Analytical Review of National Flower Mills.

For the Periods ended December 31st, 2017 & 2018

Overview of National Flower Mills:

National Flour Mills Limited (NFM) was incorporated in 1972 and over the years has since been
recognised as the leader in flour milling, feed milling and dry mix operations throughout Trinidad and
Tobago. Prior to that NFM, then known as Trinidad Flour Mills was owned and operated privately until it
was nationalized by the Government of Trinidad and Tobago upon purchasing shares of two minority
shareholders. In 1995 NFM became a Public Limited Liability Company, with its shares being sold on the
Trinidad and Tobago Stock Exchange. To date, 49% of its shareholding is owned by the public and 51%
by the Government of Trinidad and Tobago

National Flower Mills Vision Statement:

To be the most trusted food and feed manufacturer in the region.

National Flower Mills Mission Statement:

We will feed the region by:

 Meeting and exceeding global food safety standards

 Value for money offerings
 Fairness and equity in treating with our employees

National Flower Mills Guiding Principles and Core Values:

 Results Oriented & Innovative  Value for Money

 Accountability  Customer Delight
 Fairness and Integrity  Building Teams and Talent
 Innovation

National Flower Mills Financial Performance in 2017:

National Flower Mills was indeed profitable in 2017 as reflected by its annual report and its independent
auditor’s report undertaken by PricewaterhouseCoopers. In 2017, The then Chairman Mr. Nigel Romano
 reported the company’s attainment of revenues amounting to $435M and Net profit after Tax of $29M
despite reduction in sales due to depressed economic conditions. Earnings per share stood at $0.24
reflecting a 17% decrease over the period all attributable to the company’s reduction in revenues from
$470M in 2016.

In 2017, National Flower Mills was faced by a reduced customer demand for its products and in particular
for its feed products arising from the reduced disposable income of citizens. The reduced revenue was off-
set by more effective grain purchases, more effective debt management and efficiencies in operations as a
result of the ongoing continuous improvement initiatives. In 2017 the USDA reported that wheat
production decreased by 25% thus NFM was adversely impacted by these developments. In Trinidad, the
low returns from both the energy and non-energy sectors resulted in an anticipated contraction of the
Trinidad and Tobago economy of 2.3% comparable to the 6% contraction in 2016. Overall productivity
continued to decrease, with the greatest contractions occurring in the food processing industry.

In 2017 the Financial performance of National Flower mills was influenced by the following:

 Efficient Forex Management. The increased allocation of Forex to the Manufacturing sectors facilitated
NFM in its payment of its financial obligations in a timely manner avoiding penalties.
 More Efficient Procurement. Meticulous attention has been placed on grain prices to ensure a significant
cost saving compared to market rates without compromising quality.
 Enterprise Resource Planning Upgrades. This will allow NFM to have real time information and better
governance to aid in more effective decision making.
 Continuous Improvement Program. Over 30 projects were completed to date due to efficient production
shifts and preventative maintenance programmes.

Risks faced by National Flower Mills (2017)

 Depreciation of the exchange rate of TTD$

 Volatility of raw material costs due to factors of demand and supply
 Continued depressed economic conditions and reduction in customer spending
 Increased transportation costs due to increase in fuel prices
 Major lifestyle changes of its target market
National Flower Mill Financial Overview – 10 Year Comparison
National Flower Mills Financial Performance in 2018:

In 2017 the Financial performance of National Flower mills was influenced by the following:

Risks faced by National Flower Mills (2017)

National Flower Mills Liquidity Ratios

Ratio Year End 2017 Year End 2018 Variance

Current Ratio. 1.97 2.02 0.05
Quick Ratio 1.55 1.37 0.18

Current Ratio / Working Capital Ratio:

The current ratio indicates a company's ability to meet short-term debt obligations in the subsequent 12
months. The standard norm of the current ratio is 2:1. During the financial year 2017 the current ratio for
NFM was 1.97, however in 2018 the ratio improved and resulted to be 2.02 suggesting greater liquidity of
NFM for that period. Despite the current assets declining by $37K, 12.93%. The improved liquidity was
directly attributable to the decline in NFM’s current liabilities, which reduced by $22K, 14.98% as
compared to 2017.This improvement in the current ratio, indicates the efficiency of NFM operating cycle
or its ability to turn its products into cash. This suggests an overall better financial position of NFM since
its current ratio was concluded to be satisfactory.

Quick Ratio / Acid Test Ratio:

The quick ratio measure of a company's ability to meet its short-term obligations using its most liquid
assets. (Cash or cash equivalents). This indicates the company’s financial strength or weakness. The
standard norm for the quick ratio is 1:1. Contrary to this, the quick ratio of NFM declined by XX% from
1.55 in 2017 to 1.37 in 2018.Contrarily to the current ratio, there was a decline in the entity’s quick ratio.
This is because in 2017, the ratio was 1.55, however in the financial year of 2018, it declined to 1.37. This
was mainly attributed to the increased levels of inventory on hand as compared to 2017 which was
attributed primarily to the devastating flood and earthquake which Trinidad and Tobago in 2018. Despite
the decline of the Quick Ratio, NFM boasts of an above average quick ratio indicating its greater financial
security.

Interpretation: The overall liquidity position of National Flower Mills Limited is satisfactory based on
its current and quick ratios. NFM is able to meet its financial obligations in a timely manner.
National Flower Mills Solvency Ratios:

Ratio Year End 2017 Year End 2018 Variance

Debt to Equity Ratio 0.82 or 81.70% 0.98 or 98.47% 0.16
Debt Ratio

Debt to equity:
This ratio measures the financial leverage of a company by indicating the proportion of debt and
equity utilized by a company to finance its operations. A lower number suggests there is both a
lower risk involved for creditors and strong long term financial security for the company. In 2017
the company’s debt to equity ratio was 0.98, however in 2018 this declined to 0.82. This decrease
was attributed to NFM utilization of less debt to finance its operations in 2018. Although there
was a decline however, their debt to equity ratio is very steep.

Debt Ratio: The Debt ratio indicates the percentage of a company’s assets that are financed
through debt. A ratio greater than 1 indicates that a considerable portion of debt is funded by
assets. Such companies are at risk of default on its loans if interest rates were to increase. The
NFM Debt Ratio decreased form 0.50 in 2017 to 0.44 in 2018 all attributable to their repayment
of finance lease charges and the divestment of the Rice Mill at Carlsen Field.

Interpretation: The overall solvency position of National Flower Mills Limited is satisfactory based on
its Debt and Debt to equity ratios. NFM is able to meet its short and long term financial obligations in a
timely manner, and is unlikely to default on its debt obligations.
National Flower Mills Activity Ratios

Ratio Year End 2017 Year End 2018 Variance

Inventory Turnover Ratio 0.82 or 81.70% 0.98 or 98.47% 0.16
Accounts Receivable Days

Inventory Turnover Ratio:

This ratio indicates how rapidly inventory is sold or used within a period. Evidently, in 2017 the
inventory turnover was 4.89 times, while in 2018 it was 3.90 times. This can be regarded as a
negative occurrence, since the inventory is now staying longer in the hands of the manufacturer
(NFM). This occurrence directly reflects the issue raised by Mr. Romano (Chairman) where he
indicated that the sales in the period of 2018 declined compared to 2017.

Accounts Receivable Days:

This ratio measures the average number of days a company's receivables are outstanding. A
lower number of days is desired. An increase in the number of days receivables are outstanding
indicates an increased possibility of late payment by customers. In the financial year 2017, the
receivable days were 48.38 days while in 2018, the receivable days were 43.13 days. This
therefore shows that for the period of 2018, debtors were able to pay off their accounts in a much
shorter timeframe than they would have done in 2017. As such, NFM should attempt to continue
to give debtors incentives to clear their accounts quickly, this will in turn increase the entity’s
cash flow.

Accounts Receivable Turnover:

This ratio measures the number of times per year that the company collects its average accounts
receivable. NFM Accounts receivable turnover remained consistent at approximately 6 times over the two
periods with a turnover of 5.99 times in 2018 and 6.01 times in 2017. This indicates the conservative
credit policy and aggressive collections department, as well as a number of high quality customers.

Interpretation: The overall the activity ratios of National Flower Mills Limited is satisfactory based on
its inventory turnover, accounts receivable days, and accounts receivable turnover, this indicates the
efficiency of NFM collections department and its high quality customers.

National Flower Mills Profitability Ratios

 Ratio Year End 2017 Year End 2018 Variance
Gross Profit Margin 30.03% 27.99% -2.04
Net Profit Margin 6.66% 5.25% -1.14
Return on Equity 12.96% 9.11% -3.85
Return on Assets 11.29% 8.52% -2.77
Earnings per share $0.24 $0.19 -0.05
Dividend Payout Ratio

Gross Profit Margin & Net Profit Margin:

For the financial year 2017, the Gross Profit Margin was 30.03%, however, in 2018 it dropped to
27.99%. This therefore shows a decline in GP by 2.04%. According to the chairman’s report, the cost of
sales was negatively impacted by the rising price of grains. Thus, reducing the level of gross profit
generated by the firm.
However, since the margin did not decline by a great amount, it can be said that management employed
the necessary policies to ensure that there were high levels of efficiency in production in order to buffer
the effect of the raising price of grains as well as the decline in sales against the profit-making ability of
the entity.
Additionally, during the year 2017 the Net Profit Margin was 6.66%, so for every dollar of sales, NFM
was generating $0.066 cents in profit. In 2018 however, this margin declined to 5.25%. The deterioration
of this measure resulted from the declining revenues that NFM faced in 2018 as well as the increasing
cost of sales incurred. Furthermore, it was also expressed by the chairman that there was also an increase
in NFM’s expenses due to increases in transport costs and wages. Therefore, these factors eroded the
entity’s profit margin.

Return on equity:
This ratio expresses the rate of return on equity capital employed and measures the ability of a company's
management to realize an adequate return on the capital invested by the owners in a company. A higher
number is preferred for this ratio. In 2017 the return on equity for NFM was 12.96% while in 2018 it
declined to 9.11%. Due to the decline in Net Income between the two periods, it is fair to suggest that this
factor resulted in the drop in NFM’S return on equity.

Return on assets:
This ratio measures how effectively a company's assets are being used to generate profits. A higher
number reflects a well-managed company with a healthy return on assets. NFM’s return on assets for
2017 was 11.29% while in 2018 it was 8.52%. There was an evident decrease on the return on assets.
Restricted deposits, drastically declined from 2017 to 2018, which definitely contributed to such a
decline. Conclusively, this ratio indicates that there is a need for improvement in this area to ensure the
company can remain competitive and continue to operate successfully.

Earnings per share:

Shareholders and potential investors often look at an entity’s EPS in order to make investment decisions.
The higher the EPS, the more profitable the firm is. During the financial year 2017, the EPS for NFM
was $0.24, however in 2018 this declined by $0.05 cents to $0.19. This miniscule decline obviously
occurred due to the decline in the Net Profit between the two financial periods being observed.

Interpretation:

Although the profitability ratios of National Flour Mill generally deteriorated from 2017 to 2018,
this change was not material in nature. Management was therefore able to mitigate the severe
effects of the economic downturn by implementing more efficient processes within the
organization. In a nutshell, NFM showed dire resilience during this economic turmoil, and as such,
their performance in 2018 was acceptable.

Workings:

Ratio Calculation 2018 Calculation 2017

Gross Margin GP GP
SALES SALES

120,991 130,796
432,199 435,493

=27.99% =30.03%
Net Profit Margin NP NP
SALES SALES

22,691 29,005
432,119 435,493

= 5.25% = 6.66%

Current Ratio Current Assets Current Assets

Current Liabilities Current Liabilities

249,658 286,719
123,798 145,606
= 2.02 = 1.97

Quick Ratio Current Assets−Inventory Current Assets−Inventory

Current Liabilities Current Liabilities

249,658−79,593 286,719−61,625
123,798 145,606
= 1.37 = 1.55

Inventory Cost of sales Cost of sales

Turnover Inventory Inventory

311128 301093
79593 61625

= 3.90 times = 4.89 times

Receivable Days Trade Receivables T rade Receivables

x 365 x 365
Credit Sales Credit Sales

51,462 57,724
435,493 435,493
 = 43.13 days = 48.38 days
Earnings per share Net Income Net Income
Outstanding s h ares Outstanding s h ares

22,691 29,055
120,200 120,200

= $0.19 = $0.24

Debt to Equity Total Liabilities Total Liabilities

S h are h olders Equity S h are h olders Equity

203,390 248,856
248,960 252732

= 0.82 or 81.70% = 0.98 or 98.47%

Return on Equity Operating Profit after tax Operating Profit after tax
Ordinary s h are h older ' s equity Ordinary s h are h older ' s equity

22,691 32748
248,960 252732

= 9.11% = 12.96%

Return on Assets Operating Profit Operating Profi t

Total Assets Total Assets

38540 56620
452350 501588

= 8.52% = 11.29%