Financial Statement Analysis

Of

Almarai

January 25, 2023

Introduction
Financial statement analysis helps to critically analyse the performance of a company
over a period of time. It not only helps to compare the financials of the company with its close
competitors, but also helps to identify the gaps in the current performance and how such gaps are
affecting the profitability. Almarai is one of the leaders in food and beverage with the annual
revenue of 15.8 billion SAR (2021). The company earned net profit of 1,564 million SAR in
2021 which appears to be quite interesting for its investors. But, at the same time one should
check how the overall growth has happened in the last few years and should the investors’
concern about any dwindling performance, especially post Covid. This report discusses many of
these aspects by different financial analysis techniques such as Common Size Balance sheet
preparation, Ratio Analysis, etc. These findings are critically analyzed to bring a conclusion
regarding the overall performance of the company and how it could possibly improvise it.

About company
Almarai Company is one of the largest dairy companies across the work. It is the largest
food and Beverage Company in the Kingdom of Saudi Arabia and ranks first in the Fast Moving
Consumer Goods sector in the Middle East & North Africa region. The company has been
running successful and sustainable operations for the last 40 years. It offers healthy and
nutritious products whose quality is well known to the target consumers.

The company provides juices, poultry and bakery products under different brand names
among which the flagship ones are Almarai, Albashayer, Alyoum, 7Days etc. It has made few
joint ventures with other companies such as PepsiCo to expand the business across the world.
The company earns most of its revenue from Fresh Dairy product category, followed by Foods,
Poultry and then Bakery products. The company earns almost two-third of its revenue from KSA
region (i.e. 10.2 billion SAR, 2021) and remaining from other countries in the Middle East. It
employs 40213 employees as of 2021. The operating cash flow has increased from 2019 to 2021,
though Covid put a toll on its 2020 profit levels. It has been identified among the top 10
recommended brands in KSA, healthiest brand in UAE, and best employer in KSA by Forbes.

Common size statements

Balance Sheet
 Consolidated Statement of Financial Position
As at 31 December 2021
Vertical Analysis Horizontal Analysis
31-Dec-21 31-Dec-20 31-Dec-21 31-Dec-20 31-Dec-21
% of Total % of Total % increase
Notes SAR ’000 SAR ’000
Assets Assets /(Decrease)
ASSETS
Non-Current Assets
Property, Plant and Equipment 7 20,873,448 21,112,904 65.7% 65.3% -1.1%
Long-term Prepayments 8 579,677 606,939 1.8% 1.9% -4.5%
Right-of-Use Assets 9 464,704 470,269 1.5% 1.5% -1.2%
Intangible Assets and Goodwill 10 1,129,105 1,217,642 3.6% 3.8% -7.3%
Biological Assets 11 1,469,084 1,392,079 4.6% 4.3% 5.5%
Investments in Associate and Joint
Venture 12 88,749 89,623 0.3% 0.3% -1.0%
Equity Investment 12 - 129,734 0.4%
Derivative Financial Instruments 36 2,011 142 0.0% 0.0% 1316.2%
Deferred Tax Assets 22 45,339 35,517 0.1% 0.1% 27.7%
24,652,117 25,054,849 77.6% 77.5% -1.6%
Current Assets
Inventories 13 4,353,596 4,705,364 13.7% 14.5% -7.5%
Biological Assets 11 117,980 90,195 0.4% 0.3% 30.8%
Trade Receivables, Prepayments
and Other Receivables 14 1,991,205 1,936,341 6.3% 6.0% 2.8%
Derivative Financial Instruments 36 11,597 54,047 0.0% 0.2% -78.5%
Equity Investment 12 46,894 - 0.1%
Cash and Cash Equivalents 15 580,913 503,510 1.8% 1.6% 15.4%
7,102,185 7,289,457 22.4% 22.5% -2.6%
TOTAL ASSETS 31,754,302 32,344,306 100.0% 100.0% -1.8%
EQUITY AND LIABILITIES
Share Capital 16 10,000,000 10,000,000 31.5% 30.9% 0.0%
Statutory Reserve 2,585,270 2,428,915 8.1% 7.5% 6.4%
Treasury Shares 17 (875,157) (906,594) -2.8% -2.8% -3.5%
Other Reserves 18 (622,389) (443,871) -2.0% -1.4% 40.2%
Retained Earnings 5,031,770 4,608,458 15.8% 14.2% 9.2%
Equity Attributable to Equity
Holders of the Company 16,119,494 15,686,908 50.8% 48.5% 2.8%
Non-Controlling Interests 19 498,919 546,771 1.6% 1.7% -8.8%
TOTAL EQUITY 16,618,413 16,233,679 52.3% 50.2% 2.4%
Non-Current Liabilities
Loans and Borrowings 20 7,072,240 10,088,955 22.3% 31.2% -29.9%
Lease Liabilities 9 360,434 330,980 1.1% 1.0% 8.9%
Employee Retirement Benefits 21 951,827 909,353 3.0% 2.8% 4.7%
Derivative Financial Instruments 36 10,041 3,757 0.0% 0.0% 167.3%
Deferred Tax Liabilities 22 117,302 102,139 0.4% 0.3% 14.8%
8,511,844 11,435,184 26.8% 35.4% -25.6%
Current Liabilities
Bank Overdrafts 32 78,395 137,512 0.2% 0.4% -43.0%
Loans and Borrowings 20 2,631,598 1,026,013 8.3% 3.2% 156.5%
Lease Liabilities 9 80,710 94,509 0.3% 0.3% -14.6%
Zakat 23 429,988 371,993 1.4% 1.2% 15.6%
Income Tax Payable 23 17,264 26,311 0.1% 0.1% -34.4%
Trade and Other Payables 24 3,339,496 3,014,834 10.5% 9.3% 10.8%
Derivative Financial Instruments 36 46,594 4,271 0.1% 0.0% 990.9%
6,624,045 4,675,443 20.9% 14.5% 41.7%
TOTAL LIABILITIES 15,135,889 16,110,627 47.7% 49.8% -6.1%
TOTAL EQUITY AND LIABILITIES 31,754,302 32,344,306 100.0% 100.0% -1.8%
 The common size statements can be prepared vertically as well horizontally. In vertical
common size, the each of the assets is shown as percentage of total assets. In this case, the
vertical analysis was done for both 2021 and 2020. The non – current assets amount for 77.6%
and 77.5% respectively in 2021 and 2020 respectively. Likewise, the current assets account for
22.4% and 22.5% in 2021 and 2020 respectively. As Almarai is a dairy product company, the
tangible fixed assets and inventories play an important part in the overall total assets
composition. The property, plant and equipment in 2021 accounts for 65.7% of the total assets
against 65.3% in 2020. Similarly, the share of inventories in total assets has dropped from 14.5%
in 2020 to 13.7% in 2021. The portion of cash and cash equivalents of the company has
relatively smaller share in comparison to total assets as it is mainly of the character of
Merchandise Company. In terms of liabilities and equity, the largest share is of equity with
52.3% in 2021 and 50.2% in 2020. This increment is mainly due to increase in retained earnings
statutory reserves. The loans and borrowings are 22.3% in 2021 of the total assets against 31.2%
in 2020. This means that the company has been successful in offloading some of their loans
which otherwise, would have increased the interest burden and stressed the overall profitability
available for shareholders. As expected, the largest share in current liabilities is that of trade
payables with 10.5% of total assets in 2021 against 9.3% in 2020.

The horizontal analysis of the company is available for 2021 only. The total assets
declined by 1.8% and this decline were due to both non – current assets as well as current assets,
which declined by 1.6% and 2.6% respectively in 2021. Most of the non – current assets have
declined over a period of one year from 2020 to 2021. The only exceptions are derivative
financial instruments, deferred tax assets and biological assets. However, their presence is
insignificant as the above mentioned three assets count for only 5% of total assets. On the
liability side, while the long – term loans and borrowings have declined, the short term loans and
borrowings have shown as increment of 156.5% over the period of one year from 2021 to 2020.

Profit & Loss account

While looking at the vertical analysis, the cost of goods sold has increased from 64% in
2020 to 68.1% in 2021. This is a cause of worry as companies tend to remain close to their
COGS in order to maintain the topline and drive profits. A difference of 4% is large and
management must have reasonable backing for the same like increase in input costs etc. This has
resulted in decline of Gross profit from 36% in 2020 to 31.9% in 2021. The cascading impact of
the same is visible in the declining percentage of sales for operating profit, profit before tax and
net profit. The selling, general and administrative expenses along with other operating costs are
in control but that damage was already done in cost of goods sold.

Horizontally, the sales has increased by 3.2% year on year basis but with increment of
9.9% in cost of goods sold, the gross profit has declined by 8.6%. This has impacted operating
profit and net profit as well. The net profit has declined by 18.4%, which questions the efficiency
of operational managers. Further, net profit is one of the ingredients that impact the return on
assets calculation, which is explained in the ration analysis in this report elsewhere.
Consolidated Statement of Profit or Loss
For the year ended 31 December 2021
Vertical Analysis Horizontal Analysis
31-Dec-21 31-Dec-20 31-Dec-21 31-Dec-20 31-Dec-21
% of Total % of Total % increase
Notes SAR ’000 SAR ’000
Sales Sales /(Decrease)
Revenue 31 15,849,720 15,356,948 100.0% 100.0% 3.2%
Cost of Sales 25 (10,790,450) (9,821,440) -68.1% -64.0% 9.9%
Gross Profit 5,059,270 5,535,508 31.9% 36.0% -8.6%
Selling and Distribution Expenses 26 (2,518,851) (2,490,479) -15.9% -16.2% 1.1%
General and Administration Expenses 27 (428,157) (419,790) -2.7% -2.7% 2.0%
Other Expenses, net 28 (85,563) (78,428) -0.5% -0.5% 9.1%
Impairment Loss on Financial Assets (11,845) (24,477) -0.1% -0.2% -51.6%
Operating Profit 2,014,854 2,522,334 12.7% 16.4% -20.1%
Finance Cost, net 29 (346,063) (495,881) -2.2% -3.2% -30.2%
Share of Results of Associate 12 (941) 1,405 0.0% 0.0% -167.0%
Profit before Zakat and Income Tax 1,667,850 2,027,858 10.5% 13.2% -17.8%
Zakat 23 (77,080) (72,042) -0.5% -0.5% 7.0%
Income Tax 22,23 (11,334) (20,260) -0.1% -0.1% -44.1%
Profit for the year 1,579,436 1,935,556 10.0% 12.6% -18.4%
Profit / (Loss) for the year attributable to:
Shareholders of the Company 1,563,543 1,984,361 9.9% 12.9% -21.2%
Non-Controlling Interests 15,893 (48,805) 0.1% -0.3% -132.6%
1,579,436 1,935,556 10.0% 12.6% -18.4%
Earnings per Share (SAR), based on Profit
for the year attributable to Shareholders
of the Company
- Basic 30.00 1.59 2.02 -21.3%
- Diluted 30.00 1.56 1.98 -21.2%

Ratio Analysis
Activity ratios

Activity Ratios How Calculated 2021

Assets Turnover Revenue / Average Assets 49.45%
Fixed asset turnover Revenue/Average net fixed assets 63.77%
Working capital turnover Revenue/Average working capital 8.88
Inventory turnover Cost of sales / Average inventory 2.38
Days of inventory on hand Number of days in period / Inventory
(DOH) turnover 153.22 days
Receivables turnover Revenue / Average receivables 8.07
Days of sales outstanding Number of days in period / Receivables
(DSO) turnover 45.22 days
Payables turnover Purchases / Average trade payables 3.40
Number of days of payables Number of days in period / Payables turnover 107.47 days
Cash Cycle DSO + DOH - Payable Turnover 90.97 days

Activity ratios indicate the efficiency f the business that is being carried out. The ratios
also help in understanding the capability and capacities of the operational team as well. The main
ratios include assets turnover, fixed assets turnover, working capital turnover and Cash cycle
which comprises of days of inventory in hand, days of sales outstanding and number of days of
payable. These ratios measure the efficiency of both fixed and current assets.

As can be seen from the above table, the total assets turnover is relatively low at about
50%. However, fixed assets turnover ratio is higher, which means that the fixed assets are being
used better to generate more revenues. However, the company needs to do more to increase the
efficiency of its assets. The working capital turnover is impressive at 8.9 times which indicates
that the components of working capital are being rotated vigorously in creating more and more
revenues. The rotation of inventory is very slow in comparison of receivables and payables. The
overall cash cycle is approximately 91 days, which means that the company takes approximately
three months to convert their inventory or raw material to cash. With this analysis, the company
must focus on rotating its inventory too often, not let receivables to age and buy more days from
trade payables to pay. The analysis also indicates that company is able to collect money faster
from its customers than it pays to its creditors.

Liquidity Ratios

Liquidity
Ratios How Calculated 2021 2020
Current Ratio Current assets/Current liabilities 1.07 1.56
(Cash + Short-term marketable investments + Account
Quick Ratio receivables)/Current liabilities 0.40 0.53
(Cash + Short-term marketable investments)/ Current
Cash Ratio liabilities 0.10 0.12

Liquidity ratios are one of the most important ratios not only for management but for
creditors and bankers as well. These ratios tell about the ability of the business to pay its short
term liability. The ratio is higher the better. The current ratio of the business is merely been able
to cover the total current liabilities at 1.07 times against 1.56 times in the previous year. This
shows that the ability to cover the payment of short – term creditors has gone down considerably.
The next ratio is quick ratio which is just 0.40 in 2021. This means that business’s quick assets
can cover only 40% of the current liabilities. The cash ratio is even worse at just 0.10 or 10%.
This means that the company does not have enough cash to repay its short term obligation on an
urgent basis.

Solvency Ratios
 Solvency Ratios How Calculated 2021 2020
Debt-to-assets ratio Total debt / Total assets 47.67% 49.81%
Total debt / Total debt + Total shareholders’
Debt-to-capital ratio equity 47.67% 49.81%
Debt-to-equity ratio Total debt / Total shareholders’ equity 91.08% 99.24%
Financial leverage
ratio Average total assets / Average total equity 1.95
Debt-to-EBITDA
ratio Total debt / EBITDA 7.51 6.39

Coverage Ratios How Calculated 2021 2020

EBIT interest
coverage (EBT + Interest payments)/Interest payments 5.82 5.09
Fixed charge (EBIT + Lease payments)/(Interest payments + Lease
coverage payments) 4.91 4.43

The solvency ratios are categorized as solvency and coverage ratios. The former one
calculates the position in terms of meeting the long – term obligations such as debt. This is
compared in contrast to the assets and equity. It is considered as lower the better. The debt to
assets ratio is 47.7% in 2021 (down from almost 50% in 2020) shows that the total debt of the
business can be covered by 47% of the total assets. This is a comfortable situation for any
business. The high ratio not only stresses the profitability of the business, but also the
management of the businesses as creditors pressurizes management in day to day operations as
they have greater say. Likewise, the business is also comfortably sitting in terms of debt to
capital ratio at 47.67%. However, debt to equity ratio is very high and indicates that the total debt
is 91% of all the equity in 2021. The good part is that it has reduced substantially from 99% in
2020 to 91% in 2021. The financial ratio is also good at 1.95 which means that the firm has
almost twice the assets than its shareholding. This ratio is important when the firms go in
liquidation and shareholders feel secure about their invested money. Financial leverage is not
only just a solvency ratio but is also used in decomposition of return on equity and reflects upon
the efficiency of the top management in leveraging their capital structure. Financial leverage
ratio is important as it is the duty of top management to maintain the profitability of the business
above the leverage ratio.

The coverage ratios indicate the robustness of the earnings of the business to pay interest
and service the debt as well on a regular basis. Here, the interest coverage ratio is good at 5.82
times in 2021 against 5.09 in 2020. This means that the earnings are good enough to pay the
interest amount on a regular basis. Similarly, the fixed charge coverage is also good and the
company has the leverage and bandwidth to cover its fixed obligations such as lease payments
and repayment of loans along with interest payments.
Profitability Ratios

Profitability How Calculated 2021 2020

Gross profit margin Gross profit/Revenue 31.92% 36.05%
Operating profit
margin Operating profit/Revenue 12.71% 16.42%
Net Profit margin Net Income / Revenue 9.97% 12.60%
Return on Equity Net Income / Average Equity 9.62%
Decomposing ROE
Net Profit margin Net Income / Revenue 10.0%
Assets Turnover Revenue / Average Assets 49.5%
Average Assets / Average
Leverage Equity 1.95
PRODUCT 9.62%

Profitability ratios are the most important and most popular one as it shows the ability of
the businesses to earn and produce return on revenue. The most popular ones are net profit ratio,
gross profit ratio and operating profit ratio. Both the gross profit ratio and net profit ratios have
declined over a period of one year. The gross profit ratio has declined from 36.05% in 2020 to
31.92% in 2021. This is a huge drop as it has also impacted the operating profit margin ratio and
net profit ratio as well. The net profit ratio has declined from 12.6% in 2020 to just 10% in 2021.
The profitability analysis, when read with common size income statements, reveals that the cost
of goods sold have increased in 2021, which has cascaded its impact on all the profitability
ratios. It is an important lesson for the firm to keep its direct costs in control as the adverse and
strong economic forces indicate recession and high inflation.

The later part of the profitability ratios is about decomposition of Return on Equity
(ROE) in three parts, viz. profit margin (indicated by Net profit ratio), turnover (indicated by
assets turnover) and leverage (indicated by financial leverage ratio). The multiplication of these
three gives the same answer as that of ROE. The decomposition of ROE splits the responsibility.
In this case, the lower ROE is primarily due to the lowering net profit ratio.

Valuation Ratios

Valuation How Calculated 2021

P/E Price per share / Earnings per share 31.25
P/CF Price per share / Cash flow per share 9.92
P/S Price per share / Sales per share 3.08
Dividend payout Dividend Per share / Earnings per
ratio share 0.64
Dividend yield Dividend Per share / Price 2.1%
 Valuation ratios indicate the profitability of the business against the market price of its
share. Among the valuation ratios, Price to Earnings ratio is the most popular and indicates the
relationship of the market price of the share of the business against the earnings per share. The
P/E ratio indicates the expectations of the market that the firm will earn more profits in the
future. The P/E ratio of 31.25 is not relevant as standalone ratio as it cannot be compared with
the previous periods. The Price to cash flow ratio is same as P/E ratio with the exception that it
uses cash flow per share as denomination instead of EPS. The other important ratio is dividend
payout ratio which indicates the percentage of net profit available for common shareholders is
distributed as dividend. The DPS of 0.64 indicates that this company distributes 64% of its
earnings to shareholders as dividend. The companies tend to keep the dividend payout ratio fixed
but the amount changes depending upon the fluctuations in the earnings. Last, dividend yield is
the dividends as percentage of share price in the market.

Conclusion
The above financial analysis of Almarai was done on two broad aspects of common size
statements, both vertical as well as horizontal and then, in-depth ratio analysis. While the
common size analysis indicates the composition of the assets and liabilities along with
components of the income statement, it also indicates the trends over a period of time. One of the
biggest revelation with the analysis is that Almarai could not control the cost of goods sold,
which impacted its profitability and this the overall performance of the management in
generating enough returns that can beat the cost of capital. The total assets have declined over a
period of time. It can be understood that the period from 2020 to 2021 was a difficult year for all
the businesses due to pandemics. However, Almarai need to take care of its expenses,
management of operating assets, especially inventory and improving the cash position. The
company is weak on ability to meet the current obligations and must try to keep enough cash and
liquid assets that can cushion any emergency payment situation of the short – term debt. On the
solvency and coverage front, the company’s position is satisfactory and they should try to either
maintain the same or improve it further. Overall, the company has sound financial and has the
capability to do better in the coming years as the economic factors improve in the economy.