BDFA4103 Financial Accounting of Dutch Lady Milk Industries

Ratio analysis is a tool by which the financial and operating efficiency of an entity is evaluated. The trend of these ratios is evaluated in other to gain an idea whether the entity is improving or deteriorating (Brigham and Daves 2012). The purpose of this report is to analyze the liquidity and the profitability ratios of Dutch Lady Milk Industries Berhad in order to evaluate the overall performance of the company.

Background of the Dutch Lady Milk Industries Berhad

Dutch Lady Milk Industries Berhad also known as Dutch Lady Malaysia is one of the leading dairy companies of Malaysia (Malaysiastock.biz. 2017). The company has been operating over fifty years. Royal FriedslandCampnia N.V. (RFC) is a Netherlands based company which one of the largest dairy cooperatives in the world is the holding company of Dutch Lady Milk Industries Berhad. Dutch Lady Malaysia primarily deals in milk and a variety of milk related products since 1963 (Dutchlady.com.my 2017). The company has its registered office in Petaling  Jaya, Selangor. Ever since its incorporation, it has consistently been evolving through its rigorous marketing and campaigning activities.

The year 2016 witnessed a growth in the revenue of the company by 4.6%.  There was also a rise in the profits of the company by 4.9% in 2016 from 2015. The reason behind the increase in the profitability of the company in 2016 is mainly due to increased sales, higher margins and a fall in the prices of dairy materials (Dutchlady.com.my 2017).

Ratio Analysis of Dutch Lady Malaysia

The key ratios of Dutch Lady Malaysia have been calculated and presented below.

Liquidity Ratios	('000)	('000)
Particulars	2016	2015	Increase/Decrease
Current Ratio
Current Assets	419377	316595
Current Liabilities	348390	248912
Current Ratio	1.20	1.27	Decrease
Acid Ratio
Cash and Cash Equivalents	213619	160391
Trade and other receivables	90581	55172
Short term investments in derivatives	-	1056
Current Liabilities	348390	248912
Acid Ratio	0.87	0.87	No change
Cash Ratio
Cash and cash equivalents	213619	160391
Short term Investments in derivatives	-	1056
Current Liabilities	348390	248912
Cash Ratio	0.61	0.65	Decrease

                   

(Dutchlady.com.my 2017)

These ratios have been interpreted below in order gain an idea about the overall financial position of the company.

Liquidity Ratios

Liquidity ratio is a means by which the capability of a company to repay its debts is measured. This includes current ratio, acid ratio and cash ratio.  The liquidity ratio of Dutch Lady Malaysia is calculated and analyzed below.

Current Ratio

This ratio is a measure of the ability of the company to pay its short term and ling term liabilities. An entity having a ratio below 1 indicates that the current liabilities of the entity are more than its current assets the financial health of the company is not very good. It is calculated by the formula given below.

Current Ratio= Current Assets/ Current liabilities (Delen, Kuzey and Uyar 2013)

It can be seen from the table given above that the current ratio of the company is has declined in 2016 from 2015.  However, despite the decrease in the current ratio, it is still more than 1 which clearly indicates that the current assets of the company are more than the current liabilities of the company. A company with a current ratio more than 1 is a financially stable company and is in a position to pay off its debts on time. Hence, Dutch Lady Malaysia is a financially stable company.

Acid Ratio

The ratio provides strong indication that whether a company has sufficient short-term liabilities to pay off its immediate obligations. It is more accurate than current ratio as it completely ignores assets which cannot be liquefied easily. Ideally, ratio more than 1 is considered to be good. It is indicated by the formula given below.

Acid Ratio= (Cash+ Accounts Receivable+ Short term Investments)/Current Liabilities

It can be seen in the above table that the acid ratio of the company is less than 1 in both the years. However, the ratio is close to 1. The company should take adequate steps to ensure the ratio increases to 1 or more than 1.

Cash Ratio

This ratio is a ratio of an entity’s cash and cash equivalents to the entity’s total current liabilities. Ideally, this ratio should be more than 1. However, a ratio less than 1 does not indicate that the financial position of the company is bad. It only implies that the company follows a strategy of maintaining lower cash reserves. It is calculated by the ratio given below.

Cash Ratio= Cash and cash equivalents/ Current liabilities

It can be seen in the above table that Dutch Lady Malaysia has a cash ratio less than 1in both the years. It can be inferred that the company adopts a conservative approach in maintaining the cash reserves.

Profitability Ratios 

This class of ratios measures the ability of the company, to generate profits with respect to its expenses and other costs during a specified period. Profit margins at different levels of cost are used to measure the profitability of the entity. Profitability ratio includes gross profit margin, operating profit margin, net profit margin, cash flow margin, return on assets, return on equity and cash return on assets. The profitability ratios of Dutch Lady Malaysia have been calculated as given below.

 

 

This ratio measures the proportion of money that is left over after accounting for the cost of goods sold. A company should have stable gross profit margin over the years. Changes in the gross profit margin occur due to changes in the market or if there is any change in the pricing strategy of the company. It is calculated as under.

 

 

The table given above shows the gross profit margin of the chosen company.  The gross profit margin of the company has increased by 0.37% in 2016. It can be seen from a close observation of the table given above that the company maintains a stable gross profit margin over the years. It is a good sign about the financial position of the company.

 

 

Operating profit margin is calculated by diving the operating profit by the net revenue. Operating profit refers to the profit that is left over after deducting the cost of goods sold and the operating expenses (Bodie 2013). It is calculated by the formula given below.

 

 

A high profit margin indicates the ability of the company to create value for its shareholders and satisfy its creditors. It can be seen from the table given above that the operating profit margin of the company has slightly fallen in 2016 as compared to 2015. However, the company maintains the an average operating profit  margin on a consistent basis. This implies that the company is a stable company.

 

 

Net profit margin means the percentage of revenue that remains after all operating expenses, taxes and preference dividend but before paying any dividend to the equity shareholders (Gibson  2012). It is computed by the formula given below.

 

 

It can be seen from the table given above that there is a rise in the net profit margin in 2016 from 2015 that is a positive sign for the company. A high net profit margin or an increase in the net is a sign about the financial well being of the company.

 

 

Cash flow margin is a measure of how much cash a company is generating from the core operations of the company per dollar of sales. An analysis of the historical margins provides an idea about the long-term trends of the company. It is calculated from the formula as given below.

 

 

The Table given above shows the cash flow margin of Dutch Lady Malaysia. It can be seen that the company is quite successful in maintaining the cash flow margin from year to year on a consistent basis, which is a good indication for the company.

Return on Assets

This ratio indicates the profitability of the company relative to its assets. The higher this ratio the better it is. It is calculated by the following formula.

 

 

It can be seen in the above table that the return on net assets of the company has decreased. However, it is not a bad signal for the company. This is because the decline in this ratio is not due to decreasing profits but because the company has purchased some fixed assets during the year. The company has more profits in 2016 than in 2015. This implies that the financial health of the company is good.

Return on Equity

The ratio shows the amount of net income as a percentage of shareholder’s equity. A high return on equity is considered good. It is calculated as given below.

 

 

As mentioned above  a company with a high return on equity is considered as financially strong company.  It can be seen the return on equity of Dutch Lady Malaysia is quite high in both the years. It can be inferred that the company is performing quite well.

 

 

This ratio measures the cash return as a proportion of total assets. It is calculated by the following formula.

 

 

It can be seen in the table given above that the cash return on assets has declined in 2016 from 2015. However, this decline is not due to decline in cash flow from operating activities.  The reason behind the decline is due to increase in the assets during the year. Therefore it can be said the company is successful in maintain the return on assets.

Summary

All the key points have been summarized below:

• Dutch Lady Malaysia is one of the leading diary companies of Malaysia.
• During the year 2016, it witnessed a growth in the revenue of the company by 4.6% from the year 2015.
• There was also an increase in the profits of the company by 4.9% in 2016 from 2015.
• The company has a strong current ratio which is an indicates the company has a strong current asset base.
• The company needs to focus on increasing in acid ratio as the acid ratio of the company is less than 1.
• The cash ratio indicates that the company has a conservative approach in maintaining cash reserves.
• The company is able to maintain a stable gross profit margin over the years. There has been a slight gross profit increase in the gross profit by 037% in 2016 from 2015.
• There has been a slight decline in the operating  profit margin from 2015 to 2016. This is due increase in the operating expenses.
• The net profit of the company has increased in 2016 from 2015.
• The company is successful in maintaining a consistent cash flow margin.
• The return on assets indicates that the financial well being of the company
• The high return on equity indicates that the company is able to create value for its shareholders.

Conclusion

It can be concluded from the above ratio analysis that the company is a stable company. The company’s financial performance is quite well which is evident from the strong liquidity and profitability ratios. Further, the company has been able to generate more profits in 2016 as compared to 2015 due to increased sales in 2016.

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