Analysing an Annual Report

-Arunima Arora 19P130

Ishika Jain 19P140
Navdeep N 19P146
Nitesh Kumar Kashyap 19P150
Rishabh Bhardwaj 19P160
Aman Agarwal 19P180
Harish Kumar 19FPM131
 Dairy Farm International Holdings Ltd.
• Leading pan-Asian retailer
• Operate more than 3,000 outlets, including supermarkets, hypermarkets,
health and beauty stores, convenience stores, home furnishings stores and
restaurants
• Employs approximately 60,000 people
• Sales in excess of US$5 billion
 Annual Report
• concerned with communicating economic and other data about a
corporation compiled by investor relations specialists
• used by external users to assess an organization and its management
• Since the publications are prepared by the companies, and in recognition of
this conflict of interest, institutional checks and balances have evolved over
time, for example GAAP
• The auditors perform checks and analyses that will allow them to express an
opinion as to the fairness of the financial statements.
 DAIRY FARM INTERNATIONAL
HOLDINGS LIMITED
• The focus is the financial analysis of Dairy Farm’s statutory financial statements and
the use of ratio analysis
• In this case, we are analysing a two-year period; any analysis of Dairy Farm should
be both longitudinal and comparative
• For comparison, data from two other companies has been included: the two
companies selected are the very successful British giant Tesco PLC, and a Canadian
food retailer, Sobeys Inc
• Dairy Farm’s annual report contains the standard content: promotional statements
by senior management, a financial review, information about its various subsidiaries
and joint ventures and a discussion about corporate governance
 Ratio Analysis
A) Liquidity
• Current Ratio
• Current ratio helps investors understand more about a company’s ability to cover its short term debt with current assets
• A current ratio that is lower than the industry average may indicate a higher risk of distress or default. Similarly, if a company has a very high
current ratio compared to their peer group, it indicates that management may not be using their assets efficiently
• Quick Ratio
• Quick ratio is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its
most liquid assets
• The quick ratio measures the amount of liquid assets available to the company against the amount of its current liabilities
• Cash Flow from Operations
• Operating cash flow (OCF) is a measure of the amount of cash generated by a company's normal business operations
• Operating cash flow indicates whether a company can generate sufficient positive cash flow to maintain and grow its operations, otherwise it may
require external financing for capital expansion.
 Ratio Analysis
• Average Receivable Collection Period

• The average collection period is the amount of time it takes for a business to receive payments owed by its clients in terms of accounts receivable

• Companies calculate the average collection period to make sure they have enough cash on hand to meet their financial obligations

• Average Number of Days of Inventory

• The average age of inventory is the average number of days it takes for a firm to sell off inventory. It is a metric that analysts use to determine the
efficiency of sales.

• The average age of inventory tells the analyst how fast inventory is turning over at one company compared to another. The faster a company can
sell inventory for a profit, the more profitable it is.

• Average Number of Days Payable

• Days payable outstanding (DPO) is a financial ratio that indicates the average time (in days) that a company takes to pay its bills and invoices to its
trade creditors, which include suppliers, vendors or other companies

• A company with a higher value of DPO takes longer to pay its bills, which means that it retains the available funds for a longer duration. It may
allow the company an opportunity to utilize the available cash in a better way to maximize the benefits.
 Ratio Analysis
B) Solvency/Leverage
• Total Debt to Total Assets
• Total-debt-to-total-assets is a leverage ratio that defines the total amount of debt relative to assets. This metric enables comparisons of leverage to
be made across different companies.
• The higher the ratio, the higher the degree of leverage (DoL) and, consequently, financial risk
• Total Debt to Total Capital
• The debt-to-capital ratio gives analysts and investors a better idea of a company’s financial structure and whether or not the company is a suitable
investment
• All else being equal, company with the higher debt-to-capital ratio is the riskier company

• Long-term Debt to Equity

• The debt-to-equity (D/E) ratio is calculated by dividing company’s total liabilities to its shareholder equity

• It is a measure of the degree to which a company is financing its operations through debt versus wholly-owned funds
 Ratio Analysis
• Fixed Charge Coverage

• The fixed-charge coverage ratio measures a firm's ability to cover its fixed charges, such as debt payments, interest expense and equipment lease
expense

• A low ratio often reveals a drop in earnings and could be dire for the company, which is a situation lenders try to avoid
• Operating Cash Flow to Debt
• This ratio is a type of coverage ratio and can be used to determine how long it would take a company to repay its debt if it devoted all of its cash
flow to debt repayment

• A high ratio indicates that a company is better able to pay back its debt, and is thus able to take on more debt if necessary

C) Asset Management
• Capital/Total Assets Turnover
• The asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to generate revenue
• This metric helps investors understand how effectively companies are using their assets to generate sales
 Ratio Analysis
• Fixed Assets Turnover
• This efficiency ratio compares net sales (income statement) to fixed assets (balance sheet) and measures a company's ability to generate net sales
from its fixed-asset investments, namely property, plant, and equipment (PP&E)
• In general, a higher fixed asset turnover ratio indicates that a company has more effectively utilized investment in fixed assets to generate revenue

D) Profitability
• Gross Margin
• It is the sales revenue a company retains after incurring the direct costs associated with producing the goods it sells, and the services it provides
• The gross margin represents the portion of each dollar of revenue that the company retains as gross profit
• Operating Profit Margin
• The operating margin measures how much profit a company makes on a dollar of sales, after paying for variable costs of production, such as
wages and raw materials, but before paying interest or tax
• It shows the proportion of revenues that are available to cover non-operating costs, like paying interest, which is why investors and lenders pay
close attention to it
 Ratio Analysis
• Net Profit Margin

• Net profit margin is the ratio of net profits to revenues for a company or business segment

• Investors can assess if a company's management is generating enough profit from its sales and whether operating costs and overhead costs are
being contained

• Return on Total Assets

• It is defined as the ratio between net income and total average assets, or the amount of financial and operational income a company receives in a
financial year as compared to the average of that company's total assets

• The ratio is considered to be an indicator of how effectively a company is using its assets to generate earnings
• Return on Equity
• ROE is considered a measure of how effectively management is using a company’s assets to create profits

• Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity
 Ratio Analysis
E) Return to Investors
• Earnings per Share
• Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares of its common stock. The resulting number serves
as an indicator of a company's profitability
• A higher EPS indicates more value because investors will pay more for a company with higher profits
• Price Earnings Ratio
• The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings
• P/E ratios are used by investors and analysts to determine the relative value of a company's shares in an apples-to-apples comparison. It can also
be used to compare a company against its own historical record or to compare aggregate markets against one another or over time
• Dividend Yield
• The dividend yield is the ratio of a company's annual dividend compared to its share price
 2. COMMON-SIZE FINANCIAL
STATEMENTS
• In calculating common-size financial statements, each asset is expressed as a
percentage of total assets, and each liability and owners’ equity is expressed
as a percentage of their respective totals
• In the income statement, each item is expressed as a percentage of sales
 The Modified Du Pont Formula
• The Modified Du Pont Formula allows us to examine three basic contributors
to a company’s profitability:
1. How well the company uses its assets to generate sales
2. How efficiently the company is operated
3. The impact of the company’s financial structure, or the proportion of
financing that is derived from equity or the extent of financial leverage
Du Pont Formula
Income × Assets = Income
Assets Equity Equity

Sales × Income × Assets = Income

Assets Sales Equity Equity

 Comparisons with Tesco and Sobeys

• Tesco, with group sales of more than £43 billion, operates internationally and in a
variety of retailing markets, including both food and non-food products, as well as
other services, such as telecom and financial services
• Sobeys, with sales of almost Cdn$13 billion, operates only in Canada
• Sobeys has chosen a strategy of a focus on food and service in the face of
significant competition from larger and more diverse retailers, both Canadian and
multinational companies, such as Loblaw and Wal-Mart. In early 2007, Sobeys
initiated a process to change from a public company to a private company
Thank You