Analyzing Al-Marai's Financial Health Through Ratio Analysis

This report provides a comprehensive ratio analysis of Al-Marai Company, a leading dairy company in the Arabian region, using financial statements from 2015 to 2017. The analysis covers activity, liquidity, profitability, and debt ratios to assess the company's financial health and investment viability. Activity ratios indicate a decline in inventory and accounts receivable turnover, suggesting increased working capital needs. Liquidity ratios show a slight deterioration but no immediate concerns. Profitability ratios reveal improved gross and net profit margins, driven by product diversification, although ROA and ROE decreased in 2017 due to lower revenues. Debt ratios indicate a manageable debt level with a healthy interest coverage ratio. The report concludes that Al-Marai presents a viable investment opportunity due to earnings growth and a strong balance sheet, despite some deterioration in activity ratios, recommending it as a sound choice for investors.

RATIO ANALYSIS
AL-MARAI COMPANY
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Introduction
Al Marai is one of the largest dairy companies in the Arabian region and is based in Riyadh,
Saudi Arabia. The company from a humble beginning in 1977 has made rapid strides and
now has annual revenues in excess of SAR 10 billion. The objective of the given report is to
analyse the financial performance of the company using ratio analysis as the enabling tool.
Further, based on the ratio analysis, recommendation would be offered on whether the
company represents a good investment opportunity or not.
Financial Performance Analysis
The financial performance of the company has been analysed using ratio analysis taking into
consideration the financial statements for three years namely 2015, 2016 and 2017. The
various have been analysed below.
Activity Ratios
The relevant activity ratios for the company are presented below.
The graphical representation of the ratios is shown below.

The activity ratios for the company provide indication with regards to the underlying
efficiency of the operating activities undertaken by the company (Damodaran, 2015). With
regards to the company, it is apparent that there is a constant decline in the inventory turnover
ratio from 2015 to 2017. This implies that during the period under consideration, there is an
increase in the period required to convert the inventory into sales. This typically results in
increasing the cash cycle duration which in turn leads to higher requirement of working
capital for operational activities (Petty et. al., 2015).
A similar picture is presented by the accounts receivable turnover ratio which is on the
decline during the interval. This highlights that the company takes longer time to collect cash
from the credit sales and hence again leads to cash cycle becoming longer. As a result, higher
working capital would be required by the company. The asset turnover ratio has deteriorated
during the given period which is indicative of the reduced capability on the part of the
company to generate sales from the available assets (Parrino & Kidwell, 2014).
Liquidity Ratios
The relevant liquidity ratios for the company are presented below.
The graphical representation of the ratios is shown below.

The liquidity ratios tend to highlight the ability of the company to meet the short term
obligations. Typically poor performance in this regards would lead to liquidity issues and a
failure to meet the short term or current liabilities (Brealey, Myers & Allen, 2014).
With regards to current ratio, there has been a dip in 2016 as compared to 2015 but then the
current ratio has recovered in 2017. The value is 2017 is lower than the corresponding value
in 2016. However, the positive aspect is that the current ratio is greater than 1 which implies
that the company does not face any potential liquidity issues atleast in the short term. The
quick ratio also follows a similar trend (Damodaran, 2015). The quick ratio in 2016 was quite
low but has recovered in 2017. Also, considering the nature of the business, it is expected that
inventory would be a significant proportion of the total current assets. The operating cash
flow ratio is on decline during the given period. While in 2015, the operating cash flows are
enough to meet the short term liabilities of the company, but in 2016 and 2017 this ability has
declined and going forward, it is essential that this deterioration should be managed by the
company (Petty et. al., 2015).
Hence, even though, there has been deterioration of the liquidity ratios, there is no cause of
any immediate worry for the business.
Profitability Ratios
The relevant profitability ratios for the company are presented below.
The graphical representation of the ratios is shown below.

The profitability ratios tend to capture the underlying profitability of the business operations.
The gross profit margins and the net profit margins for the company have sequentially
improved. This is on account of the continuous diversification of the product mix whereby
higher focus has been put on higher margin products. In 2017, the net profit margins had
lower growth than the gross profit margins owing to a significant jump in operating expenses
as the company looked to expand the presence in new geographies. Also, the sales in 2017
were lower than the corresponding level in 2016 which might also be responsible for lower
margins.
The other measures i.e. ROA and ROE has increased in 2016 over 2015 but have decreased
in 2017 when compared to both 2915 and 2016. The two reasons contributing to this trend are
the lower revenues in 2017 coupled with lower increase in net profit margins. The end result
is that the net profits in 2017 were only marginally higher than the corresponding levels in
2016 even though the percentage increase in assets and shareholders’ equity was higher
(Brealey, Myers & Allen, 2014).
Debt Ratios
The relevant debt ratios for the company are presented below.

The graphical representation of the ratios is shown below.
The debt ratios tend to provide an indication of the ability of the company to service the long
term debt obligations both in terms of interest payment and principal repayments (Parrino &
Kidwell, 2014).
With regards to the debt ratio, there has been a marginal improvement in 2017. However, the
debt ratio does not pose any threat for the company considering that total liabilities account
for about 53-54% of the total assets. The long term debt of the company also seems to be
under control considering the fact that debt to equity ratio has marginally improved during
the period. This is despite the fact that the long term debt on the books of the company has
increased. The percentage increase in shareholders’ equity has been higher which is
responsible for decrease in debt to equity ratio. The interest coverage ratio has declined
during the given period on account of higher interest expense because of higher debt.
However, even after the decline, the interest coverage remains healthy and does not pose any
concerns for the company (Petty et. al., 2015).
Recommendation
Based on the above ratio analysis, it is apparent that the activity ratios of the company have
deteriorated during the period leading to potentially higher working capital requirements.
With regards to liquidity also, there has been a slight deterioration but no concerns are
foreseeable for the company in the near future on this front. The profitability of the company
has shown significant improvement during the given period which augers well for the

shareholders owing to higher earnings being reported. The debt ratios of the company have
shown a mixed performance but again no concerns regarding long term solvency can be
indicated from the given ratios. Hence, it would be recommended that the company provides
a viable choice for investment owing to earnings growth coupled with strong balance sheet
with limited liquidity & solvency risk.

References
Brealey, R. A., Myers, S. C. & Allen, F. (2014) Principles of corporate finance, 6th ed. New
York: McGraw-Hill Publications
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley,
John & Sons.
Parrino, R. & Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley
Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., & Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education,
French Forest Australia

Appendix
The data used for computation of ratios is indicated below.