To: Zambian Breweries Shareholders

From: ERUDICON Business Consultants

Date: 17th September 2020

REF: Year-end 31st December 2018 Financial Performance and Financial position
Analysis of Zambia Breweries.

As per your request, I have analyzed in depth the performance of your company in the
year ended 31st December 2018 and comparisons have been made with the prior year
2017 to establish precedence in the effectiveness of the strategies that have been
employed by management of the company. The various computations to aid in the
interpretations of financial indicators are attached in the appendix section.

Profitability

The profitability of the company was subject to an increase in revenue of 40.9%. This
increase may have been due to several reasons among them increase in prices,
production expansion or reduction in receivables. Management should be quick to
determine which among these factors is applicable for strategic planning purposes.
Further, the gross profit margin exhibited an increase of 46% signifying that the
company was managing its pricing policy well. Increase in gross profit percentage may
be due to increase in selling prices not matched by an increase in purchase prices. The
operating profit increased tremendously by 339% which means that the company was
able to meet its expenses much more effectively without much difficulty. The on capital
employed increased gigantically from 26% in 2017 to 116% in 2018. Return on net
assets seeks to assess the effectiveness of management in generating profit from the
assets at its disposal. The company was effectively utilizing its assets in profit
generation. Lastly, the net profit showed an extraordinary spike of 559% increase in
2018. The company’s overall profitability exhibited a positive increasing trend which
resonates well with its ability to pay dividends to its shareholders, to meet interest
payments on long term borrowings intended to be obtained as well as settling its tax
obligations without difficulty.

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Efficiency

The efficiency of the business in using its assets is assessed through its receivables,
payables and how quickly it is able to convert inventory into cash. The analysis showed
that the asset turnover was 1.58 times in 2018 which means that the company is
effectively using its assets to generate revenue. However, management ought to be
vigilant to ensure that it is not overtrading. Further, inventory days reduced in the year
which means that the ability to convert inventory into cash was heightened. Similarly,
the receivables days also showed a slight decrease to 43 days from 45 days, a positive
effect on revenue generation. On the contrary, the payables days increased drastically
which is a negative implication for the company. When the company holds on to
creditors finances for too long, this might affect the company’s credit purchase
agreements with vendors. It may be difficult to negotiate terms in the future if this
trajectory is not rectified.

Liquidity

The company’s liquidity stood at 0.91 and improvement from 0.89 in 2017. The ideal
ratio is 1:1 nevertheless the liquidity position is still favorable for the company to be able
to meet its short term obligations from current assets. The acid test ratio stood at 0.57 in
2018 and 0.47 in 2017 exhibiting a slight increase of 0.1. This is an average indication
that without inventory, the company can still be able to meet its short term obligations.
However, it must be emphasized that the liquidity of the company is highly propelled by
cash and cash equivalents. These could be short term securities that the company
holds in various avenues. This is a good strategy pre-empted by the company as this
will allow swift conversion of cash equivalents into cash should any obligations arise on
demand.

Gearing

Gearing is the proportion of debt finance to equity finance. The statements of Zambia
Breweries have categorically shown that the company as at 31 st December 2020 is
100% equity financed therefore I am inclined to receive any comment on this variable.

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3
The impact of the Covid 19 pandemic on the performance of Zambia Breweries

Introduction

The Covid 19 pandemic has had tremendous impact on the global economic activity
leaving many industries paralyzed. The effect has been harsh especially on industry’s
that were banned from conducting any form of business to pave way for measures to
combat the pandemic. In Zambia, the Zambia Breweries is among those hit by the
pandemic intensely. The value chain of the alcohol industry in Zambia starts from
production, wholesale/distribution and finally retail. The ban on alcohol products cut the
value chain at retail level consequently affecting the flow of products to consumers. The
effect of this disruption has had two major effects on Zambia Breweries.

The first effect of the Covid 19 on Zambia Breweries is operational. The production
department has forecasts and targets predetermined to meet customer demand. Many
customers in the alcohol industry place orders prior to production due to the huge
demand for alcoholic beverages in Zambia. Due to the ban on sale of alcoholic
beverages, the company was faced with challenges of production as demand
decreased acutely. This means that the company was not able to produce to capacity.
The implications of this is in three folds. The first is that the cost of idle capacity
increased significantly. Despite reduced production, the company had the obligation to
meet the cost associated with idle capacity and idle labor. Second, the holding costs
increased. Due to the ban, the company was not able to distribute its products in bulk
therefore it had to create extra space to store the products until such a time the ban is
lifted. These costs will affect the profitability of the company in the year 2020. Third is
the liquidity of the company. Customers that have credit facilities with Zambia Breweries
were not able to meet their obligations due to lack of sales. This meant that revenue
was been tied in receivables which possibly would result into bad debts if the customers
do not make enough sales to remit their due to ZB.

The second effect is external. This is associated with the industry challenges as a
whole. The Covid 19 pandemic has affected the exchange rate of the domestic currency
against major international currencies. During this period, the procurement of raw
materials was costly as most of these are imported from neighboring countries.

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Therefore, the total cost of purchases is high during Covid and ultimately will affect the
net profit for the year.

ANNEXES

Horizontal analysis

2018 2017 % change

Revenue 2,200,228 1,561,138 40.94%
Gross profit 1,001,074 683,784 46.40%
Operating profit 1,610,040 366,017 339.88%
Net profit 1,456,136 220,820 559.42%
Non-current 1,719,850 1,555,578 10.56%
assets
Current assets 3,212,050 1,506,968 113.15%
Equity 765,300 1,428,854 -46.44%
Liabilities 4,166,600 1,633,692 155.04%

Current Assets

2018 2017 2018 2017

Inventories 554343 482628 17.26% 47.93%
Trade and other receivables 260070 193691 8.10% 19.24%
Current income tax 5909 0.59%
Cash and cash equivalents 239763 324736 74.65% 32.25%
7
321205 100696 100.00%
0 4

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Vertical analysis

2018 2017 Proportion 2018 Proportion 2017

Revenue 2,200,22 1,561,138
8
Gross profit 1,001,07 683,784 45.50% 43.80%
4
Operating profit 1,610,04 366,017 73.18% 23.45%
0
Net profit 1,456,13 220,820 66.18% 14.14%
6
Non-current 1,719,85 1,555,578 34.87% 50.79%
assets 0
Current assets 3,212,05 1,506,968 65.13% 49.21%
0
Equity 765,300 1,428,854 15.52% 46.66%
Liabilities 4,166,60 1,633,692 84.48% 53.34%
0
Total assets 4,931,90 3,062,546
0

Ratio Analysis

2018 2017
Operating profit percentage 1,610,040∗100 366,017∗100
=73 % =24 %
2,200,228 1,561,138

Return on capital employed 366,017

∗100=26 %
1,555,578−119,474
1,610,040
∗100=116 %
1,719,850−328,921

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Asset turnover 2,200,228 1,561,138
=1.58 =1.09
1,390,929 1,436,104

Inventory days 554,343∗365 482,628∗365

=169 days =200 days
1,199,154 877,354

Receivables days 260,070∗365 193,691∗365

=43 days =45 days
2,200,228 1,561,138

Payables days 3,512,858∗365 869,378∗365

=1,069 days =362days
1,199,154 877,354

Current ratio 3,212,050 1,006,964

=0.91 =0.89
3,540,971 1,126,438

Acid test ratio 2,012,896 524,336

=0.57 =0.47
3,540,971 1,126,438

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Formulas

1.

EBIT
Return on capital employed= ∗100 %
Non−current assets+Working capital

Working capital=Current assets−Current liabiltie s

2018 2017
Working 3,212,050 - 3,540,971 = 1,006,964 - 1,126,438 =
capital -328,921 -119,474

2. Asset turnover = Revenue / Non-current assets + Working capital

3. Inventory holding period (in days) = Inventory x 365 / Cost of sales

4. Receivables collection period (in days) = Trade receivables x 365 / Credit sales

5. Payables payment period (in days) = Trade Payables x 365 / Credit purchases

6. Current ratio = current assets / current liabilities