in 2008. This led to an increase in average payables period throughout the period
from 11.27days in 2005 to 124.15days in 2008. This increase creates a very bad image for the
company, it means the company is not that financially sound to meet its debts as they fall due.

Assets turnover ratio also decreases from 1.98times in 2005 to 1.68times in 2008. This decrease
was due to a non-proportionate increase in sales revenue to meet the increase in the total
assets base of the company.

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TABLE 4.0 DEBT MANAGEMENT RATIOS

  2005 2006 2007 2008
E/M 1.83 1.67 1.53 1.53
D/E 0.83 0.67 0.53 0.53
D/A 0.45 0.40 0.35 0.35
TIER 27.04 13.81 27.02 79.65
Details of the above ratios can be found under appendix

WHERE:
E/M Equity Multiplier
D/E Debt to Equity
D/A Debt to Asset
TIER Times Interest Earning Ratio

2
1.8
1.6
1.4
1.2
E/M
1
D/E
0.8 D/A
0.6
0.4
0.2
0
2005 2006 2007 2008

Fig 2.0 The above diagram shows the debt management ratios from 2005 to 2008

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TIER
90
80
70
60
50 TIER

40
30
20
10
0
2005 2006 2007 2008

Fig 2.0 The above diagram shows the TIER from 2005 to 2008

Equity multiplier measures the extent to which company’s assets are financed by its equity.
Fanmilk Ghana limited has been experiencing a fall in this ratio throughout the years. This
decrease indicates that the company assets are increasingly being financed with equity.
Debt to equity ratio also decreased from 0.83 in 2005, through 0.67 in 2006 and remains fairly
constant at 0.53 in 2007 and 2008 respectively. This means the company is outsourcing for
additional common stock for its expansion needs.
The debt to assets ratio which measures the percentage of funds provided by creditors also
decreased proportionately with the debt to equity ratio. In 2005, the debt to asset ratio stood
at 0.45, fell to 0.40 in 2006 and then to 0.35 in 2007 and 2008.
Times interest earning ratio measures the extent to which the company can meet its annual
interest obligation. This stood at 27.04 in 2005, which means the company can pay its interest
27.04times from the reported earnings for the year. This falls to 13.81times in 2006 and then
increased dramatically to 79.65 in 2008.

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TABLE 5.0 MARKET VALUE RATIOS

  2005 2006 2007 2008
EPS 0.18 0.17 0.22 0.36
DPS 0.04 0.046 0.0575 0.075
Details of the above ratios can be found under appendix

WHERE:
EPS Earnings per Share
DPS Dividend per Share

0.4

0.35

0.3

0.25

0.2 EPS
DPS
0.15

0.1

0.05

0
2005 2006 2007 2008

The diagram above shows the trend in market value ratios over the period 2005 to 2008

Fanmilk’s

Both earnings per share increased throughout the period signifying that the company is
performing profitably. There has been an increase in earnings per share from 0.18 in 2005 to
0.36 in 2008 which records a hundred percent increment over the four year period. Dividend
per share also increased from 0.04 in 2005 to 0.75 in 2008 which also records a seventy five
percent increase.

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APPENDIX
PROFITABILITY RATIOS

gross profit
Gross profit margin= total sales revenue

142787
2005 312464 = 45.7%

153569
2006 323744 = 47.44%

19620
2007 41068 = 46.64%

26442
2008 55041 = 48.04%

net income
Net profit margin= total sales revenue

35223
2005 312464 = 11.27%

32747
2006 323744 = 10.12%

4354
2007 41068 = 10.6%

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7054
2008 55041 = 12.82%

net income
Return on Asset (ROA) = total assets

35223
2005 157983 = 22.3%

32747
2006 182970 = 17.9%

4354
2007 23707 = 18.37%

7054
2008 32858 = 21.47%

net income
Return on Capital Employed (ROCE) = capital employed

35223
2005 91249 = 38.6%

32747
2006 118989 = 27.52%

4354
2007 16177 = 26.91%

7054
2008 22218 = 31.75%

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¿
Return on Equity (ROE) = net income available ¿ common stockholders common equity

35223
2005 86244 = 40.84%

32747
2006 109890 = 29.8%

4354
2007 15494 = 28.10%

7054
2008 21410 = 32.95%

gross profit
Gross Mark-up (GMU) = cost of sales

142787
2005 169677 = 84.15%

153569
2006 170178 = 90.24%

19620
2007 21448 = 91.48%

26442
2008 28599 = 92.46%

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profit before tax∧interest

Basic Earning Power (BEP) = total assets

48602
2005 157983 = 30.76%

44545
2006 182970 = 24.35%

6004
2007 23707 = 25.33%

9387
2008 32858 = 28.57%

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LIQUIDITY RATIOS

current assets
Current Ratio (CuR) = current liabilities

61967
2005 66734 = 0.93times

74812
2006 63981 = 1.17times

23707
2007 7530 = 3.15times

32858
2008 10640 = 3.09times

current assets less inventory

Quick Ratio (QR) = current liabilities

12937
2005 66734 = 0.19times

33990
2006 63981 = 0.53times

18185
2007 7530 = 2.42times

26047
2008 10640 = 2.45times

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cash∧cash equivalents
Cash Ratio (CaR) = current liabilities

8211
2005 66734 = 0.12times

25848
2006 63981 = 0.40times

5111
2007 7530 = 0.68times

8834
2008 10640 = 0.83times

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MANAGEMENT ACTIVITY RATIOS

cost of sales
Inventory Turnover Ratio (ITR) = closing stock

169677
2005 49030 = 3.46times

170178
2006 40822 = 4.17times

21448
2007 5522 = 3.88times

28599
2008 6811 = 4.2times

365
Inventory Holding Period (IHP) = inventory turnover ratio days

365
2005 3.46 = 105.49days

365
2006 4.17 = 87.53days

365
2007 3.88 = 94.07days

365
2008 4.2 = 86.9days

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total sales
Receivables Turnover Ratio (RTR) = debtor

312464
2005 4152 = 75.26times

323747
2006 8142 = 39.76times

41068
2007 1593 = 25.78times

55041
2008 2129 = 25.85times

cost of sales
Payables Turnover Ratio (PTR) = payables

169677
2005 46632 = 3.64times

170178
2006 52358 = 3.25times

21448
2007 7398 = 2.9times

28599
2008 9719 = 2.94times

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365
Average Collection Period (IHP) = RTR days

365
2005 75.26 = 4.85days

365
2006 39.76 = 9.18days

365
2007 25.78 = 14.16days

365
2008 14.12 =86.9 days

365
Average Payment Period (APP) = PTR days

365
2005 3.64 = 100.27days

365
2006 3.25 = 112.31days

365
2007 2.9 = 125.86days

365
2008 2.94 = 124.15days

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total sales
Assets Turnover (R) = total assets

312464
2005 157983 = 1.98times

323747
2006 182970 = 1.77times

41068
2007 23707 = 1.73times

55041
2008 32858 = 1.68times

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DEBT MANAGEMENT RATIOS

total assets
Equity multiplier (E/M) = total equity

157983
2005 86244 = 1.83times

182970
2006 109890 = 1.67times

23707
2007 15494 = 1.53times

32858
2008 21420 = 1.53times

total debts
Debt equity ratio (D/E) = total equity

71739
2005 86244 = 0.83times

73080
2006 109890 = 0.67times

8213
2007 15494 = 0.53times

11448
2008 21420 = 0.53times

total debts
Total debt to total asset = total assets

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71739
2005 157983 = 0.45times

73080
2006 182970 = 0.40times

8213
2007 23707 = 0.35times

11448
2008 32858 = 0.35times

earning before interest ∧tax

Time interest earned. = interest charged

46941
2005 1736 = 27.04times

42076
2006 3046 = 13.81times

5972
2007 221 = 27.02times

9000
2008 113 =79.65times

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