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Thursday, May 22, 2014

Balance Sheet analysis of Apollo Vs London Biscuits kcchongnz

Source: http://klse.i3investor.com/blogs/kcchongnz/52684.jsp

Balance Sheet analysis of Apollo Vs London Biscuits kcchongnz

We recalled the great growth story of LonBisc with sales growing unabated from 2006 through 2013 by 169%, or at a CAGR of 15.2% as shown in the link below. Despite of that, the net profit has been stagnant for the last 7 years, seriously out of sync with the revenue growth.

http://klse.i3investor.com/blogs/kcchongnz/52002.jsp

In analyzing the balance sheet, we look at the most important thing in the growth in equity, plus the dividends paid out. These two things determine if the company has increased shareholder value throughout the years. Figure 2 below shows equity of LonBisc has in fact grown by 165%, as much as the revenue growth for the same 7 years period, or a CAGR of 15%! The dividend yield is insignificant with less than 2% a year.



But how come such a great growth in equity when the earnings has been flat for the last few years? Yes, you probably guess it right; the growth is not from retained earnings of the past year which we should hope for, but with the money forked out from the shareholders pocket through right issues and private placement. The share capital, as a result, has doubled since 7 years ago to 142m now. On top of that, LonBisc’s borrowing has also been increasing every year unabated by 143% from 108m to 263m now as shown in Figure 2 below.



In contrast, the slower but steady growth Apollo has a steady increase of its equity of 5.3% a year. Together with a dividend yield of about 5%, shareholders of Apollo obtained a reasonable good return of more than 10% a year. The increase in equity was purely from retained earnings without any cash calls for the last 7 years. Net cash of company, which has zero borrowings, also increases in tandem with the net income growth as shown in Figure 1 above. For the most recent year, there was a spike of Apollo’s earnings accompanied by corresponding increase in cash.

In fact for LonBisc, the most alarming thing is about its growth in property, plant and equipment (PPE) which outpaced the growth of its revenue and total assets, whereas there is no growth in its earnings at all as shown in Figure 3 below.



The growth in receivables for Apollo is generally in line with its growth in revenue as shown in Figure 4 below. This signifies its good credit control. Inventories growth is slightly ahead of revenue growth which may signify better anticipated sales prospect ahead.

However, for LonBisc, while receivables grew generally in line with revenue growth, there is a drop in the growth of inventories last two years as shown in figure 5 below. Why? Is it because anticipation of no demand for its products, or short of money to maintain a healthy inventories? When taken into considerations with the high growth in PPE, there appear to be some “fishy” handling of its business by the management of the company.



Quality of assets

Property, plant and equipment made up of a whopping 77% of the total assets of LonBisc as compared to 45% of Apollo having a similar business as shown in figure 6 and Figure 7 respectively. Why must LonBisc require such a high outlay of fixed assets and burdening its balance sheet?

One can easily compare and contrast the good quality of Apollo’s assets with 25% in cash, 8% inventories and that of LonBisc with negative net working capital and just 4% in inventories as shown in Figure 6 and 7 below.


Financial strength
Table 1 below tabulates the liquidity ratios and long term financial strength of Apollo and LonBisc.
Table 1: Risks
Liquidity risk
Apollo
LonBisc
Current ratio
13.8
0.6
Quick ratio
11.5
0.5
 

Long term financial strength 

Total debt/Equity ratio
0
0.7

Am I required to explain which company is safer to invest in terms of financial strength?
In fact, the financial position of company is very precarious with both current and quick ratio below 1, or way too much short term liabilities than current assets. It would be very difficult for LonBisc to fulfil its short term debt obligation and can go kaput in case of economic downturn or another financial crisis, which we know do happen occasionally.
Apollo is very safe. However, it may not be good as the liquidity ratios are too high that there is inefficient use of cash assets. Why not distribute out to shareholders or buy back its own shares when they are cheap?
In any case, the pictures above paint a thousand words. I don’t think I am require to argue further which company has a better balance sheet, do I?

K C Chong (17 May 2014)

Appendix
Table 2: Balance sheet of Apollo, trend
         
Year
2013
2012
2011
2010
2009
2008
2007
2006
Revenue
156%
141%
124%
112%
123%
127%
108%
100%
Net Income
155%
105%
86%
119%
101%
101%
118%
100%
Net cash
152%
133%
130%
146%
100%
77%
109%
100%
Receivables
161%
126%
106%
98%
97%
169%
115%
100%
Inventories
177%
153%
168%
130%
109%
103%
103%
100%
         
PPE
151%
154%
152%
129%
119%
109%
104%
100%
Total assets
143%
134%
130%
127%
117%
112%
108%
100%
         
Total debts        
Total liabilities
140%
136%
136%
129%
116%
128%
120%
100%
         
Share capital
100%
100%
100%
100%
100%
100%
100%
100%
Common equity
143%
134%
130%
126%
118%
110%
106%
100%


Table 3: Balance sheet of LonBisc, trend

Year
2013
2012
2011
2010
2009
2008
2007
2006
Revenue
269%
235%
216%
207%
171%
128%
109%
100%
Net Income
103%
94%
110%
123%
117%
72%
80%
100%
Net cash
-259%
-238%
-214%
-188%
-189%
-178%
-141%
-100%
Receivables
246%
198%
236%
146%
124%
103%
114%
100%
Inventories
174%
160%
202%
188%
197%
108%
103%
100%
         
PPE
319%
294%
222%
215%
194%
140%
118%
100%
Total assets
268%
241%
237%
196%
176%
146%
117%
100%
         
Total debts
243%
218%
201%
178%
173%
176%
133%
100%
Total liabilities
228%
202%
223%
178%
161%
156%
116%
100%
         
Share capital
200%
187%
135%
135%
110%
110%
102%
100%
Common equity
265%
241%
193%
176%
154%
135%
119%
100%

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