Essay Example on Financial Information of Farm Pride Foods Limited and Select Harvests Limited

Introduction

The reason for writing this report is to carry out comparative ratio analysis for financial information of Farm Pride Foods Limited and Select Harvests Limited for years ending 2017 and 2018. The financial information generated from each company and the result of their comparison will help users or stakeholders not only to have information about the differences between these companies but also their strengths and weaknesses. When analyzing financial information about these companies it is essential to use information from the financial statements.

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Overview of Farm Pride Foods Limited

This is a company that produces, processes, manufacture and sells egg and eggs products. The company operates in Australia where it grades, packs, processes, supplies and market shell eggs and other products. Most of these products are exported to Asian countries. Eggs are collected from the company farms and from local suppliers. This ensures that it processes and park over 8million eggs per week.

Overview of Select Harvest Limited

This is a public limited company operating in Australia. It is one of the best-performing companies in Australia. Its main source of income is the sale of Citrus Fruits, nuts and other kinds of fruits which are grown in Australia. In 2018, the company generated $22367700 revenues. The Company has 558 workers both within Australian and in other countries. Most of its products are sold locally but there is a smaller percentage which is exported to Asian, Middle East and European countries.

Financial Analysis

Financial analysis involves the evaluation of the financial performance of each company using ratio analysis. Different types of ratios will be used to measure the financial performance of these companies.

Capital structure Ratios

It is important for the company to have a good mix of debt and equity capital. It is unnecessary for the company to have too much debt over equity as it increases the risk the company faces within the same financial year. Farm Pride Foods Limited uses more equity capital than debt. In 2018, the company had a total of debt of $12023 while equity was $47143 while in 2017; there was no debt while Equity was $46,640. Farm Pride Foods Limited is therefore 18% debt and 82% equity making it less geared. In 2017, the company uses no debt capital to finance its assets meaning that the company finances its investments using equity capital only. For that matter, the company has a lower interest expense because it has a low debt to equity ratio from 2017 to 2018. It does not also benefit from the interest tax shield.

On the contrary Select harvest Limited has a lower debt to equity ratio because it only has 14% debt and 86% equity. The company has a total debt of $71147million while equity was $378640million in 2018. It means that most of the operations of this company are financed by equity capital. Select Harvest Limited therefore also pays lower interest expenses at the end of every financial year.

Margin Ratios

Farm Pride Food Limited company manages its expenses well. The gross profit margin for this company is 36.04% showing that it manages its cost of sales well (Stoutenburg, 2015). Poor management of cost of sales reduces gross profit margin significantly because it makes the company spend more money on buying raw materials to produce the end product. In comparison to Select harvest limited it manages its gross cost of sales better because Select Harvest limited has a gross profit margin of 17.89% in 2018 and 19.79% in 2017. This shows that the company is becoming worse in the way it manages its cost of sales. The company could not minimize the cost of its purchases and this makes it spend huge sums of money to purchase raw materials. Farm Pride Foods Limited experiences an improvement in the management of cost of sales as there is an increase in gross profit margin from 23% to 36% from 2017 to 2018. Select Harvest Limited worsen in its management of cost of sales. It decreases from 20% in 2017 to 18% a significant sign that the does not properly manage its cost of sales.

Although Select Harvest limited manages its cost of sales poorly as compared to Farm Pride Foods Limited, it manages its operating expenses so well to ensure that its gross profit margin covers operating cost at a greater extent than in the case of Farm Pride Foods Limited. Select Harvest limited ensures it spends least of its expenditures on its operating activities in order to reduce total operating cost. Furthermore, it eliminates some of the unnecessary expenses that would increase its total operating cost at the end of the year. This, therefore, increases the ability of Select Harvest limited to meet financial obligations and also generate sufficient amount of profit that the investors earn as dividends at the end of the financial year.

Asset Management Efficiency Ratios

These are ratios which are essential in measuring how the company is managing its assets to generate revenues (Adey, 2019). These ratios are sometimes called turnover ratios or efficiency ratios. The company that invest too much money on assets, the company is likely to have high operating capital and it is likely also to increase the company profitability but impairs liquidity. Receivable turnover ratio is a ratio used in assessing whether the company is managing its accounts receivable well or not. It shows the number of days the company takes to collect its account receivables. Farm Pride Foods Limited has the highest account receivable turnover of 10.2368 in 2018 and 10.4475 in 2017 showing that it is more efficient than Select Harvest limited which only had a receivable turnover of 4.63 in 2018 and 5.8872 in 2017. This implies that Farm Pride Foods Limited can only take 35.65 days to collect its account receivables from credit customers while Select Harvest can take as long as 78.82 days in 2018. There is a slight change in the efficiency of these companies because Farm Pride Foods collects its account receivables with a period of less 36 days while Select Harvest collect theirs within a period less than 79 days. This shows that Farm Pride foods limited manage its assets more efficiently than Select Harvest Limited company.

In addition, Farm Pride Foods limited also has the highest inventory turnover ratio of 12.37 in 2018 and 21.35 in 2017. This shows that this company was more efficient in 2017 than in 2018 because it could convert its inventories within a period of 17.09 days in 2017 and 29.51 days in 2018. This means that the inventories take few days in store before they are sold thus reduces storage costs. On the contrary, Select harvest limited has a very small inventory turnover of 1.923 in 2018 and 2.768 in 2017. The company, therefore, takes very many days to convert its inventories into sales revenues or convert raw materials into finished goods.

The profitability of Invested Capital

These are ratios which show how the company uses its capital to generate profits. It includes return on capital employed, return on equity and return on invested capital (Zamfir, Manea, & Ionescu, 2016). Farm Pride Foods limited company generates higher returns on its capital invested in 2018(18%) than 2017(13%). This shows that there is an improvement in the way the company manages its capital to generates profit at the end of every financial year. On the contrary, Select harvest does not properly utilize its invested capital to produce returns. It uses all its capital employed to generates a return of 4% in 2018 and 2% in 2017. This is a sign of underutilization of invested capital to produce a return. Profitability changes because the company do not invest its capital invested in long term assets to produce profit but rather used them to finance short term assets which only increases liquidity but reduces profitability.

Recommendations

These two companies have not been performing well for the last recent years. To ensure that these companies generate high profits, it is recommended when they invest their capitals in long term investment. Investing in long term assets will not only increase profitability but also ensure that there is no cash and cash equivalent lying idle. The only problem that the company should not do is to over-invest in long term assets as it may bring a problem of liquidity. Furthermore, these companies must review their credit policies to ensure that they collect their account receivables within a period of fewer than 30 days to increase the amount of cash entering the business and reduce the amount of cash going out of the business.

References

Adey, B. T. (2019). A road infrastructure asset management process: gains in efficiency and effectiveness. Infrastructure Asset Management, 6(1), 2-14. doi:10.1680/jinam.17.00018

Stoutenburg, G. (2015). Vicious Regresses, Conceptual Analysis, and Strong Awareness Internalism. Ratio, 29(2), 115-129. doi:10.1111/rati.12087

Zamfir, M., Manea, M. D., & Ionescu, L. (2016). Return on Investment - Indicator for Measuring the Profitability of Invested Capital. Valahian Journal of Economic Studies, 7(2), 79-86. doi:10.1515/vjes-2016-0010