JOHNSON TURNAROUND CASE STUDY ANALYSIS

INTRODUCTION
Johnson Pte. Ltd., a public non-listed subsidiary of a fast moving consumer goods
(FMCG) group of companies based in Southern Indian region. Before the takeover,
JPL was wholly-owned by the Indian government. Then, 20 years after it began
operations, the Hong Kong group of companies acquired 80% of the companys
shareholdings and the company were involved in a similar industry operating
within the Asia Pacific region. JPL manufactured and distributed a range of
products, including frozen, chicken, noodles, pastries, bread products, yeast and
fats. It also traded in commodities such as oil. It owned a chain of restaurants and
retailing outlets.
Azmi, the new Chief Executive Officer in November 2009 had been assigned by the
chairman to plan and execute a turnaround programmed for the company due the
besieged with problems ever since they took over its operation from the previous
owner. Addition, the sales figures is on a decline but their operating costs are up.
So, the chairman directed Azmi to check what is happening to the company credit
control and inventories management. Therefore, Azmi had to plan and execute an
appropriate turnaround strategy.

EXECUTIVE SUMMARY
The case is about a company based in southern Indian region, named Johnson Pte
Ltd, (JPL). It a non-public listed firm operating in Fast Moving Consumer Goods
Industry, (FMCG). The company manufactures and distributes products which
include frozen Chicken, Noodles, pastries, bread products, yeast and fat. Also the
company owned a number of restaurants and retailing outlets and it deals in
trading of oil products as well. It was initially owned by Government of India, has
operated 20years in this industry (FMCG), before Hong Kong group of companies
acquired 80 percent equity share to become its parent company. The acquisition
was in line with the Hong Kong group of companies strategic objective of
expanding their business operations globally and to reach it targeted customers in
Middle East and Indian subcontinent states.
In subsequent years after the acquisition, the company experienced steady
decline in sales and increasing operating cost. In November 2009, Encik Azmi was
employed as the chief executive officer (CEO) of JPL. His appointment was
facilitated by the Chairman of the group with the task of salvaging the company by
constituting a turnaround strategy that will facilitate the revitalizing and
sustainability of the companys before the situation get worsen.

JPL is among the major players in FMCG industry in India, with other contenders
like Nestle and Unilever dominating the market. In 2007, JPL controlled 30% market
share while Nestle and Unilever shared the balance. These rival companies invest
lot of resources for research and development, advertisement and promotion. Also
they spend 2% to 3% of their revenues to maintain their market.

TERM OF REFFERENCES

Azmi, the Chief Executive Officer of Johnson Pte Ltd (JLP) had appointed me, a
charted accountant to give the best choice and convince the other boards on how
to solve the problem.
The report had been made so that it is easy for the other boards to see or review
my works. The calculations and information that will be written is quite hard to see
if it is no on paper. So, the report will help the boards to understand better.
There are two alternatives that Azmi suggested and should to do. The first option is
to purpose plan and execute a turnaround programmed for the company and
analyze financial statement and others related document to determined problem.
So, I have prepared analysis the financial statement that obtained from finance
manager and was pondering the way forward for JPL. Based on the income
statement of JPL as of 31 Dec 2008, this company was facing big problem which is
sales figure decrease and cost also increase. This company also had losses for
every year from 2005 until 208 based the financial statement given.
So, based on the information given by the top management, I have prepared the
calculation to calculate ratios analysis of the financial statement that shows what
alternative the company should take and make comparison of economic value
added (EVA) as it measures performance while taking into account capital
investment required for the economic return.

PROBLEMS/OPTIONS

PROBLEM
Sales figure decrease and cost also increase
Factors increase cost
Low entries barriers
The existence of multiple private labels
Existence of external forces such as rising raw material prices also posed a
threat to players in the FMCH industry
OPTION
Plan and execute a turnaround programmed for the company.
Assign Azmi, Chief executive officer (CEO) to execute the programmed.
2

 Analyzed financial statement and others related document to determined

problem

FINANCIAL EVALUATIONS

1) Short term solvency or liquidity ratios

i.

Current ratio = current assets

current liabilities

2005
2006
2007
2008

$42,531,460
$34,130,000
$40,478,080
$36,135,000
$37,626,380
$38,140,000
$35,109,820
$40,133,000

= 1.246 times
= 1.120 times
= 0.987 times
= 0.875 times

In 2005, the calculation above show that in every $1 liability Johnson Pte Ltd could
cover with $1.246 of their asset
In 2006, it is clearly show that the current ratio decrease from 1.246 to 1.120
In 2007 and 2008, Johnson Pte Ltd could not cover all total current liabilities as the
current ratio below 1

ii.

Quick Ratio= Current Assets - Inventory

Current Liabilities

2005

2006

2007

2008

$42,531,460 - $13,000,000 =
times
$34,130,000
$40,478,080 - $13,000,000 =
times
$36,135,000
$37,626,380 - $13,000,000 =
times
$38,140,000
$35,109,820 - $13,000,000 =
times
$40,133,000

0.865

0.760

0.646

0.551

In 2005, without considering the inventory, Johnson Pte Ltd had its current liabilities covered
0.865 times over from the figure above, Johnson Pte Ltds quick ratio decreasing year by year
iii.

Cash Ratio=

Cash
.
Current Liabilities

2005

($1,468,540)
$34,130,000
($4,521,920)
$36,135,000
($7,873,620)
$38,140,000
($10,890,180)
$40,133,000

2006
2007
2008

= -0.043 times
=- 0.125 times
=-0.206 times
= -0.271 times

In 2005, the cash ratio was -0.043 . This figure showed that Johson Pte Ltd could not cover
their current liabilities at all as there was bank overdraft of $1,468,540.
Johnson Pte Ltds cash ratio worsen year by year as the ratio decreasing continuously

2) Financial Leverage Ratios

i.

Total Debt Ratio

The debt ratio is defined as the ratio of total debt to total assets, expressed in
percentage, and can be interpreted as the proportion of a companys assets that are
financed by debt.
Total Debt Ratio = Total Assets Total Equity
Total Assets

2005 = $233,286,460 - $194,806,460

$233,286,460
= 0.16 @ 16%

2006 = $232,423,080 - $192,038,080

$232,423,080
= 0.17 @ 17%

2007 = $230,571,380 - $188,281,380

$231,571,380
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= 0.18 @ 18%

2008 = $225,044,820 - $180,961,820

$225,044,820
= 0.20 @ 20%

The higher this ratio, the more leveraged the company and the greater its financial
risk. A debt ratio of greater than 1 indicates that a company has more debt than
assets. Meanwhile, a debt ratio of less than 1 indicates that a company has more
assets than debt. Used in conjunction with other measures of financial health, the
debt ratio can help investors determine a company's risk level. Therefore, as the
results above we can see that the companys debt ratio every each year became
increased. So, the company should take it seriously as the financial are become more
risky.

ii.

Debt-Equity Ratio

A measure of a company's financial leverage calculated by dividing its total liabilities

by stockholders' equity. It indicates what proportion of equity and debt the company is
using to finance its assets.

Debt-equity Ratio = Total Debt

Total Equity

2005 = $38,480,000
$194,806,460
= 0.20

2006 = $40,385,000
$192,038,080
= 0.21

2007 = $42,290,000
$188,281,380
= 0.22

2008 = $44,083,000
$180,961,820
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= 0.24

The results above shows that each year the company leverage ratio became
increased. A high ratio is generally considered bad, because the company has a high
amount of debt, and is therefore exposed to high risk in terms of interest rate
increases or credit rating.

iii.

Equity Multiplier

The equity multiplier is a way of examining how a company uses debt to finance its
assets. Also known as the financial leverage ratio or leverage ratio.

Equity Multiplier = Total Assets

Total Equity

2005 = $233,286,460
$194,806,460
= 1.20

2006 = $232,423,080
$192,038,080
= 1.21

2007 = $230,571,380
$188,281,380
= 1.22

2008 = $225,044,820
$180,961,820
= 1.24

The results above show that the company ratios increasing year by year. Equity
multiplier is a financial leverage ratio which is calculated by dividing total assets by
the shareholders equity. It tells about assets in dollar per dollar of equity. A higher
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equity multiplier indicates higher financial leverage, which means the company is
relying more on debt to finance its assets.
3) Asset management, turnover and measures
i.

Inventory turnover

A ratio showing how many times a company's inventory is sold and replaced over a
period. The days in the period can then be divided by the inventory turnover formula
to calculate the days it takes to sell the inventory on hand or "inventory turnover
days."

2005

38, 250, 000

13, 000, 000

= 2.942 times
2006 =

45,100, 000
13,000, 000

= 3.469 times
2007 =

45,360, 000
13,000, 000

= 3.489 times
2008 =

42,500, 000
13,000, 000

= 3.269 times

In 2007, they turned their inventory over 3.489 times during the year. The higher
ratios for inventory turn to sale, the more efficiently they manage inventory.

ii.

Days sales in inventory

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A financial measure of a company's performance that gives investors an idea of how

long it takes a company to turn its inventory (including goods that are work in
progress, if applicable) into sales. Generally, the lower (shorter) the DSI the better, but
it is important to note that the average DSI varies from one industry to another. Here
is how the DSI is calculated :
=

2005 =

365 days
inventory turnover

365 days
2.942

= 124.065 @124 days

2006 =

365 days
3.469

= 105.218 @ 106 days

2007 =

365 days
3.489

= 104.615 @ 105 days

2008 =

365 days
3.269

= 111.655 @ 112 days

In 2007, they turned their inventory over 105 days during the year. The higher ratios
for inventory turn to sale, the more efficiently they manage inventory.

iii.

Receivables turnover

An accounting measure used to quantify a firm's effectiveness in extending credit as

well as collecting debts. The receivables turnover ratio is an activity ratio, measuring
how efficiently a firm uses its assets.
Formula:

Some companies' reports will only show sales - this can affect the ratio depending on
the size of cash sales.

2005 =

45, 000,000
31,000, 000

= 1.452 times
2006 =

55, 000, 000

32, 000, 000

= 1.719 times
2007 =

54, 000, 000

32, 500, 000

= 1.662 times
2008 =

50, 000, 000

33, 000, 000

= 1.515 times
In 2006, they collected their outstanding current accounts and recovered the money
1.719 times during the year. This is because, the lowest ratios the more efficient to
collect their outstanding current accounts and recovered the money.
iv.

Days sales in receivables

A measure of the average number of days that a company takes to collect revenue
after a sale has been made. A low DSO number means that it takes a company fewer
days to collect its accounts receivable. A high DSO number shows that a company is
selling its product to customers on credit and taking longer to collect money.
Formula :

2005 =

365 days
receivableturnover

365 days
1.452

= 251.377 @ 251 days

9

2006 =

365 days
1.719

= 212.333 @ 212 days

2007 =

365 days
1.662

= 219.615 @ 220 days

2008 =

365 days
1.515

= 240.924 @ 241 days

In 2006, they collected their outstanding current accounts and recovered the money
212 days during the year. This is because the lowest days, the more efficient to collect
their outstanding current accounts and recovered the money.

v.

Total asset turnover

This is a financial ratio that measures the efficiency of a company's use of its assets in
generating sales revenue or sales income to the company.
Companies with low profit margins tend to have high asset turnover, while those with
high profit margins have low asset turnover. Companies in the retail industry tend to
have a very high turnover ratio due mainly to cut-throat and competitive pricing.
This ratio is more useful for growth companies to check if in fact they are growing
revenue in proportion to sales.
Formula :

2005 =

sales
total assets

45,000, 000
233, 286, 460

= 0.193 times
2006 =

55,000, 000
232, 423, 080

= 0.237 times
10

2007 =

54, 000, 000

230, 571, 380

= 0.234 times
2008 =

50, 000, 000

225, 044, 820

= 0.222 times

In 2005, for every dollar in assets, they generated $.193 sales. While, in 2006, for
every dollar in assets, they generated $.237 sales and 2007 they generated $.234
sales. In 2008, for every dollar in assets, they generated $.222 sales. The higher
ratios, the assets could be more productive and efficient.

4) Profitability Measure
i.

Profit margin = net income

Sales
Year
2005

calculation
(5,193,000)
45,000,000

2006

= (11.54)%
(12,768,380)
55,000,000

2007

= (5.03)%
(3,756,700)
54,000,000
= (6.97)%

2008

(7,319,560)
50,000,000
= (14.64)%

Profit margin use to know how many sales can generate profit.

11

In year 2005, -11.54% was generate in profit for every RM in sales. Even though, a
sale was high but still high loses of income.
In year 2006, - 5.03% was generate in profit for every RM in sales. A sale was increase
while profit margin was decrease and it wills lowering loses of income.
In year 2007, - 6.97% was generate in profit for every RM in sales. A sale was
decrease and profit margin was increase compared to 2006.
In year 2008, -14.64% was generate in profit for every RM in sales. Compared to
previous year, sales was decrease and increasing loses of income.

ii.

Return of asset = Net income

Total asset
Year
2005

calculation
(5,193,000)
233,286,00

2006

= (2.27)%
(12,768,380)
232,423,080

2007

= (1.19)%
(3,756,700)
230,571,380
= (1.63)%

2008

(7,319,560)
225,044,820
= (3.25)%

Return of asset shows how efficient management is at using its assets to generate
earnings.

In year 2005, -2.27% was generate in profit for every RM in asset. It shows that low
ROA earning for every asset.
In year 2006, - 1.19% was generate in profit for every RM in asset. Asset return was
high and better than previous year.
In year 2007, - 1.63% was generate in profit for every RM in asset. Asset return
decrease and
In year 2008, -3.25% was generate in profit for every RM in asset. ROA was decrease
tremendously compared to previous year. It means that, asset was not efficiently
controlled
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iii.

Return of equity = Net income

Total equity

Year
2005

calculation
(5,193,000)
194,806,460

2006

= (2.67)%
(12,768,380)
192,038,080

2007

= (1.44)%
(3,756,700)
188,281,380

2008

= (1.99)%
(7,319,560)
225,044,820
= (4.04)%

Return of equity use to a measure of profitability of stockholders' investments.

In year 2005, -2.67% was generate in profit with the money shareholders have
invested. It shows that company didnt generate income efficiently.
In year 2006, - 1.44% was generate in profit with the money shareholders have
invested. Company was efficiently managed their money when high return of equity
received for this year.
In year 2007, - 1.99% was generate in profit with the money shareholders have
invested. Company return of equity was decreased compared than 2006.
In year 2008, -4.04% was generate in profit with the money shareholders have
invested. Lower return of equity compared previous year means that income wasnt
managed efficiently.
4)

Profit Margin for each Product:

Profit margin are use to measure the immediate amount of sales available to generate
income. Segment Bakery measure the higher profit margin at 29% rather than other
products. This means that they are more efficient in manage their operation and
generate more income with fewer sales.
Analysis :
Profit

Noodles

Bakery

Consum
er Flour

Further
Processe

Cooking
Oil

Retail
Food

Bakery
Raw
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Margin
Computati
on:

Net Income
Sales
Result
Explanatio
n

3,500,000
25,000,000
0.14/14%
RM1 of
sales will
generate
14sen of
income.

1,178,000
4,000,000
0.29/29
%
RM1 of
sales will
generate
29sen of
income.

Beverage

(2,800,000) (1,350,000) (1,400,000) (4,564,050)

5,000,000
3,500,000
3,500,000
4,500,000
-0.56/56%
RM1 of
sales will
generate
56sen of
loses.

-0.39/39%
RM1 of
sales will
generate
39sen of
loses.

-0.4/-4%
RM1 of
sales will
generate
4sen of
loses.

-1.014/101%
RM1 of
sales will
generate
RM1.01 of
loses.

Ingredient

(4,699,900)
4,500,000
-1.04/104%
RM1 of
sales will
generate
RM1.04 of
loses.

Bostons Consulting Group Model

The BCG matrix, invented by the Boston Consulting Group, is a tool that allows to
classify and evaluate
the products and services of a business. It is a decision making tool in order to balance
the activities of a
company among those which make profits, those who ensure growth, those which
constitute the future of
the firm or those who are its heritage. With this tool one is able to define the
development policy of the
company. The matrix will position the products/services in two ways:
- the rate of growth of the market ;
-the market share of a product/service offered facing the competitors/segments.

Revenu
es (RM)
Growth
Rate
Operati
ng
Income
(RM)
Market

Noodles

Bakery

Consum
er
Flour

Further
Process
es Meat
Product

Cooking
Oil

Bakery
Raw
Ingredie
nts

3,500,00
0
Low

Retail,
Food
and
Beverag
e
Operatio
n
4,500,00
0
Low

25,000,0
00
High

4,000,0
00
Low

5,000,00
0
Low

3,500,00
0
Low

3,500,00
0

1,178,0
00

(2,800,00
0)

(1,350,00
0)

(1,400,00
0)

(4,564,05
0)

(4,699,90
0)

High

High

Low

Low

Low

Low

Low

4,500,00
0
Low

14

Share

Question marks

They do not generate profits unless the company decides to invest resources to
maintain and even increase the market share (become potential stars). They have a
high demand for liquidity and the company must ask the question: Invest or give up
the product?

Stars

These are promising products for the company, they even can be considered as
leaders of the industry. The strategy is to boost these products by appropriate
investments to monitor the growth and maintain a position of strength. These
products require a large amount of cash but also contribute to the company's
profitability. They are becoming progressively cash cows with market saturation.

Cash Cows

These are products or services which are mature and which generate interesting
profits and cash, but need to be replaced because the future growth will be lower.
They must therefore be profitable because they can finance other activities in
progress (including stars and question marks .

Dogs

These products are positioned in a declining market and highly competitive and that
the company wants to get rid of soon as they become to expensive to maintain. The
company must minimize the dogs .

Noodles

15

Consumer Flour, Further Processes Meat Product, Cooking Oil

Bakery

Retail Food &Beverage Operations, Bakery Raw Ingredients

OTHER BUSINESS/MANAGEMENT FUNCTION ISSUES
Johnson Pte Ltd is experiencing decline sales and increasing operating cost. In order to
turnaround the company and making company profitable again Encik Azmi as a Chief
Executive Officer need to plan and execute a turnaround programmed for the
company and also consider other issues in making decision.
Business strategy issues:
Develop the product segment

Products must meet customer requirements.

Incurred cost in doing R&D for develop product.
Acquired new technology.
High risk in making innovative product.
Maybe facing failure.

Invest in product segment

Low in fund company gain loses every year.
High risk to gain loss when investing.
The product must high in future value.
Divest the product segment

Redundancy of employee.
High cost in divest the product.
Might damage the reputation of the company.
Have other product to make the profit
The product surplus can be use as a inventory for other products.

ACTION PLAN
1)
2)
3)
4)

Noodles & bakery market penetration to Europe.

Try seeking new partner in Europe for joint venture contract.
Entrance to new segment of noodles market ( airlines agencies, hotel).
Getting contract with airlines agencies and hotel in supplying noodles for their
services.
5) Product development of noodles & bakery- add bambusia powder.
16

6) In bringing new nutrition to noodles & bakery product, add bambusia powder in
the original recipes of noodles & product as bambusia powder rich in fibre
nutrition.
7) Finance for investment in poultry farm.
8) As the bakery unit generate cash in excess, they could finance for investment in
poultry farm.
9) Seek of supplier that give relative low cost for consumer flour , further
processes meat products, cooking oil, and retail, food & beverage operations.

10)
Do survey on suppliers price. Consider supplier that gives best service and
relative low price compared the others suppliers.
11)
Close down the bakery raw ingredients factory.
12)
Close down the bakery raw ingredients factory as this segment having lost
highest than the other segments and it sales could not cover its variable expenses.
Johnson Pte Ltd may sell that factory to potential manufacturer and income from selling
that factory could use for recover bank overdraft .
13)
Minimizing the cost of manufacturing further processes meat products by own
poultry farm.
14)
Johnson Pte Ltd may open up their own farm for supplying poultry product for
product segment of further processes meat products. That could reduce cost for
manufacturing further processes meat products.
15)
Employee from bakery raw ingredients factory may join production in bakery s
factory.
16)
In avoiding redundancy payment, Johnson Pte Ltd may offer their staff to join the
production in bakerys factory.
17)
The inventory of bakery raw ingredients can be use for the production at
bakerys factory.
18)
Bring the inventory of bakery raw ingredient to bakerys factory to avoid loss.

17