Engro Accounting Analysis

Standard

 

Course: Principles of Accounting – I

 

 TERM PROJECT

ENGRO FOODS LIMITED

 

 

AN INTRODUCTION

Engro Foods Limited was officially launched as a fully owned subsidiary of Engro in 2004. Using dairy as a stepping stone to enter into the food business, the Company has established state-of-the-art processing units in Sukkur and Sahiwal, along with an ice cream production facility in Sahiwal.

With an acquisition of Al Safa – a fast growing and established Halal meat brand – Engro Foods is now venturing into North American market starting from Halal Foods category. The new organization, Engro Foods Canada Ltd. with a subsidiary Engro Foods USA, LLC, intends to aggressively grow the business in this market. Hence, currently it is operating in 310 cities and four provinces of Pakistan, as well as across18+ US states and 4 Canadian provinces.

 

Top quality brands like Olper’s, Olwell, Tarang, Omore and Owsum have been successfully launched under the helm of Company’s dairy products. To support these brands and their highest standards of quality, Engro Foods has invested heavily in milk processing and milk collection infrastructure. The vision of Elevating Consumer Delight Worldwide will shift the Company’s significant focus towards the global operations in the years to come.

 

FINANCIAL OVERVIEW

“Engro Foods will continue to make investments aimed at impacting lives and inspiring hope for millions of Pakistanis every day, in a multitude of ways.”- says the company’s vision.

 

As the country’s fastest growing local conglomerate and leading ice-cream manufacturer, the success of Engro Foods today directly translates into growth of Pakistan’s agri-business sector, accounting for more than 11% of Pakistan’s GDP.

 

 

 

 

PAST YEARS PROFIT AND LOSS ANALYSIS

Sales

The revenue has grown at a very rapid pace from the past 5 years. This is primarily the result of product innovation and launch of new segment.

 

Gross Profit

Gross Profit ratio has significantly improved from 55.7% in the past few years (From the financial statement).

The significant increase in gross profit is a direct consequence of efficiencies in production and economies of scale due to exponential growth in business volume.

 

Distribution and marketing expenses

In order to support continuous growth trajectory, significant expenditure has been incurred for brand building which led to manifold increase in marketing costs.

With many brands now in a very established position, the marketing costs now stand at 12% of revenue in 2012 compared to 26% in 2007.

 

Administrative and other expenses

These expenses have increased primarily due to larger support functions required to manage the business growth.

The expenses under these heads are mostly fixed in nature and therefore, have witnessed reduction in relation to revenue.

 

Finance cost

Finance costs increased with the higher amount of long-term borrowings.

Due to lowering of interest rates in 2012, the finance cost for 2012 is lower despite increase in amount of borrowing.

 

Provision for taxation

This is directly attributable to increase in profitability.

 

PAST YEARS BALANCE SHEET ANALYSIS

EQUITY

With time-to-time capital injections from the parent company and private placement in 2011, the share capital (including premium) has reached to Rs 8.4 billion in 2012 from Rs 2.2 billion in 2006 (From financial report).

The Company incurred losses in its earlier years. However, the recent profit trajectory has significantly increased Company’s overall equity position.

 

NON-CURRENT LIABILITIES

 

Long-term finances

In order to maintain the growth momentum, the Company continues to finance a portion of its capital requirement by raising long-term loans. Therefore, the long-term loans have significantly increased over the years.

The ratio of long-term loans to equity has gone down to 38:62 in 2012 compared to 55:45 in 2007. The company has been able to reduce this ratio due to its higher cash generation capacity.

 

Deferred taxation

Due to taxable losses in earlier years of operation, the Company’s deferred tax liability has increased significantly.

 

CURRENT LIABILITIES

 

Current portion of Long-term finances

The increase is consequential to higher borrowings.

 

Trade payables

Trade payables have quadrupled over the years in line with the rising business volume.

 

Accrued interest / markup on finances

Increase in borrowings over the years has led to higher year end accruals for financing obligations.

 

NON-CURRENT ASSETS

 

Property, plant and equipment

Property, plant and equipment has witnessed a very large increase over the years. This is due to continuous investment in production facilities and infrastructure to support growing scale of business.

Property, plant and equipment represent almost half of the company’s balance sheet size.

 

Long-term investments

In 2009 and 2010, Engro Foods invested in a rice processing company (then Engro Foods Supply (Private) Limited).

The subsidiary was later sold to another group company as part of group strategy.

 

Biological assets

This represents value of animals purchased at the time of establishment of Company’s Dairy Farm in Nara.

 

 

CURRENT ASSETS

 

Stock-in-trade / Stores & Spares

The increase is in line with the continuous increase in the overall business volume.

On average, the company maintains at least a month’s inventory to meet sales demand and production requirements.

 

Other Receivables

The increase in Other Receivables is primarily due to two factors:

– Increase in sales tax refunds from the government arising mainly on input tax paid at the time of imports.

– Increase in receivable from Tetra under cost-sharing arrangements. This is a direct consequence of increase in business volume.

 

Short-term investments / Cash

Cash and short-term investments were retained in 2011 & 2012 to finance upcoming capex commitments.

 

 

 

REVIEW OF FINANCIAL ACCOUNTING SYSTEM

 

Engro Foods make use of integrated accounting system that is directly linked to its Enterprise Resource Planning. The system is beneficial for the firm in several ways; managers get timely report regarding what company’s performance had been to date, no hassle of baffling with manual records and the system acts as an independent check on fraud and accuracy. Also the system has enabled the managers to have less dependency on sources in order to verify financials in various departments.

Though having an integrated and computerized accounting system, the firm does maintain some records manually. They are usually concerned with day-to-day operating expense, which is a small proportion of total expenses. Some of the books that are recorded manually include:

  • Petty Cash book
  • Mess/pantry record book
  • Stationary record book
  • Gratuity collection book

 

Extract of General ledger chart of accounts

 

Chart of accounts include all the ledgers of the sub accounts that are summarized under a heading mentioned in account’s summary. The extracts of several headings and their sub accounts is given below:

 

REVENUES AND EXPENSES

Revenue is measured at the fair value of the consideration received or receivable and is shown net of sales returns and discounts. Revenue is recognized to the extent it is probable that the economic benefits will flow to the Company and the revenue can be measured reliably, on the following basis:

– Sales are recorded on dispatch of goods to the customers; and

– Return on deposits / bank balances is recognized on accrual basis.

Following are the extracts that show the revenues generated by company for the year 2012:

 

 

 

 

 

 

 

 

 

 

 

The figures reveal that the major revenue by the firm is from the sales of its milk products and Raw-milk. Also company has earned income from its bank deposits and from the disposal of its operating assets during the year.

Research and development costs are charged to income as and when incurred, except for certain development costs which are recognized as intangible assets when it is probable that the development project will be a success and certain criteria, including commercial and technological feasibility have been met.

Borrowing costs are recognized as an expense in the period in which these are incurred except where such costs are directly attributable to the acquisition, construction or production of a qualifying asset, in which case, such costs are capitalized as part of the cost of that asset. Borrowing costs include exchange differences arising from foreign currency borrowings to the extent these are regarded as an adjustment to borrowing costs.

Following are the extracts that show the major expenses incurred by the firm in the same year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCK VALUATION

 

Stores, spares and loose tools

These are valued at weighted average cost except for items in transit, which are stated at invoice value plus other charges paid thereon till the balance sheet date. A provision is made for any excess book value over estimated realizable value of items identified as surplus to the Company’s requirements. Adequate provision is also made for slow moving items.

 

Stock-in-trade

Stock in trade is valued at the lower of cost and net realizable value. Cost is determined using weighted average method except for raw materials in transit which are stated at invoice value plus other charges paid thereon till the balance sheet date. Cost of finished goods comprises purchase cost and other manufacturing expenses. The cost of work in process includes material and proportionate conversion costs.

Net realizable value signifies the estimated selling price in the ordinary course of business less estimated cost of completion and estimated costs necessary to make the sale. Provision is made for slow moving stocks, where considered necessary.

 

 

Sample vouchers used in firm

 

 

 

 

 

 

 

 

 

 

 

 

 

Horizontal Analyses of Profit and Loss Account (2012 vs. 2011 and 2011 vs. 2010)

Analysis:

  • We see that Engro foods have increased their cost of sales, mainly due to increase in production, but in turn they have considerably increased their sales of the goods.
  • A contributing factor to this is their increase in the Distribution and Marketing Expenses which as you can see that they have increased by about 993 Million rupees.
  • They have also considerably reduced their Finance costs which are the interest and other costs that they have incurred due to loans and the like.
  • The provision of taxation is increased directly due to the increase in profits.
  • Finally when we analyze their Net profit (after-tax); we see that by a whooping increase of 400% in 2011 and another awe inspiring increase of almost about 200% in 2012, the brand induced Food Company is proving itself as a highly profiting and rapidly growing venture.
  • For the sake of a better understanding, above we include data of profit and loss statement till up to the year 2006.
  • From the trend we can see that Engro foods have continuously increased their sales over the periods.
  • They have been continuously investing in the Marketing and distribution of their products for a better reach to consumers and for a better brand image.
  • The provision of taxation is increased directly due to the increase in profits.
  • We can also see that after 2006 they have continually till 2009 experienced the period of continuous losses (After-tax net loss).
  • However since the last 3 years or so, they have emerged as a brand induced highly profiting company with their profits growing by more than 100% each subsequent year.

 

Vertical Analyses of Profit and Loss Account (2012 vs. 2011 and 2011 vs. 2010)

Analysis:

  • The vertical analysis gives us a better picture of the income statement and how much invested in each of its components.
  • If we compare 2012 vs. 2011, we see that they have reduced their cost of sales.
  • Gross profit has increased.
  • The expenses have been almost or approximately stabilized at their previous levels.
  • Operating profit has increased.
  • Finance costs have decreased.
  • The provision of taxation is increased directly due to the increase in profits.
  • Finally, the after-tax net profit has more than doubled, through which we can confidently conclude that Engro Foods is a star company with an ability of doubling its profits.
  • For the sake of a better understanding, above we include data of profit and loss statement till up to the year 2007.
  • If we see the trend, Engro foods has successfully and admirably reduced their cost of sales over the years.
  • Over the periods the percentage of operating profits has increased and revived from a chasm of losses.
  • In the recent periods they have been successful in reducing their finance costs.
  • The provision of taxation is increased directly due to the increase in profits.

 

They have admirably taken their after-tax net profit from a negative figure to a positive figure doubling each year.

 

Horizontal Analysis of Balance Sheet:

Analysis:

  • As we can see that the share capital (including premium) has reached to Rs 8.4 billion in 2012 from Rs 2.2 billion in 2006.
  • The Company incurred losses in its earlier years. However, the recent profit trajectory has significantly increased Company’s overall equity position.
  • The ratio of long-term loans to equity has gone down to 38:62 in 2012 compared to 55:45 in 2007. The company has been able to reduce this ratio due to its higher cash generation capacity as shown by the income statements.
  • Trade payables have quadrupled over the years in line with the rising business volume.
  • As you can see from the data that the Property, plant and equipment has witnessed a very large increase over the years. This can be due to continuous investment in production facilities and infrastructure to support growing scale of business.
  • We also see that, Property, plant and equipment represents almost half of the company’s balance sheet size.
  • Biological assets represent value of animals purchased at the time of establishment of Company’s Dairy Farm in Nara.
  • Advance against purchase of shares of Engro Foods Netherlands B.V.: This represents advance paid to Engro Corp for purchase of shares of Engro Foods Netherlands (Al Safa business). The Company is already managing the Al Safa business in North American and Canadian markets.
  • As we see that Stock-in-trade / Stores & Spares has also increased in line with the continuous increase in the overall business volume.
  • On average, the company maintains at least a month’s inventory to meet sales demand and production requirements.
  • The increase in Other Receivables is primarily due to two factors:

o   Increase in sales tax refunds from the government arising mainly on input tax paid at the time of imports.

o   Increase in receivable from Tetra under cost-sharing arrangements. This is a direct consequence of increase in business volume.

  • Cash and short-term investments were retained in 2011 & 2012 to finance upcoming commitments.

 

Vertical Analysis of Balance Sheet:

Future Outlook:

As per the above trend analysis of the profitability ratios shows, considering the multinational company status, the dividends to stockholders, and brand image of Engro, we can confidently conclude that Engro is a highly profit making, finance milking and a brand star corporation.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s