#MMBA 4
As part of the Corporate Financial Accounting module at Lagos Business School, our group had to evaluate the financial performance and situation of two companies using ratio analysis and other relevant evaluation tools. Our group decided to focus on two companies in the food and agriculture business: Olam and Livestock.
Olam is a major global food and agribusiness company that serves over 20,200 customers around the world with food, ingredients, feed, and fibre. Pfizer started Livestock Feeds Plc in 1963 as a branch of their medicine business, which they had started in Nigeria a few years before.
To start our research, we got the financial statements from both companies for the last ten years and looked at them. Then, we used different financial ratios to judge how the companies worked, how well they did, and where they stood.
With liquidity ratios, you can figure out how well a company can meet its short-term commitments. Over the years, Olam’s current ratio, which is the ratio of its current assets to its current liabilities, has stayed fairly stable, averaging around 1.5. On the other hand, the present ratio for livestock has changed, going from 0.7 in 2019 to 2.3 in 2017. This means that in some years, Livestock may have trouble meeting its short-term commitments.
Profitability ratios show how well a company can make money based on its sales, assets, or stock. Olam’s return on assets (ROA) has always been more than 1%, with an average of 2.5%. The return on assets (ROA) for livestock, on the other hand, has been more unstable, going from -1.9% in 2016 to 2.7% in 2018. This shows that Livestock may have had trouble turning its assets into consistent income.
Debt rates show how well a company can pay its long-term debts. Over the years, Olam’s debt-to-equity ratio has been pretty stable, hovering around 1.5. The debt-to-equity ratio of livestock, on the other hand, has been going up over time and will hit a high of 4.7 in 2020. This means that Livestock has a higher chance of not being able to pay its long-term debts.
After looking at the financial ratios, we found that each company had both strengths and flaws. The fact that Olam’s current ratio and return on assets (ROA) stay the same shows that it has good liquidity and is making money. But investors may be worried about how much debt it has compared to how much stock it has. The fact that Livestock’s current ratio and return on assets change shows that it may have trouble making consistent profits and meeting short-term commitments. But because it has less debt than equity, it may be a better option for shareholders.
Based on our analysis, we think Olam should focus on lowering its debt levels to improve its financial situation and lower the risk of not meeting its long-term commitments. Livestock should work on making more money by getting more consistent profits from its assets and doing a better job of managing its short-term commitments. This could mean cutting costs or making more money.
Overall, we think that both Olam and Livestock have pros and cons that would-be buyers should think about carefully. Olam has a good history of making money and being stable, but its high debt levels may be a cause for concern. Even though livestock may have more room for growth in terms of profit and short-term obligations, it could be a good investment because it has less debt.
TUESDAYS WITH MORRIE