GROUP 19SERIAL

NO. GROUP MEMBERS MATRIC NO.

1 EBUKU TONYE 1102030602 EGEDE PEACE 1102030613 IBE CHRISTIAN C. 1102030684 IDOWU PAUL K. 1102030715 IGWE BRENDA 1102030756 IMEDIEGWU CHIKAOME C. 1102030787 IRIKEFE SMILE 1102030808 IRONUAH ROSEMARY 1102030819 IYIOLA IFEOLUWA 11020308410 KOYI BOLATITO 110203090

FINANCIAL STATEMENTANALYSIS

OFDANGOTE FLOUR MILLS PLC

FOR THE PERIOD 2012 and 2013

WHAT IS FINANCIAL STATEMENT ANALYSIS?Financial statement analysis is the investigation of a firm’s financial performance as shown in their balance sheet and profit and loss account/income statement. It involves a careful examination of a firm’s records via the use of financial ratios.

A financial ratio is an index that relates two accounting numbers and is obtained by dividing one number by another. It is used for comparison; both internally and externally.

Internal comparison involves just the firms records over a period of time, while external comparison involves comparing the ratios of one firm with those of similar firms or industry averages.

Financial statement analysis is useful for planning, control and decision making amongst other things, and is utilized by both shareholders and stakeholders alike.

BRIEF BACKGROUND OF DANGOTE FLOUR MILLS PLC

Dangote Flour Mills PLC commenced operations in 1999, as a division of Dangote Industries LTD (DIL); one of Nigeria’s largest and fastest conglomerates. Following the strategic decision of DIL to unbundle its various operations, Dangote flour Mills was incorporated in 2006. The restructuring was completed in January 2006 when the federal high Court sanctioned a scheme of arrangement wherein all the assets, liabilities and undertakings of the erstwhile flour division of DIL was transferred to Dangote Flour Mills, from an initial installed capacity of 500mt per day at its Apapa Mill, Dangote flour has expanded rapidly by opening, in quick succession 3 other flour mill in Kano (2000), Calabar (2001), and Ilorin (2005)

These expansions were in response to a growing National demand for flour and flour based product in addition to the company’s drive for increased market share. Thus, has grown to become one of the industry leaders within a 6 year period, the company has 3 wholly owned subsidiaries, namely: Dangote Agro Sacks LTD, Dangote pasta LTD and Dangote Noodles LTD.

• VISIONTo be a world class enterprise that is passionate about the quality of life of the general populace and giving high returns to stakeholders.

• MISSIONTo touch the lives of people providing their basic needs

DANGOTE FLOUR MILLS BALANCE SHEET-(ASSET SIDE)Dangote flour mills balance sheet for the nine months ended 30 September, 2013FIXED ASSETS N('000) Property, plant and equipment 17,351,051 Interest in subsidiary companies 2,597,637 Deferred taxation asset 1,829,016 TOTAL 21,777,704 CURRENT ASSETSInventories 7,686,391 Trade and other receivables 3,961,715 Amounts owed by subsidiaries 17,219,636 Short-term loans receivable 3,288,629 Cash and bank balances 910,024 Assets classified as held for sale 4,956,000 TOTAL 38,022,395 TOTAL ASSETS 59,800,099

DANGOTE FLOUR MILLS BALANCE SHEET-(LIABILITY SIDE)

Dangote flour mills balance sheet for the nine months ended 30 September, 2013CURRENT LIABILITIES N('000) Trade and other payables 7,677,861 Taxation 149,204 Short-term borrowings 17,757,915 Amounts owed to subsidiaries 1,547,289 Bank overdrafts 2,394,459 TOTAL 29,526,728

EQUITY 18,233,825 LONG TERM LIABILITIES 12,039,546

30,273,371 TOTAL LIABILITIES 59,800,099

DANGOTE FLOUR MILLS INCOME STATEMENTDangote flour mills balance sheet for the nine months ended 30 September, 2013Turnover 23,079,590 Cost of sales (22,728,987)GROSS PROFIT 350,603 Distribution and administrative expenses (3,642,573)Other income 42,708

(loss)/profit on significant disposal of fixed assets (64,618) (3,664,483)EBIT (3,313,880)Finance cost (2,346,275)Interest received 12,665 (2,333,610)EBT (5,647,490)Taxation 1,166,842 EAT (4,480,648)

FRAMEWORK FOR FINANCIAL ANALYSISIn analyzing the financial performance of Dangote flour mills, we determine the health of the firm, using financial ratios to do an external comparison with the leader in the Consumer Goods Industry - Nestle Nigeria Plc.; who currently has the highest share value(N1, 050.03 as stated in the Stock Market Update as at Thursday 02 October, 2014).

• Source: Business Day Newspaper of 3rd October, 2014.

LIQUIDITY RATIOS

DANGOTE

NESTLE

DANGOTE

NESTLE

2013 2013 2012 2012CURRENT RATIO 1.12 1.95 1.43 1.62

ACID-TEST RATIO 0.86

1.691.1

1.63

INVENTORY TO NET WORKING CAPITAL 2.17

-2.940.76

-1.95

CASH RATIO 0.030.14

0.040.12

-3

-2

-1

0

1

2

3

LIQUIDITY RATIOS

DANGOTE 2013NESTLE 2013DANGOTE 2012NESTLE 2012

SUMMARY OF THE LIQUIDITY RATIO COMPARISON

From the table and chart above, for the 2012&2013 period, the current and acid test ratio for Dangote Flour mills has dropped compared to Nestle Nigeria Plc. which is rising; indicating that Dangote have inventory problems. However, Dangote was better able to use its inventory to finance its short term debt compared to Nestle.

Also, Nestle had more cash to meet its short term obligations than Dangote flour mills, indicating that they are more liquid.

PROFITABILITY RATIOSDANGOTE

NESTLE

DANGOTE

NESTLE

2013 2013 2012 2012NET PROFIT MARGIN -19.41%

11%-10.51%

12%

GROSS PROFIT MARGIN 1.52%

48%3.75%

47%

RETURN ON INVESTMENT -7.49%

8.70%-5.30%

8.50%

RETURN ON EQUITY -24.57%

17%-13.81%

18%

EARNINGS PER SHARE - Naira/(kobo)

(90)

3.14 (63)

3.21 NET PROFI

T MARGIN

GROSS P

ROFIT M

ARGIN

RETURN ON IN

VESTMENT

RETURN ON E

QUITY

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

DANGOTE 2013NESTLE 2013DANGOTE 2012NESTLE 2012

SUMMARY OF THE PROFITABILITY RATIO COMPARISON

The table and chart above reveal that, for the 2012&2013 period, Dangote Flour mills plc. has a very poor gross and net profit margin, i.e. they have steadily generated loss, have a high level of inefficiency in their operations and pricing policy and also a very poor return on investments and equity, compared to the industry leader. This has also reflected in their earnings per share.

ACTIVITY RATIOSDANGOTE

NESTLE

DANGOTE

NESTLE

2013 2013 2012 2012INVENTORY TURNOVER 3 10.99 4.08 10.04

NET WORKING CAPITAL TURNOVER 6.52

1.443.11

1.43

ASSET TURNOVER 0.39 0.77 0.5 0.71

FIXED ASSET TURNOVER 1.06 3.43 1.09 3.38

ACCOUNTS RECIEVABLE 1.34 7.55 1.61 0.01

INVE

NTORY TU

RNOVER

Net wor

king c

apita

l turn

over

ASSET TURNOVER

FIXED AS

SET TU

RNOVER

ACCOUNTS R

ECIE

VABLE

0

2

4

6

8

10

12

DANGOTE 2013NESTLE 2013DANGOTE 2012NESTLE 2012

SUMMARY OF THE ACTIVITY RATIO COMPARISON

From the table and chart above, for the 2012&2013 period, Dangote Flour mills plc. has a poor and declining inventory turnover ratio i.e. the number of times their finished goods was turned to sales is low and declining as compared to the industry leader, however they have effectively used only their net working capital to generate sales, but have a very weak total assets turnover.

Also, fixed asset turnover is low compared to the industry leader and the quality as well as the success rate of the firms collection of debt is low and steadily declining.

ACTIVITY RATIOS Contd.

DANGOTE

NESTLE

DANGOTE

NESTLE

2013 2013 2012 2012

DAYS OF INVENTORY

12464

9369

AVERAGE COLLECTION PERIOD 273

48227

43

DAYS OF CASH15

2612

24DAYS

OF I

NVENTORY

AVERAGE COLL

ECTIO

N PERIO

D

DAYS O

F CASH

0

50

100

150

200

250

300

DANGOTE 2013NESTLE 2013DANGOTE 2012NESTLE 2012

SUMMARY OF THE ACTIVITY RATIO COMPARISON

From the table and chart above, for the 2012&2013 period, Dangote Flour mills plc.’s average collection period is very high i.e. their waiting period to collect a sale too much and has increased, this is very poor compared to that of the industry leader which is low and still managed to reduce theirs.

Also, the number of days Dangote flour mills has cash in hand in relation to sales level is low and decreasing compared to the industry leader and the number of days their inventory stays is increasingly high.

LEVERAGE RATIOS

DANGOTE

NESTLE

DANGOTE

NESTLE

2013 2013 2012 2012DEBT TO ASSET RATIO 69.51%

47%61.63%

50%

DEBT TO EQUITY RATIO 227.96%

88%160.59%

104%

LONF TERM DEBT TO CAPITAL STRUCTURE 66.03%

37%62.52%

40%

CURRENT LIABILITIES TO EQUITY 161.93%

53%98.06%

63%

DEBT TO

ASSET R

ATIO

DEBT TO

EQUITY R

ATIO

LONF T

ERM D

EBT TO CAPI

TAL STR

UCTURE

CURRENT LIABIL

ITIE

S TO EQUIT

Y0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

DANGOTE 2013NESTLE 2013DANGOTE 2012NESTLE 2012

SUMMARY OF THE LEVERAGE RATIO COMPARISON

The table and chart above reveal that, for the 2012&2013 period, Dangote Flour mills has increased to a higher level debt utilization i.e. over the years more than 50% of the firm’s asset is financed by borrowed funds, and their leverage level is abnormally high compared to the industry leader which is dangerous for the firm.

Also, Dangote Flour mills’ capital structure has increased in debts than equity; drastically reducing shareholders profit, compared to the industry leader who has reduced theirs; thereby increasing their shareholders profit.

SUMMARY OF THE RATIO ANALYSESIn summary, Dangote Flour mills plc:• Are barely able to meet its short term obligations with its

current assets, have inventory problems and are fairly liquid.• Are inefficient in their operations and pricing policy and as a

result are generating loss rather than profit.• Has a low turnover rate and are ineffectively utilizing their

assets to generate sales.• Are dangerously financed by debt rather than equity so much

that they risk bankruptcy and minimize earnings to shareholders.

HEALTH OF THE FIRMFrom the analyses above, Dangote flour mills plc. is in a bad shape; the firm has gradually moved from recording profits to loss. The firm is experiencing a decline in it’s sales volume relative to the previous corresponding period and the gross profit is adversely affected by the raw material cost push that could not be immediately recovered through price increment. Also, they have inefficiency and ineffectiveness problems in their operations.

In summary, it is clear that Dangote Flour mills performance is generally very poor both as an individual firm and in comparison to the industry leader, and as such requires immediate attention.

RECOMMENDATION• Dangote Flour mills plc. should put efforts in improving their

inventory management.• Dangote Flour mills plc. should strive to offset the inequality in

their capital structure by increasing the amount of equity.• Dangote Flour mills plc. should work on improving the level of

efficiency in their operations and pricing policy.• Dangote Flour mills plc. Should actively engage all their assets

in generating sales.• Generally, Dangote needs to go back to their drawing boards and

review the current strategy it is employing in order to avoid bankruptcy.