INTRODUCTION
Tantalizers Plc is a leading Fast Food company established in May 1997 with a promise to deliver full value for money to an increasingly discerning target audience. The company pioneered the integration of African menu into fast food operations.
In order to evaluate how tantalizers’ plc has improved in its financial performance in terms of profitability, efficiency and stability, its financial statement in 2008 and 2009 would be analyzed and interpreted using some basic financial ratios. Profitability, efficiency and financial risk ratios will be used to evaluate the company’s performance in 2008 and 2009 respectively.
Financial Ratios
Turnover Growth
Net profit Growth
Gross profit Margin
Operating Profit
Interest burden
Tax burden
Net profit Margin
Asset turnover
1.21 times
1.09 times
Return on Total Asset (ROTA)
Return on Equity (ROE)
Financial Leverage
Current Ratio
Quick Ratio
stock turnover period
14.8days
19.5days
Debtors collection Period
4.87days
4.39days
Creditors payment Period
Turnover/net current asset
37.53times
19.53times
Interest Cover
8.41times
7.02times
Debt Ratio
Gearing Ratio
Tantalizers achieved a 19.9 percent growth in turnover between the year 2008 and 2009 while the net profit dropped within the same period by -81.46 percent, which should be properly investigated.
The primary driver of the company’s growth in turnover was the increasing level of the company’s advertisement and new product offering.
Three of the ratios are profitability ratios, one efficiency ratio and the last is a financial risk measurement ratio. Return on investment is further subdivided into two main ratios, which are: return on total assets and financial leverage.
Financial leverage is a measure of financial risk and it increased to 1.22 in 2009 from 1.10 in 2008, signifying increased financial risk.
Return on total asset reduced from 7.34 percent in 2008 to 1.27 percent in 2009; this ratio is a combination of net profit margin, a profitability measurement and asset turnover and efficiency measurement.
Asset turnover improved to 1.21 times in 2009 as compared to 1.09 times in, this improvement shows clearly that the reduction in return on total asset is due to profitability with net profit margin dropping to 1.1 percent in 2009 as compared 6.7 percent in 2008.
In order to carry out investigation on the reason for the reduction in net profit margin, the following three sub-ratios, namely operating profit margin, interest burden and tax burden can be used.
The operating profit margin dropped from 8.9 percent in 2008 to 3.7 percent in 2009 signifying increase in operating expenses, also reflected by the gross profit margin decreasing by 0.8 percent. Interest burden improved although financial leverage increased, this conflicting view necessitated further analysis which showed that the company was using short-term borrowing which has a lower cost of fund as against higher cost that would be occasioned in long term. The tax burden dropped from 0.884 (2008) to 0.319 (2009), this implies that the effective tax rate for 2009 was 68.9% largely on deferred tax.
Liquidity
Tantalizers’ short term obligation can be favorably matched with its current assets though there’s a dip in both the values of current ratio from 1.2375 in 2008 to 0.8896 in 2009 and the quick ratio from 1.1 in 2008 to 0.8 in 2009, this reduction in less than 1 in the current ratio shows that the company is aggressive in his working capital and is showing sign of overtrading.
However the balance sheet ratio is not a true test of liquidity, net cash flow from operating activities increased showing a strong cash flow generation base but is primarily due to increased creditors and accruals which might not before the owners come calling for their funds, hence a lower level of liquidity available in the company.
The company was efficient the effective utilization of their employees as sales/turnover per employee increased to 2.3million per employee as compared to 2.1 million in 2008. However the basis of this improvement is due to turnover growth.
The interest cover improved 8.41 times in 2009, as compared to 7.02 times in 2008 figures, debt ratio increased to 36.64 percent 2009 as compared to 26.67 percent in 2008 figures, all indicating an increased financial risk.
In summary the company in relative to prior year figures was efficient in the management of resources improving turnover by 18.9 percent however they have reduced profitability, increased financial risk, pursuing aggressive working capital that might lead to overtrading if it persist, a high cash flow generation as shown in cash flow from operating activities, a higher effective tax rate in 2009 and increased operating expenses.
Investment in a company can either be long term or short term, though all investment requires finance.
The principle of finance tells us that the matching approach should be appropriate in the tenure of the financing the appropriate investment.
Investments in short term are in working capital, that is current assets and its financing should be in current liabilities.
Using 2009 as a case study, the company had a reduction in their current asset see statement of cash flow by ,while the turnover increased by 18.9 percent signifying efficient management of their inventory and their debtors ledger. Comparing this to 2008 when the company made huge investment in current assets which was financed by creditors and accruals and the balance in bank overdraft.
Reviewing the working capital management objective of the company shows clearly that the company has increased in its inventory management and also had efficiency in credit control administration in 2009 but increasing the risk in management of working capital
Investments in long term assets are in fixed assets, the company made an investment of 1.12 billion in 2009.
This was financed partly from the cash flow from operating activities and long-term loan as well as short-term borrowings.
The fixed capital investment process requires generating investment ideas, appraisal the various investments for viability using basic techniques such as payback period, accounting rate of return, net present value and internal rate of return. The payback period is simple to calculate and managers use it as a first screening device but it does not consider cash flow after the payback period and as well time value of money. The ARR use accounting profit and it’s a relative measure that can be used for comparison but suffers limitation in its use of accounting profit as investor values a company in its ability to generate cash flow and also do not consider time value of money. The NPV a superior technique considers time value of money and it an absolute measure as compared to IRR a relative measure computed further from NPV but suffers limitation of generating multiple IRR when non-conventional cash flow is generated.
After the investment have been appraised and the viable ones selected an approval will be required by the board for the project that aligns with the strategy of the company and the means of financing approved. In the context of tantalizers the board must approved the use of debt to fund part of the investment after exhausting retained cash flow shown by no dividend payment in 2009 could not consider equity having raised N2.49 billion in 2008 and had not shown improvement in providing returns to existing investors as shown in the reduction in profitability increased leverage.
Conclusion
The financial performance of Tantalizers Plc in 2008 and 2009 has been analyzed in terms of profitability, liquidity, and leverage. The analysis indicates a decrease in profitability as there is a significant drop in net profit. The return on equity also dropped considerably from 8.11 percent in 2008 to 1.55 percent in 2009, further signifying the decrease in profitability. The return on total asset reduced during this period. However, the company achieved a substantial growth in turnover during the period. Asset turnover improved, indicating that the company’s assets were more efficiently used in generating income during this period. The decrease in profitability is thus attributed to an increase in the operating expenses. This is indicated by a drop in both the operating profit margin and the gross profit margin. The financial leverage increased depicting an increase in the company’s financial risk. However, an improvement in the interest burden showed that short-term borrowings were largely used.
Tantalizers Plc is able to meet its short-term financial obligations as indicated by the liquidity ratios. However, a drop in both the current ratio and the quick ratio to a value less than 1 indicates that the company is more aggressive on the working capital and is likely to be overtrading. This reduces the liquidity level.
The performance of the company in 2009 indicates efficient management of resources. Besides, there is increased inventory management and efficiency in credit control administration which, however, increases the risk in management of working capital. For fixed capital investment, the investment ideas should be appraised for viability. After the appraisal, the viable ones are selected and approved. After exhausting the retained cash flow as indicated by lack of dividend payment, Tantalizers Plc should use debt to fund part of the investment.
In summary the company had been aggressive in their growth drive by increasing their leverage which had reduced the earnings available to equity now and the next three year. This increased leverage would have impact on their cost of equity required unless the company is able to find an optimum mix that will reduce their overall weighted average cost of capital that will be use to discount their cash flow forecasted to derive NPV.
Appendix 1
Appendix 2
Appendix 3
Appendix 4
Financial Ratios Formula and Calculation
Net Profit Growth = PAT (2009) – PAT (2008) / PAT (2008) * 100
= (56,623,226 – 305,404,105) / (305,404,105) *100
= -81.46%
Turnover Growth = Turnover (2009) – Turnover (2008) / Turnover (2008) * 100
= (5,390,835,577 – 4,531,407,261) / (4,531,407,261) * 100
= 18.9%
Financial Ratios
Gross profit Margin
(Gross Profit / Turnover)*100
Operating Profit
(PBIT / Turnover)*100
Interest burden
(PBT / PBIT )
Tax burden
(PAT / PBT)
Net profit Margin
(PAT / Turnover) * 100
Asset Turnover
(Turnover / Asset)
5,390,835,577 / 4,445,961,251
= 1.21times
4,531,407,261 / 4,161,747,439
= 1.09 times
Return on Equity
(PAT / Shareholders fund) * 100
Financial Leverage
(Total Assets / Shareholders fund)
Return on Total Asset
(Net profit / Total Asset) *100
Current Ratio
(Current Asset / Current liabilities)
Quick Ratio
(Current Asset – Stocks) / (Current Liabilities)
Stock turnover Period
(Stocks / cost of sales) * 365
(122,465,516 / 3,020,728,123) * 365
= 14.8 days
(134,130,426 / 2,507,136,848) *365
= 19.5 days
^ Debtors Collection Period
(Debtors / Credit Sales) * 365
(71,955,341/ 5,390,835,577) *365
= 4.87 days
(54,511,333 / 4,531,407,261) * 365
= 4.39 days
Creditors payment Period
(Creditors / Cost of Sales) * 365
(490,587,056 / 3,020,728,123) * 365
= 59.27 days
(247,730,129/ 4,531,407,261) * 365
= 20.88days
Interest Cover
(PBIT / Net interest Expense)
201,474,706 / 23,944,736
=8.41times
402,678,974 / 57,330,788
= 7.02 times
Debt Ratio
(Total Debt / Total Asset) * 100
Turnover/employees
Turnover/net current assets
Gearing Ratio
(Prior Charge capital / Capital) * 100
PAT – Profit after Tax PBIT – Profit before Interest & Tax PBT – Profit before Tax
^ -turnover used instead of credit sales, assuming all sales are on credit, business of this nature would always have a significant percentage as cash.
Brigham, Eugene F. and Joel F. Houston. Fundamentals of Financial Management, Ninth Edition, Harcourt College Publishers, Fort Worth, 2001.
http://www.netmba.com/finance/financial/ratios/
[Assessed: 15 March 2012, 3:15PM]
http://www.terry.uga.edu/~akefalas/courses/mirrors.htm
[Assessed: 10 April 2012, 1:15AM]
