Financial Statement Analysis

Mid-Year Examination
FOOD EMPIRE: VALUATION AND INVESTMENT

Jessabel Margaretha 17/415855/EK/21595

Lecturer:
Putri Paramita Agritansia, S.E., M.Acc.
Rahmatdi, S.E., M.Acc.

Faculty of Economics and Business

Universitas Gadjah Mada
2019
 PART I
Introduction
Background

Food Empire is a food and beverage company headquartered in Singapore. The company was

established in 1992 and launched their initial public offering (IPO) on the Singapore Stock Exchange

in April 2000. The manufacturing company had 200 different types of consumables such as instant

beverage products, frozen food and snacks. They also supply raw ingredients including instant coffee

and creamer to other food manufacturers. Some of their well-known propriety brands, namely

MacCoffee, Petrovskaya, Klassno, Hyson, OrienBites, and Kracks also contribute to the strengths of

Food Empire. The various awards that the company won, such as the Forbes’ prestigious list of

“Asia’s 200 Best Under a Billion” serve as evidences of the company’s excellent performance.

Despite being headquartered in Singapore, the company does not sell their products in Singapore but

exports and sells their products to more than 60 other countries instead. These countries include

Russia – which is Food Empire’s main market, followed by Ukraine, Kazakhstan, China, Mongolia,

Vietnam, the Philippines, Myanmar, Iran, Kenya, and the United States.

Business Risk

Business risk refers to any factor that threatens a company's ability to meet its target or achieve its

financial goals (Kenton, 2019). One of the factors include political risk from foreign exposure. From

the case, it can be seen that Food Empire earns a large proportion of their revenues overseas, for

instance Russia and Ukraine each contributed 55.77% and 10.71% of the company’s total revenue

respectively. Having heavy reliance on these two countries is risky especially because of the political

tension and worsened economic condisions in Russia and Ukraine.

After the Soviet Union's dissolution in 1991, Russia and Ukraine have undergone periods of tensions

and outright hostility (Thompson, 2017). This is worsened by the crisis in 2014 when Russia

completed the annexation of Crimea. As a result of the political dispute, both Ukrainian hryvnia and

Russian ruble depreciated especially after Russia faced several trade sanctions from the violation of

various international laws. Additionally, because of the depreciation, Food Empire was vulnerable to
earnings decline due to the worsened exchange rate of rubles and hryvnia to US$ where it has lost

54.7% and 65.7% of its value from 2013 to 2015 respectively. Unfortunately, due to the foreign

exchange loss, Food Empire reported a net loss of US$13.6 million when they could have earned

US$15.6 million of net profit.

Another possible business risk of Food Empire is the vast presence of competitors. The food and

beverage industry is a highly competitive market where manufacturers compete to develop similar

alternative products for their customers (McKewen, n.d). From the case, it can be seen that Food

Empire is not the market leader and that they have larger-sized competitors earning higher amount of

revenues. In the year 2014.

Moving on from the introduction section, the next part of the essay will consist both qualitative and

quantitative analysis of Food Empire to help investors in making decisions on whether to keep,

increase or sell of their shares.

 PART II

Analysis

SWOT Analysis

In this case, the SWOT analysis of Food Empire (refer to Appendix A) acts as a qualitative analysis to

help aid investors when making decisions when investing in the company.

From the analysis, Food Empire is already a well-established company offering wide array of

products with stong branding. This is evident from the various awards that they have received,

including being ranked by the Singapore Brand Awards as one of the “The Strongest Singapore

Brands”. There are also some opportunities that the company has considered such as diversifying into

the upstream business especially in Asia whereby the company had successfuly established a new

production facility in Andhra Pradesh, India in 2014 and built a non-dairy creamer plant in Malaysia.

Besides that, the company also had the opportunity to increase coffee consumption in European

countries such as Russia. The country had imported around 4.7 million 60 kg bags of coffee which is

double the import level in the year 2000 (Ketz, and Ian Tai, 2018).

However, Food Empire relies heavily on foreign income. This is considered a weakness for them as

there are various threats that arise such as foreign currency loss and poor economic condition that can

be caused due to political stability, as mentioned above. Additionally, the food and beverage

manufacturers regulations in Singapore can also affect the operations of Food Empire especially now

that there are stricter regulations on the labelling and advertising of food ( “Parliament: Stricter Rules

Passed for Health Claims and Sale of Food, Infant Formula Milk.” 2017) .

Common Size Financial Statement

From the common size income statement (refer to Appendix B), the company’s net income decreases

throughout the years. The sharpest decrease is experienced from 2013 to 2014 whereby net income

fell from 4.56% to -5.20% of sales. This is possibly resulted from the stark increase in the foreign

exhange loss from -0.76% in 2013 to -11.60% in 2014. The sharp increase in foreign loss is resulted

from the depreciation of Russian rubles and Ukrainian hryvnia against the U.S dollars as mentioned

earlier.
Additionally, the common size balance sheet shows us that the long-term debt of the company

generally increases throughout the years especially from 2012 with 5.7% to 2013 with 11.8% of its

total liabilities and stockholders’ equity. Short-term debt also generally increases but experienced the

sharpest rise from 2013 to 2014 1.75% to 4.1% when it double in size. This may be because the

company needs immediate capital due to the loss that they have been experiencing and increasing

their debt is an effective way to finance business operations. However, the company’s non-current

assets specifically the net property, plant and equipment have been increasing throughout the years in

relation to its total assets. This is a good sign for investors because it shows the company’s positive

long-term outlooks and profitability, since plant, property and equipment are physical, tangible assets

expected to generate economic benefits and contribute to revenue for many years (Murphy 2019).

Financial Ratios

The financial ratios of Food Empire and its peers can be obtained in Appendix C and Appendix D

respectively.

The company’s short-term liquidity measures the ability of Food Empire to meet its short-term

financial obligation (Wohlner, 2018). The current and quick ratio generally decreases throughout the

years, especially from 2013 to 2014 where they fell by 0.8 and 0.88 respectively. This can be resulted

from the increase in short-term debt from 2013 to 2014. Comparing these ratio to the peers, the

current ratio of Food Empire in 2014 of 2.30 is better than most of the competitors except for Petra

Food Ltd with a slightly better ratio of 2.32. Same goes to the quick ratio of the company – 1.40 in

2014, where there are only three competitor with better ratio.

The solvency ratio measures the ability of the company to meet its debt obligation (Kenton, 2019).

The debt to assets ratio shows the amount of assets that is financed by debt, the higher the ratio, the

riskier it is for Food Empire. This ratio of the company increases throughout the years, especially

from 2013 to 2014. This can be due to the increased number of debt as well as assets. Comparing this

to its peers, most of the peers have better and lower ratios ranging from 0.03 to 0.21.

In analysing the asset use efficiency ratio, it can be seen that the inventory period of Food Empire

increases throughout the years. In 2014, the performance worsen and compared to its peers, the
company takes longer to sell their goods or turn inventory into cash. This may be due to the increased

in cost of manufacturing.

From the profitability ratio of the company, the gross margin ratio of the company is proven to be

higher than most of its competitors with a ratio of 0.4. This ratio shows us that Food Empire can

produce their products effectively due to relatively a low and stable cost of revenue as supported in

the common size balance sheet. However, the net profit margin ratio has worsened throughout the

years and it became -0.05 in 2014. This is because the company experienced net loss because of the

stark increase in foreign exchange loss. Comparing to the competitors, Food Empire net profit ratio is

one of the worst because the other competitors generally has positive net profit ratio – except for

Premier Foods plc with -0.29 ratio. Additionally, return on assets in -0.05 and return on equity is

-0.09, this is because company with net loss is bound to have negative return on equity and return on

assets.

In analysing the market value ratio, three types of ratios can be used. Firstly, the price/earnings ratio

measures the current share price relative to the earnings per share (Hayes, 2019), this ratio tends to

fluctuates from 2010 to 2013. However, since Food Empire experienced loss in 2014, this ratio would

not have any value. Secondly, the price/book ratio measures the current market price to its book value

(Hayes, 2019). The price/book ratio decreases from 2010 to 2014 with the lowest ratio of 0.8 in 2014.

This can be because the decreasing book value of Food Empire from 2010 to 2014 as shown in

Appendix E. The price/sales ratio shows how much the market values every dollar of Food Empire’s

sales (McClure, 2019). The lower the price/sales ratio, the more attractive the investment. In the case

of Food Empire, the ratio generally decreases throughout the five years. This can be because the

revenue of company generally increases throughout the years despite a relatively small fall in 2014 as

it can be seen in the case.

Valuation Using Book Value

The net tangible asset (NTA) per share (refer to Appendix E) can also be used to value the company.

The NTA per share of Food Empire increases from 2010 with US$0.33 to 2013 with US$0.41.

However, the NTA per share drops in 2014 to $0.34. This fall may be resulted from the increased
usage of debt in 2014 as a way for the company to deal with the net loss, which resulted in an

increased total liabilities.

Valuation Using Dividends

The dividends of Food Empire show an increasing trend from the year 2000 to 2007 and it generally

shows a decreasing trend in the next seven years. The fell in dividends in the year 2007 is resulted

from the 2007-2008 financial crisis. The company has the lowest dividend in the year 2014 with $0.

This is because the company experienced a net loss and therefore unable to distribute earnings to the

shareholders. From the dividend model (refer to Appendix F), the share price calculated will represent

the present value of all future dividends. Since, the share price calculated is a negative number, this

shows that shareholders may get no or very little dividends in the future.
 PART III
Conclusion
Solely based on the analysis above, I would suggest investors to sell off their shares, this is because

the share price calculated from the dividend model is a negative number. Additionally, the company

was not able to pay off any dividends in 2014 which is very unattractive for investors. The net profit

ratio of the company has also been worsening throughout the years and one of the lowest in 2014 as

compared to its competitors. Besides that, the company places heavy reliance on Russia and Ukraine

for their income and these countries poor economic performance will negatively affect Food Empire

earnings.

Having said that, if the investors have a diversified portfolio and the investors have invested in other

industry other than the food and beverage industry, they can choose to keep their shares instead.This

is because the company is a well-established company that has attracted customers loyalty over the

years. Besides that, the company has also diversified their investments in Asia, meaning that they can

reduce their reliance on Russia and Ukraine. Additionally, the negative share price from the dividend

model is just a current assumption and it is still possible for the company to grow in the future.
 PART IV
Appendices

Appendix A: SWOT Analysis of Food Empire

Strengths Weaknesses

 Wide variety of high-quality products -  Heavy reliance on income from

around 200 different types of products overseas
are sold worldwide

 Large international customer base - they

export to 60 countries worldwide

 Well-recognised brand name

Opportunities Threats

 Increase in Europe coffee consumption  Political instability in the main

markets Food Empire operate in -
 Building brand equity through marketing Russia and Ukraine

 Growth opportunities in Asia  Depreciation of foreign currency

that results in foreign currency loss

 Competitive food and beverage

industries

 Strict food and beverage regulation

in Singapore
 Appendix B: Common Size Financial Statements

Common Size Income Statement

Fiscal year ends Dec 31st 2010 2011 2012 2013 2014
Revenue 100.00 100.00 100.00 100.00 100.00
Cost of Revenue -57.39 -55.31 -55.04 -58.94 -54.80
Gross Profit 42.05 44.25 44.54 41.06 45.20
Total operating expense -93.24 -37.61 -36.55 -35.74 -39.60
Operating income 8.11 6.64 7.98 5.32 5.20
Interest expense -0.40
Foreign exchange gains(losses) -0.44 0.42 -0.76 -11.60
Other income (expense) 4.55 0.88 0.84 0.38 0.00
Income before taxes 7.95 7.08 9.24 4.94 nill
Provision for income taxes -0.44 -0.42 -0.38 1.20

Net income 7.95 6.64 8.40 4.56 -5.20

Earnings per share 0.02 0.01 0.02 0.01 -0.01

Number of shares outstanding 300.57 234.07 222.27 202.66 213.20
EBITDA 7.95 7.96 10.50 6.08 -4.40
Common Size Balance Sheet

Fiscal year ends Dec 31st 2010 2011 2012 2013 2014
Cash and cash equivalents 24.85 18.72 22.27 11.81 9.01
Receivables 29.59 29.41 26.07 22.36 18.02
Inventories 14.20 11.76 12.80 18.14 20.72
Prepaid expense 1.18 3.74 3.32 2.95 1.80
Other current assets 1.18 2.14 0.95 1.27 2.70
Total Current Assets 71.01 65.78 65.40 56.54 52.25

Net property, plant and equipment 10.65 12.83 16.11 26.16 30.18
Intangible assets 7.69 6.95 6.16 5.49 4.50
Other long-term assets 10.65 12.30 12.80 12.24 13.51
Total non-current assets 28.99 32.62 35.07 43.88 47.75

Total assets 100.00 100.00 100.00 100.00 100.00

Short-term debt 0.6 0.5 0.5 1.7 4.1

Accounts payable 15.4 13.9 12.8 13.1 16.2
Other current liabilities 1.2 1.1 5.2 4.6 6.3
Total current liabilities 17.2 15.5 18.0 17.7 22.5

Long-term debt 3.0 6.4 5.7 11.8 14.9

Deferred taxes liabilities 0.6 0.0 0.0 0.4 0.5
Total non-current liabilities 3.6 7.0 5.7 12.2 15.3

Common stock 23.7 21.4 19.0 17.3 18.5

Retained earnings 55.0 55.1 56.4 52.7 49.5
Accumulated other comprehensive
income 0.6 1.1 0.9 0.0 -5.9
Total stockholders' equity 79.3 77.5 76.3 70.0 62.2

Total liabilities and stockholders'

equity 100.0 100.0 100.0 100.0 100.0

Appendix C: Financial Ratios of Food Empire

 2010 2011 2012 2013 2014
Short-term Liquidity
Current Ratio 4.1 2.9 3.63 3.2 2.3
Quick Ratio 3.3 3.5 2.92 2.2 1.4
Solvency
Total Debt to Assets Ratio 0.04 0.2 0.09 0.1 0.3
Time Interest Earned nill nill nill nill -15.0
Asset Use Efficiency
Inventory Period 86.7 64.2 75.23 101.3 122.6
Receivable Period 103.7 88.8 84.35 73.6 58.4
Payable Period 94 75.9 75.20 73 95.9
Profitability
Gross Margin Ratio 0.4 0.4 0.44 0.4 0.5
Net Profit Margin Ratio 0.08 0.066 0.08 0.05 -0.05
ROA 0.08 0.122 0.15 0.05 -0.06
ROE 0.1 0.103 0.12 0.07 -0.09
Market Value
Price/Earning 15.4 9.1 12.0 14.7 nil
Price/Book 1.6 0.9 1.5 1.4 0.8
Price/Sales 1.2 0.6 1.0 0.9 0.5
Appendix D: Financial Ratios of Peers
 Appendix E: Net Tangible Asset per Share

In SGD

2010 2011 2012 2013 2014

$0.23 $0.25 $0.28 $0.29 $0.24

In USD

2010 2011 2012 2013 2014

$0.33 $0.36 $0.40 $0.41 $0.34

 Appendix F: Constant Growth Dividend Model

Dividend
Share price=
Required Return−Growth

0.00563
¿
6.35−9.85

¿ U $ (−0.00 1608)

Note: Dividend is calculated using dividend from year 2013.

 PART V
Bibliography

Hayes, Adam. 2019. “What the Price-to-Book Ratio (P/B Ratio) Tells Us.” Investopedia. Investopedia.

March 12. https://www.investopedia.com/terms/p/price-to-bookratio.asp.

Hayes, Adam. 2019. “What the Price-to-Earnings Ratio Tells Us.” Investopedia. Investopedia. March 12.

https://www.investopedia.com/terms/p/price-earningsratio.asp.

Kenton, Will. 2019. “Business Risk.” Investopedia. Investopedia. March 27.

https://www.investopedia.com/terms/b/businessrisk.asp.

Kenton, Will. 2019. “How to Use the Solvency Ratio.” Investopedia. Investopedia. April 8.

https://www.investopedia.com/terms/s/solvencyratio.asp.

Ketz, and Ian Tai. 2018. “Is Food Empire Holdings A Good Investment?” Value Invest Asia. July 11.

https://valueinvestasia.com/food-empire-holdings-limited/.

McClure, Ben. 2019. “How to Use Price-To-Sales Ratios to Value Stocks.” Investopedia. Investopedia.

March 12. https://www.investopedia.com/articles/fundamental/03/032603.asp.

McKewen, Ellen. n.d. “Challenges and Trends Facing Food and Beverage Manufacturers in 2016.”

Challenges and Trends Facing Food and Beverage Manufacturers in 2016.

https://www.cmtc.com/blog/food-and-beverage-manufacturing-trends-and-challenges-2016.

Murphy, Chris B. 2019. “How to Analyze Property, Plant, and Equipment (PP&E) with Exxon's PP&E.”

Investopedia. Investopedia. April 11. https://www.investopedia.com/terms/p/ppe.asp.

“Parliament: Stricter Rules Passed for Health Claims and Sale of Food, Infant Formula Milk.” 2017.

TODAYonline. November 8. https://www.todayonline.com/singapore/laws-sale-food-amended-rule-

changes-infant-formula-milk-labels.

Thompson, Nick. 2017. “Ukraine: Everything You Need to Know about How We Got Here.” CNN. Cable

News Network. February 3. https://edition.cnn.com/2015/02/10/europe/ukraine-war-how-we-got-

here/index.html.

Wohlner, Roger. 2018. “Liquidity Measurement Ratios.” Investopedia. Investopedia. March 20.

https://www.investopedia.com/university/ratios/liquidity-measurement/.