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Financial Analysis and Management – FAM

 Introduction

This report contains the financial analysis of Borneo Oil BHD and evaluation of its management’s skills reflected through the decisions taken, policies adopted and competencies turned in favour of the organization (Beaver et al., 2011). The report overall consists of analysing the trend of the company and performance over past four years through analysing the different forms of ratios, which have their own indications and refer to their own recommendations and in conclusion it provides guidelines whether the company should be selected to be a good investment junction.

Overview                                                                                            

Background of the Company

The company was formed in 1979 as Sugar Bun Corporation Berhad (Former Name). The company listed itself in 1997. The name of the company was changed in January 2007 to Borneo Oil Berhad. The basic characteristic of this company is that it is an Investment Holding Company. It is a Malaysia based company (Ahrendsen & Katchova, 2012).The company operates in four different sectors which are Gas and Mining, Oil, Fast Food operations and Franchising, Renewal Energy and property and other activities through its subsidiaries. Each subsidiary has its own success principles like subsidiary engaged in renewal energy follows that if you want to produce anything you need energy and producing that energy at cheapest cost would be a long term profitable vision and subsidiary engaged in Food and Franchising works on a very simple principle that every human being whether engaged in any sector will require food. The company has versatility in its operations and is constantly showing better results in all aspects of analysis of a company. It has increasing trend in sales revenue with has led to increasing profits of the company.  The company is not distributing dividends for using the profits generated into future growth opportunities. The properties management division is long term investment tool for the company to fight against inflation.

For the last few years the company is moving on single curved line showing increasing trend. The subsidiary operating under Fast Food and Franchising category having chain of restaurants were certified byISO 9002 standard (Delen et al., 2013).

Since the company can be seen as ideal company for the industry it belongs and have a diversified operational characteristic, it has been selected for the purpose of the financial analysis under this project.

Key Announcements or Events

The company is constantly buying its shares back from the market for improving the efficiency of allocation of available funds and increasing the earning per share of the company. The buyback announcements are made by the company in smaller lots. The Fast Food Division of the company has shown the performance beyond the planned one and other divisions are performing according to the plans or goals set. The company announces the monthly production figures of Mining division which also depicts a better picture (Devine, 2011).

The company’s directors have constantly been engaged in informing their shareholders about each and every minor to major issues or achievements of the company. Issuing of monthly production report, timely publication of buying back information etcetera are few examples of that.

The company went for Right Issue in April 2015 of Malaysian Ringgit 237 Million and it was successfully and fully subscribed by their existing shareholders despite of poor market conditions crude oil price collapse, devaluation of Yuan and negative interest rates (Du & Vieira, 2012).

The company was been appointed by JMM (Jusra Mining Merapoh) SDN Berhad to carry out gold mining in Sungai in an area measuring 202.8 H.A.

New launch of Pezzo in existing Sugar Bun Outlets has boosted up the growth of the Franchising division. Despite of various unfavourable situations, the Mining division has been able to earn huge profits by unloading some of its inventory (Healy & Palepu, 2012). This shows the skilful mentality and decision taking ability of its management force. There have been several changes in the board of the company over past few years. Among those, inclusion of Mr. Chan Keng Leong as Executive Director is one. The Borneo Oil and Gas Corporation SDN Berhad has entered into a production sharing agreement to carry out mining works on an exclusive basis in Pahang with HDL Global Sdn Berhad. This agreement is a new step of mining division towards expansion of its operations which would soon be exercised (Healy & Palepu, 2012).            

Analysis of Key Financial Trends

Row Labels

Sum of 2013

Sum of 2014

Sum of 2015

Sum of 2016

Dividend Payout Ratio

0

0

0

0

EPS (Basic/Diluted)

-0.01

0

0.01

0.01

Market Value of Shares

0.39

0.63

0.9

0.16

Return on Invested Capital %

-4.24

1.56

3.07

3.03

 

The trend of anything is all about studying the phase of a number of periods in a continuous line. Hence the Financial Trend means study of financial data.The directors have included the abovementioned ratios in their report and these could be better understood with the help of below presented chart (Hunt, 2012).


The chart is well describing how the 4 parameters like dividend payout ratio, earning per share, market value of shares and return on invested capital is heading towards in the past 4 years.

The dividend pay-out is the part of earnings given as dividend to shareholders. The Earnings per Share is the net profit available for distribution to shareholders. There is link between the EPS of the company and its Market Value and that is its Price Earnings Ratio (Fridson & Alvarez, 2011).

The best way to compare the performance of the company with its competing entities is to compare their return on capital invested. This is what the investors care about the most.

The company is not distributing any dividend for last few years hence dividend payout ratio is constantly nil. The Earning per Shareof the Company also has shown positive trend over past 4 years. The market price of share has fallen in October 2015 due extreme financial crises and many other unfavourable conditions (Harford et al., 2012).

The company has recovered itself from negative return on capital invested and has taken it up to a satisfactory level.These ratios clearly indicate the availability of future investment opportunities in the hands of the company.

The director’s report of the company is giving a brief about these ratios and projecting and hoping for a better picture in the near future by focusing the Food and Franchising Division as well as Mining Division a bit extra and scheduling the remaining two divisions as per pre specified goals (Brigham & Houston, 2012).

Analysis of Financial Ratios

The Ratio analysis provides a deep understanding of the financial statements by looking in the minor aspects of each Balance Sheet and Profit and Loss Account item and analyzing them by putting into mathematical relationships (Zietlow, 2012). It can be of many types like Profitability, Growth, Cash Flow or Efficiency Ratios. The analysis of the Financial Ratios can be divided into a number of sections which are described below: -

Profitability Ratios

These ratios act as a measure of the profitability of the company and its stability in the short run of the business. Generally these ratios are classified as under: -

Gross Margin Ratio

This ratio is calculated by dividing the Gross Profit of the company by the Turnover of the respective period. Over the last 4 years this ratio is constantly decreasing due to intention of the company to avoid the indirect operating expenses by enhancing the focus on direct expenses.  This ratio is 37.50%, 31.02%, 31.35% and 12.09% for the year ending 2013, 2014, 2015 and 2016 respectively (Saleem & Rehman, 2011).

EBIT (Operating)Margin Ratio

This ratio is calculated by dividing the Earning before Interest and Tax of the company by the Turnover of the respective period. Through the last 4 years this ratio is constantly improving by decreasing the indirect expenses except in 2016 due to other financial crises.  This ratio is -19.40%, -9.83%,8% and 2.35% for the year ending 2013, 2014, 2015 and 2016 respectively.

Net Margin Ratio

This ratio is calculated by dividing the Net Profit after Tax of the company by the Turnover of the respective period. In the last 4 years this ratio has improved a lot from negative to positive level. In 2016 the company has been able to maintain its Net Margin over the industry average since due to various crises the industry profit level has shaken from top to bottom. This ratio is -24.27%, -7.43%, 8.34% and 4.47% for the year ending 2013, 2014, 2015 and 2016 respectively.

Return on Assets

This ratio is calculated by dividing the Net Profit after Tax by Average Total Assets of the company. The Average total assets are calculated by dividing the summation of total assets at the beginning and end of the year by 2. The return on assets for the last 4 years has been considerably favourable for the company. It ranges from -4.23%, 1.48% 2.60% and 2.41% for the year ending 2013, 2014, 2015 and 2016 respectively. The reason behind this ratio being in line with Net Margin Ratio is that there is constant and reasonable investment in the overall assets of the company (Harford et al., 2012).

Financial Leverage

This leverage is to evaluate the company’s ability to bear the interest burden. This is calculated by dividing the Earnings before Interest and Tax by Earnings before Tax. Higher the amount of Debt higher shall be the financial leverage and Earnings per Share. This leverage is constantly increasing which shows that the company is reducing debt in its structure. The leverage is 0.92, 1.11, 1.12 and 1.12 for last 4 years in ascending order respectively.

Assets Turnover Ratio

This ratio is calculated by dividing the dividing the Net Sales by Average Total Assets of the company. This can also be seen as routing of funds of the company through its turnover. The higher value of the ratio represents a better the position of the company. In 2013, this ratio was quite unfavourable but over the past 4 years the situation has improved and a better position can be expected from the company in the future. The ratio is 0.17, 0.20, 0.31 and 0.54 for last 4 years 2013, 2014, 2015 and 2016 respectively (Murray & Scott, 2012).

Growth Ratios

This ratio is used to find out the long term stability of the company. The ratio is simply the % growth in comparison to previous year. It has many variants like Sales, Operating Income, Net Income or Earnings per Share etcetera.

Growth Rate in Sales

This rate is reflective of trend of sales over past few years. In other words this is the rate at which, the sales of the company is increasing year after year. The Growth Rate is 30.67%, 25.46%, 101.46% and 204.01% for the year ending 2013, 2014, 2015 and 2016 respectively (Novy-Marx, 2013).

Growth Rate in Operating Income (OI)

This rate indicates the flow of Operating Income over past few years. Since in 2013, the company incurred losses, for the year ending 2013 and 2014 the rate is in applicable. The Growth Rate is 93.21% and 72.27% for the year ending 2015 and 2016 respectively.

Growth Rate in Net Income (NI)

This Growth rate ratio is much similar to Growth Rate in Operating Income. Italso indicates the flow of Net Income over past few years. For the same reason as provided in previous ratio, for the year ending 2013 and 2014 the rate is in applicable. The Growth Rate is 126.15% and 63.03% for the year ending 2015 and 2016 respectively.

Growth Rate in Earning per Share (EPS)

This growth rate is indicative of increase in EPS year after year. Since in 2013, the company incurred losses, for the year ending 2013 and 2014 the EPS growth data is unavailable. The Growth Rate is 77.75% and 73.63% for the year ending 2015 and 2016 respectively (Saleem & Rehman, 2011).

Cash-flow Ratios

These ratios are used to measure the company’s ability to meet its short term cash commitments and to ensure the smooth functioning of the operations. Despite of profits in profitability ratios it focuses on cash flows of the company and future ability to continue and maintain it.  We can understand it under the following heads: -  

Capital Expenditure as a % of Sales

This ratio is calculated by dividing the Capital Expenditure incurred by the company by the turnover of that period. An increasing this ratio shows the better investment steps available for the company in the near future. Except in year 2016 and 2014 there is huge amount constantly being invested every year in capital assets. This has been 78.01%, 31.09%, 75.97% and 17.96% for the year ending 2013, 2014, 2015 and 2016 respectively.

Free Cash Flow as a % of Sales

This ratio is calculated by dividing the Free Cash Flow of the company by the turnover of that period. The company’s free cash flows are continuously showing negative values and hence this ratio is also contains negative output. The reason behind negative cash flows could be company’s increasing investment for the growth purposes. This has been -75.01%, -28.70%, -74.78% and -53.49% for the year ending 2013, 2014, 2015 and 2016 respectively (Hunt, 2012).

Free Cash Flow/ Net Income

This ratio is calculated by dividing the Free Cash Flows by the Net Income of the company. This describes the part of profit which helps in generating the free cash flows. This has been -11.96, -8.97, -3.86 and 3.09 for the year ending 2016, 2015, 2014 and 2013 respectively.

Liquidity/ Financial Health Ratios

These ratios are calculated to evaluate the short term as well as long term liquidity and financial viability of the company. This is classified under Current Ratio, Acid Test Ratio/Quick Ratio, Debt/ Equity Ratio etc.

Current Ratio

The current ratio is the ratio to determine the liquidity position as well as working capital level of the company. This ratio is calculated by dividing the Current Assets by Current Liabilities of the company. The ideal current ratio is generally 2 which mean that the amount of current assets should be at least twice the amount of current liabilities. For last 2 years the company has improved its current ratio and it is 1.38, 1.65, 2.83 and 3.33 for the years 2013, 2014, 2015 and 2016 respectively (Bragg, 2012).

Quick Ratio/ Acid Test Ratio

The Quick Ratio is similar to and a fine version of Current Ratio. This ratio is calculated by dividing the Liquid Assets by the Current Liabilities of the company. The liquid assets include all items of Current Assets except inventory. In other words Liquid Assets are equal to Current Assets minus Inventory (Saleem & Rehman, 2011).  The ideal Quick Ratio is 1 which means that Liquid Assets of the company should be Equal to the Current Liabilities. Since the inventory has been at a consistent level throughout past 4 years, this ratio has same trend as that of Current Ratio. This ratio is 1.14, 1.41, 2.16 and 2.29 over the past 4 years respectively in ascending order. Here is one thing should be given into consideration related to the current ratio or quick ratio. A higher Current Ratio or Quick Ratio is good but up to a certain limit. If the major portion of Current Assets is lying in idle funds, it can be disadvantageous for the company’s growth (Campello et al., 2011).

Debt/ Equity Ratio

This ratio is basically describes the capital structure of the company and acts as a good tool in the hands of manager to procure further finance and to maintain or exercise the control over the business. As the name denotes, this ratio is calculated by dividing the long term debt by the equity funds of the company. In year 2016, the company has repaid all its long term debts and hence it is nil for that year end. For the remaining years it is 0.03, 0.03 and 0.06 for the years 2013, 2014 and 2015 respectively (Novy-Marx, 2013).

Efficiency Ratios

These ratios are to estimate the efficiency level at which its operations are being conducted, so that further improvements can be made in them by changing the production schedules, rotating jobs within or outside the organization etcetera. These ratios are of many types like Inventory Turnover Ratio, Assets Turnover Ratio or Fixed Assets Turnover Ratio Etcetera which are discussed below:-

Inventory Turnover Ratio

This ratio is to determine how many times the average inventory is rotated in the business of the company. It is calculated by dividing the cost of sales by the average inventory of the company. Since the company is increasing the amount of inventory year after year, the ratio is coming down which is somehow against the general appraisal terms. This ratio is 8.26, 8.84, 6.38 and 4.20 for the last 4 years (Xu et al., 2014).

Assets Turnover Ratio

This ratio is to evaluate, how many times the average total assets are rotated through the sales of the company.  It is calculated by dividing the net sales by the average total assets of the company. For the last 4 years the total assets of the company have increased up to 3 times. This ratio is 0.17, 0.20, 0.31 and 0.54 for the last 4 years, 2013, 2014, 2015 and 2016 respectively.

Fixed Assets Turnover Ratio

This ratio is much similar to Asset Turnover Ratio. It is to evaluate, how many times the average fixed assets are rotated in the business of the company.  It is calculated by dividing the net sales by the average fixed assets of the company. For the last 4 years the fixed assets of the company have increased up to double. This ratio is 1.34, 1.04, 1.25 and 2.68 for the last 4 years, 2013, 2014, 2015 and 2016 respectively (Derudder et al., 2011).

Findings

Financial Strength and Weaknesses

The company has planned to write down their current assets to their Net Realizable value but basically the Net Realizable value is not much down their book value. The directors of the company are not recommending any dividend and this can be seen as a financial strength for the company. To the best of their information, the directors believe that there is not contingent liability in the hands of the company. The year 2015 has been a year of uncertainties like fall in crude prices, unfavourable changes in interest rates etcetera, these all can been seen as weakness period at the industry level but if we go specifically, the company has been able to handle such crises in much balanced manner (Hill et al., 2011)

By analysing the different ratios like profitability, growth, efficiency etcetera, the directors as well as any layman can make an estimate that the company has growth potential and is constantly moving in that direction. The ups and downs are obvious in any path but this company is a very good example for fighting against the failure conditions and taking advantage of the winning conditions (Hunt, 2012).

The company has also taken initiatives to step into increasing the areas for the gold mining in Pahang. Further the directors have felt that their new launches in Food and Franchising divisions are working beyond the plans, the launch of Pezzo is one of the example. Increasing number of outlets of Food division can also be seen as one of the growth sign. The best of all the financial strengths of the company is that the company operates in a diversified business so if any particular division goes down, the other division cover that down portion and represents an overall better picture (McKeen-Edwards & Porter, 2013).

Basically if we go with the SWOT analysis, the strengths of the company are its skilled work force, approach to domestic market, cheap labour cost, experienced business units and high profitability. The weaknesses of the company are that there are certain doubts about the future profitability and the portfolio of the company is branded. The company has its own opportunities which directors can focus that the economy is growing; the markets that the company has chosen are new, venture capital, the income level of the company is constantly increasing and the company has access to the global market with increasing demand.

Recommendations

So far we have discussed the financial trend as well as background of the company along with the latest announcements of the directors and analysis of ratios of Borneo Oil Berhad.

In almost all the ratios there is one thing is common and that is except the year 2016, the company has made constant growth.

As the company somehow managed the 2015 crisis, it can be well said the policies or the strategies of the directors have actually worked out (Mulford & Comiskey, 2011).

The threats that may be encountered by the company include the changes in the prices of the products and its financial capacity. The price levels of the products have already undergone certain changes and it can be expected that there will be changes in future too. Now it would also be worth consideration that whether the company will be able to maintain the same level of financial capacity because otherwise situation may take a u –turn.

The accounts payable of the company has grown almost 40 times in 2016 when compared with the year 2015 even when the company has raised funds through issue of right shares which can be considered as a future obligation on the company.

For the prospective investors, the company is a very good option to invest their money. As we have discussed the financial strengths and weaknesses of the company, it is very much clear now that whatever be the situation, the company will always perform beyond the industry level.

The cash component of Balance Sheet of the company is significantly higher than past years which shows that the company is having liquidity requirement in the near future either for investing in capital assets or other investments to earn short term profits. But since zero dividend policy and high cash balance are contrasting with each other as it can be predicted that company has idle funds, it may create a doubtful situation in the mind of investors (Maricica & Georgeta, 2012).

The company has made its strategies on the division level and there is a coordinating vision to direct those strategies into single objective. The company is operating in a very dynamic environment which can even make the company to reach on top or bring it down but never on the bottom line (Mulford & Comiskey, 2011). Thus with few minor doubts, the company have vast opportunities which investors can look into before investing money in it.

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