SADAFCO:

Established in 1976, Saudi Dairy and Foodstuff Company (SADAFCO) has become a leading
food manufacturer, seller and distributor based in Saudi Arabia with operations across the
Middle East. The company is a market leader in Saudi Arabia in Long Life Milk, Tomato Paste
and Ice Cream, marketing its core products under its flagship brand Saudi.

After the company’s formative years as a joint venture between Saudi, GCC and
international businessmen, SADAFCO was merged with two other Dairy companies and
ownership was transferred to Saudi and GCC interests. An initial public offering (IPO) on 23
May 2005 SADAFCO transferred from being a closed to a publicly listed company in Saudi
Arabia and was listed on the Saudi Arabian stock exchange TADAWUL.

SADAFCO factories currently produce almost 40 million cases of product per annum, its long-
distance transportation trucks travel 18 million kilometers each year delivering product to 23
depots that service more than 32 000 customers across the GCC.

SADAFCO currently offers around 100 Stock Keeping Units (SKU) with its core products being
marketed under its flagship Saudi brand. The company operates three, ISO22000:2005,
ISO14001 and OHSAS18001-accredited factories in Jeddah(two) and Dammam, three
Regional Distribution Centers (RDCs) in Riyadh, Jeddah and Dammam and 21 depots across
Saudi Arabia, Bahrain, Qatar, Kuwait and Jordan providing the company with wide sales
penetration. In addition, the company accesses the UAE and several other export markets
through external distributors and agents.

SADAFCO ended 2016-17 with net sales of SAR 1.858 billion, reflecting a year-on-year
decline of 6.3% while showing increased market shares in key product categories, indicating
strong consumer loyalty to the company brands. Commercially, it has improved its share of
market during the past 12 months in spite of a tough trading year, indicating the good health
of its strong and resilient brands and the effectiveness of its Marketing, Trade Marketing and
Sales & Distribution functions.

In regards to organizational development, SADAFCO ended the year with a total of 2,488
full-time employees. There is no doubt that every employee despite their different nature of
work have an impact on company's dynamic. However, we will discuss here the importance
of existence and functions of Financial Manager Mr. Sriram Chandran. Financial managers
perform data analysis and advise senior managers on profit-maximizing ideas. Financial
managers are responsible for the financial health of an organization. They produce financial
reports, direct investment activities, and develop strategies and plans for the long-term
financial goals of their organization.

The role of the financial manager, particularly in business, is changing in response to

technological advances that have significantly reduced the amount of time it takes to
produce financial reports. Financial managers’ main responsibility used to be monitoring a
company’s finances, but they now do more data analysis and advice senior managers on
ideas to maximize profits. They often work on teams, acting as business advisors to top
executives.

There are three types of financial management decisions are eligible for financial manager,
capital budgeting, capital structure, and working capital management. A business
transaction that would include capital budgeting is if your company should open another
store or not. A business transaction that would include capital structure is deciding whether
to issue new credit to pay off old debts. A business transaction that would include working
capital management is seeing if we should extend credit to a customer.

SADAFCO's Conflict of interest:

Based on previous lists, there is no dominating family in the board of directors or in
the management team. We might say that there is some sort of diversification
among them since the management team is non-Arabic and we might conclude that
they are isolated from each other. According to Sadafco's annual report 2016-2017,
some members of the board of directors hold membership in the board of directors
in other companies; such thing might raise a conflict of interest. To overcome this
issue, in the annual shareholders' meeting held in 2011 they assigned the
Nomination and Remuneration Committee which consists of three non-executive
Board Members.

One of the committee responsibilities is to ensure, on an annual basis, the

independence of the independent members and the absence of any conflict of
interest if the member holds a membership of the Board of Directors of another
company. In addition, the committee identifies the weaknesses and strengths in the
Board and proposes recommendations that are in the interests of the company.
Furthermore, Identify weaknesses and strengths in the Board and propose
recommendations that are in the interests of the company. Moreover, the
committee insures that the nomination of Board of Directors members is done in
accordance with the policies and procedures, taking into account not to nominate
any person previously convicted of a crime involving moral turpitude and dishonesty.
Finally, reviewing the structure of the Board and make recommendations regarding
changes that can be made is one of the committee's responsibilities.
Ratios Calculations and Analysis:
In this part, we are supposed to calculate the ratios for the previous three years for
each company based on the five major categories of financial ratios: Short-term or
liquidity ratios, Long-term solvency ratios, Asset management or Turnover ratios,
Profitability ratios, and finally market value ratios. After that, we have to compare
and discuss the changes in the results for the three year and interpret them.
Furthermore, for the last year, we will compare between the companies ratios and
the industrial average to see how good or bad the companies are.

SADAFCO's Ratios Calculations and Analysis:

SADAFCO's Short-term Solvency ratios 2015 2016 2017

Current ratio 3.50 4.14 ↑ 3.88 ↓
Quick ratio 1.50 2.20 ↑ 2.69 ↑
Cash ratio 0.38 1.25 ↑ 2.02 ↑
NWC to TA 0.36 0.44 ↑ 0.47 ↑
Interval measure 136.38 days 173.84 days 246.28 days
↑ ↑

The short-term solvency (liquidity) ratios are used to measure the company's ability
to meet its short-term (current) obligations. The current ratio = current
assets/current liabilities, this ratio is a measure of how good a company is in
covering its current liabilities from its current assets. Based on our calculations, the
value of the current ratio has been greater than 1 in the past three years which
indicates that the company can cover its current debts from its current assets. The
ratio increased in 2016 compared to 2015, but decreased in 2017 which means that
liquidity decreased. As for the quick ratio = CA-inventory/CL, it measures how fast a
company is able to cover its current liability from current assets (excluding
inventory), in other words are inventory very important current asset or not. Based
on the results, the quick ratio in the three years is greater than 1 and kept increasing
which means that the company is trying somehow to depend less on inventory in
covering its current liability. The cash ratio results showed that in 2015 the company
wasn't depending that much on cash in covering its current liability. But, the ratio
increase more than 1 in 2016 & 2017 indicating that the company changed its cash
strategy and can depend completely on cash to cover its current liability.

NWC to total assets ratio gives the percentage of investment in short-term to total
assets. Based on the calculations, the ratio kept increasing through the previous 3
years until it reached 0.47 in 2017. The Interval measures ratio give an indication of
how many days the company can survive and pay its daily costs if something bad
happens. Results show big improvement from 136 days in 2015 to 246 days in 2017.
SADAFCO's Long-term Solvency ratios 2015 2016 2017
Total debt ratio 21.49% 21.35% ↓ 23.13% ↑
Debt/Equity 0.274 0.272 ↓ 0.301 ↑
Equity Multiplier 1.274 1.272 ↓ 1.301 ↑
LTD ratio 8.11% 8.41% ↑ 8.09% ↓
Times Interest Earned
Cash coverage

The long-term solvency (financial leverage) ratios are used to know the degree of
using debt and equity. Firstly, the total debt ratio indicates the percentage of
financing the company assets by debt and the lower the value the better because
interest is costly. According to the calculations, the total debt ratio was almost the
same in 2015 & 2016, but it increased a bit in 2017 which not good. The Debt/Equity
ratio measures how much debt the company has per each $ 1 invested (Riyal in our
case). Results show a very small increase in the 3 years but still financing from equity
is more than financing from debt. The Equity multiplier ratio indicates per each 1 $
invested (Riyals in our case), how many the company has assets. EM is greater than 1
in the three years and almost didn't change. The LTD ratio gives a percentage of LTD
from LTD + TE, the lower the better & the higher the riskier because financing from
debt is risky. Calculations show a low percentage in the three years with a slight
increase in 2016 but decreased in 2017 which is good.

SADAFCO's Assets management 2015 2016 2017

ratios
Inventory turnover 3.56 3.34 ↓ 3.41 ↑
Days sales in inventory 102.62 109.18 ↑ 107.0 ↓
Receivables Turnover 10.50 times 11.58 11.48
times  times

Days Sales in Receivables days 35 days 32 days 32

Total Asset Turnover 1.49 1.42 1.13
 
NWC Turnover times 4.10 times 3.22 times 2.40
 
Fixed Asset Turnover times 3.05 times 3.44 times 3.12
 

The assets management ratios attempt to measure how efficient a company is in

managing its assets to generate sales. The inventory turnover ratio is a measure of
how many times a company sells and restocks in a year (the higher the better).
Results show a decrease in 2016 compared to 2015 and increase in 2017 but didn't
reach the value of 2015. As for the days' sales in inventory ratio, it shows how many
days are needed to restock. The company restocked every 102.6 days in 2015 but it
increase to 109 days in 2016 and decreased to 107 days in 2017 which means 2015
was the best.

The receivables turnover ratio is an activity ratio measuring how efficiently a firm
uses its assets. SADAFCO have managed the account receivable in a good way where
it increased turnover times with fewer days for collecting. This reflects how fast
SADAFCO are in collecting their sales. The Asset Turnover ratio can often be used as
an indicator of the efficiency with which a company is deploying its assets in
generating revenue. In our example, it is obvious that ratios during the last three
years were instable and it might be due to inefficient use of its current and fixed
assets. Unwell management of SADAFCO’s assets reflected on both NWC & Fixed
Asset Turnover which show the same result.

SADAFCO- Profitability 2015 2016 2017

Ratios

Profit Margin 7.83% 13.14%  16.24% 

Return on Assets (ROA) 11.70% 18.76%  18.38% 

Return on Equity (ROE) 14.90% 23.85%  23.91% 

Profitability ratio measures the amount of net income earned with each dollar of
sales generated by comparing the net income and net sales of a company. SADAFCO
profit margin keeps increasing every year indicating an outstanding healthy working
firm. Return on assets (ROA) is a financial ratio that shows the percentage of profit a
company earns in relation to its overall resources. There is a slight decrease in ROA
in 2017 but it can be negligible because of overall increasing indicators that shows an
efficient control of assets utilization. Same for Return on Equity (ROE) that measures
a corporation's profitability by revealing how much profit a company generates with
the money shareholders have invested. From the above table we can tell that the
company depends more on debt as ROA results are lower than ROE ones so no need
to issue new stocks because ROE will decrease.

SADAFCO- Market Value 2015 2016 2017

Ratios

PE Ratio 13.99 times 13.33 times  16.30 times 

Market to Book Ratio 3.33 times 3.21 times  3.22 times 

PE ratio is one of the most widely used tools for stock selection. It shows the sum of
money you are ready to pay for each dollar worth of the earnings of the company or
in other words to own SADAFCO’s stock. Although the ratio decreased in 2016 but
again increased incredibly in 2017 which signifies that this company is confident and
attractive. Same scenario repeated for Market to Book Ratio that is used to evaluate
a company's current market value relative to its book value. In 2017, the company
has once again proved its success, effectiveness and strength in the market.

Part F & G

We need the industrial avg & the other company

The DuPont Identity:

The DuPont identity is used to divide the return on equity into 3 parts: Profit margin
which is a measure operational efficiency, total asset turnover which is a measure of
asset usage efficiency, and equity multiplier which measures the financial leverage.

2015 2016 2017

Profit Margin 7.83% 13.14% 16.24%
Total asset turnover 1.49 1.42 1.13
Equity mulitplier 1.274 1.272 1.301
ROE 14.90% 23.85% 23.91%
We need the industrial avg & the other company