Investment Management and Financial Innovations, Volume 13, Issue 2, 2016

Mishelle Doorasamy (South Africa)

Using DuPont analysis to assess the financial performance of the top

3 JSE listed companies in the food industry
Abstract
This study attempts to measure the financial performance of the food industry taking the top three JSE listed companies
Pioneer Foods, Tiger Brands and RCI for the period of 2013-2014. In order to achieve the objectives of this research,
ratios such as return on equity (ROE), return on assets (ROA) have been calculated by applying the DuPont analysis.
The DuPont analysis is an important tool to measure the operating performance of a firm (Sheela and Karthikeyan,
2012). The volatility of the stock market makes investment decisions a controversial issue for most investors.
Investments of huge amounts of money need proper analysis in order to make an informed decision. Financial
statements are indicators of the profitability and financial sustainability of the business. Ratios are tools used to
quantify the risk element before making any strategic decisions, more especially, investment decisions. It has been
reported to be one of the most important financial ratios, because it provides investors with a more comprehensive
measure of performance (Demmer, 2015). A detailed financial analysis of all three companies using the DuPont system
shows that investing in Tiger Brands would generate a higher return to shareholders than Pioneer Foods or RCI.
Keywords: profitability, ratios, financial sustainability, financial analysis, investments, DuPont analysis, strategic
decisions.
JEL Classification: C32, G10, G15.
Introduction” predicting changes in future return on assets, and
Soliman (2008) cites DuPont components as
In publishing their financial statements, corporate
yielding important information about the operating
organizations fully disclose matters concerning their
characteristics of a firm.
operations to aid investors in making investment
decisions (Blessing and Onoja, 2015). The goal of 1. Literature review
corporate managers is to maximize the value of the
1.1. Development of the DuPont model. The
firm, which is determined by the investment and
DuPont model was created in the early 1900s to
financing decisions made by the managers of the
assess the profitability of a business (Sheela and
firm (McGowan and Stambaugh, 2012).
Karthikeyan, 2012). Modified twice after its initial
Ratios are used to establish the relationship between conception, the original DuPont method of financial
two variables and how they influence one another, ratio analysis was developed in 1918 by
and ratio analysis offers a means by which the F. Donaldson Brown, an engineer at DuPont in
financial and operational ills of a business enterprise charge of understanding the finances of a company
can be effectively diagnosed (Agala, Jadhav and that DuPont was acquiring, who recognized a
Borhade, 2014). Ratios also point out areas for mathematical relationship between profitability and
further investigation. To guide decision making, return on equity (ROE) that was determined by
managers analyze financial statements together with return on assets (ROA).
the ratios given. Analysis and interpretation of
Since ROA impacts both profitability and
financial statements is an important tool in assessing
efficiency, operating decisions of a firm in terms of
the company’s performance and gives investors an
planning and control will, thus, focus on increasing
indication of the level of risk associated with that
ROA, but the first modification of the DuPont
particular firm. For an investor, this is important and
model shifted the focus from ROA to ROE,
relevant information.
incorporating debt or “leverage” as a third area of
Different ratios are used to measure different attention. This modification made the DuPont model
aspects of the business in terms of performance, a powerful tool for strategic decision making within
liquidity, riskiness and profitability. Of these an organization to increase ROE (Collier, McGowan
possible indicators, literature indicates that the most and Muhammad, 2006).
important measure of profitability and performance
The latest modification of the DuPont model
is the one which is calculated using DuPont
incorporates a combination of five ratios to
analysis. Demmer (2015) notes that changes in
determine ROE. With the focus of annual statements
profit margin provide incremental information for
from a managerial perspective being to assess a
firm’s financial performance, the significance of
operating decisions (profitability and efficiency) and
” Mishelle Doorasamy, 2016.
Mishelle Doorasamy, Lecturer, Department of Accounting, University
financing decisions (leverage) upon ROE continues
of KwaZulu-Natal, Westville, Durban, South Africa. to be important, and recent evidence has shown that
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Investment Management and Financial Innovations, Volume 13, Issue 2, 2016

this modified DuPont approach can be used to identify entrants into the market place or result in existing
the causes of financial problems within manufacturing rivals imitating the new ideas. However, he found
companies (Liesz and Maranville, 2008). that competition may be less threatening to an
efficient deployment of assets. If production
According to Rogova (2014), DuPont analysis
processes are efficient, it makes it difficult to imitate
effectively revealed factors of efficiency which had,
another firms ideas due to the large cost factors
in turn, impacted on the investment appeal of
involved. Soliman’s findings contribute to literature
Russian oil-extracting companies. It was found that
on the sell-side analyst use of accounting
a strong advantage of ROE was the possibility of its
information. He argues that if DuPont components
disaggregation into different profitability ratios,
map into equity value, analysts could use this
with ROE indicating profitability and efficiency
information when creating forecasts and reviewing
from the shareholders’ point of view.
prior literature about the future profitability of the
1.1.1. The DuPont analysis system. The DuPont firm (Soliman, 2008).
system of financial analysis is based on return on
Blessing and Onoja (2015) agree that profitability,
equity, with the components of this ratio being the
assets, liabilities and equities are significant ways of
net profit margin, the total asset turnover and the
evaluating performance reports of companies and
equity multiplier (McGowan and Stambaugh, 2012).
for making investment decisions. They note a
DuPont analysis is a preferred method to estimate
general belief that published financial statements
the market value of a firm, indicating the leverage of
have failed in their responsibility to provide credible
a company to improve future profitability through
information for investors and other users of
more efficient utilization of its assets which will, in
financial statements.
turn, improve the return to shareholders – higher
leverage being preferable for potential investors. 1.2. Research objective. The main objective of this
Demmer (2015) reports documentation in prior study is to ascertain the role of financial statements
literature on the usefulness of DuPont on investment decision making.
disaggregation for predicting a firm’s future
2. Research methodology
profitability, operating income, and stock market
returns and concludes that changes in profit margin To test the research hypothesis, this study used
provide important and relevant information on secondary data from financial statements for 2013
future return on assets. His findings also imply that and 2014 of the top three JSE listed food
DuPont components are partially influenced by the manufacturing companies, centred on Pioneer
quality of the firms’ expected earnings. He points to Foods, with its two main competitors, Tiger Brands
recent financial statement analysis (FSA) research and RCL Foods, used as comparatives. The model
which has shown the usefulness of change in profit used for this research is good for investment
margin for predicting year-ahead changes in RNOA decision making by potential investors and for
(Demmer, 2015). policy-making purposes by banks and other
corporate organizations.
1.1.2. Earnings quantity and the influence on
profitability forecasts. According to Dechow et al. 3. Financial analysis of the three companies
(2010), the quality of earnings is recognized as
3.1. Cash flow analysis. While the statement of
higher when they provide more information about
profit or loss and other comprehensive income
the features of a firm’s financial performance for
relays important information about the inflows and
decision making, which, in turn, depends on the
outflows of money in the business (using accrual
specific situation. It has also been stated in prior
literature that the accounting system influences both accounting), the cash flow statement (using cash
future profitability and market reactions of a firm basis accounting) gives the true representation of the
(Demmer, 2015). actual cash movement of the business for the
financial year (McClure, 2015).
Investment decisions affect the operating leverage
of a firm, and financing decisions impact the degree 3.2. Interpreting cash flow.
of financial leverage of a firm. These, in turn, Table 1. Operation cash flow/turnover
determine the future cash flows of the firm (Collier,
Company Working 2014 Working 2013
McGowan and Muhammed, 2006). According to
Pioneer
Soliman (2008), a change in asset turnover is 2154 / 17698.6 12.17% 1429 / 16240.9 8.79%
Foods
positively related to future changes in earnings, and Tiger Brands
4193.2 / 30126.0 13.92% 3974.1 / 27064.7 14.68%
he goes on to discuss the extent to which competitor
competitive forces differently affect the profitability RCL Foods
1174 / 19719 5.95% 669 / 10108 6.62%
competitor
of a firm, noting that large profit margins draw new

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The operating cash flow/turnover ratio shows how However, it is still in the company’s best interest for
much cash is received per R1.00 of turnover Pioneer Foods to improve this ratio, as in the event
(Alsemgeest, L., DuToit, E., Ngwenya, S. & of a market collapse it will not be able to meet its
Thomas, K., 2014). Between 2013 and 2014 this current liabilities, if it cannot convert its current
ratio for Pioneer Foods rose from 8.79 percent (or assets into cash (McClure, 2015). This would
8.79c per R1.00 of turnover) to 12.17 percent, compromize the liquidity of the company.
amounting to a 3.38 percent increase. This is
4. DuPont ratio analysis
beneficial for the company as more of its turnover is
being converted to actual usable cash, and is also a In analyzing the performance of Pioneer Foods over
good indicator for investors as it indicates a more the 2013-2014 time period, a suitable starting point
liquid cash flow situation, with more money would be a DuPont analysis (Correia et al., 2013) in
available to pay short-term debt. which the following assumptions will apply (rand
amounts shown in millions in each case):
Table 2. Free cash flow
Working 2014 Working 2013
i “Profit before tax” seen in the ratios is equal to
Company the profits attributable to continuing operations.
R mil R mil R mil R mil
Pioneer Foods 1767.2-486 1281.2 1196-828 368 i Average equity excludes non-controlling interests.
Tiger Brands competitor 3106.9-983 2123.9 2879.3-727.6 2151.7
See Appendix A for the DuPont analysis ratios.
RCL Foods competitor 638-653 (15) 610-476 134
The 14.93 percent return on equity achieved by
Free cash flow is defined as net operating cash flow Pioneer Foods is highly satisfactory considered against
less capital expenditure (Accounting Coach, 2015). the negative return on equity of -3.59 percent for RCL
From 2013 to 2014, Pioneer Foods’ free cash flow Foods. The poor performance by RCL Foods is chiefly
rose from R368 million to R1281.2 million, which attributable to strikes, coupled with a nationwide
is a 248 percent increase. In comparison, Tiger Brands poultry industry crisis (News 24, 2014). Because
2014 free cash flow is R2123.9 million, a 1.29 percent Pioneer Foods has a diversified product range it was
decrease from 2013, and RCL Foods’ 2014 free cash less affected by the poultry crisis. In addition, the
flow is negative at í R15 million. Free cash flow is an company unbundled Quantum Foods, its poultry-
important indicator for investors; it shows that the related division, and focused its resources on more
company is in a strong position to avoid excessive profitable operations (Pioneer Foods, 2014). This
borrowing and has the ability to expand its business strategy protected their returns in the face of a
and pay dividends (Loth, 2015). It is important that hostile market.
Pioneer Foods has a positive and growing free cash
Tiger Brands achieved a return on equity of 15.33
flow as it allows the company to follow opportunities
percent, which is 0.4 percent higher than that of
that enhance shareholder wealth (McClure, 2015).
Pioneer Foods. Tiger Brands’ performance can be
Investors, would, thus see the increase in free cash
attributed to its higher profit margin of 6.62 percent
flow of Pioneer Foods as an encouragingly positive
compared to a 5.35 percent profit margin for Pioneer
indicator.
Foods. Pioneer Foods is higher leveraged than Tiger
Table 3. Operating cash / total debt Brands by only 0.01 times. The two companies thus,
make similar use of leverage, yet Tiger Brands is more
Company Working 2014 Working 2013
profitable.
Pioneer
1767.2 / 6229.3 28.37% 1196 / 4661.8 25.66%
Foods The DuPont analysis shows that Tiger Brands would
Tiger Brands be more beneficial to invest in compared to either
1639.7 / 10904.9 15.04% 1453.2 / 10726 13.55%
competitor
Pioneer or RCL Foods.
RCL Foods
666 / 10474 6.36% 610 / 10347 5.86%
competitor 4.1. Liquidity. Liquidity refers to a company’s
The ratio of cash generated from operating activities ability to honour its short-term obligations (Correia
to total debts is 28.37 percent in 2014 and 25.66 et al., 2013). Adequate liquidity means that
sufficient current assets are available to cover the
percent in 2013 – an increase of 2.7 percent. This
current liabilities (Correia et al., 2013).
means that Pioneer Foods has generated sufficient
cash to cover only 28.36 percent of its total debts. Table 4. Current ratio
Although this ratio seems poor, in an industry-level 1. Current ratio = current assets: current liabilities
comparison, it is 13.33 percent higher than its Pioneer Foods Tiger Brands RCL
nearest competitor. Tiger Brands has a 15.04 2014 2013 2012 2014 2014
percent ratio in 2014, 13.33 percent less than 5 420.9 / 4416.1 / 5079.6 / 10 728.3 / 7 789 /
Pioneer Foods. RCL Foods has a 6.35 percent in 3 920.7 = 2 357.2 = 3 035.5 = 9 371.9 = 8 478.1 =
2014, 22.01 percent less than Pioneer Foods. 1.38:1 1.87:1 1.67:1 1.14:1 0.91:1

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Table 4 (cont.). Current ratio Table 5. Debt í asset ratio

2. Quick ratio = current assetsinventory: current liabilities Debt í asset = total debt: total assets
Pioneer foods Tiger brands RCL Tiger
Pioneer Foods RCL
2014 2013 2012 2014 2014 Brands
2 997.6 / 2 014.9 / 2629.7 / 6 027.7 / 5 631.7 / 2014 2013 2012 2014 2014
3 920.7 = 2 357.2 = 3 035.5 = 9 371.9 = 8 478.1 = 6 229.3 / 4 661.8 / 4 413.1 / 10 904.8 / 10 474.5 /
0.76:1 0.85:1 0.87:1 0.64:1 0.12:1 12 910.2 = 11 734.4 = 10 606.2 = 24 852 = 19 910.8 =
3. Cash ratio = cash: current liabilities 0.48 0.40 0.42 0.44 0.53

1 107.6 / 379 / 375.6 / 1 160.3 / 1 047.7 / The debt asset ratio shows the relationship between
3 920.7 = 2 357.2 = 3035.5 = 9 371.9 = 8 478.1 =
0.28:1 0.16:1 0.12:1 0.12:1 0.12:1 debt and total assets, which provides an indication
of the portion of the total capital that is financed by
Pioneer Foods’ current ratio for year 2014 is 1.38:1, means of debt capital (Correia et al., 2013). The
which is a 26.2 percent decrease from 2013 (1.87:1). higher the value of this ratio, the weaker the
This still indicates a liquid situation for Pioneer solvency of the business (Alsemgeest et al., 2014)
Foods, however, as the company can pay off
short-term debts with their current assets. Its In 2014, 48 percent of the company’s assets were
current ratio for 2014 is 1.38:1, which is 0.24:1 financed by debt; a deterioration from prior yearly
greater than Tiger Brands (1.14:1) and 0.47:1 figures of 40 percent (2013) and 42 percent (2012).
However, the increase in risk which accompanies
greater than RCL Foods (0.91:1). This indicates
the use of more debt capital has led to an
that Pioneer Foods is more liquid than the industry
improvement in profitability ratios (discussed
in relation to current ratio.
below), which is the ultimate goal in utilizing more
Although the quick ratio for Pioneer Foods has debt. Pioneer Foods also has a slightly worse
decreased from 0.85:1 (2013) to 0.76:1 (2014), the solvency position than Tiger Brands, with only 44
2014 quick ratios for Tiger Brands and RCL Foods percent of Tiger Brands assets having been financed
are 0.64:1 and 0.66:1, respectively, indicating that by debt. Pioneer Foods’ solvency position is more
Pioneer Foods is above the industry norm, and, thus, favorable than RCL Foods, which has 53 percent of
more liquid in terms of the quick ratio. However, its assets financed by debt.
the decrease in the quick ratio is still
Table 6. Debt í equity ratio
disadvantageous to Pioneer Foods, firstly, because
it shows a declining liquidity position, and, Debt í equity = total debt: total equity
secondly, because it may indicate that the Pioneer Foods Tiger Brands RCL
company is holding too much inventory, since the 2014 2013 2012 2014 2014
decrease between current ratio and quick ratio is 6 229.3 / 4 661.8 / 4 413.1 / 10 904.8 / 10 474.5 /
6 112.8 = 6 590.6 = 6 193.1 = 13 947.2 = 9 436.3 =
the greatest for Pioneer Foods (44.92 percent). 1.02 0.71 0.71 0.78 1.11
Holding too much inventory implies that Pioneer
Foods may be tying up too much money in The debt í equity ratio compares the amount of debt
inventory that it could, instead, be investing to capital with equity capital (Correia et al., 2013). In
receiving an investment return. Holding too much 2014, debt capital exceeded equity capital by 0.02
stock could also mean higher risk of obsolete stock percent. This is a decline in Pioneer Foods’ solvency,
(Correia et al., 2013). with an increase in debt í equity ratio from 0.71 in the
prior years to 1.02 in the current year. Thus, in
The cash ratio shows how much cash the company 2014ɛ Pioneer Foods (at 102 percent) had a weaker
has available to cover its current liabilities (Correia solvency position compared to Tiger Brands, which
et al., 2013). Pioneer Foods’ cash ratio has risen had 78 percent of debt capital, and a better solvency
from 0.16:1 (2013) to 0.28:1 (2014). This is position than RCL, which had 111 percent of debt
positive as it means money is available to pay off capital. An increase in the use of debt is a concern
short-term debts. In comparison with industry as it increases the financial risk that a company
competitors, Pioneer Foods has a much higher cash faces, as well as the finance charges, with adverse
ratio than both Tiger Brands (0.12:1) and RCL effect on profit (Alsemgeest et al., 2014).
Foods (0.12:1). Table 7. Finance cost coverage ratio
Pioneer Foods has shown to be slightly less liquid Finance cost coverage = earnings before interest and tax / finance cost
than in prior years, but still more liquid than Tiger Tiger
Brands and RCL Foods. Pioneer Foods RCL
Brands
2014 2013 2012 2014 2014
4.2. Solvency and financial leverage. Solvency
1 537.9 / 3 125.2 /
measures the ability of the company to pay its long- 138
1 064.7 / 1 066.1 /
429
692.7 /
term obligations using the total assets of the 125.5 136.1 1 043.5
= 11.14 = 7.28
= 8.48 times = 7.83 times = 0.66 times
company (Correia et al., 2013). times times

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The finance cost coverage ratio indicates whether end. Pioneer Foods has a higher gross profit margin
there are sufficient profits available to pay the than RCL Foods (24.40 percent) which suggests that
finance cost charge (Correia et al., 2013). In 2014, it is more profitable, and, perhaps, has more buying
the finance cost coverage ratio is sufficient, as an power that allows it to request cheaper materials
amount of R11.14 is available to cover each R1.00 from suppliers.
of finance cost that needs to be paid. This is an
However, Tiger Brands is slightly more profitable
improvement from 2013 (where the corresponding
than Pioneer Foods as it makes a gross profit of
cost coverage ratio was 8.48 times) and 2012 (where
R31.70 for every R100 worth of sales. Tiger
it was 7.83 times). This ratio suggests that Pioneer
Brands’ performance is expected as it has the
Foods has a better solvency position than Tiger
highest revenue, while still apparently able to
Brands and RCL, for which cost coverage
control its cost of sales efficiently and consistently.
availability was only 7.28 times and 0.66,
respectively. Table 10. Net profit margin
Table 8. Financial leverage ratio Net profit margin on sales = net profit / sales
Pioneer Foods Tiger Brands RCL
Finance leverage = average total assets / average total equity
2014 2013 2012 2014 2014
Pioneer Foods Tiger Brands RCL
947 / 699 / 610.6 / 1 990.3 / -289 /
2014 2013 2012 2014 2014 17 698.6 = 16 240.9 = 15 534.5 = 30 072 = 19 720 = -
12 322.3 / 11 238.5 / 10 234.6 / 25 046.5 / 18 651.4 / 5.35% 4.30% 3.93% 6.62% 1.47%
6 341.85 = 6 389.8 = 5 844.4 = 12 982.25 = 8 240.9 =
1.94 1.76 1.75 1.93 2.32 The net profit margin indicates how much revenue
is available after tax is paid (Alsemgeest et al.,
As discussed in the DuPont analysis (Appendix 1), 2014). Pioneer Foods’ net profit margin is 5.35
the financial leverage ratio compares the average percent in 2014, a 1.05 percent increase from 2013.
amount of total assets with the average amount of This suggests, at a surface level, that management
equity capital included in the company’s capital has proportionately decreased expenses relative to
structure (Alsemgeest et al., 2014). Pioneer Foods’ the increase in net profit, indicating reduced
financial leverage in 2014 was 1.94, an increase inefficiencies. This improvement is also attributable
from 1.76 in 2013, which indicates an increase in to the increase in net profit that the company has
portion of debt capital utilized by the company. been experiencing from the year 2012 to the current
Pioneer Foods has a slightly worse leveraged year. The improvement in the net profits of the
position than Tiger Brands (1.93) but a better company in 2014 may be attributable to profit made
solvency position than RCL (2.32) profitability. from the discontinued operation (Quantum Foods)
Profitability refers to the efficiency with which a of R18.2 million, compared to the loss of R200.4
company utilizes its capital to generate turnover million made in 2013 financial year. Notably,
(Alsemgeest et al., 2014). profitability was reduced because of a R36.3
increase from 2013 in the impairment of the
Table 9. Gross profit margin company’s investment in the Pepsi business.
Gross profit margin on sales = gross profit / sales
Pioneer Foods has a lower net profit margin than
Pioneer Foods Tiger Brands RCL
Tiger Brands (6.62 percent), but a higher net profit
2014 2013 2012 2014 2014
5 377.4 / 4 713.4 / 4 677.0 / 9 531.8 / 4 811.3 /
margin than RCL Foods (-1.47 percent). This is
17 698.6 = 16 240.9 = 15 534.5 30 072 = 19 720 = expected, as Tiger Brands has been generating
30.38% 29.02% =30.11 31.70% 24.40% higher revenues in the current year. Compared to
The gross profit margin is an indication of the Pioneer Foods, RCL Foods has been experiencing
portion of the company’s turnover that is realized as losses. The loss suffered by RCL Foods in 2014 is
gross profit after the cost of sales has been mainly caused by a R889 783 increase in finance
subtracted (Correia et al., 2013). This ratio costs from 2013 (the company has compulsory
decreased from 2012 (30.11 percent) to 2013 (29.02 redeemable preference shares which means they
percent) and increased from 2013 to 2014 (30.38 recognize dividends as a finance cost).
percent). This fluctuation is attributable to change in Table 11. Return on ordinary shareholders’ equity
revenue growth, above the rate of inflation. In 2014,
revenue from continuing operations increased by 9 Return on ordinary shareholder’s equity = profit after tax- non-controlling
interest-preference dividends / average ordinary shareholders equity
percent to R17.7 billion, mainly due to increase in Pioneer Foods Tiger Brands RCL
the mix of selling prices, exports and sales (Pioneer 2014 2013 2012 2014 2014
Foods, 2014). Notably, this favorable increase 947 / 699 / 610.6 / 1 990.3 / -289.0 /
occurred despite the discontinuation of Quantum 6 341.9 = 6 383.1 = 5 836.6 = 12 982.3 = 8 054.4 =
Foods which took place subsequent to the 2014 year 14.93% 10.95% 10.46% 15.33% -3.59

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Investment Management and Financial Innovations, Volume 13, Issue 2, 2016

The return on ordinary shareholders equity measures Average collection period = average trade
how much the ordinary shareholders earned for their receivables* / sales × 365,
investment in the company (Alsemgeest et al.,
where * is calculated using net trade receivables
2014). Pioneer Foods’ return on ordinary
(being trade receivables less impairment provision),
shareholders equity for 2014 is 14.93 percent, which
as stated in the Trade and other receivables Note.
is 3.98 percent more than 2013 (10.95 percent). This
improvement was mainly caused by a substantial Indicate the average number of days, it takes debtors
increase in profits, further assisted by a decrease in to pay the company (Alsemgeest et al., 2014).
equity. This higher ratio indicates that management Pioneer Foods’ average collection period has
is more efficient in utilizing its equity base, decreased by 5.21 days from 37.57 days (2013) to
ultimately leading to better return for investors. 32.36 days (2014). Thus, debtors are paying Pioneer
Foods more quickly than in the previous year,
Tiger Brands has a higher return on shareholders’
placing the company at decreased risk of bad debts
equity than Pioneer Foods, as for every R100
and poor cash flow. Additionally, Pioneer Foods has
investment in Tiger Brands, ordinary shareholders indicated that the credit quality of its customer base
receive a return of R15.33 as compared to a return is considered to be good based on historical default
of R14.93 from Pioneer Foods. However, the rates (Pioneer Foods, 2014).
Pioneer Foods’ return is greater than the RCL
Foods’ negative return of -3.59 percent. In relation to their competitors, Pioneer Foods has a
much lower risk of bad debts, as Tiger Brands
4.3. Asset management. Asset management ratios (42.17 days) and RCL Foods (40.79 days) debtors,
are designed to determine how effectively the assets of respectively, take 9.81 and 8.43 days longer to
the company are being utilized (Correia et al., 2013). pay. Further discussion on the implications of this
Inventory turnover days. ratio is continued below in relation to the working
capital ratio.
Inventory turnover days are calculated according to
the formula: Table 12. Fixed asset turnover ratio
Inventory turnover days = average inventory / cost Fixed asset turnover ratio = sales / average non-current assets

of sales × 365. Pioneer Foods Tiger Brands RCL

2014 2013 2012 2014 2014
Indicate that the average number of days that 17 698.6 / 16 240.9 / 15 534.5 / 30 126 / 19 720 /
inventory is on hand before being sold (Alsemgeest 5 393.7 = 5 445.8 = 5 282.2 = 14 939.6 = 10 859.5 =
3.28 times 2.98 times 2.94 times 2.02 times 1.82 times
et al., 2014). There has been a favourable 5.34 day
decrease in the Pioneer Foods inventory turnover The fixed asset turnover ratio measures the
days, from 76.8 days in 2013 to 71.46 days in 2014. utilization of all the company’s operating assets in
This is due to the consumption of their goods relation to sales revenue (Correia et al., 2013). This
increasing over the year, evidenced in their ratio is of particular interest as Pioneer Foods falls
increased market share in core categories (Pioneer within the manufacturing industry. The ratio has
Foods, 2014). Additionally, the ratio is 11.65 days shown a favorable increase from 2013 (2.98 times)
lower than that of Tiger Brands (83.11 days), which to 2014 (3.28 times). This means that the company
is a positive indication that Pioneer Foods is running has over the years used its assets to generate higher
through its stock at a faster rate than its main returns. This ratio is 1.26 times and 1.46 times
competitor. The company, is thus, at decreased risk higher, respectively, than those of Tiger Brands
of product spoilage in relation both to prior years (2.02 times) and RCL Foods (1.82 times). This
and to Tiger Brands. RCL Foods (at 40.88 days), on means that Pioneer Foods utilizes its fixed assets
the other hand, has an inventory turnover ratio that more efficiently than its competitors.
is 30.58 days lower than that of Pioneer Foods, but 4.5. Trade payable days. Trade payable days are
not too much should be read into this comparison as calculated according to the formula:
RCL Foods mainly deals in poultry which has a
shorter shelf life and, thus, quicke rinventory Trade payable days = average trade payable* / cost
turnover than the bulk of Pioneer Foods products of sales × 365,
such as cereals. The figure do, nonetheless, suggest where * is calculated using trade payable as found
that Pioneer Foods may have to take further in the Notes to the Financial Statements.
initiatives to continue improving the ratio.
Measure the number of days on average, it takes a
4.4. Average collection period. The average company to pay its creditors (Correia et al., 2013).
collection period ratio is calculated according to the Pioneer Foods has taken, on average, 1.15 days
formula: longer to pay their trade creditors in 2014 (49.76

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 Investment Management and Financial Innovations, Volume 13, Issue 2, 2016

days) than in 2013 (48.61 days). The increase in Table 14. Dividend yield ratio
trade payable days indicates that the company is Dividend yield ratio = dividend per share* / price per share#
taking advantage of the credit that is available to Pioneer Foods Tiger Brands RCL
them, allowing themselves a longer time to recover 2014 2013 2012 2014 2014
the funds to pay creditors (Correia et al., 2013). This 221c / 132c / 114c / 940c / 20c /
ratio is certainly favorable as it is higher than the 11 800c = 8 750c = 5 300c = 31 543c = 1 580c =
average collection period of debtors calculated 1.87% 1.51% 2.15% 2.98% 1.27%
above to be 32.36 days in 2014. This means that Notes: * The Pioneer Foods dividend per share for 2014
Pioneer Foods is receiving money owed to it before excludes the dividend in specie declared with the unbundling of
having to pay their creditors – a favorable cash flow Quantum Foods. # The share price utilized in all market ratio
position. calculations is the price at year end for all the companies. Year
ends as follows: Pioneer Foods and Tiger Brands year end: 30
This has not put the company at an increased risk of September; RCL Foods: 30 June. This affects analysis as
incurring interest on overdue accounts, since perusal market forces and conditions prevailing on 30 June 2014 differ
from market conditions on 30 September 2014.
of its financial statements reveals that it has not
incurred any interest on trade payables (Pioneer Dividend yield shows how much a company pays
Foods, 2014). The Pioneer Foods ratio is 19.66 days out in dividends each year relative to its share price
longer than that of Tiger Brands (30.10 days) and (Investopedia, 2015a). The dividend yield for
1.84 days longer than that of RCL Foods, thus Pioneer Foods decreased by 0.64 percent in 2013
giving Pioneer Foods a better cash flow position (1.51 percent) from 2012 (2.15 percent), but shows
than the industry at large, which is a positive a favorable increase of 0.36 percent in 2014 (1.87
indicator for investors (Correia et al., 2013). percent). This means that shareholders received a
higher return on their investment in the form of
Table 13. Working capital cycle dividends in 2014 compared to 2013.
Working capital cycle = inventory turnover days + average collection The return received by Pioneer Foods shareholders
period – Trade payables days
is 0.6 percent higher than the return for RCL Foods
Pioneer Foods Tiger Brands RCL
(1.27 percent), but is 1.11 percent lower than the
71.46 + 32.36 – 49.76 83.11 + 42.17 – 30.10 40.88 + 40.79 – 47.92
= 54.06 days = 95.18 days = 33.75 days
return for Tiger Brands (2.98 percent). This
indicates that Tiger Brands is likely to be the most
The longer the working capital cycle of an entity, favorably viewed of the three companies by
the longer the working capital of the business is tied investors as its shareholders receive the highest
up in the cycle without earning a return on it return on their investment.
(Correia et al., 2013). For the year 2014, Pioneer Table 15. Earnings yield
Foods (54.06 days) has a working capital cycle that
is 41.12 days shorter than that of Tiger Brands Earnings yield = headline earnings per share / price per share
(95.18 days), but 20.31 days longer than that of Pioneer Foods Tiger Brands RCL

RCL (33.75 days). 2014 2013 2012 2014 2014

575.6c / 389.8c / 337.1c / 1 816c / -47.7c /
In this respect, Pioneer is earning returns on its 11 800c = 8 750c = 5 300c = 31 543c = 1 580c =-
4.88% 4.45% 6.36% 5.76% 3.02%
working capital at a much faster rate than Tiger
Brands, but at a slighter slower rate than RCL Earnings yield indicates the yield investors are
Foods. The company may improve its cycle by demanding (Correia et al., 2013). Earnings yield
encouraging debtors to pay it sooner or by declined by 1.91 percent in 2013 (4.45 percent),
researching alternate ways in which it may improve from 6.36 percent in 2012. It has favorably
inventory turnover. However, as discussed above, increased by 0.43 percent in 2014 (4.88 percent).
the comparison between Tiger Brands and Pioneer
The earnings yield achieved by Pioneer Foods for
Foods has greater significance as these two
2014 is 0.88 percent lower than that achieved by
companies produce similar goods, whereas the
Tiger Brands (5.76 percent). In relation to RCL
major focus of RCL Foods is on poultry. Analysis of
Foods, Pioneer Foods has an earnings yield that is
the asset management ratios indicates a favorable 7.9 percent more favorable.
trend in the efficiency of asset utilization by Pioneer
Foods. This is a positive indicator for both existing Table 16. Dividend cover ratio
and prospective investors, particularly, if the trend Dividend cover ratio = headline earnings per share / dividend per share
continues. Tiger
Pioneer Foods RCL
Brands
4.6. Market value. Market value ratios provide an 2014 2013 2012 2014 2014
indication of the market perception of the 575.6c / 389.8c / 337.1c / 1 816c /
company’s past performance and future prospects -47.7c / 20c =
221c = 132c = 114c = 940c =
í2.39 times
(Correia et al., 2013). 2.60 times 2.95 times 2.95 times 1.93 times

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Investment Management and Financial Innovations, Volume 13, Issue 2, 2016

The dividend cover ratio measures the earnings that Pioneer Foods increased year on year by 0.88 times
are being paid out in the form of dividends (Correia in 2013 (2.43 times) and by 1.13 times in 2014 (3.56
et al., 2013). In 2012 and 2013, the dividend cover times). This indicates that Pioneer Foods has been
ratio remained constant for Pioneer Foods at a factor increasingly able to create value for its shareholders
of 2.95, and, then, declined by 0.35 in 2014 to 2.60. (Firer et al., 2004).
A larger percentage of earnings is, thus, being
Pioneer Foods’ ratio is 2012 times higher than that
retained by Pioneer Foods for future reinvestments,
of RCL (1.44 times) which indicates that Pioneer
which may not discourage investors as their long-
Foods has been more successful in the creation of
term wealth is being taken into account.
shareholder wealth. Tiger Brands, however, has a
Pioneer Foods also retains more of its earnings, in ratio 0.28 times higher than that of Pioneer Foods.
comparison with its competitors. Tiger Brands This is indicative of shareholder being willing to
(1.93) and RCL Foods (-2.39) have ratios that, pay more for a share in Tiger Brands than for
respectively, are 0.67 times and 4.99 times lower Pioneer Foods.
than that of Pioneer Foods. This is indicative of the
4.7. Earnings per share.
competitors adopting different strategic approaches
to that of Pioneer. Table 19. Earnings per share (in cents)
Table 17. Price: earnings ratio Pioneer Foods* Tiger Brands RCL Foods
2014 2013 2014 2013 2014 2013
Price-earnings ratio = price per share / headline earnings per share
Basic EPS 516.6 385.5 1245.9 1574.9 (45.7) 4.5
Pioneer Foods Tiger Brands RCL
Diluted basic EPS 492.9 376.3 1212.5 1535.8 (45.7) (4.4)
2014 2013 2012 2014 2014
Headline EPS 637.4 466.5 1804.4 1574.3 (47.7) 4.8
11 800c / 8 750c / 5 300c / 31 543c / 1 580c / -
575.6 = 389.8c = 337.1c = 1 816c = 47.7c =- Diluted headline EPS 608.2 455.2 1760.2 1535.2 (47.7) (4.8)
20.51 times 22.45 times 15.72 times 17.37 times 33.1 times
Notes: * Pioneer Foods’ headline earnings adjusted for the
The price-earnings ratio is the inverse of the impact of the share-based payment charge on the B-BBEE
Phase 1 transaction due to volatility and non-repetitive nature of
earnings yield ratio. It is ratio of a company’s the Quantum Foods effect on profits (non-recurring item).
current share price compared to its per-share
earnings (Investopedia, 2014). Pioneer Foods’ ratio Table 20. EPS trends 2013-2014
has shown a positive increase by a factor of 6.73 in 2013-2014 trends Pioneer Foods Tiger Brands RCL Foods
2013 (22.45 times) from 2012 (15.72 times). The Basic EPS +34.01% -21.08% -1115.56%
price-earnings ratio (P/E ratio) declined by a factor Diluted EPS +30.99% -21.05% -938.64%
of 1.94 in 2014 (20.51 times). Headline EPS +36.63% +14.62% -1093.75%
Despite the decrease in the P/E ratio, investors are Diluted headline EPS +33.61% +11.14% -1093.75%
still willing to pay more per rand of reported profits Earnings per share is a significant performance
for Pioneer Foods than for its competitors. Tiger
measure that calculates the amount of profit that is
Brands has a ratio (17.37 times) that is lower than
attributable to each issued ordinary share of the
that of Pioneer Foods by a factor of 3.14, while the
company (Stainbank, Oakes, Razak, 2014). The
ratio for RCL Foods (-33.1 times) is lower than that
of Pioneer Foods by a factor of 53.61. This shows importance of this ratio stems from the fact that
that Pioneer Foods is perceived as having high investors are more interested in knowing how
growth prospects in the future (Investopedia, 2014). efficiently their individual share in the company has
been utilized in generating profits, rather than merely
Using the P/E ratio, it should, thus, be noted that having an overview of the total profits achieved by
investors would pay more money to receive R1.00 the entity (Stainbank, Oakes, Razak, 2014).
of Pioneer Foods earnings than for earnings from
either Tiger Brands or RCL Foods. The 34.01 percent increase in basic earnings per
share experienced by Pioneer Foods over the year
Table 18. Market to book value ratio
puts it in a favorable position in relation to Tiger
Market to book value ratio = price per share / net asset value per share Brands and RCL Foods, whose basic earnings per
Pioneer Foods Tiger Brands RCL share have decreased by 21.08 percent and 1115.56
2014 2013 2012 2014 2014 percent, respectively. Although Tiger Brands and
5 300c / 1 580c / RCL Foods have experienced an increase in the
11 800c / 8 750c / 31 543c /
337.1c = -47.7c =
575.6 = 389.8c =
15.72
1 816c =
í33.1 number of ordinary shares in issue, earnings have
20.51 times 22.45 times 17.37 times
times times evidently failed to compensate for that increase.
Market to book value ratio compares the market Diluted earnings per share indicates the lowest
value of the firm’s investment to its costs (Firer, possible earnings per share, assuming that potential
Ross, Westerfield and Jordan, 2004). The ratio for shares currently in existence are converted into

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 Investment Management and Financial Innovations, Volume 13, Issue 2, 2016

ordinary shares (Service, 2014). Diluted earnings investors to compare and contrast the two
per share for Pioneer Foods increased by 30.99 companies other than ratio analysis.
percent from 2013 to 2014. This increase shows
5. Share price analysis
growth in the company, as there was an increase in
the number of weighted average shares for the year. 5.1. The industry. The consumer goods industry in
Tiger Brands and RCL Foods have experienced which Pioneer Foods and its competitors are located
decreases, respectively, of 21.05 percent and 938.64 is an extremely volatile market characterized by
percent, which is only slightly lower than their virtually continuous and inevitable change and
respective basic earnings per share. uncertainty. Most consumers, regardless of price
increases, still need to purchase the staple consumer
It should be borne in mind that the basic earnings
goods that they require on a daily basis (Alsemgeest
per share calculation may be extremely volatile, as it
et al., 2014).
includes all items of income and expenses, including
abnormal items that do not regularly occur. This One significant measure of a company’s industry
volatility is compensated for by the calculation of impact is its market cap, which is the total market
headline earnings, which more accurately represents value of the company’s outstanding shares in rand
maintainable earnings of the entity (Service, 2014). value, calculated by multiplying the total number of
outstanding shares by the current market price of the
Headline earnings per share is a JSE listing
share (Investopedia, 2015). Of the three companies
disclosure requirement intended to calculate
under discussion, Tiger Brands has the largest
earnings, as they relate to core trading activities of
market cap (R52 billion), followed by Pioneer
the company (Stainbank et al., 2014). Headline
Foods (R42 billion) and RCL Foods (R16 billion).
earnings per share for Pioneer Foods increased by
36.63 percent for the year, compared with decreases 5.2. Month-to-month share price. Refer below for
for Tiger Brands and RCL Foods, respectively, of the share price graph (Figure 1).
14.62 percent and 1093.75 percent. Over the five years leading up to 30 June 2015,
Based on this analysis, it becomes evident that Pioneer Foods has been at frontier of growth in the
Pioneer Foods has made an overall improvement in industry. In comparison with Tiger Brands and RCL
terms of trading performance and earnings per share Foods, Pioneer Foods’ share price grew by 349.6
from 2013 to 2014. Although Tiger Brands has percent in this time period, while the corresponding
experienced a decrease in basic earnings per share, growth for Tiger Brands and RCL Foods was,
there has been an increase in headline earnings, respectively, 62.54 percent and 6.75 percent
which is a positive indicator for shareholders. RCL (Moneyweb, 2015).
Foods, on the other hand, has performed In the period 1 January 2015 to 30 June 2015,
unfavorably for the reporting period, which is Pioneer Foods’ share price showed a positive
mainly attributable to the fact that they failed to appreciation of 28.03 percent, while share prices for
generate enough returns to compensate for the Tiger Brands and RCL Foods declined by 25.14
substantial increase in the number of ordinary percent and 11.5 percent, respectively. This is
shares that occurred during the year. This being the mainly attributable to the fact that Pioneer Foods
case, they have experienced a substantial decline in does not deal in poultry. Tiger Brands and RCL, on
the earnings per share. the other hand, both have interests in the poultry
industry, which is under severe strain after passing
The market value ratios give clear evidence that
of the AGOA (African Growth and Opportunity
choice of investment is between Tiger Brands and
Act) agreement allowing the United States to export
Pioneer Foods, as RCL Foods has performed poorly
650 000 tons of chicken into the South African
on the market and rendered negative returns for
market and leading investors to be wary of potential
shareholders. The performance of Tiger Brands and
saturation of the chicken market (News 24, 2015).
Pioneer Foods can be interpreted in different ways.
Some investors may prefer to invest with Tiger In a sign of growing investor confidence in the new
Brands, because they have exhibited a higher board of directors, Pioneer Foods closed the second
earnings and dividend yield. Pioneer Foods, on the quarter (months ending 31 March 2014) favorably
other hand, has a higher EPS and has shown with a share price of R83.50 per share. The share
evidence of high growth potential, which some price rose substantially over the remainder of the
investors may prefer – particularly, if they are year, reaching a financial year high of R128.07 on 3
interested in long-term investment and growth. September 2014, before closing the year strongly on
Lastly, there needs to be consideration for other R118.00 per share, a 48.89 percent increase in share
qualitative and market related factors that can help price from 24 February 2014.

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Investment Management and Financial Innovations, Volume 13, Issue 2, 2016

Although the appointment of a new board of board of directors and to external, macro and global
directors had a positive effect on the share price factors affecting the company (Business Day, 2012).
during the 2014 financial year, the true effect of the This, in the opinion of Moneyweb analysts, it was
appointment is seen more clearly during the 2015 due to the fact that the company implemented value-
financial year, when the share price grew even enhancing initiatives focused on cost reduction and
further, with the company expanding both locally efficiencies which were expected to continued
and internationally. riving the group’s earnings (Moneyweb, 2015).
It is evident that investor confidence increased in What is certain is that the company had shown
Pioneer Foods. Overall, the stock market reacted considerable growth, and there was no evidence to
favorably to the decisions made by the company’s suggest that this growth might stop.

Source: Moneyweb Click-a-company, 2015.

Fig. 3. Share prices of Pioneer Foods, Tiger Brands and RCL Foods 2011-2015

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 Investment Management and Financial Innovations, Volume 13, Issue 2, 2016

Summary and conclusions R2153.6 million in 2014. Because of this,

Pioneer Foods increased operating cash
Invest in Pioneer Foods or not?
flow/turnover ratio from 2013 to 2014; Tiger
Deciding whether to invest in Pioneer Foods is not a Brands, on the other hand, had a reduced
simple matter of yes or no. There are pros and cons operating cash flow/turnover ratio. This
which have a greater or lesser effect on investors reduction in operating cash flow/turnover ratio
according to whether they are risk averse, or risk for the rest of the industry indicates that the
seeking. To arrive at an impartial conclusion, both increase in operating cash flow/turnover ratio
the positives and the negatives must be considered for Pioneer Foods is most certainly a positive
in comparison with the company’s main competitor, sign for the investor.
Tiger Brands. i Pioneer Foods free cash flow increased from
R368 million to R1 281.2 million, which is a
The cons:
248 percent increase, which is most certainly a
i In the DuPont analysis, Pioneer Foods’ return positive sign the investor. Tiger Brands’ free
on equity is 14.93 percent, 0.4 percent lower cash flow as decreased from 2013 to 2014, yet is
than that of Tiger Brands (15.33 percent). Tiger still double that of Pioneer Foods.
Brands’ performance can be attributed to the i Pioneer Foods’ current ratio for 2014 is 1.38:1,
higher profit margin of 6.62 percent compared which is 0.24:1 greater than the current ratio for
to Pioneer Foods’ profit margin of 5.35 percent. Tiger Brands (1.14:1). This indicates that
Pioneer Foods is leveraged higher than Tiger Pioneer Foods is more liquid than the industry,
Brands by only 0.01 times. This indicates that in regard to current ratio.
they make similar use of leverage, yet Tiger i For the 2014 year, Pioneer Foods (54.06 days)
Brands is more profitable. This DuPont analysis, had a working capital cycle 41.12 days shorter
thus, shows that Tiger Brands would be more than that of Tiger Brands (95.18 days). From an
beneficial to invest in, compared to Pioneer Foods. analysis of the asset management ratios, we can
i Pioneer Foods’ debt-equity ratio is 0.48:1, conclude that there is a favorable trend in
whereas the figure for Tiger Brands is 0.44:1. efficiency of asset utilization by Pioneer Foods.
This will be discouraging to the shareholder, as This is a positive indicator for both existing and
it means Pioneer Foods has less in total assets to prospective investors, particularly, if the trend
pay off its total liabilities. continues.
i Tiger Brands has a higher return on i Despite the decrease in the Pioneer Foods P/E
shareholder’s equity than Pioneer Foods, as for ratio from 2013 to 2014, investors were still
every R1.00 investment in Tiger Brands willing to pay more per rand of reported profits for
ordinary shareholders receive a return of Pioneer Foods than for Tiger Brands. Tiger Brands
R15.33, compared to a return of R14. 93 from P/E ratio was 17.37 times, which is 3.14 times
Pioneer Foods. lower than that of Pioneer Foods (20.51 times).
i Dividend yield ratio for Pioneer Foods i The investor would be satisfied that a constant
shareholders is 1.11 percent lower than for Tiger dividend pay-out has been paid (last nine out of
Brands. This indicates that Tiger Brands is ten years). Dividends per share increased from 132
likely to be more favorable in the eyes of cents in 2013 to 211 cents in 2014.
investors, as shareholders receive a higher i Pioneer Foods experienced a 34.01 percent
return on the price that they have paid to invest increase in basic earnings per share over the
in Tiger Brands. year, which placed it in a favorable position in
i The earnings yield achieved by Pioneer Foods is relation to Tiger Brands (which showed a
0.88 percent lower than the figure for Tiger decrease of 21.08 percent). Headline earnings (a
Brands (5.76 percent). A higher percentage of more stable indicator) increased for both
earnings is being retained by Pioneer Foods for Pioneer Foods (36.63 percent) and Tiger Brands
future reinvestment, which may not discourage (14.62 percent).
investors, as their long-term weal this being i During the period of 1 October 2011 to 30
considered, although this is a concern for the September 2014, the Pioneer Foods’ share price,
majority of short-term investors. rose by 349.6 percent, while the Tiger Brands
share price grew by only 62.54 percent. During
The pros:
the more recent period of 1 January 2015 to 30
i Profit for the year increased by R466.6 million June 2015, Pioneer Foods’ share price showed a
from R498.6 million in 2013 to R965.2 million positive appreciation of 28.03 percent,
in 2014. Net cash generated from operations compared with a 25.14 percent decline for Tiger
also increased from R1429.1 million in 2013 to Brands. This was due to the fact that the company

39
Investment Management and Financial Innovations, Volume 13, Issue 2, 2016

implemented value-enhancing initiatives of a lower dividend and return on shareholders’ equity,

(unbundled Quantum Foods in 2013, acquired compared to Tiger Brands. What is certain is that the
Future Life and a Nigerian company, and company has had considerable growth and there is
appointed a new board of directors) focused on little evidence to suggest that this growth may stop in
cost reduction and efficiencies which were the near future.
expected to continue driving the group’s earnings
It should, none the less, be noted that short-term
(Moneyweb, 2015). investors would prefer an investment in Tiger
Taking into account all the above-listed considerations, Brands, as they would be receiving higher returns
long-term investors should invest in Pioneer Foods, as immediately.
the pros of the continuously increasing share price This paper presents an exemplar of the DuPont
attributable to growth initiatives coupled with the system of financial analysis as applied to the top
impact of the new board of directors outweigh the cons three firms in the South African food industry.
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Appendix A: DuPont analysis

Fig. 2. DuPont analysis: RCL Foods

42
 Investment Management and Financial Innovations, Volume 13, Issue 2, 2016

Fig. 3. DuPont analysis: Tiger Brands

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Investment Management and Financial Innovations, Volume 13, Issue 2, 2016

Fig. 4. DuPont analysis: Pioneer Foods



44