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Oct 9, 2013

Financial Statement Analysis And valuation Of Apex Foods Ltd





Introduction
Apex Foods Limited is a renowned food processing company in Bangladesh having its head office at Dhaka and manufacturing facility at Chittagong. It is regarded with great honor among its buyer in global market now as “value added processors of shrimp” which was previously famous as a “supplier of raw material”. It is incorporated under companies act in Bangladesh in 1979 and listed in Dhaka and Chittagong Stock Exchanges. Apex Food has modern and hi-tech shrimp processing plant and exports 100% of its output to the foreign markets. Its products are exported mainly to European and American Countries.
About 50% of its products are exported to Portuguese and Netherland Markets. It also exports its product to countries like Mauritius, Russia and Canada. It exports around five million Kilogram of shrimps every year to the markets of the above mention countries. Company has completed all the necessary certification obligations needed for its business. It has acquired eight different types of national and international certificates. Among these certificates, major are ISO 9001-2008, BAP Certificate 2011 and Bangladesh BRC Certificate. It follows strict quality standards in its plant to avoid rejection in export markets. Company currently has around 560 employees on its role. It has taken enough care to give employee the benefits like PF, Perquisites, and Bonuses so as to keep them charged. Company is a 100% Food Processing EOU (EXPORT ORIENTED UNIT) and its product, shrimp is used as a favorite sea food in Europe and America. Apex Foods Limited’s financials are very healthy. It has sales of around Tk. 4000 Million and Net Profit of Tk. 15 Million in the year 2011-2012. Its plant has installed capacity of 7200 MT and is currently utilizing 60% of it. The company’s utilization is lower due to unavailability of Shrimp round the year. Company is paying dividend since last five years and it has EPS of around 27 last year. Company’s strength in finance is shown on its cash reserves of around Tk. 330 Million in 2011-12. Its investment portfolio in other companies including group companies stood at Tk. 189 Million last year. With the great performance in a turbulent economy company has completed 33 years of successful operation in 2012 and looking forward to be a major player in Food Processing Industry of Bangladesh.
Company overview
Company Background
Apex Foods Co., Ltd. is the subsidiary of Apex Group Co., Ltd. established in 1994. And under great effort of all staffs , Apex Foods Co., Ltd. was granted with GMP. We are determine to deliver the best standard of production by choosing good quality of raw materials and manufacturing all products in high hygienic rooms.
Furthermore, we have quality control in every process and provide training program for employee’s hygienics in order to correspond to GMP system. As the result, our products have delivered top standard quality and met customers’ expectations.

Apex Foods Limited was enlisted in Dhaka Stock Exchange in 1981. It’s been rated as “A” category share under the Food & Allied sector as on 04-12-2012.

Major Products manufactured by Apex Food Ltd.
1.    Spicy Garlic Shrimp
2.    Shrimp Appetizer
3.    Jumbo Shrimp Parmesan
4.    Butterfly Shrimp and Pasta
5.    Chili Garlic Roasted Shrimp etc

General Products
Apex Foods is the manufacturer and distributor of yoghurt wafers, corn snacks, candies, and etc. We also manufacture “candy toys” type, which most of products are licensees of famous characters around the world.
Licensed Products
We have been working with well-known Japanese and other licensors such as
-Disney (Micky Mouse, Winnie The Pooh, Lilo & Stich, Ben Ten, and Toy story)
Imported Product
In addition, we are trying to expand our market by importing many products around the world such as Chocolate and Biscuit (Japan) Sanrio and Disney (Hong Kong), Mints (Canada), Biscuit (France), Pastilles (Australia), and etc.
Distribution Channels
Our main distribution channels are
      Convenience store : 7-Eleven, Familymart, Suncolor, Freshmart, and etc.
      Hypermarket : Big C, Carrefour, Makro, Tesco Lotus, and etc.
      Supermarket : Foodland, Home Fresh Mart, Marketplace, Tops, Villa Market, and etc.
      Department Store : Siam Paragon, The Emporium, Central, Isetan, Robinson, The Mall, Tung Hua Seng, and etc.
      Gas station : Jet, Shell, Petronas, Caltex, and etc.
-
Contact information of Apex Foods Limited:
Address: Rupayan Golden Age, 5th&6th Floor
99 Gulshan Avenue, Dhaka-1212, Bangladesh
Contact Phone: 9883358
Fax: 8810990, 8810850
Email:
apex@apexfoods.com
Financing & Dividend Policy
Dividend policy is concerned with taking a decision regarding paying cash dividend in the present or paying an increased dividend at a later stage. The firm’s dividend policy must be formulated with two basic objectives in mind: providing for sufficient financing and maximizing the wealth of the firm’s owners. A particular firm’s cash dividend policy may incorporate elements of each.
 There are three major types of dividend policy a firm may follow-
     Constant-Payout-Ratio Dividend Policy
     Regular Dividend Policy
     Low Regular & Extra Dividend Policy
Apex foods ltd has a policy of giving dividends to their shareholders on a regular basis. It is informal to understand that they follow the Dividend Relevance Theory which says a company’s value is affected by the dividend policy it has. In addition, a positive and ever increasing dividend in every year, apex foods ltd has a positive image in front of its shareholders. Apex foods ltd has always given away cash dividend to their stockholders. It can be assumed that apex foods ltd had never had such liquidity crisis during their operation in aforementioned fiscal years. Apex foods ltd follows this policy is because they find the local investors as mixture of only profit seeking and growth lovers.

Industry Structure
Food industry is a potential industry and its growth is also related with national GDP. About one percent of our GDP is used in consumption of food product that is why it becomes a huge market for the competitors of food industry. There are many food companies in Bangladesh. At present there are hundreds of firms that manufacture sea food in Bangladesh. Among them Apex Foods Ltd.  is the pioneer and leading food manufacturer followed by local manufacturer Dhaka food. It is abundantly clear that the British American Food Bangladesh and Dhaka Food Industries play the dominant role in the cigarette market of Bangladesh.


Industry Analysis
Using Porters Five Forces Model for industry analysis, managers are able to affectively gauge the intensity of competitive forces against the threats to profit facing an average firm in the industry.  The five competitive forces used to analyze the industry are the threat of new entrants, the threat of rivalry, power of suppliers, power of buyers, and the threat of substitution.  In doing this, firms are able to determine the potential profitability and attractiveness of an industry. 
Apex Food Ltd. Mainly produce shrimp but they also produce some other foods.

Forces
Ranking
Threat of New Entrants
Low – Medium
Threat of Existing Competitor
High
Threat of Substitute Products
low-Medium
Bargaining Power of Suppliers
Low
Bargaining Power of Buyers
Low-Medium


Threat of new entrants   

Threat of new entrants in Food and Allied industry in Bangladesh is somewhere low and somewhere medium. Food business is needed low capital/technical requirements for setting up basic local expeller/crushing units and solvent extraction units. The the food industry is not is highly regulated and administrated. Increasing regulations through permits and bonds required to manufacture tobacco as well as imposing advertising restrictions on tobacco companies create inconvenience for the new entrants to enter into the industry. Sea food processing , fish production and bakery products does not need high technological help and capital but maintaining economics of scale or optimum production is not difficult for such company.  . In the event a new competitor enters the industry, economies of scale enable the established firms to exercise price flexibility and lower their prices to maintain their market share.

   Threat of existing Competitor
The edible oil industry is highly fragmented with no differentiation within products. Switching cost for the consumers from the lower strata is low as they seek unbranded varieties of low priced oil to save expenses. In the tobacco manufacturing, the top two firms in the industry are all relatively equal in size and hold nearly identical market share percentages. In our country many local small business involve in producing bakery, fish and sea food processing.  This makes for intense rivalry because competitors are constantly seeking ways to reach a competitive advantage over one another to gain market share. The pursuit for an advantage over competitors can lead to businesses changing their prices of their products or increasing the amount of capital for product innovation, both of which have a negative effect on profits.  And while there are only a few major competitors in the industry, there is a significant amount of brands and products available to consumers, adding to the intensity of the rivalry. 
                                                        
Threat of substitute product
So far there are no major substitutes to edible oil. This leads to substitution of traditional oils like groundnut, sunflower and mustard oil by cheaper palm/soya-bean oils. The market currently does not have other substitute products for tobacco. While there is research ongoing to find safer alternatives for tobacco, consumers simply do not have any other options for tobacco substitutes. In fisheries there are some good substitutes. Such as chicken, beef, mutton etc .Sea food is also substitute of fish.
                                                                  

Bargaining power of supplier
Main Raw materials of the edible oil is crude oil imported from Malaysia, Indonesia, Brazil, etc. Imports are primarily of crude oil due to 0% import duty (Duty on refined oil is 7.5%). The share of refined oil in the overall import of vegetable oil has recently increased from 13% in Nov 2011 to 35% in Feb 2012 due to the reduction in export duty on refined oil by the primary supplier, Indonesia. The materials required for tobacco manufacturing include various types of paper, cellulose fibers, and a variety of additives. However, the most important raw material used by tobacco manufacturing companies is tobacco leaves, which are purchased directly through tobacco farmers or at auction. In our country, the number of tobacco suppliers fall shorts than demand causing most companies to enforce contracts to purchase internationally. The supplier of bakery is not so strong.


Bargaining Power of Buyers
Price of the edible oil is fixed by government in accordance with international price. Many industries are now operating much below its optimum capacity level of production and this is because of insufficient domestic market for consuming the entire product when produced utilizing full capacity level. The immediate market for tobacco manufacturers is wholesalers; however, a majority of tobacco manufacturers have their own wholesaling operations.  By adding wholesale operations in addition to manufacturing, the firms are able to successfully hedge themselves by having greater control of downstream buyers. Buyers of tobacco are also composed of the end consumers. However, in light of the current economic downturn, some buyers have turned to low-price tobacco products. The buyers of bakery, sea food, fisheries have low switching cost and lot of substitute. So they have some bargaining power.

Ratio Analysis
Ratio Analysis against Benchmark

The benchmark company of Apex Food Ltd. is BATBC. The ratio of 2012 of both companies are compared below-

Apex Foods Ltd
BATBC
Current Ratio
1.39
1.30
Quick Ratio
0.53
0.619
Inventory Turnover
5.07
3.087
Receivable Turnover
47.95
28.740
Total Assets Turnover
2.50
1.949
Debt-to-equity ratio
1.67
0.003
Return on Assets
0.01
0.262
Return on Equity
0.03
0.294


Liquidity Ratios of Apex Foods Ltd.
Liquidity ratio analysis focuses on cash flows, measures a company’s ability to meet short term liabilities. Liquidity measures how quickly assets are converted into cash. Ratios of Apex Food Ltd from 2008-12 as follows

 2008
2009 
2010
 2011
 2012
 Liqudity (Short term solvency Ratio)





1)Quick Ratio
0.68
0.40
0.64
1.09
0.53
2) Current ratio
1.47
1.42
1.69
1.36
1.39

Trends of Liquidity ratios

Quick ratio decrease in 2012 compare to 2011 while the Current ratio increase in 2012 compare to 2011. The company’s liquidity position can be is not sound as though it’s current ratio was somewhat stable the others indicators of liquidity position were in a volatile trend.

Activity/efficiency ratio

Activity ratio measures how efficiently a company performs day-to-day tasks. The industry benchmark for the liquidity ratios are as follows:

2008
2009
2010
2011
2012
1) Total asset turnover
2.29
1.80
1.94
2.16
2.50
2) Account receivable turnover
25.67
189.55
109.35
344.56
47.95
3) Inventory turnover
5.13
3.11
3.47
13.56
5.07

Trends of Activity ratios

From the trend of ratio we see that that A/R turnover ratio is highly volatile. Inventory turnover ratio is very high in 2011 compare to other years. On the other hand total asset turnover ratio is quite stable.
c

2008
2009
2010
2011
2012
1) Current Liability to equity ratio
1.32
1.46
1.42
2.30
1.59
2) Debt to equity ratio
1.21
1.42
1.75
2.44
1.67

The debt to equity ratio of Apex Food Ltd is very high. That is the co. use huge sum of debt in it’s capital structure.
Profitability Ratios:

2008
2009
2010
2011
2012
1)Net income to revenue
0.010332
-0.004894
0.003881
0.003366
0.003924
2) Return on Equity
0.06
-0.02
0.02
0.03
0.03
3)Return on Asset
0.02
-0.01
0.01
0.01
0.01

Trends of profitability ratio of Apex Foods Ltd




Ratio Analysis against Peer


Ratio Analysis against Peer


Apex Food Ltd
Gemini Sea Food Ltd.
Liquidity


1)Quick Ratio
1.3931
0.334194527
2) Current ratio
0.5340
0.8317928
Activity/efficiency ratio


1) Total asset turnover
5.0705
5.567117941
2) Account receivable turnover
47.9465
8.799373811
3) Inventory turnover
2.5031
2.04403848
Leverage/solvency Ratio


1) Current Liability to equity ratio
1.5912
30.16291319
2) Debt to equity ratio
1.6733
0
Pfofitability Ratioes:


1)Net income to revenue
0.0039
0.000304047
2) Return on Equity
0.0280
0.030984779
3)Return on Asset
0.0098
0.001692664
Market value ratio


1) Price earnings ratio
27.2296
5097.401368
2) Dividend payout ratio
0.6650
0.452545

Here we see that quick solvency ratio of Apex Food Ltd. Is better  than Gemini Sea food Ltd.  Current ratio of apex food ltd. Is not so good as Gemini Sea food ltd. Apex Food has current ratio only .53 where Gemini sea food has current ratio equal .83 .
Total asset turnover ratio of apex foods is almost equal to Gemini sea foods . Apex is more efficient in managing its Account receivable because its Account receivable turnover ratio greater than Gemini food ltd.
Debt to equity ratio of Apex food is very high on the other hand Gemini food do not use any kind of debt in their capital structure.
ROE of apex food is less than Gemini sea food. Dividend paid by apex food in proportion to its net income is more than Gemini Sea food ltd. There is huge difference in P/E ratio.

Dupont Analysis

DuPont analysis (also known as the DuPont identity, DuPont equation, DuPont Model or the DuPont method) is an expression which breaks ROE (Return on Equity) into three parts. However the decomposition of ROE of Apex Food Ltd. into 5 factors is shown below-
Decomposition of ROE of Apex foods ltd. from 2008-2012

2007-08
2008-09
2009-10
2010-11
2011-12
Operating profit margin
0.041252619
0.03262806
0.037098201
0.031380129
0.039147847
Total asset turnover
2.28731558
1.802534874
1.941025429
2.159583155
2.503059658
Interest burden
0.470917552
0.031883278
0.235352165
0.339690479
0.303310393
After tax retention rate
0.531856754
-4.704575301
0.444476819
0.315741994
0.330466363
Financial leverage
2.401444225
2.551410448
2.831931258
3.665323082
2.849651079
ROE
0.056753111
-0.022508091
0.021332124
0.02664113
0.027988868

Measuring sensitivity of ROE of Apex Foods Limited:
Sensitivity of ROE in terms of operating profit margin:

Year
O.Profit Margin
Total Asset turnover
Interest Burden
After tax Retention Rate
Financial Leverage
ROE
% Change in ROE
2007-08
0.0413
2.2873
0.4709
0.5319
2.4014
0.0568

2008-09
0.0326
2.2873
0.4709
0.5319
2.4014
0.0449
-0.2091
2009-10
0.0371
2.2873
0.4709
0.5319
2.4014
0.0510
0.1370
2010-11
0.0314
2.2873
0.4709
0.5319
2.4014
0.0432
-0.1541
2011-12
0.0391
2.2873
0.4709
0.5319
2.4014
0.0539
0.2475


Mean
0.0053
variance
0.04913208
Standard deviation
0.221657573
CV
4155.01

Sensitivity of ROE in terms of total asset turnover:

Year
O.Profit Margin
Total Asset turnover
Interest Burden
After tax Retention Rate
Financial Leverage
ROE
% Change in ROE
2007-08
0.0413
2.2873
0.4709
0.5319
2.4014
0.0568

2008-09
0.0413
1.8025
0.4709
0.5319
2.4014
0.0447
-0.2119
2009-10
0.0413
1.9410
0.4709
0.5319
2.4014
0.0482
0.0768
2010-11
0.0413
2.1596
0.4709
0.5319
2.4014
0.0536
0.1126
2011-12
0.0413
2.5031
0.4709
0.5319
2.4014
0.0621
0.1590


Mean
0.03413
variance
0.028045714
Standard deviation
0.167468545
CV
490.6258858

Sensitivity of ROE in terms of interest burden:
Year
O.Profit Margin
Total Asset turnover
Interest Burden
After tax Retention Rate
Financial Leverage
ROE
% Change in ROE
2007-08
0.0413
2.2873
0.0413
0.5319
2.4014
0.0050

2008-09
0.0413
2.2873
0.0413
-4.7046
2.4014
-0.0440
-9.8456
2009-10
0.0413
2.2873
0.0413
0.4445
2.4014
0.0042
-1.0945
2010-11
0.0413
2.2873
0.0413
0.3157
2.4014
0.0030
-0.2896
2011-12
0.0413
2.2873
0.0413
0.3305
2.4014
0.0031
0.0466





Mean
1.45
variance
11.14489673
Standard deviation
3.33839733
CV
230.8067193

Sensitivity of ROE in terms of after tax retention rate:
Year
O.Profit Margin
Total Asset turnover
Interest Burden
After tax Retention Rate
Financial Leverage
ROE
% Change in ROE
2007-08
0.0413
2.2873
0.0413
0.5319
2.4014
0.0050

2008-09
0.0413
2.2873
0.0413
-4.7046
2.4014
-0.0440
-9.8456
2009-10
0.0413
2.2873
0.0413
0.4445
2.4014
0.0042
-1.0945
2010-11
0.0413
2.2873
0.0413
0.3157
2.4014
0.0030
-0.2896
2011-12
0.0413
2.2873
0.0413
0.3305
2.4014
0.0031
0.0466


Mean
-2.795761014
variance
22.31801383
Standard deviation
4.724194517
CV
-168.9770511

Sensitivity of ROE in terms of Financial leverage:

Year
O.Profit Margin
Total Asset turnover
Interest Burden
After tax Retention Rate
Financial Leverage
ROE
 % Change in ROE
2007-08
0.0413
2.2873
0.0413
0.5319
2.4014
0.0050

2008-09
0.0413
2.2873
0.0413
0.5319
2.5514
0.0053
0.0624
2009-10
0.0413
2.2873
0.0413
0.5319
2.8319
0.0059
0.1099
2010-11
0.0413
2.2873
0.0413
0.5319
3.6653
0.0076
0.2943
2011-12
0.0413
2.2873
0.0413
0.5319
2.8497
0.0059
-0.2225


Mean
0.061035516
variance
0.04573762
Standard deviation
0.213863556
CV
350.391982

After going through the sensitivity analysis of each of the component mentioned in the DU Pont analysis from
the year 2008 to 2012, the following CV’s have been found-

O. Profit Margin
Total Asset Turnover
Interest Burden
After tax Retention rate
Financial Leverage
CV
4155.01

490.62

230.81

-168.98

350.39


The higher the co-efficient of variation of a factor, the higher will be the sensitivity of ROE. So, from this data it is apparent that the ROE of Apex Food Limited is most sensitive to its operating profit margin.

Leverage Analysis
Degree of Operating Leverage

DOL is a quantitative measure of the “sensitivity” of a firm’s operating profit to a change in the firm’s sales. When comparing firms, the firm with the highest DOL is the firm that will be most “sensitive” to a change in sales. Thus, the EBIT or Operating Profit would be unpredictable for the company, even if all the other factors remain the same.

2007-08
2008-09
2009-10
2010-11
2011-12
Average
% change in sales
-0.0511
-0.2035
0.2086
0.4542
0.2264

% change in EBIT
1.4496
-0.0566
0.1659
0.1824
0.1130
0.3709

Degree of operating leverage (DOL)
-28.3480
0.2779
0.7953
0.4015
0.4991
0.4935


The average DOL for Apex foods ltd is 0.4935, although it is observed from the table that there is a low volatility of DOL over the period. As the DOL is medium the sensitivity of operating profit to a change in the firm’s sales is also medium.

Degree of Financial Leverage

The degree of financial leverage or DFL makes use of fixed cost to provide finance to the firm and also includes the expenses before interest and taxes. If the Degree of Financial Leverage is high, the Earnings per Share or EPS would be more unpredictable while all other factors would remain the same. The degree of financial leverage (DFL) indicates the sensitivity of the EPS in relation to the changes of the operating profit of the firm.

2007-08
2008-09
2009-10
2010-11
2011-12
Turnover
2,291,194,337
1,824,823,719
2,205,549,551
3,207,314,733
3,933,346,104
Growth rate

-20.35%
20.86%
45.42%
22.64%






A/R
89,252,478
9,627,220
20,169,720
9,308,500
82,036,136
growth

-89.21%
109.51%
-53.85%
781.30%
Inventories
402,397,836
531,786,340
573,384,439
216,977,700
715,872,045
Growth Rate

32.15%
7.82%
-62.16%
229.93%
Reported income
23,672,984
-8,930,907
8,559,275
10,794,736
15,434,217
Cash flow from operating activities
136611144
-72479592
46284431
-228925474
152091482
Gap between RI & OCF
-112,938,160
63,548,685
-37,725,156
239,720,210
-136,657,265
Degree of Financial Leverage of Apex foods ltd ltd. from 2008-2012.

2007-08
2008-09
2009-10
2010-11
2011-12
EBIT
23,672,984
-8,930,907
8,559,275
10,794,736
15,434,217
EBT
      44,510,075
       1,898,345
       19,256,966
      34,188,471
      46,704,351
Degree of financial leverage (DFL)
4.4202
97.7753
11.2380
7.4843
6.0976

A relatively higher DFL indicates the firm’s riskiness as great compared to other firms.
The industry average of the DOL & DFL would give better insight about the performance of the individual company.

 Leverage in Food Industry
Industry Average of Leverage







BATBC
Apex Foods
Fine Foods
Rahima Foods
FuWang Foods
Average
Degree of Operating Leverage
2.33750
-5.274841
4.7568440
-0.63912077
3.46
0.9281
Degree of Financial Leverage
0.86509
25.40307
1.088683
-26.4557846
-9.0116
-1.6221


Potential red flags of Apex Food Ltd
In addition to accounting analysis, A very common approach to accounting quality analysis is to look for “red flags” pointing to questionable accounting quality. These indicators suggest that the analyst should examine items more closely or gather information on them. Some common red flags are
      Unusual increase in inventories in relation to sales increase.
      An increasing gap between a firm’s reported income  and its cash flow from operating activities.
      An increasing gap between a firm’s reported income  and its tax income.
      A tendency to use financing  mechanism like research and development partnership and the sale of  receivables with recourse .
     Unexpected large assets write off.
     Large fourth quarter adjustments
     Unexplained changes in accounting especially when performance is poor.
      Unexplained transactions that boost up profits.
      Unusual increase in accounting receivable in relation to increase in sales.
     Related party transactions or transactions between related parties.
     Qualified audit opinions or changes in accounting auditors that are not well justified.


These are the Red flags found in Apex Foods Ltd.
1. Unusual increase in account receivable in relation to sales increase:   Apex Food Ltd. showed its turnover decreases 20.35% in year 2008-09 but its A/R decreases 89.21%. Next year A/R increases 109.51% while sales increase only 20.86%. Most radical increase occurred in year 2011-2 that is 781.30% in relation to an increase in sales only 22.64%. This may suggest that company relaxing its credit policies or artificially loading up its distribution channels to record revenue during current period. If credit policies relaxed unduly, the firm may face receivable write off in the subsequent period.
2. Unusual increase in inventory in relation to sales increase:  In year 2008-09 sales decreases 20.35% on the other hand inventory increases by 32.15%. This indicates 52.50% net increase in inventory in relation to sales. In financial year 20011-12 inventory increases 229.93% while sales increases only 22.64%. it could be a sign that the demand of firm’s product decreasing in that year. Inversely in year 2010-11 inventory decreases while sales increases.
3) An increasing gap between a firm’s reported income and its cash flow from operating activities. If we take into account 2008, 2009, 2010 we see that there is an increasingly negative gap between income and OCF. While  in 2011 and 2012 we see that the firm is doing well on this quality and the gap between these decreases  significantly
Earnings Quality Evaluation
Earnings quality is typically defined in terms of persistence and sustainability. To build a meaningful forecast of future cash flows one should recognize that very high and very low earnings are expected not to continue into the future. Aggregate accruals measures the extent of distortion embedded in the reported financial statements.
Activity Ratios of Apex Foods Ltd. Based on Balance Sheet from 2008-2012
Balance sheet based aggregate accruals
96,868,201
-21,227,658
317,061,895
25,144,565
Average net operating assets
       772,721,588.50
      810,541,860.00
         958,458,978.50
 1,129,562,208.50
Balance sheet based accruals ratio=BSA/Avg NOA
0.125359771
-0.026189465
0.330803824
0.022260452

Aggregate Accruals
-65,297,314
97,248,117
-23,748,243
317,479,111
-113,121,223
Accruals Ratio

                       0.13
                     (0.03)
                         0.33
                  (0.10)

Activity Ratios of Apex Foods Ltd. Based on Cash flow statement from 2008-2012

Comparative Analysis
Comparative Earnings Quality  Analysis



APEX
BATBC
Accruals Ratio Cash Flow Basis
0.081911315
0.137791166
Accruals Ratio Balance Sheet Basis
0.113058645
0.333666151

From the table it is observed that Apex Foods Ltd has comparatively better performance in maintaining the earnings or alternatively it has more earnings manipulation than its peer one.

 

 

Analysis of cash flow Statement


2007-08
2008-09
2009-10
2010-11
2011-12
Free cash flow
116,616,619
-60,481,104
75,223,074
423,844,657
-484,992,076
Operating  Cash flow
136,611,144
-72,479,592
46,284,431
-228,925,474
152,091,482

Free cash flow versus operating cash flow analysis
Free Cash Flow: A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.
From the following graph we see that FCF is negative in Year 2008-09 and 2011-12. Except these two year FCF is positive.
Operating Cash flow: operating cash flow means cash collected from the operations of the firm. In accounting, a measure of the amount of cash generated by a company's normal business operations. Operating cash flow is important because it indicates whether a company is able to generate sufficient positive cash flow to maintain and grow its operations, or whether it may require external financing. OCF is calculated by adjusting net income for items such as depreciation, changes to accounts receivable and changes in inventory. Operating cash flows of Apex Foods Ltd. Are negative in years 2008-09 and 2010-11 and rest of the cash flows are positive.
Free cash flow versus operating cash flow


As we have known from our study that with the comparison OCF and FCF we determine the firms category.
There are four types of decision that we can take:

OCF
FCF
Category
Positive (+)
Negative (-)
Growth Company
Positive (+)
Positive (+)
Cash Cow
Negative (-)
Positive (+)
Disinvest/Quit
Negative (-)  > FCF
Negative (-)  <FCF
Negative (-)
1)Disinvest/Quit
2) BMRE

From the comparison of Operating cash flow and free cash flow of Apex Foods Ltd. we find out the following characteristics of the company-
Year
OCF
FCF
Characteristics
2008
Positive
Positive
Cash Cow
2009
Negative
Negative
BMRE
2010
Positive
Positive
Cash Cow
2011
Negative
Positive
Disinvest/Quit
2012
Positive
Negative
Growth Company

As the company’s OCF is positive and FCF negative so the co. is a growth company in 2012. But in previous year the company disinvests that is it contract its business. The contraction might be temporary because the company wants to setup new plant and machinery so they sell their previous/old assets. From the analysis we can predict that the company will be a growth company.
                

Actual & Sustainable Growth Rate
Sustainable growth rate refers to the maximum growth rate that a firm can achieve without any equity financing while maintaining a constant debt to equity ratio. Actual growth rate is assumed as the groth rate of sales.
Factors affecting sustainable growth rate:                            
1. Profit margin: An increase in profit margin will increase the sustainable growth rate.         
2. Dividend policy: A decrease in the amount paid out as dividend from net income will increase the sustainable growth rate.                                                                                                                 
3. Financial policy: The higher the amount of debt used in the capital structure, the higher will be the leverage of the firm, the higher will be the sustainable growth.                                     
4. Asset turnover: An increase in the total asset turnover of a firm increases the sales generated for each dollar in assets. This decreases the firm's need for new assets as sales grow and this thereby increases the sustainable growth.                                                                             
 The important note to remember here is that, If a firm does not wish to sell new equity and its profit margin, dividend policy, financial policy and asset turnover are all fixed, then there is only one possible growth rate.                                                                                                           

2008
2009
2010
2011
2012
Sustainable growth rate
3.03%
-3.82%
0.43%
0.70%
0.95%
Actual growth rate
-5.11%
-20.35%
20.86%
45.42%
22.64%

Over the time Apex foods ltd. has higher actual growth rate than the sustainable one which indicates the vulnerability associated with the growth of the company.
Estimation of value addition


2012
NOPAT
      224,285,567
Invested Capital
1,474,151,687
Cost of capital
0.098776412
Economic Value Added
78674152.38

The positive value of EVA tells us that  generating  BDT 224285566.5 in after-tax net operating profits, Apex Foods Ltd can cover cost of capital. it fully serviced its debt, we find that Apex Food Ltd     gain (some would say "increse value") BDT 78674152.38 in economic profit over the year.









                                                                                                                                                      
Disclosure Practices
In every financial statement disclosure of the information provided by the respective company can be classified into two basic categories, these are-
Mandatory Disclosures of Apex Foods Ltd.

Name of the BAS
BAS No.
Status
Notes No.
Presentation of Financial Statement
1
Applied

Inventories
2
Applied
3.4,5
Cash Flow Statement
7
Applied

Accounting Policies, Changes and Estimation Errors
8
Applied
3
Events after balance date
10
Applied
3.17,39
Construction Contracts
11
N/A

Income Taxes
12
Applied
3.12,3.12.1,3.12.2,23
Property, Plant and Equipment
16
Applied
3.2,4,37
Leases
17
Applied
3.3,14
Revenue
18
Applied

Employee Benefit
19
Applied

Accounting for Government Grant and Disclosure of Government Assistance
20
N/A

The Effects of changes in foreign exchange
21
Applied

Related Party Disclosures
24
Applied
3.14,32
Comparatives
32
Applied

Earnings Per Share
33
Applied
3.13,3.13.1,24
Impairment of Assets
36
Applied

Provisions Contingent Liabilities and Contingent Assets
37
Applied

Investment in Property
40
Applied

M&D Analysis
Management Discussion and Analysis or MD&A is an integrated part of a company's annual financial statements. There are five contents elements that should be included in a typical MD&A prescribed by the International Accounting Standard Board (IASB), which are:
     The nature of the business
     Management’s objectives and strategies
     The company’s significant resources
     Results of operation
     Critical performance measures.

From 2008-2011 Standard ceramic presented their managerial discussion analysis in a comprehensive segment called “Directors Report”. This report has the following aspects of the business
     Growth of the business- the company’s overall performance was reflected in this section whether they are growing in terms of revenue generation. And they also provide the reason why that increase of the revenue is achieved or why they are not generating revenue more than the previous year. They also provided the overall industry growth for the respective years to make it clear whether their performance was actually good or not. Moreover, they also provide the challenges that they have encountered throughout the previous fiscal years and also probable challenges for the upcoming years.
     Management’s Objectives & Strategies- over the time what were the company’s management’s strategies is also a part of MD&A. Over the time the focus of SC was on the improvement of its supply chain, in doing so they were proactive to enhance EH&S standards across all sites. Besides this they also take initiatives to increase mine productivity, to reduce waste and to improve quality of warehousing and logistics. They also aimed at leaf import substitution by quality improvement as well as Wrapping material cost reduction initiatives.
     Results of Operations-  the company presents the key financial performance which includes gross turnover, changes in the profit before tax, contribution to National Exchequer, foreign currency income from leaf export, interim & final dividend amount, and the amount that has been transferred to reserve over the years etc. in the “Directors Report”.
     Resources & Risks- it is evident that the company follows an indirect approach to present the risk exposures relevant to the company. They provide this into their “Statement of Internal Control’ section of their financial reports. In addition to this they practiced a conservative way to present only those risks that are controllable by the company and the other factors those can be addressed within the capability of the firm.     

In the year 2012 the company employed new audit firm and the MD&A structured has been changed to a new format. Till then they provide a “Statement  of Chairman” regarding the overall performance of the business along with separate auditor’s report, statement of internal control, corporate governance report & Director’s report. The profile of the directors and the composition of directors, audit committee members and their shareholding positions are also presented in the MD&A.

Accounting Policies
Corporate & Financial Reporting: 
 The Company has complied most of the requirements of Corporate Governance as required by The Securities and Exchange Commission. Accordingly, the Directors are pleased to confirm the following:
     The Financial Statements together with the notes thereon have been drawn up in conformity With the Companies Act 1994 and Securities and Exchange Rules 1987. These statements present  fairly  the  Company's  state  of  affairs,  the  results  of  its  operations,  cash  flow  and changes in equity.

     Proper books of accounts of the Company have been maintained.
     Appropriate  Accounting  Policies  have  been  consistently  applied  in  the  preparation  of financial  statements  and  the  accounting  estimates  are  based  on  reasonable  and  prudent judgment.
     The International Accounting Standards, as applicable in Bangladesh, have been followed in the preparation of financial statements.
     The  systems  of  internal  control  are  sound  and  have  been  effectively  implemented  and monitored.
     There are no significant doubts upon the Company's ability to continue as a going concern.
     The key operating and financial data for the last five years is annexed. Basis of preparation:

These financial statements are prepared as going concern under historical cost convention subject to revaluation of land and land development on 29-02-1996.
     Revenue recognition - sales are recognized at the time of delivery from go down.
     Recognition of Property - plant & Equipment and Depreciation: Property, Plant & Equipment are stated at cost less accumulated depreciation in accordance with IAS

16 “Property, Plant & Equipment". Cost represents cost of acquisition of construction and include Purchase price and other directly attributable cost of bringing the assets to working conditions for its intended use, but do not include any capitalized borrowing cost. No. depreciation is charged on land and land development. Depreciation on all other fixed assets are computed using the reducing balance method in amount sufficient to write off depreciable assets over their estimated useful life.
     Expenditure for maintenance and repairs are expenses; major replacements, renewals and betterment are capitalized.
     Impairment of Assets the company reviews the recoverable amount of its assets at each reporting date. If there exists any indication that the carrying amount of assets exceeds the recoverable amount, the company recognizes such impairment loss in accordance with BAS-36 "Impairment of Assets"
     Inventories the raw materials have been valued at weighted average method. The finished goods have been valued under variable costing method following marginal costing technique. The work-in-process has been valued at cost of materials with proportion of electricity & gas and factory overhead absorbed in production.

Revenue (Turnover) - turnover is stated at net value. Retirement benefits -retirement benefits are incorporated on payment basis. Reporting Currency-the figures in the financial statements represent Bangladesh Taka Currency. Foreign Exchange - transactions in foreign currencies are converted into Taka currency at rates prevailing on the

Earnings Projection

Apex Foods Ltd.
Pro forma Income Statement
For the next five years
Particulars
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
TURNOVER
3,933,346,104
4607578021
5397382956
6322571780
7406351234
8675906026
Cost of goods sold
3,629,828,686
4192490732
4911143754
5752984208
6739128186
7894311380







GROSS PROFIT
3,629,828,686
415087289
486239201.8
569587572.5
667223049
781594646
OPERATING EXPENSES:






Administrative & selling overhead
177,505,226
283928087.5
332597432.6
389609401.2
456394039
534626520.5
Financial expenses
107,277,682
132758403.6
161580860.2
186277611.3
215253883
249246210.4
Total Operating Expense
284,782,908
416686491.1
494178292.8
575887012.5
671647921
783872731
OPERATING PROFIT/(LOSS)
18,734,510
-1599202.082
-7939091.037
-6299440.071
-4424872.29
-2278085.009
Other income
30,305,059
44649283.7
65783027.67
96919958.64
142794862
210383630.1







PROFIT BEFORE PPF & WF
49,039,569
43050081.62
57843936.63
90620518.57
138369990
208105545
Provision for contribution to PPF & WF
2,335,218
2152504.081
2892196.832
4531025.929
6918499.5
10405277.25







PROFIT BEFORE TAX
46,704,351
40897577.53
54951739.8
86089492.65
131451491
197700267.8
Provision for tax:






Current tax
31,164,150
17585958.34
23629248.12
37018481.84
56524141
85011115.15
Deferred tax expenses/(income)
105,984
84563.83
67472.84
53836.07
42955.39
34273.78







NET PROFIT/(LOSS) AFTER TAX
15,434,217
23227055.36
31255018.85
49017174.74
74884394.25
112654878.86
Dividend
10,263,754
15595950.38
20986376.25
32912885.98
50281591
75642817.1
Transfer to the reserve
5,170,463
7631104.99
10268642.60
16104288.76
24602803.30
37012061.76







Earnings Per share
2.70661774
4.073206959
5.481028838
8.59588502
13.1320837
19.75569565


Free cash flow and valuation
Particulars
2013
2014
2015
2016
2017
2018
EBIT
148169492.8
186677362.1
237394250.3
305737670.9
398956324.4

EBIT (1-tax rate)
84456610.88
106406096.4
135314722.7
174270472.4
227405104.9

Depreciation
31514911.13
33540256.58
35695763.4
37989796.59
40431258.7

Capital expenditure
10,247,175
10,905,723
11,606,593
12,352,505
13,146,355

Change in NWC
-179370315.6
105199890.1
123232624
144356421
169101132.6

Free cash flow
285,094,662
23,840,740
36,171,269
55,551,343
85,588,876
86872709.51







Present value discount factor
0.910103265
0.828287953
0.753827571
0.686060933
0.624386295

Present value of free cash flow
259465582.9
19746997.65
27266899.83
38111605.95
53440521.44

Terminal value





647463027.9

Enterprise value
1065241633
Cash
332,017,196
Interest-bearing debt
922,710,405
Equity value
474,548,424
Value per share
83.21906992



Conclusion & Recommendations
In compare to that the total security market and industry in particular, food sector has a different position in the market. To be precise in the time of the recession the food sector remained unchanged in the security market. The security condition for APEX FOODS LTD is also holds promising return compared to the security market. It is highly noticeable that the stock of APEX FOODS LTD has higher return with lower risk
Recommendations
1. The company should reduce its debt from its capital structure.
2. Apex foods need pay  more attention in inventory management.


Excel Sheet


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