MEMORANDUM

To: Board of Directors of Fan Milk Ltd

From: Financial Analyst

Date: 12th December 2019

Subject: Financial Analysis of the performance of Fan Milk Ltd for 2015, 2016 and 2017

Introduction

This report seeks to assess the financial performance of Fan Milk Limited. The report

will cover a period from 2015 to 2017 years (3-year period). The analysis of the financial

performance will be based on the statement of profit or loss and other comprehensive income,

statement of financial position and statement of cash flow for 2015, 2016 and 2017. The

analysis will also be done using trend analysis and ratio analysis. The report will cover the

current strategic situation of Fan Milk Limited and recommendations will be forwarded to the

Board of Directors of Fan Milk Limited as well.

Company profile

Fan Milk Limited is a dairy products company that is listed on the Ghana stock

exchange. It is based in Accra and it has recently expanded to other West African countries. It

was started in the year 1960 as the Ghanaian Milk Company but has since rebranded to Fan

Milk Limited. It rebranded and it then expanded the scope of its activities by now going

further into making ice creams, ice lollies, and yoghurt. It was listed in GES in the year 1991.

It has a total of more than 116.21 issued shares and more than 200 million authorized shares.

Mission

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 The mission of Fan Milk Ltd is to produce high quality, nutritious and refreshing

products to their consumers. They are also committed to achieving excellence in all areas of

their corporate endeavour, whilst adding to stakeholder value.

Type of business

The company operates in the Food Industry. The company is into the production and

distribution of milk-based and fruit-based products such as ice cream, yoghurt, and ice lollies.

Principal activities

The principal activity of the company is the manufacturing and distribution of dairy

products and fruit drinks.

Key Stakeholders

The key stakeholders for Fan Milk Limited are its customers and shareholders

Board of Directors

The board is responsible for setting the Company's strategic direction, for leading and

controlling the Company and for monitoring activities of executive management. The board

presents a balanced and understandable assessment of the Company's progress and prospects.

The board consists of the chairman, vice-chairman, five non-executive directors and an

executive director (the managing director). The board members, except the Managing

Director, are independent of management and free from any constraints, which could

materially interfere with the exercise of their independent judgment. They have experience

and knowledge of the industry, markets, financial and other business information to make a

valuable contribution to the Company's progress. The managing director is a separate

individual from the chairman who implements the strategies and policies adopted by the

board. They meet at least four times a year.

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Key competitors

Fan Milk Limited has a number of market competitors who are also engaged in the

Consumer Goods sector and/or the Food Production Industry. This includes Hords Limited,

Unilever Ghana Limited, Samba Foods Limited, Guinness Ghana Breweries Limited,

Produce Buying Company Limited

Corporate governance

Fan Milk Limited is committed to the principles and implementation of good

corporate governance. The Company recognises the valuable contribution that it makes to

long-term business prosperity and to ensuring accountability to its shareholders. The

Company is managed in a way that maximises long term shareholder value and takes into

account the interests of all of its stakeholders.

Fan Milk Limited believes that full disclosure and transparency in its operations are in

the interests of good governance. As indicated in the statement of responsibilities of directors

and notes to the accounts, the business adopts standard accounting practices and ensures

sound internal control to facilitate the reliability of the financial statements.

Financial Analysis

Trend Analysis – Horizontal Analysis

INCOME STATEMENT

Revenue increased by 41% in 2017 considering 2015 as a basis period. This can be

attributable to favourable weather experienced during 2017. It can also be that, the company

invested more in distribution by establishing more distribution outlets which caused the

distribution cost to also increase by 47% in 2017. This led to an increase in revenue during
3
the year 2017. The cost of sales also increased by 21% in 2016 and 52% in 2017. This can

also be attributed to an increase in the prices of the cost of sales. This caused the Gross profit

to also increase by 31% in 2017 and 24% in 2016. As stated already, Distribution cost

increased by 47% in 2017 and 16% in 2016. Due to the changes in inflation, staff salaries

were increased in 2017. This caused the administrative expenses to increase by 57% in 2017.

However, it initially increased by 9% in 2016. Other income increased by 143% in 2017

since exchange gain increased as a result of the depreciation of the cedi during the year 2017.

The company’s other income decreased by 28% in 2016. The company paid more finance

costs in 2016 as compared to 2017 and 2015. Though, the total liability kept on decreasing

from 2015 to 2017. Due to changes in the tax system in 2016, the company’s income tax

expense increased by 29%. There was a decrease in tax expense in 2017 by 1%. Finally, the

company profit for the year increased by 33% in 2016 but increased by 5% in 2017. Below is

the trend analysis of the income statement in a graphical representation.

Income Statement Trend Analysis

500,000 300%

400,000
250%
300,000
200%
200,000

100,000 150%

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2017 2016 2015 2017 2016 2015

FINANCIAL POSITION

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 From the figure below, 2016’s Property, Plant and Equipment was the highest among

the three years. The business pumped more cash in acquiring non-current assets in 2016.

2017’s PPE was the next highest. Inventory increased in 2016, however, 2017’s inventory

was more than the 2016’s own. On average, total assets increased in 2017. State capital didn’t

change since the company couldn’t issue any share. The income surplus for 2017 increased as

well as 2016’s income surplus.

Financial Position Trend Analysis

350,000 600%
300,000 500%
250,000 400%
200,000
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150,000
100,000 200%
50,000 100%
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2017 2016 2015 2017 2016 2015

CASH FLOW STATEMENT

In relation to how the company utilized its cash and generated cash, the following

trend analysis was done. First and foremost, the cash generated from operation decreased by

32% in 2016, and a 37% decrease in 2017. This can be as a result of the late payment of

customers and early payment to suppliers. The interest paid increased by 43% in 2016 and

38% in 2017. Interest received decreased by 11% in 2016. However, a 78% decreased in

interest received was experienced in 2017. Due to the change in government in 2016, the

company’s tax paid increased by 30% in 2016 and 5% in 2017. The company’s purchase of

PPE increased by 692% in 2016. These assets were acquired to replace ineffective ones. The

increment falls to 261% in 2017. Purchase of intangible assets also increased in 2016 by

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546%. The company didn’t acquire any intangible assets in 2017. The purchase of PPE led to

a corresponding increase in sales of PPE by 91% in 2016 and 136% in 2017. Dividend paid

increased by 13% in 2016 but no dividend was paid in 2017. Cash and cash equivalent

decreased by 73% in 2016 and decreased by 79% in 2017.

Chart Title
150,000 1000%
100,000 800%
50,000 600%
0 400%
-50,000 200%
-100,000 0%
-150,000 -200%

2017 2016 2015 2017 2016 2015

RATIO ANALYSIS

This involves the use of ratios to analyse the financial statement of companies.

Profitability Ratios

These ratios consider the amount of profit derived from the cost of goods sold or the

operating expenses. The gross profit margin decreased from 50.43% in 2015 to 46.78%.

Although the revenue increased by 41% in 2017, the cost of sales increased by 52%. The

increase in revenue can be attributable to favourable weather conditions in 2017, the

introduction of new products in 2017 and an increase in an advertisement. Upon all these

favourable conditions, the magnitude increase in the cost of sales superseded the increase in

the cost of sales. This caused the gross profit margin decreased in 2017. The Gross profit

margin initially increased in 2016 from 50.43% to 51% in 2017. Revenue increased by 23%

and the cost of sales increase by 21%. The increase in the cost of sales can be attributable to

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the increase in the cost of inputs and a high level of inventory in stock. The net profit margin

initially increased from 15.76% in 2015 to 17.11% in 2016 and decreased to 10.61% in 2017.

During the year 2017, distribution cost increased by 47% in 2017 from the year 2015.

Administrative expenses also increased by 57%, however, other income increased by 143%

in 2017. This was a result of a 110% (from GHS 657 to GHS 7955) increase in exchange gain

which aroused from the company’s dealings in foreign exchange. Finance income decreased

by 77% in 2017 whilst finance cost, on the other hand, increased by 33%. This caused the Net

profit decreased by 5%. The increase in distribution cost was a result of an increase in the

distribution channels. The 57% increase in Administrative expenses can also be attributed to

the establishment of a new managerial position or an increase in the salaries of management.

Operating profit increased from 21.38% in 2015 to 23.05% in 2016 and decreased to 14.63%

in 2017.

Return on Capital Employed (ROCE) ratio explains how the capital employed by the

company is used to generate profit for the business. The company’s profit before interest and

tax increased by 32% in 2016 and fell by 3.26% in 2017. The change in profit before interest

and tax should have affected the Return of Capital Employed (ROCE) but since the

percentage increase in the total assets is higher than the percentage increase in Profit Before

Interest and Tax (PBIT). Total assets increased by 14.40% in 2016 and 40.10% in 2017. This

caused the Return on Capital Employed (ROCE) to increased from 31.48% to 36.34% in

2016 and decreased to 21.74% in 2017. This indicates that, out of the three-year period, the

company effectively used its total assets in 2016. This can be a result of the higher operating

profit in the year 2016. The company’s operation in 2016 was very effective. However, the

company invested a huge sum in assets during 2017 which caused the ROCE to fall to

21.74%.

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 Return on Equity (ROE) ratio explains how the shareholder’s fund is used by the

company to generate profit. The company’s shareholders' funds increased from 2015 to 2017.

Though the company didn’t issue any shares during 2016 and 2017 the Shareholders fund

increased by 44.98% in 2016, and 84.30% in 2017. This increase was a result of the increase

in profit retained for the years 2015, 2016 and 2017. This caused the ROE to fall from

56.06% in 2015 to 51.07% in 2016 and a drastic 21.64% fall in 2017.

Liquidity

These ratios are used to determine whether a company is able to meet short-term

financial obligations. It takes into consideration the ratio of liquid assets to short-term

liabilities. The analysis of liquidity was based on the current ratio and the quick or acid test

ratio. The current ratio compares current assets to a current liability. This ratio compares how

the company can use its current assets to cover its current liabilities in a short period. The

threshold for the current ratio is 2:1. However, the current ratio decreased from 1.75 in 2015

to 1.41 in 2016 and rose to 1.71 in 2017. Current liabilities fell drastically by 21.65%. The

decrease in current liability is due to the fact that the company has paid most of its current

debt with its current asset. The current asset also decreased from GHS 152,229 to GHS

116,571 representing a 23.4% decrease. The quick ratio also gave a favourable ratio (1.20:1

time) in 2015 but decreased to 0.592:1 time. It increased to 0.74:1 time in 2017 due to a

drastic increase in the current assets in 2017. The quick acid test considers all current assets

except inventory which is seen to be illiquid. Inventory increased in 2016 and 2017 but the

corresponding increase current asset was strong. The company’s liquidity level in 2015 was

favourable as compared to subsequent years

Activity ratios

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 Inventory turnover is a measure of the number of times inventory is sold or used in a

time period such as a year. So, during 2015, the inventory turnover increased from 3.30 to

3.66 in 2016 but fell to 3.58 in 2017. This was a result of more inventory held by the firm in

2016 and 2017. The cost of sales also increased drastically by 51.8% in 2017. The Asset

turnover improved in 2016 when it increased from 1.47 times in 2015 to 1.58 times in 2016

and decreased to 1.48 times in 2017. This is a result of an increase in revenue and total asset

during the years. Receivables turnover decreased from 43.96% in 2015 to 16.11% in 2017.

This is better since the company is able to collect most of its sales made on the credit. Thus,

few debts were raised as and when the company sold its products on credits. However, its

debtor’s collection period increased from 8.30 days in 2015 to 22.66 days in 2017. This

indicates that the company takes a long period of time to collect the few debts that are arises

from credit sales. The receivables turnover was very high in 2015, in view of that, the

company instituted credit collections policy in order to collect an overdue debt. In 2017, the

debt collections policy became very weak. The company’s payables turnover increased from

1.859 in 2015 to 3.65 in 2017. This increment came up as a result of a 51.8% increase in

purchases and a 22.61% decrease in creditors. The company paid most of its debt. Most of

the purchases made were paid. However, the creditors' payment period decreased from 196

days to 100 days. This can motivate the suppliers to give goods to the company on credit to

will enhance production.

Gearing Ratio

Gearing ratios are used to predict the long-term solvency of a firm. These ratios

emphasize the long-term solvency of a firm as well as its long-term commitments to

creditors. The debt ratio measures the percentage of total assets financed by debt. The higher

the ratio, the more a firm’s assets are provided by creditors relative to owners. The debt ratio

decreased from 43.85% in 2015 to 28.84% in 2016 and further decreased to 26.13% in 2017.

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Creditors would prefer 2017’s debt ratio since the lower the ratio, the lower the risk of losing

going into liquidation. The owners, on the other hand, may want more leverage because it

increases earnings since interest paid on these debts is tax-exempt. The debt to equity ratio

decreased from 78.1% to35.38% in 2017. The debt decreased by 16% from 2015 to 2017

whilst shareholder’s fund increased. The decrease in debt didn’t reflect on the interest they

paid. The interest expense increased from GHS 1,059 to GHS 1,411. This caused the interest

cover to decrease from 63.67 to 46.23 time in 2017. The higher the ratio, the greater the

assurance of continued interest payments in case of decreased earnings.

Investor market ratio

This ratio focuses on the investors' viewpoint. The earnings per share are the cedi

amount on a share of inventory during the reporting period. The earnings per share increased

from 0.43 to 0.57 in 2016. This was due to an increase in profit. The number of shareholders

was constant throughout the three-year period. The earnings fall to 0.41 in 2017 due to a fall

in the profit. This indicates that each share earns 41 pesewas which are seen as moderate as

compared to competing companies in the industry. For 2015 and 2016, the dividend was

declared by the management. Dividend per share was GHS 0.0122 and 0.00897 from 2015 to

2016 respectively. The company’s Price / Earnings ratio increased from 17.09 in 2015 to

19.54 in 2016 and a drastic increase to 43.17 in 2017. This was a result of a 140.8% increase

in share price from 2015 to 2017. A company whose share price has increased by more than

140% is considered by investors as a high performing company. This will call out for more

investors to pump funds into the business. The payment of dividends in 2015 and 2016 can

also be attributed to the increase in the price of shares in 2017. Rational investors will invest

in firms that pay a dividend.

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Recommendation and Conclusion

The company performed very well in 2016 and 2017. The company should work on

their short-term liquidity issue by keeping more cash and cash equivalent to run day to day

administrative expenses. The company should continue to increase its distribution outlets and

advertisement campaign. The huge investments made by the company in the non-current

asset will affect the profit of the company in the future since depreciation will be charged on

them.

The company should maintain its capital structure since it tells more about the

company’s financial risk. The company should also increase the number of days they use in

paying creditors since it decreased in 2017. Though this motivates suppliers to do business

with the company, the company needs to use the funds for short term investment. Intensive

debt collection should also be instituted in order to collect debt regularly. The Administrative

and Distribution costs should be reduced by reducing the number of high positions or ranks

held by the company’s employees. An unprofitable distribution channel must be deleted in

order to improve the net income of the company. Based on the seasonal nature of the

operations of FanMilk Ltd, it will be recommended that the company extends its operation in

the production of other products that are not seasonal in nature. This will enable the company

to diversify any issue of risk.

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12
 APPENDIX
FINANCIAL STATEMENT FOR 2015, 2016 AND 2017
STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE
INCOME
(All amounts are in thousands of
Ghana cedis)
Year ended December 31

2017 2016 2015

Revenue 445,963 386,402 315,409
Cost of sales -237,345 -189,345 -156,345
Gross profit 208,618 197,057 159,064
Distribution costs -108,137 -85,371 -73,555
Administrative expenses -46,216 -32,162 -29,530
Other income 9,238 2,731 3,800
Operating profit 63,503 82,255 59,779
Finance income 1,726 6,793 7,648
Finance costs -1,411 -1,491 -1,059
Profit before income tax 63,818 87,557 66,368
Income tax expense -16,521 -21,429 -16,652
Profit for the year 47,297 66,128 49,716
Other comprehensive income 0 0 1
Total comprehensive income 47,297 66,128 49,716
Earnings per share
Basic and diluted (GH¢) 0.41 0.57 0.43

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STATEMENT OF FINANCIAL POSITION
(All amounts are in thousands of Ghana cedis)
At December 31
ASSETS 2017 2016 2015
Non-current assets
Property, plant and equipment 183,190 155,389 61,865
Intangible assets 348 580 120
Total non-current Assets 183,538 155,969 61,985
Current assets
Inventories 66,351 51,769 47,383
Trade and other receivables 27,688 11,064 7,175
Cash and cash equivalents 20,699 26,262 97,671
current income tax asset 1,833 - -
Total Current Asset 116,571 89,095 152,229
TOTAL ASSETS 300,109 245,064 214,214
EQUITY & LIABILITY
Equity attributable to owners
Stated capital 10,000 10,000 10,000
Income surplus account 211,676 164,379 110,278
221,676 174,379 120,278
Liabilities
Non-current liabilities
Deferred income tax 10,247 7,649 6,907
Current liabilities
Trade and other payables 65,082 59,168 84,097
Current income tax - 614 207
Dividend payable 3,104 3,254 2,725
68,186 63,036 87,029
Total liabilities 78,433 70,685 93,936
TOTAL EQUITY & LIABILITIES 300,109 245,064 214,214

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STATEMENT OF CASH FLOWS
(All amounts are in thousands of Ghana cedis) Note Year ended December 31
2017 2016 2015
Cash flows from operating activities
Cash generated from operations 58,931 62,803 92,995
Interest paid -1,430 -1,491 -1,040
Interest received 1,674 6,793 7,610
Tax paid -16,370 -20,280 -15,588
Net cash generated from operating activities 42,805 47,825 83,977
Cash flows from investing activities
Purchase of property, plant and equipment -49,111 -107,815 -13,613
Purchase of intangible assets - -601 -93
Proceeds from sale of property, plant and equipment 841 680 356
Net cash used in investing activities -48,270 -107,736 -13,350
Cash flows from financing activities
Dividend paid -150 -11,498 -10,186
Net cash used in financing activities -150 -11,498 -10,186
(Decrease)/increase in cash and cash equivalents -5,615 -71,409 60,441
Cash and cash equivalents at the beginning of the year 26,262 97,671 37,230
Effects of exchange rate changes on cash and cash
equivalents 52 - -
Cash and cash equivalents at the end of the year 20,699 26,262 97,671

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 RATIO CALCULATIONS
2017 2016 2015
PROFITABILITY
RATIOS
Gross Profit margin 208,618 197,057 159,064
× 100 ×100 × 100
Gross Profit 445,963 386,402 315,409
= ×100
Revenue =46.78% = 51% = 50.43%
Net Profit Margin 47,297 66,128 49,716
× 100 ×100 ×100
Net Profit 445,963 386,402 315,409
= × 100
Revenue = 10.61% = 17.11% = 15.76%
Operating Profit margin 63,818+1,411 87,557+1,491 66,368+1,059
× 100 ×100 x100
PBIT 445,963 386,402 315,409
= ×100
Revenue = 14.63% = 23.05% = 21.38%
Return on capital 63,818+1,411 87,557+1,491 66,368+1,059
x100 ×100 x100
employed 300,109−10,247 245,064−7,649 214,214−6,907
PBIT = 22.50% = 37.51% = 32.53%
= × 100
Capital Employed
Return on Asset 63,818+1,411 87,557+1,491 66,368+1,059
× 100 ×100 ×100
PBIT 300,109 245,064 214,214
= ×100
Total Asset = 21.74% = 36.34% = 31.48%
Return on Equity 63,818+1,411 87,557+1,491 66,368+1,059
× 100 ×100 ×100
PBIT 221,676 174,379 120,278
= ×100
Shareholde r ' sfund = 29.43 % = 51.07 % = 56.06%

LIQUIDITY RATIO
Current Ratio 116,571 89,095 152,229
Current Asset 68,186 63,036 87,029
=
Current Liability = 1.71: 1 times = 1.41: 1 times = 1.75: 1 times
Quick/Acid test ratio 116,571−66,351 89,095−51,769 152,229−47,383
= 68,186 63,036 87,029
Current Asset−inventory =0.74: 1 times = 0.592: 1 times = 1.20: 1 times
Current Liability

ACTIVITY RATIO
Inventory Turnover 237,345 189,345 156,345
Cost of sales 66,351 51,769 47,383
=
Average Inventory = 3.58 = 3.66 = 3.30
Receivables Turnover 445,963 386,402 315,409
Credit sales 27,688 11,064 7,175
=
Average Receivables =16.11 = 34.92 = 43.96
Payables Turnover 237,345 189,345 156,345
Credit Purchases 65,082 59,168 84,097
=
Average Creditors = 3.65 = 3.20 = 1.859
Assets Turnover 445,963 386,402 315,409
Revenue 300,109 245,064 214,214
=
Total Assets = 1.48 times = 1.58 times = 1.478 times
Debtors Period 27,688 11,064 7,175
× 365 days ×365 days ×365 days
445,963 386,402 315,409

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 Receivables = 22.66 days = 10.45 days = 8.30 days
= × 365 days
Credit Sales
Creditors payment period 65,082 59,168 84,097
×365 days ×365 days ×365 days
= 237,345 189,345 156,345
Creditors = 100 days =114 days = 196 days
×365 days
Credit Purchases

GEARING RATIO
Debt to Equity Ratio 78,433 70,685 93,936
×100 ×100 ×100
Total Debt 221,676 174,379 120,278
= ×100
Total Equity = 35.38% =40.54% = 78.1%

Debt to Total Asset 78,433 70,685 93,936

×100 × 100 × 100
Total Debt 300,109 245,064 214,214
= ×100
Total Assets = 26.13% = 28.84% = 43.85%
Interest cover 63,818+1,411 87,557+1,491 66,368+1,059
= 1,411 1,491 1,059
Profit Before Interest ∧Tax = 46.23 times = 59.72 times = 63.67 times
Interest Expense
MARKET OR
SHAREHOLDER’S
RATIO
Earnings per share 0.41 0.57 0.43
PBIT
=
No of shareholders
Dividend per share 0 12,027,000 10,459,000
Total Dividend 116,207,288 116,207,288 116,207,288
=
No of shareholders =0 =0.10 =0.09
Dividend Yield 0 0.10 0.09
Dividend per share 17.70 11.14 7.35
=
Price per share =0 =0.00897 = 0.0122
Earnings Yield 0.41 0.57 0.43
Earnings per share 17.70 11.14 7.35
=
Price per share =0.023 = 0.051 = 0.059
Price Earnings Ratio (P/E) 17.70 11.14 7.35
Price per share 0.41 0.57 0.43
=
Earnings per share = 43.17 = 19.54 = 17.09

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TREND ANALYSIS
INCOME STATEMENT
2017 2016 2015
Revenue 141% 123% 100%
Cost of sales 152% 121% 100%
Gross profit 131% 124% 100%
Distribution costs 147% 116% 100%
Administrative expenses 157% 109% 100%
Other income 243% 72% 100%
Operating profit 106% 138% 100%
Finance income 23% 89% 100%
Finance costs 133% 141% 100%
Profit before income tax 96% 132% 100%
Income tax expense 99% 129% 100%
Profit for the year 95% 133% 100%

TREND ANALYSIS FOR CASHFLOW STATEMENT

2017 2016 2015

Cash generated from operations 63% 68% 100%
Interest paid 138% 143% 100%
Interest received 22% 89% 100%
Tax paid 105% 130% 100%
Net cash generated from operating activities 51% 57% 100%
Purchase of property, plant and equipment 361% 792% 100%
Purchase of intangible assets 0% 646% 100%
Proceeds from sale of property, plant and equipment 236% 191% 100%
Net cash used in investing activities 362% 807% 100%
Dividend paid 0% 113% 100%
Net cash used in financing activities 0% 113% 100%
(Decrease)/increase in cash and cash equivalents -9% -118% 100%
Cash and cash equivalents at the beginning of the
year 71% 262% 100%
Effects of exchange rate changes on cash and cash
equivalents 200% 0% 100%
Cash and cash equivalents at the end of the year 21% 27% 100%

18