Financial Analysis of. Agricultural Company. TOKO-AGRI, s.r.o.

Transcription

1 MENDEL UNIVERSITY OF AGRICULTURE AND FORESTRY IN BRNO FACULTY OF BUSINESS AND ECONOMICS DEPARTMENT OF BUSINESS ECONOMICS Bachelor thesis Financial Analysis of Agricultural Company TOKO-AGRI, s.r.o. Supervisor: Ing. Samuel Antwi Darwah, Ph.D. Author: Jana Krovinová Brno 2009

2 Acknowledgement: I would like to thank my supervisor Ing. Samuel Antwi Darkwah, Ph.D. for his willingness and time spent on this bachelor thesis. Also many thanks for his advice and recommendations. Beside this I thank very much to the company of TOKO-AGRI, s.r.o., for providing all necessary data, practical experiences and basis for working out this bachelor thesis. 2

3 Declaration: I hereby declare that I worked up this bachelor thesis on the topic Financial Analysis of Agricultural Company TOKO-AGRI s.r.o. individually under the guidance of Ing. Samuel Antwi Darkwah, Ph.D., with the use of literature sources which are listed in the References chapter. Brno, May 1, 2009 (Jana Krovinová) 3

4 Abstract The main object of this bachelor thesis is to perform and analyze the financial potential of the TOKO-AGRI, s.r.o. agricultural company during the period of This thesis consists of two parts. The first part is theoretical, answering basic financial questions, describing users of financial analysis and explaining basic financial statements. There are also characteristics of used methods and aims for the right calculation of the financial analysis of the given company representing all possible ratios and explanations of basic terms and procedures used in the analysis. The second part is based principally on the first one but it is more practical. It made use of real numbers and calculations, applied the Balance Sheet, Profit and Loss Statement. At the end there have been figured out models predicting financial distress of the company. In case of some distress I will give possible recommendations and solutions for the future development of the company. Key words: financial analysis, horizontal analysis, vertical analysis, analysis of ratios Abstrakt Hlavním cílem této bakalářské práce je představení a analýza finančních možností zemědělské společnosti TOKO-AGRI, s.r.o. v letech 2003 až Práce je rozdělena na dvě části. První částí je teoretická část, ve které najdeme odpovědi na základní finanční otázky, metody a cíle nutné pro správnou kalkulaci finanční analýzy dané firmy a vysvětlení základních pojmů a finančních ukazatelů. Druhá část je založena na části první, jen je více praktická. Jsou zde již použita reálná čísla a kalkulace, horizontální a vertikální analýza Rozvahy a Výkazu zisků a ztrát. Na závěr jsou uvedeny modely predikce finanční tísně společnosti. V případě nedostatků vzniklých špatným hospodařením společnosti navrhnu možné způsoby vylepšení. Klíčová slova: finanční analýza, horizontální analýza, vertikální analýza, analýza poměrových ukazatelů 4

5 CONTENT 1 INTRODUCTION THEORETICAL PART What is financial analysis Users of financial analysis Internal users External users Sources of information for financial analysis Balance sheet The Profit and Loss Statement Cash flow Methods of financial analysis Horizontal analysis Vertical analysis Financial Ratios Assessing overall financial performance Prediction of financial distress AIM AND METHODOLOGY CHARACTERISTICS OF THE SELECTED COMPANY Basic information Incorporation into commercial register Basic information Management of the company Departments of the company Plans for the future PRACTICAL PART Horizontal analysis Horizontal analysis of Balance sheet Horizontal analysis of Profit and Loss statement Vertical analysis Vertical analysis of Balance sheet Vertical analysis of Profit and Loss statement

6 5.3 Ratio analysis Liquidity ratios Financial Leverage Ratios Activity Ratios Profitability Ratios Dividend Policy Ratios Assessing overall financial performance Prediction of financial distress CONCLUSION AND DISCUSSION REFERENCES Publications Internet sources LIST OF TABLES AND GRAPHS List of tables List of graphs LIST OF ABBREVIATIONS APPENDIXES Balance sheet of Czech accounting system in full format Balance sheet ( ) Profit and Loss Statement ( )

7 1 INTRODUCTION Agriculture is an integral part of all states economies. The importance lies not only in the production of foodstuffs and other agricultural products, but also in the preservation of Czech countryside and its ecological approach to the environment. The history of the agriculture goes very far to the history, from the simplest kinds of hunting to presently widely spread ecological agriculture. The main development is noticed since the year 1989 when agriculture used to be one of the most preferred branches in the central directive system in our country. In 1989 there was no private sector, two-thirds of whole farm land belonged to farmers cooperatives and one-third was controlled by state organizations. In the present reformatory period substantial changes took place in the business structure of the Czech agriculture. The number of autonomous farmers and other small individuals increased after the fall of the social regime in After this time Czech agriculture recognized big increase, mainly in farmers cooperatives, trade companies, individuals companies and other entities. In 2009 the main part of agriculture land is owned by corporations or natural persons. The portion of workers in agriculture is about 4 % of Czech population. The main function of existing agriculture is not only production of foods but also important social and ecological functions. The agricultural activity is the most essential component, which needs care and support, hence the state encourages its industry by grants. In the Czech Republic there are all products that are characteristic for the climatic and geographical location of the country. Some of these products could be all kinds of grain, potatoes, hops, fruits, vegetables, white beet etc. From the livestock production pigs, poultry and cattle are the most important. Agriculture in the Czech Republic belongs to the primary economic sector (together with forestry and fishery) that is the main reason why in this branch so many competitors and companies are dealing with agriculture components, crops, land or services. The company is successful only if it can realize the good idea for a good price and support it with precise services. After all changing regimes and likewise after the worldwide crises which strike the Czech Republic mainly at the beginning of 2009 only stationary companies are able to survive. 7

8 2 THEORETICAL PART 2.1 What is financial analysis Motto: I prefer being rather too much careful than too little far-sighted (Cicero) Financial analysis refers to a judgment of the stability, viability and profitability of business. It mainly focuses on two aspects. The first one is the money aspect of the company and the second one is financial profitability to the investors. Financial analysis applies analytical tools and techniques to general purpose financial statements and related data to derive estimates and inferences useful in business decisions. It is a diagnostic tool in assessing financing, investing and operating activities and it is also an evaluation tool for managerial and other business decisions. Analysis enables its users (like investors, managers, supervision organs, banks etc.) to evaluate the whole financial business of the company and predict its future. We can use this evaluation for data in the past, the present and mainly in the future for estimating the position of the company. The main aim of this analysis is to recognize financial health of the company, identify its weak points which can make serious problems in the future and specify strong points from which the company can make some profit and can build on them in the next couple of days. Sources used for the financial analysis are also found in another internal area such as accounting, money markets, statistics, mathematics, etc. 2.2 Users of financial analysis Information and data included in the financial analysis and financial statements influence not only companies but also some other external and internal users. 8

9 2.2.1 Internal users Owners of the company use financial analysis as a controlling tool, which checks if their owned sources and capital was fully used and allocated in the proper manner Managers company managers need information for short-term and long-term financial control of the firm. Knowledge of the financial situation of the company makes it possible to decide in the right way with earning financial sources. Results from the financial analysis enable managers to decide about right prospectus which is processed in the business plan. Employees are interesting in financial information especially from the point of job stability and from wage and social perspective External users Banks and other creditors ask potential debtors for information about their business situation, on these bases they suggest if they will lend some money or not. They also verify if the company can give the warranty for loans and if they pay under given conditions. Competitors they are interesting in the financial analysis comparing with their own business results, mainly in profitability, yearly revenues, stock value etc. Share holders of the company are interested in long-term liquidity and in paying back ability, interests are repaid on time Business partners can be separated into two parts suppliers they choose potential business partners on basic of partners financial situation, focused mainly on stability and ability to pay on time subscribers they work on the same principle, according to results of financial analysis they choose new suppliers, make sure that supplier fulfill their contractual obligations. Investors need to make sure that their money is saved on the acceptable place and that company has qualified managers. Investors are interested mainly in stability and liquidity of the company, also care about the level of return and risk in investment. 9

10 Analysts and tax consultants concern on the widest aspects of financial economy of the company, they have to identify scarcity and recommend steps for reparation Stockbrokers they require through knowledge and information about financial situation of the company to be successful in business with securities and make qualified decisions State and its organs demand of financial information for many objectives like statistics, inspection of fulfillment of tax liability, monitoring of government Public use financial situation of companies for reasons like checking if company is not against environmental protection, development of region and many others. Public mainly focused on big companies which has the main demand for shares. Of course this list is not complete. Other groups like students, universities, job hunters, etc. can be mentioned. Companies are not obliged to provide information to external users! It can be influenced also with rising competition and misusing of information. 2.3 Sources of information for financial analysis Financial accounting informs about property and financial situation of the company, economical results and cash flow. The basic statements for financial analysis are: Balance Sheet Profit and Loss Statement Cash Flow and notes accompanying the financial statements. All these statements are examined by auditors once a year. They compose together three main pillars for calculation of the financial analysis. 10

11 2.3.1 Balance sheet Balance sheet is a snapshot of company s or person s balances. It is the most important financial statement used in the system of double-entry accounting. It is the static view on two main parts assets and equities. For dynamic aspect is better to analyze balance sheets for two consecutive time periods. The Balance Sheet must follow given formula: Assets = Liabilities + Owner s Equity ASSETS represent possessions of the company. They are divided on fixed assets and current assets because we must separate the resources which are bounded in the long term and those which are changing very frequently. Fixed Assets - property which is not easy to convert into cash - Intangible assets, Tangible assets, Long-term financial assets Current Assets - expected to be sold or used within one year - Inventories, Long-term receivables, Short-term receivables, Short term financial assets EQUITIES describe the ways of financing assets. Equities are divided into two categories the owner s equity and liabilities. From the term owner s equity we could understand the entry capital which was brought by the proprietors. Liabilities represent some kind of obligations corresponding to certain business operations with given maturity date. Owner s equity - also called net worth of the company - Common stocks, Capital funds, Funds created by net profit, Economic result Liabilities - represents financial debts, obligations or potential loss - Reserves, Long-term debts (liabilities), Short-term debts (liabilities), Bank credits 11

12 There is important equality between assets and equities! The Profit and Loss Statement After the Balance sheet it is the second basic financial statement that must be obligatory compiled to the date of accounting shutter. Due to this statement we can calculate if the company is in Profit (+ result) or in Loss (- result). The main aim is to calculate properly all costs, revenues and finally the economic result of the company. Revenue is explained as the result of the economic activity of the company. Cost is then defined as the input into the economic activity of an enterprise. Economic result is than calculated as revenues minus costs. (For structure of Profit and Loss Statement see appendix No.10.3.) Cash flow This statement provides information about structure of expenditures and incomes realized during given accounting period by the company. This statement is not obligatory in Czech system, it is often used as a part of appendix. Cash flow shows the difference in amount of money (in the beginning and in the end of given period). Expenditure is for company decrease of money and income is an increase of money. Formulas: Cash flow = Incomes Expenditures Economic result = Revenues - Costs It is usually divided into three different activities: operating activity (expenditures and incomes from material, goods, paid wages) investment activity (expenditures and incomes from tangible and intangible fixed assets) 12

13 financial activity (expenditures and incomes from financial assets as cash, securities, etc.) Accounting units can chose the method of processing according to the valid legal norms. The two methods are as following: direct focused on monitoring of receipts and expenditures, data from bank and cash vouchers. This method goes out of net profit plus other expenditures minus other incomes, which does not require the movement of money indirect still the most used method. It starts from profit (or loss) from the common activity before taxation, not from the whole net profit. In practice cash flow statement is the main conception for whole financial management and the main criteria for decision making. 2.4 Methods of financial analysis Financial statements are the main data used in accounting return and therefore could be entitled as indicators. They are differentiated as absolute, difference, ratio and velocity indicators. Absolute indicators are included in accounting return and mean e.g. assets, liabilities, costs, revenues etc. Used in percentage analysis, analysis of trend and index analysis. Difference indicators are utilized for analysis of financial resources. Ratio indicators appear from absolute one and reflect dependence between items of accounting return. Velocity indicators act as measures of turnover rate of every single component of assets, mean intensity of usage. 13

14 2.4.1 Horizontal analysis It compares indicators in time (for example for how many % will change economic result in comparison with the year before). This analysis is also called trend analysis. Absolute change (difference) = (value in year t) (value in year t-1) When t = present year Percentage change (in %) = (absolute change) / (value in year t-1) * Vertical analysis It is very often called Cross-sectional. This financial statement is used as a base value and all other statements are compared with it. This analysis shows the ratio of each single item on their aggregate values. Thanks to this we can make observations of structure of each statement during the given time period Financial Ratios All financial ratios are very useful and important indicators of the company s financial situation and performance on the market. Most of these ratios can be calculated from given financial statements (Balance sheet, Profit and Loss Statement and Cash Flow). Classification of financial ratios: Liquidity Ratios Financial Leverage Ratios Activity Ratios Profitability Ratios Dividend Policy Ratios 14

15 Liquidity Ratios Liquidity ratios give us information about company s ability to meet its short-term financial obligations (the ability to pay company s bills). Quick Ratio (or Asset test ratio) The recommended values of this ratio is from 1 to 1,5. From the owner s point of view the less the number the better the position of the company is. From the creditor s point of view higher values are more advantageous. Quick Ratio = (Current Assets Inventory) / Current Liabilities Quick ratio is the ratio of Current Assets less Inventory to Current Liabilities. Current Ratio Current Ratio is the ratio of Current Assets to Current Liabilities. Higher values indicate the possibility of the company s ability to meet its short-term obligations. Current Ratio = Current Assets / Current Liabilities Cash Ratio Cash Ratio is the most conservative liquidity ratio. It is used only with internal financing. The ratio of 0,40 or higher is common for healthy companies. Cash Ratio = (Cash + Marketable Securities) / Current Liabilities It is the ratio of the company s ability to pay off its current liabilities. Net Working Capital Ratio Net Working Capital Ratio = Net Working Capital / Total Assets This is the ratio of Net Working Capital (which is equal to Current Assets less Current Liabilities) to Total Assets. Inventory Period We are able to calculate also the period of inventory: Inventory Period = Average Inventory / (Annual Cost of Goods Sold / 365) or Inventory Period = 365 / Inventory Turnover 15

16 Financial Leverage Ratios Financial Leverage Ratios are used to analyze total debt, short-term debt and long-term debt. Total Debt Ratio Total Debt Ratio = Total Liabilities / Total Assets Total Debt Ratio is defined as Total Liabilities to Total Assets. Debt-Equity Ratio Debt-equity Ratio = Total Debt / Equity Debt-equity Ratio is the ratio of Total Debt to Total Equity. Equity Multiplier Equity multiplier = Total Assets / Equity Multiplier of equity is calculated as Total Assets divided by Total Equity. Times Interest Earned (TIE) It is used for measuring the company s ability to meet its debts. Failing to meet these obligations could force a firm into bankruptcy. Times interest earned = EBIT / Interest expense Times Interested Earned Ratio is the ratio of EBIT (Earnings Before Interests and Taxes) to Interest Charges Activity Ratios These ratios measure how efficient the company is using only its assets. Asset Turnover Ratio Asset turnover ratios show the efficiency of companies utilization of assets. The two most important ratios are: Total asset turnover = Sales / Total assets Fixed asset turnover = Sales / Fixed assets 16

17 Average Collection Period Number of days that credit sales stay in accounts receivable before they are picked is called Collection Period. This period is calculated: Average Collection Period = Accounts Receivable / (Annual Credit Sales/365) Average Collection Period = 365 / Receivables Turnover Two commonly used are also: Receivables Turnover It shows how fast the company collects its accounts receivable. Receivables Turnover = Annual Credit Sales / Accounts Receivable Inventory Turnover Inventory Turnover = Cost of Goods Sold / Average Inventory Profitability Ratios Net Profit Margin Ratio A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It shows how much out of every crown of sales a company actually keeps in earnings. Net Profit Margin Ratios = Net profit Before Tax / Net Sales Return on Total Assets (ROA) ROA is an indicator of how effectively the company s assets are being used to generate profits. This Ratio highly depends on the industry. The calculation is Total Net Profit divided by Total Assets. ROA = Net profit / Total Assets As another useful formula can be used: Return on total assets = After-tax profit margin * Total asset turnover 17

18 Return on Equity (ROE) It is one of the most important profitability indicators which show how much profit a company earned in comparison to the total amount of owner s equity from the Balance sheet. The higher is the Return on Equity the better. ROE = Net profit / Owner s Equity (Owner s Equity = Total Assets Total Liabilities) Is defined as a ratio of Net profit to Owner s Equity (it measures the profit earned for each one crown invested in the company s stock). ROE can be also calculated as: ROE = Net profit margin * Total asset turnover * Equity multiplier Return on Common Equity (ROCE) It shows the return to common equity after factoring out preferred shares. ROCE = Net income / Average Common Owner s Equity It is calculated as a ratio of Net income to Average Common Owner s Equity. Return on Investment (ROI) This Ratio is probably the most important one of all. It is the percentage of return on funds invested by its owners in the business. It is calculated as: Return on Investment = Net Profit Before Tax / Net Worth Earnings per Share (EPS) It is the ratio of total earnings divided by the number of shares outstanding. Companies used very often a weighted average of these outstanding over the reporting time period. Earnings per Share can be calculated for the previous year ( trailing EPS ), for the current year ( current EPS ) and for the coming year ( forward EPS ). EPS = Net Income / Number of Common Shares Outstanding This ratio is calculated as Net Income divided by Number of Common Shares Outstanding. 18

19 Dividend Policy Ratios Policy ratios show the prospects for future growth. Dividend Yield Dividend Yield = Dividends per Share / Share Price Payout Ratio Payout Ratio = Dividends per Share / Earnings Per Share All ratios are subjects to the limitations of accounting methods different accounting methods may have different ratio values Assessing overall financial performance Du Pont Model Du Pont method relates to whether the invested capital base includes an addback for accumulated depreciation on depreciable assets. This model was firstly performed by the DuPont Corporation in the 1920's. Return on Assets DuPont Is a percentage from comparison of the total assets of the company and income aftertax. Limitations of the DuPont model for financial analysis. short term measurement does not link to value does not link to the time value of money does not link to the cost of capital setting a target for a good ROCE is difficult before tax measurement 19

20 Generally used formulas: ROA= After-tax profit margin * Total assets turnover ROA= (Earnings after tax / Net Sales) * (Net Sales / Total Assets) ROA = ROE / Equity multiplier Return on Equity DuPont In this method are assets measured at their gross book value rather than at net book value in order to set up a higher return on equity (ROE) - among financiers also known as "DuPont identity". ROE can be influenced by: Operating efficiency - measured by profit margin Asset use efficiency - measured by total asset turnover Financial leverage - measured by the equity multiplier The formula for calculation is: ROE = After-tax profit margin * Total asset turnover * Equity multiplier ROE= ROA * Equity multiplier 20

21 Generally used DuPont Model: Return on Common Equity Return on Total Assets multiplied by Equity multiplier Total Asset Turnover multiplied by After-tax profit Equity Multiplier Net Sales divided Total Assets Earnings after divided Net Sales Total Assets divided Common Equity Total PLUS Total Long- Net Sales MINUS Total Costs Total Debt PLUS Common Equity Current Term Assets Current Assets Long-Term cash, suppliers accounts receivable marketable securities inventory prepaid expense Assets plant and equipment intangible assets natural resources other long-term assets Selling price Unit volume Cost of goods Taxes Expenses Accounts Payable Notes Payable Mortgage Payable Bonds Common Stock Retained Earnings Prediction of financial distress Models of financial distress, comonly referred to as bankruptcy prediction models, examine the trend and the behavior of selected ratios. Characteristics of these ratios are used in identifying the likelihood of future financial distress. We used two models Altman Z-Score and IN Index (used in Czech Republic) Altman Z-Score A predictive model created by Edward Altman in the 1960's. This model combines five different financial ratios to determine the probability of bankruptcy amongst companies. In general, the lower the level of Altman Z-Score, the higher the probability of 21

22 bankruptcy is. Firms with this score higher or equal 2,9 have very strong position and no very low likelihood to fall into bankruptcy. Scores in between 1,2 and 2,9 lie in so called grey area. Their financial situation is quite positive, but real statistics predict that 72% of these firms will bankrupt during next two years. And finally scores under the value of 1,20 are in Distress Zone and these companies will probably leave the market because of bankruptcy. Definition of Altman Z-Score: X 1 = Working Capital / Total Assets X 2 = Retained Earnings / Total Assets X 3 = Earnings Before Interest and Taxes / Total Assets X 4 = Shareholders Equity / Total Liabilities X 5 = Sales / Total Assets General formula for calculating Altman Z-Score Z = 0,717X 1 + 0,847X 2 + 3,107X 3 + 0,420X 4 + 0,998X 5 Z-Score Bankruptcy Model (for agricultural companies) Z = 1,2X 1 + 1,4X 2 + 3,3X 3 + 0,6X 4 + 0,999X 5 Zones of Discrimination: Z > 2,9 - Safe Zone 1,2 < Z < 2,9 - Grey Zone Z < 1,2 - Distress Zone Index of rentability IN This IN index was firstly created by husbands Neumaier. It is used in Czech conditions for accounting. Index IN for general companies in Czech Republic IN = 0,22x 1 + 0,11x 2 + 8,33x 3 + 0,52x 4 + 0,10x 5 16,80x 6 22

23 Index IN valid only for agricultural companies IN = 0,24x 1 + 0,11x ,35x 3 + 0,76x 4 + 0,10x 5 14,57x 6 x 1 = Total Assets / Total Liabilities x 2 = Profit before interests and taxes / Interest expense x 3 = Profit before interests and taxes / Total assets x 4 = Total revenues / Total assets x 5 = Current assets / Current liabilities x 6 = Liabilities after payback period / Total revenues Conditions: IN 2 company has strong financial potential 1 IN 2 company with neutral financial situation IN 1 it is nearly to bankruptcy 23

24 3 AIM AND METHODOLOGY The main object of the bachelor thesis is to perform and analyze the financial situation of the agricultural company TOKO-AGRI, s.r.o. during the time period Another important thing is to find all its pluses and minuses and all this ratios should point them out. There are two important questions: What is the direction of the financial situation of the company during this 5 years period? What are the predictions and problems for the near future and how to solve them? 1 The own work is divided into two parts: Theoretical part shortly characterizes basics of the financial system, describes all possible users and uses financial statements as sources for financial analysis. Finally it shows the methods for right calculation, explanation of ratios and indicators, selected ratios will be then practically used. In Practical part will be described management of the company, its incorporation and basic information. This section is principally based on the theoretical one, but it uses all methods with real numbers, which will show us the present situation of the company. Graphical representations help for clear understanding. At the end I will give concrete results, possible recommendations and also solutions for the future development of the company. 1 These questions will be answered in the practical part and results will be given also in conclusion part. 24

25 4 CHARACTERISTICS OF THE SELECTED COMPANY 4.1 Basic information In this bachelor thesis I try to identify and specify strong and weak pages of the company TOKO-AGRI, s.r.o. and evaluate its future development. TOKO-AGRI, s.r.o. is a quite small company dealing with sale of agricultural machines and components, which was established in 1990 only by one person by Ing. Tomáš Kořínek. The business was started more then 19 years ago together in two people, who did absolutely everything trade, business, import and the most important thing communication with customers. The area was then so widely spread that they recognized that they surely need more co-workers. Actual situation is 41 employees in total. Making business was easier than today, there were only a few companies dealing with agricultural products and none for the trade mark JCB company from England. The company earlier took place in spa city Luhačovice, especially known as watering place, but it was only provisionally. Then there has been build one new place in Rudice, very small village near to Luhačovice, it is place with perfect conditions for agriculture, wide space for machine testing and plant production for the nearest future. Movement in 2003 from Luhačovice to Rudice is called as big boom which started new progression and changes. After this time it noticed increase in sale and services. It is very successful in enforcing new technologies for municipal utilities in the marketplace and 36 new centers are occurring. The basic philosophy consists of complete offer of technologies for plant production from the simple kinds of specialized tools to the delivery of energy. TOKO company ensure the compact system of machinery with the highest possible economictechnological efficiency. This firm creates complete technological lines, nowadays very popular among farmers. The company does not only delivers the machines in required quality but also our professional serviceman repair them everywhere and at anytime (till 24 hours). We all know that mainly in high season it is really urgent to have machine in good condition and prepare it to work 24 hours per day. All the time of lifetime of single machine company guarantees whole service and delivery of spare parts. Matter of fact is the complete training of staff, which is carried on by our serviceman after their very professional training in companies abroad (made by our suppliers). 25

26 Beside these activities the company concentrates on services consisting of rent of machinery and components from the wide assortment of products. Simultaneously skilful service employees of the company provide services within seasonal agricultural activities. With regard to this movement it is possible to see this company as commercial the same way as agricultural. With regard to its long history on the Czech and Slovak market we can expect good and positive financial results. 4.2 Incorporation into commercial register The public limited company TOKO-AGRO, s.r.o. was established on the general meeting on August 3, The incorporation occurred on October 5, 1999 and its business activities started on January 1, Name of his company was deleted from the commercial register and the same Identification number (and also all legal activities) now belongs to TOKO-AGRI, s.r.o. 4.3 Basic information Commercial name: TOKO-AGRI, s.r.o. Seat: Praha 4, Na Strži 1702/65, zip code Type of legal entity: The public limited company (s.r.o.) The subjects of the business activity: sale of goods purchase of goods in order to its next sale lease of the machines and equipments repairs of industrial machines agricultural manufacturing Identification number of the company (IČO): Tax identification number (DIČ): CZ The registered capital: CZK Treatise marker (given by registration Court in Prague): C Date of incorporation:

27 4.4 Management of the company The company is formed by one statutory organ, which consists of two commissions agents. These two members act on behalf of the company separately. They add own signature to the business name when signing all business documents. 2 At present the company offers job totally to 41 employees. From this number 29 of them are men and 7 from total are working out of the central place. There are people employed full-time and 8 people as part-time job. These additional employees are important mainly in high season and all of them are students from agricultural high schools and universities. 4.5 Departments of the company The main area for making a business is Czech and Slovak market, where this company has exclusive agency. The main business depends on delivering of the machinery from abroad on the basis of customers orders and providing this with services and another supplementary duties (completing of warranties, necessary trainings, etc.). Company director one main person who agree or disagree about all acts, organizing the life of the firm, the head of the company Secretariat one women preparing all needful documents for director s meeting, providing all of them with records, coordination of all mail matters Economic section the main control organ, check the efficiency of others departments, lay out invoices and credits, keep all money of the company in cash and the bigger amount on account; TOKO-AGRI, s.r.o. has 3 economists Commercial section this department contains all businessmen who have the direct contact with customers, there is the first important moment to make a contract, this section is provided by two administrative workers who make all paper work (preparing of orders, actions, contracts for buying or leasing) Import section implementation of customers orders in companies abroad, dealing with suppliers, arranging of trucks for machinery; this department consist again of two administrative workers 2 Names of commissions agents can be found in the Commercial Register. 27

28 Service department 8 people, whose daily routine is: checking of the brand new machinery, preparing for customers, providing with necessary supplements (first-aid kit, fire-extinguisher, radio), warranty repairs, changing of spare parts and many other Spare parts department very similar to import section, placing an orders of parts for costumers machinery, regular control of spare parts on the stock; consists of 10 employees Advertising department 3 people make an image of leaflets and advertising materials, selling of promotion articles, preparing of meetings and fairs 4.6 Plans for the future TOKO-AGRI, s.r.o. is oriented on agriculture and for the future it wants to confirm in its position. Distribution of machinery will always be the main business, but providing this with some additional services can broader horizons. Higher level of quality the company still stays on the top of the agriculture and they want to fix this position also for the next years. It means not only the quality of machinery but also better quality of services provided. Development in all departments is necessary, not because it is needed, but by reason that customers are looking not only on prices for goods but also for the quality of the products. Spread the area of business to the production of crops the company owns fields of total area about 200 ha, for the future development they want to use it for crops production, still in progress Development of central store for spare parts company tries to make agreement with German supplier Krone, the successful contract will lead to constructing of a new big stock for Central Europe and TOKO-AGRI, s.r.o. can finally influence also other European markets. 28

29 5 PRACTICAL PART The following analysis: horizontal analysis, vertical analysis and the most important ratios as indicated in the practical part would be performed for the above named company. All results will be displayed and described in discussion part. 5.1 Horizontal analysis Horizontal analysis is performed by using the following financial data Balance sheet and Profit and Loss statement Horizontal analysis of Balance sheet ASSETS Total assets are according to Balance sheet of the company increasing every year. Total assets minimum was in 2003 in amount 152 mil. CZK and the maximum was achieved in 2007 amount 272 mil. CZK. It means that total assets rise of more than 120 mil. CZK. Fixed assets have increasing character as well (only in 2006 there was small decline). Total change in fixed assets is almost 58 mil. CZK. This increase is due to constructions made in the company and new equipment which grown rapidly in In Current assets is the main visible turnover in Short-term financial assets, it began in 2003 on the value of almost 4 mil. CZK and in 2007 it reached the amount 55 mil. CZK. As other alternatives can be mentioned growth in Inventory and decline in Short-term receivables due to decrease in trade receivables. Time distinction dropped from 3 mil. CZK (2003) to 58 thous. CZK (2007). This all passed in Deferred expenses. The most important year from the assets point of view is the last year of analysis year 2007, when happened to the most important changes. 29

30 Absolute and relative changes of particular years are described in the following tables: Table 1: Horizontal analysis of assets during the time period ASSETS (in thous. of CZK) Absolute change Relative change (%) Absolute change Relative change (%) Inventory , ,29 Short-term receivables Short-term financial assets CURRENT ASSETS Intangible fixed assets Tangible fixed assets FIXED ASSETS Time distinction , , , , , , , , , , , , , ,15 TOTAL , ,17 ASSETS Source: Author s own calculation Table 2: Horizontal analysis of assets during the time period ASSETS (in thous. of CZK) Absolute change Relative change (%) Absolute change Relative change (%) Inventory , ,89 Short-term receivables , ,46 Short-term financial assets CURRENT ASSETS , , , ,32 Intangible fixed assets , ,28 Tangible fixed assets , ,34 Long-term financial assets , ,50 FIXED ASSETS , ,98 Time distinction , ,28 TOTAL ASSETS , ,35 30

31 The graph below shows the development of assets between as indicated in the above tables. Graph 1: Development of assets during the time period Total Assets Fixed Assets Current Assets Time distinction From the graph it could be seen that the tendency of Total Assets is increasing during the whole time period, in Fixed Assets is stagnation from 2003 till 2006, only in 2007 the value dropped over CZK. Changes in Current Assets are increasing till 2006 when it reached CZK, in 2007 decreased on CZK. LIABILITIES AND OWNER S EQUITY Liabilities and owner s equity are increasing every year. Minimum was achieved in mil. CZK and maximum in mil. CZK. Total difference in the time period is 120 mil. CZK. It is obvious that there are the same results as it is in Assets; it is caused because of relative equality. In 2004 company TOKO-AGRI s.r.o. registered 100 mil. CZK in capital and this amount increased Owner s equity, this year total liabilities went up more then 7 times. There are no other changes during the period Liabilities have decreasing character. Firstly caused by Short-term debts, which totally decreased of 25 mil. CZK and secondary due to Bank credits, which fall down from 30 mil. CZK (2003) to 0 (2007). In the last year company did not need any financial support. Time distinction is floating from year to year. 31

32 The biggest variation (according to relative changes almost 7 times more) was scored in 2004 in Owner s equity. In that time the company registered new capital in amount 100 mil. CZK. Absolute and relative changes of particular years are described in following tables: Table 3: Horizontal analysis of liabilities and owner s equity during the time period EQUITIES (in thous. of CZK) Short-term debts Absolute change Relative change (%) Absolute change Relative change (%) , ,49 Bank credits , ,91 LIABILITIES , ,42 Common stock , ,00 Profit/loss previous year , ,92 Economic result , ,11 OWNER S EQUITY , ,97 Time distinction , ,53 TOTAL EQUITIES , ,17 Table 4: Horizontal analysis of liabilities and owner s equity during the time period EQUITIES (in thous. of CZK) Absolute change Relative change (%) Absolute change Relative change (%) Reserves , ,11 Short-term debts , ,20 LIABILITIES , ,34 Common stock , ,00 Reserve funds , ,67 Profit/loss previous year Economic result OWNER S EQUITY , , , , , ,18 Time distinction , ,86 TOTAL EQUITIES , ,35 32

33 The graph below shows the development of liabilities and owner s equity between as indicated in the above tables. Graph 2: Development of liabilities and owner s equity during the time period Total equities Ow ner s equity Liabilities Time distinction The development of Total equities is during the whole time period increasing (from CZK over CZK). The same tendency is measured in Owner s equity (from CZK till CZK, the biggest change passed in the first two years). Opposite direction is in Liabilities, where trend has decreasing character (from CZK down to CZK) Horizontal analysis of Profit and Loss statement This type of analysis compares difference between costs and revenues. There are the most important factors in the table below. Revenues have increasing characteristic, the main change in revenues is in 2005, where is noticed increase almost 30%. Feature indicators involving total revenues are Other financial revenues (+756% in 2004), Interest revenues (+260% in 2005), Interest revenues (+573% in 2005) and Revenues from disposals of fixed assets and materials (+1 235% in 2007). Costs have also increasing tendency in all years of measurement. The highest percentage in 2004 is in Interest expenses (202%), in Other financial expenses in 2005 (52%), in Interest expenses in 2006 (+175%), in Net book value in 2007 (+1097%). 33

34 According to calculated results the dominant suggestors are Interest revenues and Interest expenses. Table 5: Horizontal analysis of Profit and Loss statement during the time period Revenues from sold goods Absolute change Relative change (%) Absolute change Relative change (%) , ,25 Production , ,9 Revenues from disposals of FA Other operating revenues Interest revenues Other financial revenues Extraordinary revenues TOTAL REVENUES Expenses on sold goods Production consumption Personnel expenses , , , , , , , , , , , , , , , , , ,75 Taxes and fees , ,17 Depreciations , ,89 Net book value , ,65 Other operating expenses Interest expenses Other financial expenses Income tax on ord.income , , , , , , , ,88 TOTAL COSTS , ,17 34

35 Table 6: Horizontal analysis of Profit and Loss statement during the time period Revenues from sold goods Absolute change Relative change (%) Absolute change Relative change (%) , ,35 Production , ,03 Revenues from disposals of FA Other operating revenues Interest revenues Other financial revenues Extraordinary revenues TOTAL REVENUES Expenses on sold goods Production consumption Personnel expenses , , , , , , , , , , , , , , , , , ,65 Taxes and fees , ,75 Depreciations , ,58 Net book value , ,14 Other operating expenses Interest expenses Other financial expenses Income tax on ord.income , , , , , , , ,50 TOTAL COSTS , ,34 35

36 The graph below shows a comparison between total revenues and total costs. As we can see they are only slight difference between total revenues and cost. Graph 3: Development of revenues and costs during the time period Revenues Costs Fortunately Total revenues are over Total costs, from this graph is clear that the company made profit during all measured years. 5.2 Vertical analysis Vertical analysis contrasts financial data of present year with data from previous year. The basic for this analysis are Total assets. Comparison of other subjects with Total assets gives us results of the financial balance of the company Vertical analysis of Balance sheet ASSETS Total assets are composed by Fixed assets, Current assets and Time distinction. The biggest part is created by Current assets (up to 86%) and the smallest one by Time distinction (maximum 2,12%). The biggest impact on Fixed assets have Tangible fixed assets. The value is in borders from 99,3 (2004) till 81,93 (2005). Increases are because of purchase of new equipment 36

37 and constructions made in the company during these years.. Changes in Intangible fixed assets and Long-term financial assets are very unstable. Current assets have the biggest impact on Total assets. Are created by two most important parts: Inventory forms bigger part of Current assets. Its stage is increasing from 2003 till 2005 (from 54,53% till 66,10%) due to changes in goods. From 2006 the trend is rather decreasing. Short-term receivables have decreasing tendency during whole time period because of fall in Trade receivables. Short-term financial assets the tendency is increasing, caused because of changes on bank accounts, in 2007 there were paid outstanding remained from year Time distinction have only small impact on Total assets. The lowest amount in 2007, because of very low Deferred expenses of the company (only 58 thousands). Table 7: Vertical analysis of assets during the time period Inventory 54,53% 62,91% 66,10% 60,62% 45,18% Short-term receivables 42,26% 26,36% 25,96% 24,11% 25,50% Short-term financial assets 3,21% 10,73% 7,94% 15,27% 29,32% CURRENT ASSETS 80,75% 85,86% 85,62% 85,99% 69,11% Intangible fixed assets 0,98% 0,70% 2,02% 1,25% 0,22% Tangible fixed assets 98,41% 99,30% 81,93% 92,09% 94,74% Long-term financial assets 0,61% 0,00% 16,04% 6,66% 5,03% FIXED ASSETS 17,07% 12,85% 13,57% 12,70% 30,86% Time distinction 2,12% 1,29% 0,81% 1,31% 0,02% TOTAL ASSETS 100,00% 100,00% 100,00% 100,00% 100,00% 37