After 3 months of lectures, we finally wrapped up our Corporate Financial Accounting (CFA) class at the Lagos Business School with a capstone project which was a crucial moment for us to showcase our knowledge and skills in everything we had learned from Day 1. Each of the 4 groups in our Executive MBA 28 class was required to apply the theoretical knowledge we gained in class to real-world scenarios. For my Group, (Group 3), our capstone project was to analyze the 5-year financial report (2017 to 2021) of Berger Paint Nigeria Plc and Bua Cement Nigeria Plc, put together a PowerPoint presentation to summarize our findings, and write a 2000-word essay of our findings to be published in a financial newspaper or magazine.
Berger and BUA operate within Nigeria’s industrial goods industry. However, Berger operates in the paint and allied coatings subsector while BUA operates in the cement subsector. Interesting, while Berger operates in a highly competitive and fragmented market where, even as the market leader, the company only controls about 4.4% market share, Bua operates in an oligopolistic market with very few players in an industry that has a high barrier to entry.
After downloading and extracting the financial report of both entities, we proceeded to use financial ratios including growth rate, liquidity, efficiency, profitability, and leverage ratios to analyse and compare the performance of both entities. The findings from the analysis indicated that Berger had a Cumulative Average Growth Rate (CAGR) of 13.8% from the 5-year revenue reported. Between 2017 and 2019, revenue growth slowed down, then somewhat picked up steam in 2020 before surging again in 2021. On the other hand, BUA recorded a 5-year revenue CAGR of 78.8% and a 3-year revenue CAGR (2019 – 2021) of 29.3%. Post-merger revenue growth was driven by volume growth (at 22.5% CAGR) and marginal price increases.
Looking at the liquidity ratios of both companies, which is their ability to meet short-term obligations, we discovered that the current and quick ratios of Berger Paint were higher than Bua Cement, indicating that Berger Paint was in a better position to meet its short-term obligations.
Next, we looked at the efficiency ratios, which measure the effectiveness of the company’s use of its assets. Berger Paint had a higher asset turnover ratio than Bua Cement, meaning that Berger Paint was generating more revenue per asset than Bua Cement.
We also analyzed the profitability ratios of both companies, which indicates the company’s ability to generate profits. Berger Paint had a declining profit-after-tax (PAT) margin from 12.52% in 2019 (aided by the deferred tax benefit) to 2.7% in 2021 as well as a declining return on equity (ROE) margin over the years, indicating that the company’s profitability was decreasing. On the other hand, Bua Cement had a consistently high PAT margin and ROE margin, indicating that the company was generating profits efficiently.
Finally, we analyzed the leverage ratios of both companies, which measures the extent to which the company uses debt to finance its operations. Bua Cement had a higher debt-to-equity ratio, indicating that the company relied more on debt to finance its operations. In contrast, Berger Paint had a lower debt-to-equity ratio and a higher interest coverage ratio, indicating that the company was in a better position to service its debt.
Based on our analysis, our group’s recommendation to investors was not to invest in Berger Paint due to declining PAT and ROE margins. We believe that the company’s profitability is decreasing, and there is a risk that the company may not be able to generate enough profits to sustain its operations in the long run. In contrast, we recommend investing in Bua Cement due to its consistently high profitability ratios and a better ability to meet short-term obligations.
Image Credit
The Guardian. (2018). Berger Paints appoints Ayoko as company secretary. [Online]. Guardian.ng. Last Updated: 27 September 2018. Available at: https://guardian.ng/appointments/berger-paints-appoints-ayoko-as-company-secretary/ [Accessed 8 April 2023].
