Detailed Financial Analysis Report: Almarai Company Performance

This report presents a comprehensive financial analysis of Almarai, a food and beverage company based in Saudi Arabia. The analysis begins with an executive summary and includes an introduction outlining the report's objectives. The discussion section delves into Almarai's product strategy, pricing, and distribution channels. An internal analysis assesses the company's strengths and weaknesses, while an external analysis utilizes PESTEL and Porter's Five Forces to evaluate opportunities and threats. The financial analysis employs various ratios to assess profitability, investment decisions, and financial position, including a comparison with Nestle. The report also includes recommendations and a conclusion summarizing the findings. The appendix provides supporting financial data, such as revenue and gross profit charts.

Running head: FINANCIAL ANALYSIS
Financial Analysis
Name of the Student
Name of the University
Author Note

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FINANCIAL ANALYSIS
Executive Summary:
This report aims to show a complete analysis of Almarai company. A comprehensive analysis is
conducted by using PESTEL and Porter for external opportunities and threats, and internal
analysis is done by assessing the strength and weaknesses of the company. The quantitative
analysis is done by computing the ratios to assess its capabilities to pay off the debt, to assess the
financial position and to evaluate the return and profit margins of the company. The trend
analysis is also done to evaluate the past and present trends of the company. A comparison is
also conducted with the rival competitor company, which is Nestle.

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FINANCIAL ANALYSIS
Table of Contents
Introduction:....................................................................................................................................3
Discussion:.......................................................................................................................................4
Internal analysis – Strength and Weaknesses..............................................................................4
External Analysis.........................................................................................................................6
(i) PESTEL:.............................................................................................................................6
(ii) Porter:.................................................................................................................................7
Financial Analysis:......................................................................................................................8
I: Profitability analysis:............................................................................................................9
II: Decisions for investment:...................................................................................................9
III: Financial Decision analysis:...........................................................................................10
IV: Return analysis:...............................................................................................................11
Recommendations:........................................................................................................................14
Conclusion:....................................................................................................................................14
Appendix:......................................................................................................................................16

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FINANCIAL ANALYSIS
Introduction:
The listed company selected for conducting financial analysis is Almarai. This report
aims to determine how Almarai can create value for the shareholders and to assess if solvency
exists from creditor’s perspective. Almarai is a food and beverage manufacturing company based
in Saudi Arabia and listed on “Tadawul Stock Exchange.” The five essential products which the
company offers in ‘Middle East’ and ‘North Africa’ are - dairy products, infant formula
products, poultry, juices, and bakery products. This report will focus on a complete analysis of
the company by conducting ana analysis of the company’s SWOT Analysis, a market analysis of
the industry in which the company exists by PESTEL, Porter and finally a financial analysis.

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FINANCIAL ANALYSIS
Discussion:
Almarai aims at delivering high-quality products and focuses on customer satisfaction. It
focuses on achieving growth by expanding to all parts of the region and expanding the categories
of products and services. The product strategy of Almarai is the reason for its growth because
the strategy is adequate and sufficiently balanced with respect to the farms, production
operations, and the market system. The company annually distributes the products across 6
‘GCC states.’ Product positioning is essential for any product to capture the market; the way it
is placed in the market will attract and retain the customers and will be gain acceptance. It
launched flavoured milk to target the kids that will attract them and will help in increasing the
customer base by targeting various age group. It also entered in the baby food market to expand
the categories and will provide new opportunities for growth. The pricing strategy helps in
determining the best price for the product that will lead to maximization of profits and the
creation of shareholder value by focusing on the demand of the market and customer. The
company sets a final price for the product by considering the cost of production and the cost of
distribution. The company’s selection of distribution channel helps in the wide-range delivery
of the products. It uses ‘long-haul fleet’ for transporting raw milk from farm to ‘Central
Processing Plants’ and then finally from the manufacturing site to the various states and regions.
The company focuses on designing transport properly so that the foods and beverages are not
damaged and remain fresh for a more extended period. The company ensures that the products
are adequately packaged, which will protect the food during transportation.
Internal analysis – Strength and Weaknesses:

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FINANCIAL ANALYSIS
The features that help in increasing the value of the company are its strength. Strength is the
positive key points of an organization which helps in achieving the objectives and growth and is
an internal factor. The strength of Almarai are stated below:
(i) The climate conditions in Saudi Arabia and the regions where they supply beverages
works in the company’s favour since the weather conditions are extreme, it leads to
more consumption of such drinks.
(ii) The local demand is high due to a large population in comparison to the GCC states
that aids to the financial growth and perceived as a strength.
(iii) The major strength of the company is its distribution channels and production
strategy. The distribution channels are adequately decided that help in fast delivery
and keeping products fresh, which avoids any wastage. The production strategy aids
in fixing the best prices of the product that helps in increasing growth.
Weaknesses are the company’s inabilities to hold or obtain sufficient resources and the
situation where the current resources of the company are not appropriate and do not help
efficiently and effectively. Some of the weaknesses are as follows:
(i) The company procures raw material by importing them and is hugely dependent on
outside sources for raw material which is a weakness of the company. The company
is also dependent hugely on labour, which are from different countries and regions.
(ii) The pricing strategy is strong and is formulated by considering the consumers, but
since they incur high operating costs that might lead to an increase in product’s
prices.
(iii) Almarai is excessively dependent on its dairy and juices segment, but it should focus
on all of its products range.

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FINANCIAL ANALYSIS
External Analysis –
(i) PESTEL:
There are factors which are external to the company, and they have an impact on the
organization. The PESTEL Analysis will help in determining those external factors that will
influence an organization and will assist in implementing better strategic planning. The analysis
for evaluating opportunities and possible threats is explained below:
Political: The government policies regarding cost control and cost reduction will have an
adverse impact and is a threat to the company. A major external factor that is also a possible
threat for Alamrai is the tension which is prevailing in the Gulf region.
Economical: The economic factors that are external but will affect internally is a decline in
consumer spending. The constant fluctuation in the exchange rate will affect the company
economically. It can be perceived as a threat if fluctuation in exchange rates are huge and results
in losses.
Social: The company should focus on social factors such as consumer’s interest is increasing
towards nutritional food, and there is more awareness towards health and nutrition element.
Almarai is a market leader in the dairy product segment with 57% of market share in GCC and
has an excellent distribution network, so when the consumers are health conscious, it offers as an
excellent opportunity for the company.
Technological: Almarai invests in modern technology to achieve the desired objective of the
organization. It helps the company to excel even in the competitive market. They believe that the
latest technology and innovation will lead to achieving greater heights.

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FINANCIAL ANALYSIS
Environmental: The environmental factors can be determined by assessing the existing and
surrounding environment. Almarai’s strength is that the climate condition works in favour of
their products, so the company needs to evaluate the environmental factors including climate
conditions, economic and sustainable accounting, reduction in wastage. It can be a threat to the
company if there is no provision for responsible social and environmental accounting policies.
Legal: Legal factors are essential influential factors. The company must follow the legal and
regulatory framework for the smooth functioning of the organization. The organization will face
the consequences if they fail to comply with the legal requirements.
(ii) Porter:
Porter’s Five forces help in analyzing and evaluating the competitive environment of the
market. It is a tool that allows an organization to avoid and reduce the risk of competition in the
industry and to ensure growth. The five forces of Porter that will help in assessing the
competitive environment of the industry are discussed below:
Threats from Substitute products: The company’s substitute products are available in the
market abundantly and at lower prices in comparison with Almarai’s products. The product is
available at lower costs due to technological advancement and because of this the products which
are developed using better technology and at lesser prices are consumed more by the consumers
since the products are of excellent quality.
Threats from existing competitors: There are a large number of competitors existing in the
food and beverage industry. The world’s largest manufacturing company in food and beverage is
Nestle. The company must conduct an analysis to know its competitors and the prices at which
they offer the products.

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FINANCIAL ANALYSIS
Threat from new Entrants: The barrier for the new entry in the industry will help the existing
companies in the industry, there will be less competition. There can be an industrial barrier as
well as legal barriers. The existing companies reputation and the size of their operation plays an
essential role. The decisions of new entrants will also be affected by cost for entering the market,
technical barriers, raw materials procurement process.
Customers Bargaining Power: The bargaining power of consumers affect the profitability, and
hence it is essential to select customer base wisely. The customers who are in a position to
bargain for the prices of the products will influence the market and will affect the competition in
the industry. The customers will be in a position to affect the costs when it is for a particular
targeted customer.
Suppliers bargaining Power: The suppliers are capable of creating such situations where they
influence to increase the costs of the products but on the other hand, incur a reduction in quality
of the product. The suppliers bargaining power will be high if there is no substitute for the
products which is provided by the supplier.
Financial Analysis:
The financial analysis of the company will assist in determining the financial position and
growth of the company. This analysis will aid in assessing the value creation for shareholder and
will help in the decision making for investors and creditors of the company. The financial
analysis is carried out by computing ratios that will help in examining the financial performance
with the help of current and previous years information. The evaluation through investment and
financial perspective is conducted as below:

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FINANCIAL ANALYSIS
I: Profitability analysis:
The profitability analysis for Almarai is conducted by evaluating the sales trends, profit
margin. The sales trend analysis is conducted by comparing the current year (2019) revenues
with the previous years’ revenue. The analysis shows an increase in sales from 2018 to 2019.
The revenue has gone down from 2016, the revenue is showing a decline in the current year as
compared to the year 2016. The revenue trend is depicted through this chart and the revenue and
gross profits are shown in table 1 in the Appendix.
The revenue shows an increase from 2018, but there is a decline in Gross profit and
hence there is a fall in G.P.Margin. The G.P.Margin was 39.68% in 2018, but it fell to 37.40% in
2019. The analysis shows a decline in net profit and operating profit in the year 2018 and also in
2019 that lead to reducing operating and net profit margins. The sources of profits are operating
profit, gross profit and net profit. The margin reflects the company’s performance in terms of
revenue.

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FINANCIAL ANALYSIS
II: Decisions for investment:
Investment decisions can be made based on the asset turnover ratio and working capital
ratio. The asset turnover ratio helps in evaluating the efficiency of the company’s asset to
sufficiently generate revenue. The efficiency can be measured by comparing with the other
companies in the same industry. Nestle’s asset turnover ratio is .70, which is better than
Almarai’s ratio.
The working capital ratio assists in measuring the liquidity that is to assess whether the
company will be able to pay its current liabilities with available current assets. The ratio is
considered to be ideal if it is between 1.2 to 2. The company’s working capital ratio is .53 that is
below 1, and which is not a good thing, and can be considered as negative working capital.
III: Financial Decision analysis:
The financial decision that is related to short term loans, long term and loans and
shareholder’s equity can be determined with the help of liquidity and solvency ratios. An ideal
debt-equity ratio is around 1 to 1.5, and Almarai’s is 1.22, which is a good thing. The current
ratio helps in evaluating whether the company is efficient in meeting short-term debt

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FINANCIAL ANALYSIS
commitments. The quick ratio helps in measuring the company’s liquidity by assessing whether
it can meet short-term debt obligations with available liquid assets. The current ratio and quick
ratios are below 1, which means that the company might have an issue in paying off its short
term debt with the available current and quick assets, respectively.
IV: Return analysis:
The return analysis is done by calculating the return on equity and return on Capital
Employed. The ROCE helps in measuring capital efficiency for generating extra profits. The
ROE helps in measuring the profit generated shareholder’s equity. ROE of the company is
12.36%, which is average and not good. It is due to the net profit of the company, the net profit
of the company has shown a decrease and is the lowest in the three years, in 2017 Net Profit was
2,182,286 and in 2019 it is 1,811,753. The Du Pont analysis is also conducted to assets the return
efficiency. The changes in return on equity can be understood by classifying ROE into three
divisions - Net profit, asset turnover, and equity multiplier. The Du Pont analysis helps the
investor to know what factors contribute the most to change ROE. This analysis helps in
comparing the two firms in the same industry.

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FINANCIAL ANALYSIS
Comparative Analysis:
The comparative analysis is done by comparing Almarai with Nestle, since Nestle is also
in the same industry. The comparison is shown below:
Nestle is the largest company in the food and beverage industry. The comparison is
conducted by comparing the profits margin of both countries. According to ‘financial rules of
thumb’, fixed assets must be funded by the company’s stable sources of funds. The important

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FINANCIAL ANALYSIS
aspect of normative analysis and comparison is by comparing the operating margin, gross profit
margin, and net profit margin. The analysis shows that the profit’s margin of Nestle is higher
than Almarai. The ratio comparison is shown below in the picture:

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FINANCIAL ANALYSIS
The ratio analysis of Nestle will help the company to analyze the difference between the
financial growth of the two companies. Nestle have huge revenues, and so the profit margins are
high.
Recommendations:
The management can increase the value by expanding the business to other regions as
well. The operating costs are high, that leads to an increase in the price of the product. The price
of the product should be planned appropriately by paying a higher consideration to the customer.
The management should analyze the substitute products, and it’s competitiors to evaluate the
competition and then strive to offer better quality at better prices. The company should focus on
cutting down on its high operating costs, and this will help in increasing the profits of the
company which have shown a decline in the current year. The investors will be advised based on
the financial ratios of Almarai. The debt-equity ratio is good which means that the company is
able to meet its long-term debts, but not capable of paying current liabilities from existing
current assets. The investors can invest in the company since it is a profitable company. The
creditors might not like to lend the company. The profits are declining despite high revenue, so it
might be risky. The financial analysis and market analysis by analyzing the factors through
PESTEL and Porter will help the company to improve and operate more efficiently and
effectively.
Conclusion:
However, it is to be concluded that the company is well-known for its dairy product in
the Middle East and some other regions, but the 2019 profits were comparatively low even when
the revenues were higher when compared with 2018 revenues. The company’s current liabilities

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FINANCIAL ANALYSIS
are higher than current assets, and short term debt cannot be quickly paid off with available
quick assets, which reflects liquidity of the company is not reliable. The company have to
increase its current assets base so that they will be able to pay off its short term debt obligations
easily with current assets.

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Appendix:
(1) Table 1:
Sales trend analysis: 2016 2017 2018 2019
Revenue 14,698,662 13,935,532 13,722,797 14,351,277
Gross profit 5,833,612 5,583,639 5,445,362 5,366,674
Operating profit (EBIT) 2,517,779 2,583,350 2,521,235 2,473,208
Net Profit 2,080,485 2,182,286 2,008,869 1,811,753