Zaverecna Prace

MENDEL UNIVERSITY IN BRNO
Faculty of Business and Economics
Department of Business Economics
Bachelor Thesis
Evaluation of the Financial Position and Performance of Cocoa

Processing Company
Supervisor: Ing. Michaela Beranová, Ph.D.
Author: Kojo Addae Asamoah
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DECLARATION
I declare that I worked on this Bachelor Thesis on my own under the guidance of my
supervisor, Ing. Michaela Beranová, Ph.D., using the materials listed under sources.
In Brno, on 24th May, 2010 Signature:
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ACKNOWLEDGEMENT
I would like to thank my supervisor, Ing. Michaela Beranová, Ph.D., for her guidance
during the writing of this thesis. I would also like to express my gratitude to Ing. Samuel
Darkwah, Ph.D., for his advice. Lastly, I would like to thank the Ghana Stock Exchange for
providing the information I needed to write this thesis.
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ABSTRACT
The purpose of this bachelor thesis is to investigate the financial condition of Cocoa Processing
Company Limited, a food processing firm in Ghana. The period investigated was from 2004 to
2008 and audited financial statements of the company were used. These included Balance Sheets
and Profit and Loss Statements from the mentioned period. The thesis was written in two parts.
The first was theoretical which discussed financial analysis and the methods used to perform
this. The second part was concerned with the practical use of the methods of financial analysis,
employing data from the audited financial statements. This was used to find out the financial
condition of the company and the factors that led to it. The results were then analysed into detail
to find the problem areas of the company and then recommendations were made based on the
findings on how to improve the situation in the company for the future.
ABSTRAKT
Cílem této bakalářské práce je zjistit finanční situaci v podniku Cocoa Processing Company
Limited v Ghaně, zabývající se výrobou potravin. Sledované období je 2004 - 2008 a jsou
použity auditované finanční výkazy společnosti. Tyto zahrnují rozvahy a výkazy zisku a ztrát z
uvedeného období. Práce byla napsána ve dvou částech. První byla teoretická, která diskutuje o
finanční analýze a metodách použití k provedení této práce. Druhá část se týkala praktického
využití metod finanční analýzy, využívající data z auditované účetní závěrky. Tato částka byla
použita k zjištění finanční situace společnosti a faktorů, které k tomu vedly. Výsledky byly poté
analyzovány podrobněji k nalezení problémových oblastí společnosti a poté doporučení byly
provedeny na základě zjištění, jak zlepšit situaci ve společnosti do budoucna.
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Contents
1 Introduction ............................................................................................................................. 8
2 Theoretical Background to Financial Analysis ..................................................................... 10
2.1 Financial Analysis .......................................................................................................... 10
2.1.1 Objectives of Financial Analysis ............................................................................ 10
2.2 Users of Financial Analysis ........................................................................................... 11
2.2.1 Internal Users .......................................................................................................... 12
2.2.2 External Users ......................................................................................................... 12
2.3 Financial Statements used in Financial Analysis ........................................................... 13
The Balance Sheet................................................................................................................. 14
The Income Statement .......................................................................................................... 14
The Cash-Flow Statement ..................................................................................................... 15
Statement of Shareholders‟ Equity ....................................................................................... 15
The Annual Report ................................................................................................................ 15
2.4 Tools of Financial Statement Analysis........................................................................... 16
2.4.1 Comparative Financial Statement Analysis ............................................................ 17
2.4.2 Common-size Financial Statement Analysis .......................................................... 19
2.4.3 Financial Ratio Analysis ......................................................................................... 20
2.4.4 Du Pont System of Evaluating Financial Situation................................................. 23
2.4.5 Prediction of Financial Distress .............................................................................. 25
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3 Aim of the Work and Methodology ...................................................................................... 26
3.1 Aim ................................................................................................................................. 26
3.2 Methodology .................................................................................................................. 26
4 Characteristics of Selected Company ................................................................................... 28
4.1 Brief History and Objective of Company ...................................................................... 28
4.2 Management of the Company ........................................................................................ 29
4.3 Current Situation of the Cocoa Industry in Ghana ......................................................... 29
5 Financial Analysis of Cocoa Processing Company Limited................................................. 32
5.1 Comparative Financial Statement Analysis ................................................................... 32
5.1.1 Horizontal Analysis of Assets ................................................................................. 32
5.1.2 Horizontal Analysis of Equity and Liability ........................................................... 34
5.1.3 Horizontal Analysis of Profit and Loss Statement .................................................. 36
5.2 Common-size Financial Statement Analysis.................................................................. 38
5.2.1 Vertical Analysis of Assets ..................................................................................... 38
5.2.2 Vertical Analysis of Equity and Liabilities ............................................................. 40
5.2.3 Vertical Analysis of Profit and Loss Statement ...................................................... 42
5.3 Financial Ratio Analysis ................................................................................................ 45
5.3.1 Liquidity Ratios ...................................................................................................... 45
5.3.2 Leverage Ratios ...................................................................................................... 47
5.3.3 Profitability Ratios .................................................................................................. 49
5.3.4 Activity Ratios ........................................................................................................ 51
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5.4 Du Pont System of Evaluating Financial Situation ........................................................ 53
5.5 Prediction of Financial Distress ..................................................................................... 54
Altman Z-Score ..................................................................................................................... 54
6 Conclusion and Recommendation ........................................................................................ 55
7 Sources .................................................................................................................................. 60
7.1 Literature ........................................................................................................................ 60
7.2 Internet ........................................................................................................................... 61
8 List of Diagrams, Graphs and Tables ................................................................................... 62
8.1 Diagrams ........................................................................................................................ 62
8.2 Graphs ............................................................................................................................ 62
8.3 Tables ............................................................................................................................. 62
9 Appendices ............................................................................................................................ 64
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1 Introduction
The first overseas trade of cocoa from Ghana (then the Gold Coast) was made in 1885.
However, the first documented shipment of cocoa from Ghana was in January, 1893 when 2 bags
were sent from Accra to Hamburg at a value of about £300. The volume of cocoa export grew
rapidly to 20,000 metric tonnes in 1908 and in three years time, Ghana was the world‟s largest
cocoa producer of cocoa with 41, 000 metric tonnes annually. In the early 1920‟s, Ghana
produced between 165,000 – 213,000 metric tonnes per year and contributed about 40% of the
total world output.
By 1977, Ghana had experimented with different buying systems (single and multiple
buyers), the latest of which used multiple buyers, was abolished again leaving the Produce
Buying Division of the Ghana Cocoa Board (COCOBOD) to become the only local buying agent
for cocoa in Ghana. It handed over purchases to the Cocoa Marketing Company (CMC), a
wholly-owned subsidiary of COCOBOD, which has the sole responsibility for sale and export of
cocoa beans. However, since 1992, the multiple buying systems have been re-introduced with the
Produce Buying Company, operating as one of the over 20 Local Buying Companies.
Today, the domestic marketing of cocoa is completely privatized, with about 23 Local
Buying Company‟s competing at to buy cocoa from farmers. These companies also operated
along the administrative blue-print of the Produce Buying Division, by appointing purchasing
clerks to manage cocoa buying on a social level. The competition has improved the speed and
coverage of cocoa purchasing from farms. Ghanaian farmers also enjoy credit facilities and other
community improvement programmes from the local buying companies which wish to increase
their market share among farming communities.
To enjoy the full benefit of cocoa production, the government of Ghana decided to
encourage local cocoa processing to add more value. This would generate more jobs and increase
domestic consumption of cocoa as it is known for its health benefits. In view of this, the Cocoa
Processing Company has increased its capacity and it is expected that more companies will soon
join it in this venture. As competition grows, firms will employ different strategies using various
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methods of financial analyses to gain competitive advantage and also try to estimate future
conditions and plan accordingly to keep in business.
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2 Theoretical Background to Financial Analysis
2.1 Financial Analysis
Financial analysis consists of tools and techniques applied analytically to commonly-used

financial statements such as balance sheets, income statements, etc. and other connected data to
identify useful information in making business decisions. For investment purposes, it is used as a
screening tool to determine which companies are worth investing in and as a forecasting tool to
estimate how well a business will perform in the future. This analysis also has a diagnostic
function which is to look at financing, investing, operating activities and their efficiency, as well
as, evaluating the effect of managerial and other business decisions [2].
2.1.1 Objectives of Financial Analysis
A comprehensive analysis of a company‟s financial statements, first of all, shows its

strengths and weaknesses. From assessing past and current financial statements, analysts can
gather the firm‟s present financial condition and structure [1]. This includes how it finances its
activities, whether it has enough liquid assets to meet its short-term obligations, if it has an
efficient and effective asset management policy, its competitiveness in the industry while
remaining profitable and its long-term debt financing. This helps to determine the firm‟s long-
term viability and whether suitable returns are being made with regard to the risk involved.
Analysts of financial statements may also discover pertinent information for managers of
a company with regards to recent trends and occurrences that can influence further planning or
implementation of management policy. Such information can overhaul already-made decisions
in order to ensure responsible maximisation of shareholder wealth.
A summarization of the main reasons for financial analysis is as follows [2]:
a. For creditors:
 To find out reasons for a company‟s need of additional financing;
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 To find out how a debtor plans to pay back principal and interest;
 To assess how previous debts were handled;
 To know whether there would be additional requests for financing in the future.
b. For current and potential shareholders:
 To view the company‟s present and long-term operations;
 To estimate future revenue potential;
 To find out the current financial situation of the company and the factors that led
to it;
 The vulnerability of its revenue to significant variability;
 To determine the firm‟s capital structure and whether it benefits the company;
 Its position with regards to competitors.
2.2 Users of Financial Analysis
Stakeholders in the outcome of financial analysis are not limited to only those in the
company but other business subjects as well. These include those with interests not only direct
but indirect too. They are classified mainly in two groups [10]:
 Internal users: those directly involved with the company, i.e. managers and other
employees who generally have access to all information about the company.
 External users: those indirectly involved with the company and only have information
provided by management to them.
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2.2.1 Internal Users
 Owners/shareholders – they use financial results to assess if resources are being utilised
effectively by management as well as sufficient returns on their investment.
 Managers – they are an important part of the company and use results of financial
analysis to make decisions that positively impact the company. They need to determine
how previous decisions have affected company performance and whether to continue
with the practices that influenced the company such.
 Employees – they are interested in the performance of the company and how that may
affect the continued employment, wages, pensions and benefits.
 Internal auditors – they use the results to find out if the firm is using its resources for
what management has set out to do.
2.2.2 External Users
 Equity investors – they include current and potential shareholders, current ones need it to
decide whether to keep stock or sell it and potential ones use the information to help in
choosing among competing alternative investments, they are usually interested in the
future profitability potential and/or riskiness of the company.
 Merger and acquisition analysts – they need financial analysis to compare compatibility
of potential merger candidates with regards to their finances and operations.
 Creditors – these include banks, bondholders, etc. who lend money to firms either on
long or short-term basis, their main interest is in analyzing financial statements to find
out if companies have the ability to pay back loans with interest in a specified time
period.
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 Auditors – they determine areas where the company is falling short or developing in its
financial management.
 Partners (including customers and suppliers) – they are interested in whether a long-term
relationship can be sustained between them and the firm, results of financial analysis can
provide an insight into the stability of the firm.
 Regulatory agencies (also government) – they use financial analysis to properly supervise
the operations and actions of companies.
 Brokers and other intermediaries – they need the information gathered to advise clients or
the firms themselves about their investment opportunities, announcing of annual reports
and other financial statements tend to affect trading of listed companies‟ stocks.
 General public – students may find useful information from financial analysis for
research, other individuals may use the information as criteria for selecting potential
employers.
2.3 Financial Statements used in Financial Analysis
Data for the process of financial analysis is obtained from a range of sources internally
generated by the company. These statements can be prepared periodically, generally annually,
but could also be done quarterly or for biannual accounting periods. The most basic and compact
financial document available to the general public is the annual report.
The annual report includes the balance sheet, profit and loss statement, cash-flow
statement and statement of changes in equity. In Europe and most of the world (including
Ghana), these financial statements are prepared internally by the International Financial
Reporting Standards (IFRS) [15]. Also included are notes on the financial statements for
explanations of the figures. The information displayed in annual reports is usually limited to
what is prescribed by law. Any extra information is most often used by only the internal users of
financial analysis.
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The Balance Sheet
The balance sheet is a simple summarisation of a firm‟s assets, liabilities and
shareholders‟ equity, categorised accordingly, at the end of every accounting period. It is the
most basic of financial statements, therefore, the most important. The accounting equation is the
basis of this financial report:
Assets = Liabilities + Shareholders’ equity
The left-hand side of this equation (assets) denotes the economic resources controlled by
the company. This includes buildings, machinery, cash, bank accounts, etc. that are owned by the
company. Assets could be divided into two parts; fixed and current assets, to give more detail.
The right-hand side denotes sources of funding for the assets. It is also divided into two
parts. The liabilities relate to claims of creditors on assets of the company. Shareholders‟ equity
is the total of contributed funds to the company from the shareholders and accumulated profits
which are not paid out to shareholders (dividends) also known as retained earnings.
The disadvantage with the balance sheet as representation of a company‟s finances is that
it does not reflect in detail the true nature of a company‟s structure. It also only considers
accounting or book values of assets which might be different from current market value. Apart
from that, assets like employees cannot be represented by figures in the balance sheet with
regards to their work experience and qualifications.
The Income Statement

The Income Statement is also referred to as the “Profit and Loss Statement”. It simply
reflects financial performance of a company between consecutive accounting periods or balance
sheets. It shows a list of revenues, expenses, losses or profits over that time period, from
operating and non-operating activities. The difference between revenues and costs is the
economic result, which is a loss when negative and a profit or gain when positive.
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The income statement provides more detail on the company‟s activities by showing how
much was spent doing what (expenditure) and revenue accrued from those activities. This is
important in helping decide company tax and dividend policy and also helps users to know how
much an activity contributes to the economic result [1].
The Cash-Flow Statement

The statement of cash flows shows the sums of money coming in and going out at any
point in time of a company‟s life. This statement is necessary because under accrual accounting,
net income does not always equal net cash flow except over the life of a company, therefore,
reporting of cash inflows and outflows is a must to determine how much money is actually
passing through the company.
An analysis of this statement will tell the user about the about the viability of the firm in
the short-term. This has to do with its ability to meet short-term liabilities like paying bills, short-
term debts, etc. i.e. its liquidity. Also, there is a breakdown of company activities into operating,
financing and investing activities [4].
Statement of Shareholders’ Equity

The statement of shareholders‟ equity shows how a firm acquires its funds in a specific
period and how it employs them. It reports changes in the different accounts that make up equity.
It is a total of registered capital, capital contributions, reserve funds and retained earnings.
The Annual Report

This (annual) report is required by law and is prepared every year to inform the general
public about the current financial situation of the company. It consists of the balance sheet,
income statement, cash-flow statement and statement of shareholders‟ equity, as well as
additional information from the managers and other top-ranking officials like the chairman of the
board of directors and a list of major shareholders in the company.
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2.4 Tools of Financial Statement Analysis
There are many methods used to perform analyses on a company‟s financial statements
depending on the analyst‟s needs. However, in the undertaking of any financial analysis, there
are six main areas in which the objectives of such an analysis fall under. They consist of any or
all of these [8]:
 Short-term liquidity: the ability to meet short-term obligations.
 Funds flow: future availability and disposition of cash.
 Capital structure and long-term solvency: ability to generate future revenues and meet
long-term obligations.
 Return on investment: ability to provide financial rewards sufficient to attract and retain
suppliers of financing.
 Asset utilization: asset intensity in generating revenues to reach a sufficient level of

profitability.
 Operating performance: success at maximizing revenues and minimizing expenses from

operating long-run operating activities.
There is also a qualitative approach to financial analysis. Focusing on qualitative data

such as the quality of a company‟s employees, for example, its managers, its key executives, as
well as its board of directors could give some idea of its standing amongst its competitors.
Brand-name recognition, patents and employment of high-tech infrastructure are also key to this
qualitative approach to financial analysis. Be that as it may, this kind of analysis is not an
accurate measure of financial position.
With regards to the quantitative methods, financial statements will provide us with the
variables necessary to undertake this analysis. These variables will be divided further into
absolute and relative terms:
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a) Absolute
 Absolute indicators refer to those indicators that are independent of other

variables.
 Extensive indicators refer to those which contain information about extent and
quantity.
b) Relative
 Relative indicators refer to those dependent on other variables. Comparison

between such indicators for different similar firms is possible.
 Intensive indicators refer to the degree of utilisation of extensive indicators and

how quickly they are transformed.
The financial analyses performed in this thesis will be anchored mainly in the
quantitative methods. The different methods used are:
 Comparative Financial Statement Analysis/Horizontal Analysis;
 Common-size Financial Statement Analysis/Vertical Analysis;
 Financial Ratio Analysis;
 Du Pont System of Financial Evaluation;
 Prediction of Financial Distress.
2.4.1 Comparative Financial Statement Analysis
The Comparative Financial Statement Analysis is also known as horizontal analysis

given the movement of the eyes from left to right or vice versa as comparative financial
statements are reviewed. This involves placing of balance sheets, income statements or cash-flow
statements from consecutive years, side-by-side, to review changes in each individual category.
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This is done to recognise any trends that may be revealed during the investigation. This
comparison of several years of financial statements reveals the direction, speed and extent of
trends [9]. Trends can also be compared between related items. Two techniques in comparative
analysis are generally used:
 Year-to-Year Change Analysis

The Year-to-Year Change Analysis option is optimal for comparing financial statements
over relatively short time periods - two to three years. The time period for this kind of
comparative analysis makes it manageable and easy to understand. The analyst has the advantage
of displaying changes in absolute currency amounts and also in percentages. This is important
because depending on the base of the currency amount, the percentage change could be either
significant or not. That allows the user to have a better perspective and make valid conclusions
on the relative importance of the changes. The changes are defined as follows [10]:
Absolute change = current year balance – previous year balance
Percentage change (%) = [absolute change / previous year balance] * 100
 Index-Number Trend Analysis

The Index-Number Trend Analysis method is better for tracking trends in time periods
spanning longer than two or three periods. This method requires choosing a base year, for every
item, with a preselected index number usually set to a 100. It is best to choose a base year with
relatively normal business conditions as this serves as a frame of reference for all comparisons.
The formula for determining an index number is:
Index number = [current year balance / base year balance] * 100
For index-number trend analysis, the analyst must try to eliminate insignificant items.
Care must be taken when comparing changes which have occurred during times of economical or
industrial transformation. Also, it must be taken into consideration that the more diverse the
economic environment in the different periods analysed, the better our understanding of how the
company deals with adversity and takes advantage of opportunities.
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2.4.2 Common-size Financial Statement Analysis
Common-size Financial Statement Analysis is also known as vertical analysis due to the
up-down (or down-up) movement of the eyes as it is reviewed. It simply tells the user what
proportion of a total group or subgroup an item represents.
In the analysis of the balance sheet, total assets, liabilities and capital are each expressed
as a 100 percent with individual items expressed as percentages of their respective categories.
For the income statement, net revenues are expressed as a 100 percent with remaining items
expressed as a percentage of net revenues.
Common-size financial statement analysis gives an insight into the internal structure of
financial statements. For balance sheet analysis, the focus is on these elements:
 Sources of financing, including the distribution of financing among current liabilities,

noncurrent liabilities, and equity capital;
 Composition of investments, including current and noncurrent assets.
This method of analysis of balance sheet is often used to further analyse compositions of
items in subgroups such as the proportion of current assets to inventories and not just that of
inventories to total assets.
Common-size income statement analysis is usually even better measure financial

performance because each item is related in some degree to sales. It is important for users to
know how much expense items use up sales.
This way of analysing financial statements makes it easy to compare similar companies
(competitors) because they are adjusted to the same level in common-size format. It shows
differences in account structure and may be a clue to knowing why a competitor is doing better
or worse than the firm being analysed. It allows for greater exploration and understanding of the
reasons behind financial performance.
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2.4.3 Financial Ratio Analysis
A financial ratio is the ratio of two financial variables taken from the balance sheet or
income statement [7].
In studying financial ratios, the items considered are generally contingent on the analyst‟s
purpose performing the analysis in the first place. That is to say, short-term creditors for
example, are interested in the firm‟s short-run performance and liquidity rather than their ability
to fund long-term liabilities.
Ratios in themselves are not particularly significant except when they are compared to
other ratios of a competitor or to the industry average or to previous years‟ ratios [3]. Here, the
interpretation of the ratios is most important to determine the likely direction of the company.
The interpretation is done with regards to current company facts (policy) and other ratios.
Analysing financial ratios in addition to the previous methods of financial analysis are
crucial to understanding a firm‟s current standing; where and why it is underperforming or not,
thus, giving managers a view to which areas to tackle or ensure continuous level of performance
to keep the company in a good financial position.
There are four different types of financial ratios with respect to which aspect of the
company the analyst or user is interested in. They are [6]:
 Liquidity ratios;
 Leverage ratios;
 Profitability ratios;
 Activity or Turnover ratios.
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2.4.3.1 Liquidity ratios
Liquidity ratios ascertain the company‟s ability to meet short-term obligations. They
include current ratio and quick ratio (acid test).
Current ratio = current assets / current liabilities [6]
The current ratio represents current assets (which are considered to be relatively liquid) as a
fraction of current liabilities (obligations with terms up to a year). It shows whether a firm will
have difficulty in meeting its short-term obligations or underutilizing its short-term credit.
Quick ratio = (current assets – inventory) / current liabilities [6]
The quick ratio or acid test removes inventory from current assets because it usually not as liquid
as other current assets. It therefore shows a more precise picture of how obligations are likely to
be met.
Cash ratio = (cash + cash equivalents + marketable securities) / current liabilities [4]
Cash ratio measures the only the most liquid of assets against current liabilities. This includes not
only cash in hand but bank accounts, cheques, etc. as well.
2.4.3.2 Leverage ratios

Leverage ratios are a measure of a firm‟s reliance on debt. This measure includes both
long-term and short-term debt obligations. A higher leverage ratio indicates a riskier firm, ceteris
paribus. This is because debt payments remain the same even when revenues fluctuate. [7].
There are four main leverage ratios:
Debt to total assets ratio = total debt (liabilities) / total assets [7]
The debt to assets ratio shows what potion of assets the firm finances with debt. The lower the
ratio is, the lower the risk is for creditors.
Debt to equity ratio = total debt / equity [2]
The debt to equity ratio is a measure of a company‟s debt against its equity. It shows the
structural balance of the company; whether it uses more debt or equity.
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TIE = earnings before interest and taxes (EBIT) / interest expense [5]
The higher the Times Interest Earned Ratio (TIE), the better the company‟s situation, in general.
TIE reflects the firm‟s ability to pay interest out of earnings. [5]
Equity multiplier = total assets / equity [7]
Equity multiplier is simply defined as the currency unit (e.g. dollar) amount of assets the firm
uses for each currency unit of equity. [7]
2.4.3.3 Profitability ratios

Ratios of profitability are used to determine the effectiveness of a firm‟s employment of
assets or equity to generate profit. Since profit is the ultimate objective of any business venture,
poor results here would indicate a weakness which, if not corrected, would most likely result in
bankruptcy for the firm. [5]
There are three main profitability ratios [6]:
Profit margin = net income (earnings after tax) / sales
Profit margin shows how effective the company‟s pricing policy is, as well as, how well
purchase and production costs are controlled. It is a measure of how much a company actually
keeps in earnings and is sometimes expressed as a percentage.
Return on assets = earnings after tax (EAT) / total assets
Return on assets (ROA) is a measure of the profit generated by assets in the firm‟s possession.
This is an important indicator for both creditors and shareholders. It is calculated from elements
of both the balance sheet and profit and loss statement. ROA can be said to illustrate the
efficiency of a firm‟s utilisation of its assets.
Return on equity = earnings after tax / equity
Return on equity (ROE) shows how much profit is generated from shareholders‟ contributions.
Just as for the ROA, ROE is calculated from data in both the balance sheet and profit and loss
statement. It is an expression of the connection between the shareholders‟ share of revenues and
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their previously contributed capital. This is a very important indicator for potential investors
because it shows how their investment may appreciate in the future.
2.4.3.4 Activity (Turnover) Ratios

Activity ratios measure managerial effectiveness in running the operations of the firm [7].
They indicate whether a company‟s investment in current and fixed assets is too much or too
little. The different types of ratios are [6]:
Inventory turnover = cost of goods sold / inventory
Inventory turnover ratio is used to determine the number of times a firm‟s inventory is sold and
replaced. A high turnover could mean a constant shortage of inventories or highly efficient use of
inventories. A low result on the other hand, could mean larger than necessary investment in
inventories.
Total asset turnover = sales / total assets
Total asset turnover ratio measures how productively the firm uses its assets to generate sales.
Fixed assets turnover = sales / fixed assets
This turnover ratio indicates the intensity of the utilisation of fixed assets. A low ratio implies
excessive investment in fixed assets at the expense of other investments that could improve
turnover.
Average collection period = receivables / daily sales
Average collection period shows the efficiency of the firm‟s collecting on sales. This ratio can
also indicate whether the firm‟s credit policy is too lenient or too strict.
2.4.4 Du Pont System of Evaluating Financial Situation
The Du Pont method of evaluating the financial situation of a firm is a method devised to
help the analyst determine the drivers of a firm‟s profitability. It breaks down already stated
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ratios into their basic components by simple mathematical methods to further evaluate a
company‟s financial health and the efficiency of its operation [11]. It is represented in this
diagram:
Diagram 1: Du Pont Model.
ROE
ROA Equity Multiplier

×
Profit Margin Asset Turnover Total Assets Equity

× ÷
Total Assets
Sales
Sales
Total Debt
EAT
Equity
÷ ÷ +
Sales Costs Current Fixed Current Non-Current

Assets Assets Liabilities Liabilities
- + +
Source: COOLEY, P. L., RODEN, P.F. Business Financial Management. 2. edition Fort Worth: Dryden Press,
1994, pg 566.
The diagram above shows how Return on Equity (ROE) can be calculated by finding
results of other ratios or sums and combining them with mathematical operations in a rational
way. From the diagram, it is seen that:
ROE = ROA × Equity Multiplier.
And from the ratios above (profitability and leverage), it can be seen that this is true:
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EAT/owners’ equity = EAT/Total Assets × Total assets/owners’ equity.
2.4.5 Prediction of Financial Distress
In predicting financial distress, the analyst seeks to find out any indications of bankruptcy
in the near future. The Altman Z-Score provides a solution to this problem by combining certain
financial ratios of firms and weighting them with coefficients [14]. The first equation was
formulated for publicly held manufacturers. Since then, there have been modifications to include
equations for private manufacturers, non-manufacturing and service organisations. The different
weights and ratios can be changed according to the area the company falls into. The reliable
period of prediction is two years in advance.
Altman Z-Score
For publicly held manufacturing firms the formula is:
Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 +0.99 X5 [13] where
X1 = working capital / total assets
X2 = retained earnings / total assets
X3 = earnings before interest and taxes / total assets
X4 = equity / total liabilities
X5 = sales / total assets
The result of the Altman Z-score shows the liability of a company to become bankrupt. A score
of more than 3.0 is considered to be in the „safe‟ zone because the company is not in danger of
becoming bankrupt presently or in the immediate future (financially sound). A score between 1.8
and 3.0 is regarded as ambiguous („grey‟ area) because the company‟s financial condition is
uncertain but not yet perilous. A score lower than 1.8, is indicative of the company‟s imminent
danger in terms of its financial situation.
25
3 Aim of the Work and Methodology
3.1 Aim
The aim of this work is to use results from the analysis of the financial situation of Cocoa
Processing Company (CPC) Ltd., located in Tema, Ghana from 2004-2008, to make suitable
recommendations and suggest sustainable and lasting solutions to address any shortcomings
found. The main task is to assess and analyze the economic and financial standing of the
company and find the factors that have contributed to or retarded the growth of the chosen firm.
Such solutions and recommendations will go a long way to improve the present situation and
make the company more viable and profitable in future.
3.2 Methodology
For completing the financial analysis, financial statements from the years 2004 to 2008
were used. This includes balance sheets, profit and loss statements and cash-flow statements
from each year obtained from the company's annual reports and additional data from its official
website. All other information used in this thesis was gained from the literature chronicled at the
end and from knowledge acquired during my years of study.
The information gathered was then used to calculate the financial ratios of CPC Ltd. The
results realized are mentioned in the part "Financial Analysis of Selected Company" with
elaborations on how they could be used to improve deficient areas which in the long run would
enhance the financial stability of the company as well as augmenting the output of the firm.
The work has four parts. The first part includes an introduction to the company and its
current position in the industry. It contains information on what kind of economic environment
surrounds the company and how it affects its operations.
26
The second part will focus on theoretical knowledge of financial analysis. This is
comprised of explanations of the analytical methods used in the evaluation of company‟s
financial structure and why they are used.
The next part will specialize on the practical part in which the outcome of the financial
analysis will be followed by explanations and elaborations where necessary. This includes the
results obtained from the different methods used in the analysis of the company
The final part of the analysis will be concerned with discussing the obtained results and
suggestions of applicable recommendations for the betterment of the firm. It will focus on
practical solutions that can be implemented internally in the shortest possible time to improve the
financial condition of the company.
27
4 Characteristics of Selected Company
4.1 Brief History and Objective of Company
The Cocoa Processing Company Limited (CPC) is based in Tema, near Accra in Ghana.
It was incorporated according to Ghana‟s laws in November, 1981 as a Limited Liability
Company.
The main objective of the company is to process cocoa beans by adding value to them
and selling them either as semi-finished or finished products. This processing is done in two
factories, namely, the Cocoa Factory and the Confectionery Factory.
The Cocoa Factory processes raw cocoa beans into semi-finished such as cocoa liquor,
butter, natural/alkalized cake or powder. Cocoa in these processed forms is then sold to other
companies as part of their production process. 95% of the company‟s semi-finished products are
exported to Europe, the Americas, Asia and as well as the Middle East.
The Confectionery Factory transforms the cocoa beans into „Golden Tree‟ chocolate bars,
„Pebbles‟ (chocolate coated peanuts), „Vitaco‟ and „Alltime‟ drinking chocolate powder, „Choco
Delight‟ (chocolate spread) and „Choco Bake‟ and „Royale‟ natural cocoa powder. These are
mostly sold domestically as well as in the sub-region (West Africa).
Both factories use on the finest premium Ghana cocoa beans without any blending and
the products which are manufactured meet international quality standards and also consumer
satisfaction.
CPC has recently increased its cocoa throughput capacity from the original 25,000 metric
tonnes to 65,000 metric tonnes per annum. This expansion was initiated to enable the company
meet growing demand for its quality cocoa products.
28
4.2 Management of the Company
The company is run by a number of different organs. The highest organ is the Annual
General Meeting (AGM). Its function is to receive financial reports on the state of the company
as well as reports of the Directors and Auditors. It also determines whether dividends will be
offered in a year or not and elect or appoint officials to other organs.
The next is a Board of Directors headed by a Chairman. The company‟s regulations

provide for 10 executive and non-executive directors altogether including the Managing
Director. The Managing Director is a separate individual from the Chairman. His job is to
implement management strategies and policies adopted by the Board.
There are a variety of sub-committees which help the Board to do its work. They are:
Audit, Nominations, Remuneration, Finance and Marketing and Technical sub-committees.
Beyond that, there are deputy managing directors and managers of different aspects of the
company (production, human resources, finance, etc.) that are involved to ensure the smooth
running of the company.
The company has a number of shareholders, the largest being the Government of Ghana.
It holds almost half of all the shares in CPC. Following the government as the largest shareholder
is the Ghana Cocoa Board (COCOBOD) with over 20% of total shares. The third largest
shareholder is the Social Security and National Insurance Scheme (SSNIT) which is in charge of
running the nation‟s pension scheme. It is the largest non-banking financial institution in the
country at the moment. It has over 18% of total shares to its name. The remaining shareholders
each own less than 1% of the company. This includes many individuals and some companies.
4.3 Current Situation of the Cocoa Industry in Ghana
As the main input for the processing of cocoa products is the cocoa bean, the company‟s
success and failure, by and large depends on the level of cocoa production available in the
29
country at any given time. The production levels of cocoa fluctuate mainly because the country
exports most of its cocoa and therefore, it is affected by external demand. Generally, production
of cocoa beans decreases when demand is low and vice versa. This is because with low demand,
price of cocoa on the world market falls and this situation does not give the local farmer much
incentive to produce a lot. This unfavourable condition that sometimes occurs has an adverse
effect on the productivity of the firm‟s factories.
Also, due to the fact that the production of crops in Ghana is largely dependent on
weather conditions and absence of disease, there is no guarantee of a good harvest from year to
year. That, plus outdated agricultural practices employed by farmers, leads to low yielding crops.
Since, cocoa is a major crop in the country, a good yearly harvest of crops usually means the
same for cocoa. The unpredictability of this feature of agricultural production in Ghana does not
augur well for industries that depend on agricultural raw material for their existence.
The Ghana Cocoa Board (COCOBOD), the state-owned marketing board, tries to
mitigate this issue by buying some the cocoa produced from the farmers at reasonable prices
based on the yearly costs involved for the farmer plus a margin which encourages the farmers to
continuously produce. It is also in charge of exporting most of the country‟s cocoa output which
ensures the quality of beans exported at suitable prices.
Another problem with the cocoa industry is the smuggling of cocoa beans across the
border to the Ivory Coast. The higher prices the smugglers obtain in that country make this a
very lucrative business for them. This activity decreases the overall output of the nation‟s cocoa
production as well as diminishes the government‟s assistance of the cocoa industry. Assistance in
the form of mass spraying exercises undertaken by the government and subsidies on fertilizer,
etc. are wasted with the smuggling of bags of cocoa beans across the border. Security agencies
all over Ghana have been put on alert to curb the situation but this will obviously take some time
since this has been occurring for a long time.
The function of COCOBOD is to stabilise production levels which suit the company
because it ensures an acceptable level of inputs for its (the company‟s) operations. Also, the
government‟s efforts to halt smuggling activities help to guarantee a constant supply of cocoa
beans.
30
The future of the cocoa industry in Ghana is certain to be bright once measures are put in
place to improve national production. Firstly, the government must improve the training of cocoa
farmers in modern agricultural methods to boost annual output. Better inputs in the form of
resistant and high-yielding varieties of cocoa, fertilizers, etc. should be introduced to support the
first measure. Once production is improved, processing companies like CPC Ltd. will have
enough supplies to feed its operations and function at capacity. At capacity, higher returns will
be made then these could be invested into innovative technology or expansion projects to widen
the market/consumer base.
31
5 Financial Analysis of Cocoa Processing Company Limited
Under this section, different methods of financial analysis will be used to determine the
financial standing of the company.
5.1 Comparative Financial Statement Analysis
This section contains horizontal analyses of the Balance Sheets and Profit and Loss
Statements of the company in question. In performing this analysis, Index Number Trend
Analysis was used. This is because the number of periods in question was more than two or three
and this method gave a clearer picture of the Cocoa Processing Company Limited‟s performance
in comparison to a base year. The base year chosen was 2004 because that was a relatively stable
economic period.
5.1.1 Horizontal Analysis of Assets
For analysing the trend of assets over the period from 2004 - 2008, only the most
important segments were considered. They were Fixed Assets, Current Assets and Total Assets.
From the table and graph below (Table 1 pg.33 and Graph 1 pg. 34), there was a significant
increase of assets from the base year to the following year (2005). Fixed assets increased to
about 50% more than base year levels. Current assets on the other hand, decreased a little. This
caused an overall increase of total assets about 20 percentage points above current year levels.
In 2006, the amount of current assets increased to more than that in the previous year.
Fixed assets also followed this trend which led to a 50% increase in total assets in comparison to
the base year.
For 2007 and 2008, the increasing trend continued but huge differences in the latter
occurred. Fixed assets in particular recorded a substantial increment in 2007, more than twice the
levels in the base year. This, along with an increase in current assets, took total assets to a level
32
two times higher than base year. In 2008 however, current assets level fell below the previous
year. But, fixed assets rose to five times base year levels. This caused an over 200% percent
increase in total assets for the period.
Table 1: Index Number Trend Analysis of Assets in percentages
2004 2005 2006 2007 2008
Total Assets 100 128.5 153.7 206.3 352.2
Fixed Assets 100 158 185.9 235.1 538
Current Assets 100 98.5 121 177 163.3

Source: author’s calculation based on company financial statements
This steady increase of assets can be explained by the recent expansion of throughput
capacity of the firm to 65,000 metric tonnes from 25.000 metric tonnes. This was done in two
phases. The first phase was completed in 2005, hence the steady increase of fixed assets. The
second phase began in 2006 and was completed in 2008. This was the reason for the sharp
increase in 2008.
Table 2: Actual Asset Amounts in Ghana Cedis (GHC)
2004 2005 2006 2007 2008
Total Assets 51,688,300 66,402,700 79,443,200 106,631,874 182,031,835
Fixed Assets 26,057,800 41,154,500 48,430,300 61,259,485 140,177,884
Current Assets 25,630,500 25,248,200 31,012,900 45,372,389 41,853,951

33
Graph 1: Actual Asset Amounts in GHC
5.1.2 Horizontal Analysis of Equity and Liability
As with assets, the same years are used and only the most significant items are
represented. For 2005, there was significant increase in liabilities (debts). Debts increased by 40
percentage points to raise total equity and liability to +20% of base year levels.
Liability increased again in 2006 without any significant change to equity levels. They
almost doubled from the previous year‟s 40% to 76%. In total, equity and liability increased by
50%.
In 2007, there was an increase in both equity and liability. Equity almost doubled from
base year levels and liabilities did amount to more than twice the levels in the base year. These
increases accounted for the consequent increment in total equity and liability.
Total equity and liability tripled from base year levels in 2008. This was due to a fivefold
increase in equity and small but significant increase in liabilities.
34
Table 3: Index Number Trend Analysis of Equity and Liability in percentages
2004 2005 2006 2007 2008
Total (Equity + Liabilities) 100 128.5 153.7 206.3 352.2
Equity 100 101.1 103.9 194.6 523.1
Liabilities 100 140.8 176.2 211.6 275.1

In all the years analysed, there were increases from the base year period as well as
preceding years. Increase in liabilities was due to the fact that loans were contracted to support
the expansion projects mentioned earlier. The increase in equity in the later years was due to the
restructuring of some its debt by converting it into equity. Their creditors, COCOCBOD, made
this possible and thus, became part owners of the company.
Table 4: Actual Amounts of Equity and Liability in GHC.
2004 2005 2006 2007 2008
Total (Equity +
Liabilities) 51,688,300 66,402,700 79,443,200 106,631,874 182,031,835
Equity 16,066,100 16,241,400 16,691,690 31,260,068 84,045,281
Liabilities 35,613,200 50,161,300 62,751,510 75,371,806 97,986,554

Source: author’s calculation based on company financial statements.
35
Graph 2: Actual Amounts of Equity and Liability in GHC.
5.1.3 Horizontal Analysis of Profit and Loss Statement
The analysis of the Profit and Loss Statement provides an insight into the development of
Gross and Net Profits. In 2005 and 2006, revenues and costs both reduced in comparison with
base year levels. Revenues reduced at an average of 17 percentage points for the period. Costs
reduced at an average of 19 percentage points. The reduction in these two areas was due to a
reduction in demand, and thus, production.
In the following years, i.e. 2007 to 2008, revenues and costs both rose steadily. They rose
by about 40 percentage points in 2007 and almost twice that in the following year. The increase
in costs was a result of the rise in the price of crude oil and its consequent effect on other items.
Table 5: Revenues and Costs from Sales in relative values
2004 2005 2006 2007 2008
Revenues (sales) 100 81.7 84.9 140.9 173.2
Costs (sales) 100 79.6 83.2 142.1 173.8

36
Graph 3: Revenues and Costs from Sales in GHC.
In the case of gross profit and net profit, they both increased in 2005 and 2006. Net profit
increased to over 50% more than base year levels. The increase in gross profits was less
significant. It increased by an average of 4 percentage points from the levels in the base year.
In 2007 however, net profits reduced from previous year levels and gross profits rather
increased by more than 20%. Net profits decreased here due to increase in the cost of making
employees redundant and increase in interest on loans. By 2008, both sets of profit had increased
quite a bit. Gross profit increased by about 40 percentage points on previous year levels and net
profits by about 100% on previous year levels. This was due to an increase in exchange rate
differences.
Table 6: Index Number Trend Analysis of Gross and Net Profits in relative values
2004 2005 2006 2007 2008
Gross Profit 100 105.1 103 127.9 166.7
Net Profit 100 160 171.6 139.8 274.9

37
Graph 4: Index Number Trend Analysis Gross and Net Profits in relative values
5.2 Common-size Financial Statement Analysis
The following section concerns the vertical analyses of the same Balance Sheet and Profit
and Loss Statements looked at during the Comparative Financial Statement Analysis. Again,
only the most important elements of the statements were used. This analysis gives an idea of how
many and how much elements make up a single item.
5.2.1 Vertical Analysis of Assets
In performing this analysis, the different items are split into their component parts. Assets
are divided into Fixed and Current Assets. Then current assets are further divided into
Inventories and Receivables. Fixed Assets are left undivided because it encompasses Property,
Plant and Equipment which are considered as a single item. From the table (Table 7 pg. 39), it is
observed that fixed assets make up the bulk of total assets in every period. This would suggest
their importance with regards to the company‟s sphere of business. Another point worthy of note
38
is the fact that the proportion of fixed assets continues to rise in general. This is due to the
acquisition of new factories in the expansion project.
Table 7: Vertical Analysis of Assets in relative values
2004 2005 2006 2007 2008

TOTAL ASSETS 100 100 100 100 100
Fixed Assets 50.4 61.9 61 57.4 77
Current Assets 49.6 38.1 39 42.6 23
- Inventories 29.1 15.4 28.3 15.5 13.8
- Trade and Other Receivables 16.5 15.6 6.8 22.9 9.7
- Short-term Investments 3.3 2 1.8 1.5 1.1
- Cash and Bank Balance 0.7 5.1 2.1 2.7 -1.6
Graph 5: Shares of Fixed and Current Assets in Total Assets in percentages
39
In the case of current assets, inventories usually made the biggest portion except for two
periods. In 2005 and 2007, the level of inventories dropped to less than half of current assets.
This was either due to a reduction in inventories through sale or an increase in the amount of
receivables or both. There are other current assets in the form of Short-term Investments (shorter
than 1 year) and Cash and Bank Balances. For all the periods analysed, these did not add up to
more than 10% of current assets except for 2005. The negative result for Cash and Bank Balance
in 2008 was due to the overdrawn bank account.
Graph 6: Shares of Inventories and Receivables in Current Assets in percentages.
5.2.2 Vertical Analysis of Equity and Liabilities
Total equity and liabilities is divided into equity, which is the part owned by shareholders
in the firm and liability, which is owned by creditors of the firm. Transforming the values in this
statement into percentages gives information on which item the firm is more reliant on. Equity is
mainly made up of the Stated Capital, Income Surplus Account and then Redeemable Preference
Shares. In all the periods examined, equity was found to be less than half of total equity and
liability. The only time both equity and liability were in almost equal portions was in 2008,
40
which was due to debt conversion into equity. The consistent growth of liability over equity is
due to the use of external debt to fund the expansion project.
Table 8: Vertical Analysis of Equity and Liability in relative values
2004 2005 2006 2007 2008
TOTAL (E + L) 100 100 100 100 100
Total Equity (E) 31.1 24.5 21 29.3 46.2
Total Liability (L) 68.9 75.5 79 70.7 53.8
-Current Liabilities 46.8 40.6 52.6 28.7 6.9
-Non-Current
Liabilities 22.1 34.9 26.4 42.0 46.9
Graph 7: Shares of Total Equity and Total Liability in Total (Equity + Liability).
41
In comparing the elements of total liability, there are only current liabilities (trade
liabilities) and non-current liabilities (bank loans). Current liabilities made up the most portion of
total liability from 2004 to 2006 until bank loans were the dominant element from 2007 to 2008.
This was because parts of the bank loans were disbursed at regular intervals during the period
from 2004 adding up to the full amount at the end of 2008. Also, in 2008, the COCOBOD
changed its policy of cocoa supply from credit supply to payment before delivery, hence, the
reduction in current/trade liabilities.
Graph 8: Shares of Current and Non-Current Liabilities in Total Liability.
5.2.3 Vertical Analysis of Profit and Loss Statement
To make an effective comparison of the Profit and Loss Statement, revenues and costs
were considered separately. Since profits were recorded in all examined periods, revenues were
greater than costs in each year. Total revenues were largely made up of revenues from sales
(Turnover) and Other Income. Turnover made up over 95% of total revenues in all examined
42
periods. Incomes from other sources like interest on bank accounts and exchange gains made up
the rest of total revenue.
Graph 9: Shares of Turnover and Other Income in Total Revenue.
Costs were divided into more categories. They were cost of sales, selling and distribution
costs, administrative expenses, financial costs and other costs. Most of the total cost was taken
up by cost of sales, then administrative expenses. However, administrative expenses tended to
have a declining character, while financial costs tended to increase in relation to their proportions
of total cost. This was due to lesser personnel costs and higher interest costs. Other costs and
selling and distribution costs were minute.
43
Table 9: Vertical Analysis of Costs in relative values
2004 2005 2006 2007 2008
TOTAL COST 100 100 100 100 100
Cost of sales 92.27 90.75 91.41 92.86 89.94
Selling and distribution costs 0.97 1.24 2.46 1.16 0.92
Administrative expenses 6.46 7.87 5.95 3.17 2.58
Other expenses 0 0 0 2.46 0.28
Financial costs 0.3 0.14 0.18 0.35 6.28

Graph 10: Shares of different types of costs in Total Cost
44
5.3 Financial Ratio Analysis
The Financial Ratio Analysis will give insight into important financial indicators of the
company for the studied periods and assist to assess the financial condition of the firm.
5.3.1 Liquidity Ratios
Liquidity ratios for the assessed periods will determine if CPC is able to pay its current
liabilities.
 Current Ratio
Current ratio = current assets / current liabilities
From the table below (Table 10 pg. 45), current ratio of the observed periods is generally
very low. In 2004, the ratio is just over the minimum required level of 1.0 to employ an
aggressive strategy of working capital control. In the next two periods, the situation is worse
because current assets are not able to cover current liabilities. The company might incur delay
charges from its inability to meet its short-term obligations. In 2007 the situation improves and
the firm seems to be using an aggressive strategy since the indicator is between 1.0 and 1.6. Then
in the last period (2008), liabilities are covered three times over. A current ratio higher than 2.5
indicates the company changing its strategy to a conservative one.
Table 10: Current ratio of analysed periods
2004 2005 2006 2007 2008
Current Ratio 1.06 0.93 0.74 1.48 3.35

45
 Quick Ratio
Quick ratio = (current assets – inventory) / current liabilities
All observed periods have a quick ratio higher than the minimum required (0.4) to
employ an aggressive strategy like the previous indicator, except for 2006. This indicates a
difficulty for the company covering its liabilities for that period without liquidating inventories.
The only period which has more than 1.0 (on average, the satisfactory quick ratio for analysts) is
2008. It could be said that the company was applying a conservative approach to working capital
control in that year.
Table 11: Quick ratio of analysed periods
2004 2005 2006 2007 2008
Current Assets -
Inventories 10,598,800 15,079,000 8,502,900 28,796,370 16,766,894
Quick Ratio 0.44 0.56 0.2 0.94 1.34

 Cash Ratio
Cash ratio = (cash + cash equivalents + marketable securities) / current liabilities
In the case of cash ratio, the company‟s results for the examined periods are not
encouraging. The closest cash ratio came to the optimum recommended value (0.2) was in 2005.
In 2008, however, the situation was especially bad because the cash and bank balance was
negative. In comparison to the previous 2 liquidity ratios, it is realised that the amount of current
assets was dictated by the enormity of inventories in 2008. It takes longer to convert inventories
into money to pay bills and the company should be aware of that fact. The value here is negative
because the company overdrew on its bank accounts.
46
Table 12: Cash ratio of analysed periods
2004 2005 2006 2007 2008
Cash Ratio 0.02 0.13 0.04 0.09 -0.23

5.3.2 Leverage Ratios
The following ratios show the capital structure of the firm. They measure the impact of
debt in financing assets.
 Debt to Asset Ratio
Debt to total assets ratio = total debt (liabilities) / total assets
The debt to asset ratio for the examined periods fluctuates but is always above the 50%
mark. The company finances more than half of its assets by its total debts. An increasing
character of the ratio is observed from the beginning and then it declines. This is due to the debts
incurred as a result of the borrowing of money for the expansion project. As the loans get paid
off and assets grow, the ratio becomes smaller.
Table 13: Debt to Asset ratio of analysed periods in percentages
2004 2005 2006 2007 2008
Debt to Asset Ratio 69% 76% 79% 71% 54%

47
 Debt to Equity Ratio
Debt to equity ratio = total debt / equity
It is evident from the table (Table 14 pg. 48) that more debt is used to fund this company
than equity of the owners. This ratio also has an increasing trend in the beginning and decreasing
trend at the end due to the same reasons mentioned for the preceding ratio. The higher the ratio,
the less protected creditors are from business risk.
Table 14: Debt to Equity ratio of analysed periods
2004 2005 2006 2007 2008
Debt to Equity Ratio 2.22 3.09 3.76 2.41 1.17

 Times Interest Earned Ratio
TIE = earnings before interest and taxes (EBIT) / interest expense
For this indicator, the higher the value, the better it is for the company because it shows
how many times the company can cover its interest on loans with sales. 2004 to 2005 shows an
increase of TIE by a factor of more than two. In the next year, it falls and then rapidly declines
by 2008. The decline in the latter stages should be of concern as the firm is getting less likely to
pay off its interest costs. The increase of interest expense and consequent decrease of TIE in
2008 is due to the raising of interest rates on bank overdrafts as well as on loans for the
expansion.
Table 15: Times Interest Earned ratio of analysed periods
2004 2005 2006 2007 2008
EBIT 754,700 800,600 866,300 813,868 5,076,730
Interest Expense 101,400 40,700 51,000 166,675 3,803,633
Times Interest Earned 7.44 19.67 16.99 4.88 1.33

48
 Equity Multiplier
Equity multiplier = total assets / equity
The equity multiplier for all examined periods was averaging about 3.50 GHC to every
1.00 GHC of equity. The higher the ratio is, the more the firm is using debt for its financing. This
could mean higher costs because of interest incurred. The increase and decline here is explained
by the company using more debt to fund its expansion activities and then converting some of it
into equity.
Table 16: Equity Multiplier of analysed periods
2004 2005 2006 2007 2008
Equity Multiplier 3.22 4.09 4.76 3.41 2.17

5.3.3 Profitability Ratios

They are a measure of a firm‟s efficiency in using its capital to generate profit.
 Profit Margin
Profit margin = net income (earnings after tax) / sales
Cocoa Processing Company Ltd. was making an average profit of 0.02 GHC on every
sale it made after taxes were deducted. Profit margin rose to double the value from 2004 to 2005
and stayed the same in the following year. It then dropped in 2007 and rose again in 2008 to the
average level for the whole studied period. The rising and falling here is a result of the absence
of redundancy costs in the beginning and its presence due to laying off of employees.
Table 17: Profit Margin of analysed periods
2004 2005 2006 2007 2008
Profit Margin 1.4% 2.6% 2.7% 1.3% 2.1%

49
 Return On Assets (ROA)
Return on assets = earnings after tax (EAT) / total assets
The company‟s returns on invested assets were quite low for all the periods examined. It
earned from 0.006 GHC in 2007 to 0.011 GHC in 2005. This shows that the company‟s assets
are not being efficiently used or of no use. This can be explained by the unpredictability of
power supply in the country and the shutting down of some critical operations for renovation
works. All these contributed to low output and therefore, low returns.
Table 18: Return on Assets of analysed periods in percentages
2004 2005 2006 2007 2008
ROA 0.90% 1.10% 1.00% 0.60% 0.70%

 Return On Equity (ROE)
Return on equity = earnings after tax / equity
The company‟s situation with its return on assets is the inevitably same with its return on
equity. Low values are again recorded for all examined periods. An average of 0.03 GHC was
gained for every 1 GHC of equity invested. The return on equity had an increasing character
from 2004 to 2006 and it began to decline from then onwards. The low nature could be attributed
to the huge amounts of equity invested during the expansion and the inability of the firm to
capitalise on the increased capacity.
Table 19: Return on Equity of analysed periods in percentages.
2004 2005 2006 2007 2008
ROE 2.90% 4.50% 4.80% 2.00% 1.50%

50
5.3.4 Activity Ratios
The following ratios measured how efficient the firm was at using its assets to generate
sales.
 Inventory Turnover
Inventory turnover = cost of goods sold / inventory
Inventory turnover ratios remain similar for most periods except for 2006 when the value
of inventories increased and therefore led to a fall in turnover. The low values here could
indicate a difficulty in selling inventories.
Table 20: Inventory Turnover of analysed periods in actual figures
2004 2005 2006 2007 2008
Inventory Turnover 2.08 2.45 1.16 2.69 2.17

 Total Asset Turnover
Total asset turnover = sales / total assets
Values for this indicator hovered between 0.33 in 2008 and 0.66 in 2004. The difference
was the sharp increase in assets by 2008. Fewer sales were being made in relation to assets
growth over the period and the indicator was never more than or up to the minimum value
recommended by analysts, which is 1.0.
Table 21: Total Asset Turnover of analysed periods in actual figures
2004 2005 2006 2007 2008
Total Asset Turnover 0.66 0.42 0.37 0.45 0.33

51
 Fixed Asset Turnover
Fixed asset turnover = sales / fixed assets
This indicator which is a modification of the previous one was not much better. The ratio
was good in the beginning of the observed time period but fell towards the end. This was a
consequence of the inadequate use of increased resources (throughput capacity) available to the
company.
Table 22: Fixed Asset Turnover of analysed periods in actual figures
2004 2005 2006 2007 2008
Fixed Asset Turnover 1.31 0.68 0.60 0.79 0.42

 Average Collection Period
Average collection period = receivables / daily sales
The results for average collection period showed an overly flexible collection policy in
the firm. With an average of over a hundred days for collection period of all investigated years,
the excess values in receivables could have been placed elsewhere to generate more income.
Table 23: Average Collection Period of analysed periods in days
2004 2005 2006 2007 2008
Daily Sales in GHC 95,061.10 77,678.90 80,676.70 133,936.70 164,624.40
Average Collection
Period in days 89.7 132.7 67.1 182.2 107.3
52
5.4 Du Pont System of Evaluating Financial Situation
To use the Du Pont system, first, Return on Equity was calculated using the formula:
ROE = Profit Margin * Asset Turnover * Equity Multiplier
Table 24: Return on Equity of analysed periods using Du Pont method
2004 2005 2006 2007 2008
Profit Margin (PM) 0.014 0.026 0.027 0.013 0.021
Total Asset Turnover (TATR) 0.66 0.42 0.37 0.45 0.33
ROA = (PM * TATR) 0.009 0.011 0.01 0.006 0.007
Equity Multiplier 3.22 4.09 4.76 3.41 2.17
ROE 0.029 0.045 0.048 0.02 0.015

To understand the reason of the company‟s success or failure, a comparison has to be

made as to which factor is most responsible for the result of ROA/ROE. Looking at the table
above (Table 24 pg. 53), Total Asset Turnover is obviously the more important factor in the
equation for ROA. This shows that even though the turnover of assets is stable, the low profit
margins are hindering the company‟s progress into higher return on assets. This shows a problem
with the revenues the company is receiving. They are too low in comparison to the costs
involved.
When ROE is considered, it is noticed that the equity multiplier is the driving force
behind it. ROE is low even when the equity multiplier is relatively high. This shows that the firm
has higher financial risk because it is financed with more debt and low potential return on equity
because of low profit margins which in turn refers to low net income (earnings after tax).
53
5.5 Prediction of Financial Distress
To predict financial distress, different criteria are weighted and combined for each time
period to determine whether a company has a bright or bleak future.
Altman Z-Score
The Altman Z-Score was calculated using the version of the formula valid for publicly
held companies i.e.:
Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 +0.99 X5
The results gained (Table 25 pg.54) from this analysis show that with the kind of policies
the firm has made, the financial future of their enterprise is insecure. The range of values for all
the examined periods fell to dangerous levels indicating the possibility of bankruptcy in the
future, except for the first year in the range (2004) that was in the ambiguous or „grey‟ area. This
was due to the ongoing expansion project. From the table, it is realised that the important factors
or factors that had the most effect on the score have to do with the factors, X3 and X5. These
concern the issues of earnings before interest and tax (EBIT) and sales which mean that
increasing both would improve the chances of the firm not falling into bankruptcy. Even though
the results of the Z-Score were poor, the company can be optimistic of the fact that after falling
to its lowest score of 1.28 in 2006, the result began to improve towards the end of the studied
period.
Table 25: Calculation of Altman Z-Score for analysed periods
Variables 2004 2005 2006 2007 2008
1.2 * X1 0.6 0.46 0.47 0.51 0.28
1.4 * X2 0.37 0.29 0.25 0.36 0.52
3.3 * X3 0.05 0.04 0.04 0.03 0.09
0.6 * X4 0.27 0.19 0.16 0.25 0.52
0.99 * X5 0.66 0.42 0.36 0.48 0.32
Z-Score 1.95 1.4 1.28 1.63 1.73

54
6 Conclusion and Recommendation
The purpose of this financial analysis was to determine the critically problematic areas of
the food processing firm, Cocoa Processing Company Limited. The analysed period was from
2004 to 2008 using audited financial statements of the company to make recommendations based
on results obtained from financial methods of analysing the data obtained. The recommendations
would seek to improve the financial and capital structure of the company as soon as possible and
also in the future.
The analysis began with the Comparative Financial Statement Analysis or Horizontal
Analysis which dealt with items of company Balance Sheets and Profit and Loss Statements.
Index Number Trend Analysis was used because it gave context of results of one year in relation
the other years.
In the case of assets, there was an increasing character of each the elements year in year
out. The most notable though was the rapid development of fixed assets due to huge investments
in expanding the capacity of CPC‟s factories. With equities, it is noticed that they also grow
accordingly since total equities and liabilities must be equal to assets. However, the difference
here is that, while current and non-current liabilities grow, equity does not grow as fast until the
last period observed. This is because some liabilities or debt are converted into equity to reduce
interest payments on loans acquired for the expansion programme.
The horizontal analysis of the Profit and Loss Statement displayed how the company‟s
revenues fared against its costs. The alarming thing about this analysis is that revenues grow at
almost the same rate with costs which meant that the company was not using its assets efficiently
enough to boost revenues or the company was not able to cut costs. A look is then taken at the
development of gross and net profits it is seen that although net profits increase faster than gross
profits, in 2007, net profits fall to below previous year levels. This is explained by the increase in
other expenses and financial costs. It is obvious that the company needs to be wary of its
spending and try to cut unnecessary costs so that their profit levels do not suffer.
The next method used was the Common-Size Financial Statement Analysis or Vertical
Analysis which sought to describe the composition of elements in the Balance Sheet and Profit
55
and Loss Statements. Assets were split into fixed and current assets and then current assets were
subdivided into inventories, trade and other receivables, short-term investments and cash and
bank balance. For the composition of total assets, it is realised that fixed assets are larger and
dominate the structure. This is due to the new additions of property, plants and equipment made
during the expansion process. Current assets were mostly composed of inventories except for
2005 and 2007 when trade and other receivables was the larger element. This can be explained
by the sale of more inventories or increase in receivables or both. The other noteworthy
occurrence was the negative value of cash and bank balance in 2008. This was due to an
overdrawn bank account.
In the total equity and liability part of the Balance Sheet, it was found out that it was
divided into the part owned by shareholders, equity and the part owned by creditors, debt or
liabilities. Liability is then divided into current and non-current liabilities where current
liabilities are those that are short-term (less than a year) and non-current are those that are long-
term (bank loans longer than a year). Total liabilities were larger than equity for the whole of the
examined period. This was as a result of the loans used to fund the expansion project. Current
liabilities made up most of the liabilities until 2007 when non-current liabilities took over. That
was as a result of the company taking more long-term loans to finance the expansion.
In analysing the Profit and Loss Statement, revenues were separated from costs. Total
revenue was made up of revenues from sale (Turnover) and Other Income. Other income
included interests on investments and gains on exchange rate differences. Turnover was the large
part of revenues in all examined periods. Costs were divided according to function. There were
cost of sales, selling and distribution costs, administrative expenses, financial costs and other
costs. Cost of sales was the major portion of total costs. Administrative expenses declined in its
share of total cost and financial costs rose in 2008 due to higher rates interest payments on loans
and overdrawn accounts. Selling and distribution costs and other costs did not affect total cost
much.
Financial Ratio Analysis was performed next on the information gathered from the
financial statements. Its importance was to reveal the financial situation of the company.
Liquidity ratios were performed first. These were to find out if CPC could cover its current
liabilities. Results of the current ratio showed that the company was not able to fully cover its
56
current liabilities in two out of the five periods (2005 and 2006). According to the results, it
employed an aggressive strategy of working capital control in 2004 and 2007 and then took a
conservative approach in 2008. The results for the quick ratio showed that without inventories,
current assets could only fully cover current liabilities in 2008. In all other periods except 2006,
the firm used an aggressive approach to control working capital. In 2006, current assets without
inventory had decreased due to the company having to pay off its creditors. Cash ratios were also
very low for the examined period because of the sizeable investments in inventories. The value
was negative in the last period because of overdrawn bank accounts.
Leverage ratios then followed. They were used to determine the value of capital invested
in relation to debt. Firstly, the debt to asset ratio, which is a measure of how much assets are
funded by debt, was performed. More than half of the assets of the firm were leveraged by debt
from 2004 – 2008. The indicator did have a declining character in the long-run because assets
increased and debts were being paid off. The debt to equity ratio was calculated to find out
whether debt or equity was used more in financing the firm‟s operations. It was shown that debts
were greater than equity in all the investigated periods. This indicated that creditors were at risk
of default from the company. In the case of Times Interest Earned Ratio, the values were high in
the first three years (2004 - 2006). Then it rapidly fell to a low of 1.33 in 2008. This was due to
the raising of interest rates on overdrawn bank accounts and also on the loans it owed to
creditors. The equity multiplier was used to compare how much the firm‟s liabilities were used in
its financing. The equity multiplier was found to average 3.50 GHC to every 1.00 GHC of equity
invested. Higher costs could be incurred with the increase of debts.
Profitability ratios were looked at next. These are measures of efficiency with regards to
the company‟s ability to internally generate profit from its assets or equity. CPC made an
average of 0.02 GHC as its profit margin on every sale. Also, its return on assets for the
examined periods ranged from 0.6% to 1.1%. The return CPC got on equity was about an
average of 0.03 GHC for every cedi of equity invested. The low nature of all these ratios was as
a result of inconsistence in production due power cuts, shutting down of machines from breaking
down or for renovation work to take place and loss of revenue as a consequence of not adding
enough value to sufficient products.
57
Activity ratios were then calculated to find out how assets were used to generate sales.
Inventory turnover was at a relatively stable level in all studied periods. The low values recorded
here showed the company had difficulties in selling its inventories and also the investment in
inventories was likely to be excessive. Total Asset Turnover showed that fewer sales were being
made in relation to asset growth because the indicator had reduced in value from the first period
(2004) to the last period (2008) from 0.66 to 0.33. This was a consequence of inefficient use of
assets. Fixed Asset Turnover displayed the same relationship as Total Asset Turnover. The lack
of appropriate measures to make full use of newly acquired machines, property, etc. led to the
lowering of this indicator over the time period studied. The Average Collection Period indicator
reflected the firm‟s leniency in its credit policy. The value of the indicator showed too much time
was allowed debtors to pay off their liabilities. This caused a shortfall of assets that could have
been placed in a more lucrative investment.
The Du Pont Model was then used to point out the company‟s problem areas. It was
found that Return on Assets (ROA) was mostly driven by asset turnover which meant that profit
margins were low in comparison. This referred to a problem in the revenues of the firm in
relation to costs. Either the costs were too high or the revenue was too low. Then, the results of
Return on Equity (ROE) were considered and it was found out that the results were more
dependent on the equity multiplier. Since the equity multiplier was high in general, it showed the
firm‟s financial risk because it used more debt and a low potential return because it low net
incomes (earnings after tax) for the examined period.
As a predictor of financial distress, the Altman Z-Score was used to determine if the
company would be safe or be bankrupt in the near future. From the Z-Score, it is realised that the
company is in an ambiguous period or „grey‟ area only in the first year examined. The following
years show the potential of the company to get bankrupt. An explanation for this is the pressure
the expansion project put on its resources. Another issue was the importance of the factors that
had the most effect on the results, factors X3 and X5. These also showed that earnings before
interest and taxes (EBIT) and sales were very important to the survival of the company.
Improving these factors would improve the financial health of the company.
Based on this analysis, the financial outlook of Cocoa Processing Company Limited is
not good enough. The plans to increase capacity were in the right direction but inefficient use of
58
the resources made available to them has incurred debts to them in the form of secured loans and
interest payments on the loans. Despite all this, the company seems able to pay dividends to their
shareholders, which is not a good idea when there are debts to pay. The reasons given for the
company‟s inability to use the full capacity of their factories were frequent power cuts and
mechanical and electrical faults on important machines. Also, production was stopped for long
periods in the year due to rehabilitation work that took place. First of all, the frequent power
outages could be solved by acquiring a standby generator to ensure flow of production when
there is no electricity. The cost of this will be paid off as production is increased. Secondly,
proper maintenance of machinery would ensure continuous production and longer life of
equipment.
The company also had problems in the areas of sales, costs and in its credit policy.
Sufficient sales could not be generated due to the low domestic consumption. This could be
improved by employing new marketing strategies that will extol the virtues of cocoa products
with regards to its health benefits. Once domestic sales pick up, demand will increase regionally
because of the increase in domestic consumption and this could bring about new consumers and
revenue streams. Costs must also be checked to make sure that the company is always operating
at a comfortable level of profit. Reliance on liability was dragging the firm‟s profits down. Costs
on loans and overdrawn accounts were too high and the company should seek to renegotiate
those payments or use internal methods of accessing funds like floating of shares or selling
bonds since it is already listed on the Ghana Stock Exchange. Other costs like production costs
and personnel costs should be re-examined to see if cuts can be made to drive total costs lower.
This would improve returns and make the company‟s stock go higher. Credit policy should be
changed in such a way that it does not drive away customers but also ensures prompt payment of
receivables.
Taking a look at its shortcomings, applying these recommendations in the business could
go a long way to changing the future (immediate and long-term) of the company.
59
7 Sources
7.1 Literature
[1] BESANKO, D. et al. Economics of strategy. 4th edition. Hoboken, NJ: J. Wiley & Sons,
2007. 606 pgs. ISBN 978-0-471-67945-5.
[2] BERSTEIN, L. Financial statement analysis, theory, application and interpretation. Boston:
Irwin / McGraw-Hill, 1998. 662 pgs. ISBN 0-256-16704-4.
[3] COOLEY, P. L. Business Financial Management. 3rd edition Fort Worth: Dryden Press,
1994. 16 pgs. ISBN 0-03-097039-3.
[4] EMERY, D. R. -- FINNERTY, J. D. -- STOWE, J. D. Corporate financial

management. 2nd edition Upper Saddle River: Pearson/Prentice Hall, 2004. 899 pgs. ISBN 0-13-
083226-X.
[5] HALEY, C. W. --SCHALL, L.D. Introduction to Financial Management. New York, NY:
McGraw-Hill, Inc., 1991. 894 pgs. ISBN 0-07-055117-0.
[6] HELFERT, E. Financial Analysis: Tools and Techniques: a Guide for Managers. Praha:
Grada, 2001. 485 pgs. ISBN 80-247-1386-1.
[7] KOLB, R. W. --RODRIGUEZ, R.J. Financial Management. Lexington, MA: D.C. Heath and
Company, 1992. 709 pgs. ISBN 0-669-27158-6.
[8] MOYER, R. C. -- MCGUIGAN, J. R. -- RAO, R. P. Fundamentals of contemporary financial

management.2nd edition Eagan, MN: Thomson/South-Western, 2007. 624 pgs. ISBN 0-324-
23596-8.
[9] TSAY, R. S. Analysis of financial time series. 2nd edition Hoboken, N.J.: Wiley, 2005.
605 pgss. ISBN 0-471-69074-0.
[10] WILD, J. Financial statement analysis. Boston: McGraw-Hill Irwin, 2005. 800 pgs. ISBN
0-073-10023-4.
60
7.2 Internet
[11] DuPont Equation [online] © 2009 [cit.2010/04/14]. Available at:
http://www.money-zine.com/Investing/Investing/DuPont-Equation/
[12] Return on Equity – The DuPont Model [online] © 2009-2010 [cit.2010/04/15]. Available at:
http://www.enetinvesting.com/financial-ratios/return-on-equity-the-dupont-model/
[13] Z-Score formula Edward Altman [online] © 2010 [cit.2010/04/21]. Available at:
http://www.valuebasedmanagement.net/methods_altman_z-score.html
[14] Altman‟s Z-Score [online] © 2003-2010 [cit.2010/05/01] Available at:

http://www.spireframe.com/docs/financial_ratio_altmans_z_score.aspx
[15] IFRS adoption and use around the world [online] © 2010 [cit.2010/05/02] Available at:
http://www.iasb.org/Use+around+the+world/Use+around+the+world.htm
61
8 List of Diagrams, Graphs and Tables
8.1 Diagrams
Diagram 1: Du Pont Model.
8.2 Graphs
Graph 1: Actual Asset Amounts in GHC.
Graph 2: Actual Amounts of Equity and Liability in GHC.
Graph 3: Revenues and Costs from Sales in GHC.
Graph 4: Index Number Trend Analysis Gross and Net Profits in relative values.
Graph 5: Shares of Fixed and Current Assets in Total Assets in percentages.
Graph 6: Shares of Inventories and Receivables in Current Assets in percentages.
Graph 7: Shares of Total Equity and Total Liability in Total (Equity + Liability).
Graph 8: Shares of Current and Non-Current Liabilities in Total Liability.
Graph 9: Shares of Turnover and Other Income in Total Revenue.
Graph 10: Shares of different types of costs in Total Cost.
8.3 Tables
Table 1: Index Number Trend Analysis of Assets in percentages
Table 2: Actual Asset Amounts in Ghana Cedis (GHC)
Table 3: Index Number Trend Analysis of Equity and Liability in percentages
Table 4: Actual Amounts of Equity and Liability in GHC
Table 5: Revenues and Costs from Sales in relative values
62
Table 6: Index Number Trend Analysis of Gross and Net Profits in relative values
Table 7: Vertical Analysis of Assets in relative values
Table 8: Vertical Analysis of Equity and Liability in relative values
Table 9: Vertical Analysis of Costs in relative values
Table 10: Current ratio of analysed periods
Table 11: Quick ratio of analysed periods
Table 12: Cash ratio of analysed periods
Table 13: Debt to Asset ratio of analysed periods in percentages
Table 14: Debt to Equity ratio of analysed periods
Table 15: Times Interest Earned ratio of analysed periods
Table 16: Equity Multiplier of analysed periods
Table 17: Profit Margin of analysed periods
Table 18: Return on Assets of analysed periods in percentage.
Table 19: Return on Equity of analysed periods in percentages
Table 20: Inventory Turnover of analysed periods in actual figures
Table 21: Total Asset Turnover of analysed periods in actual figures
Table 22: Fixed Asset Turnover of analysed periods in actual figures
Table 23: Average Collection Period of analysed periods in days
Table 24: Return on Equity of analysed periods using Du Pont method
Table 25: Calculation of Altman Z-Score for analysed periods
63
9 Appendices
Appendix 1: Balance Sheet of Cocoa Processing Company Limited from year 2004 to year 2008
in Ghana Cedis
Appendix 2: Profit and Loss Statement of Cocoa Processing Company Limited from year 2004
to year 2008 in Ghana Cedis
Appendix 3: Structure of Statement of Changes of Equity
Appendix 4: Structure of Cash Flow Statement
64
Appendix 1: Balance Sheet of selected company from year 2004 to year 2008 in Ghana Cedis
2004 2005 2006 2007 2008

ASSETS 51,688,300 66,402,700 79,443,200 106,631,874 182,031,835
Fixed Assets 26,057,800 41,154,500 48,430,300 61,259,485 140,177,884
Current Assets 25,630,500 25,248,200 31,012,900 45,372,389 41,853,951
Inventories 15,031,700 10,169,200 22,510,000 16,576,019 25,087,057
Trade and Other
Receivables 8,530,800 10,307,600 5,414,400 24,398,993 17,667,707
Short-term Investments 1,680,200 1,359,900 1,444,600 1,568,979 1,922,736
Cash and Bank balance 387,800 3,411,500 1,643,900 2,828,398 (2,823,549)
EQUITY AND
LIABILITY 51,688,300 66,402,700 79,443,200 106,631,874 182,031,835
Total Equity 16,066,100 16,499,800 16,691,690 31,260,068 84,045,281
Stated Capital 2,416,700 2,416,700 2,416,700 3,088,186 16,778,215
Income Surplus Account 5,411,700 5,894,200 6,344,500 6,551,363 67,266,966
Capital Surplus 8,237,600 7,930,400 7,930,390 21,620,419 0
Redeemable Preference
Shares 100 100 100 100 100
Total Liability 35,622,200 50,161,300 62,751,510 75,371,806 97,986,554
Non-Current Liabilities 11,443,600 23,149,500 20,915,500 44,781,342 85,484,436
Current Liabilities 24,178,600 27,011,800 41,836,010 30,590,464 12,502,118
Trade Liabilities 24,178,600 26,753,400 41,491,410 30,150,134 12,502,118
Dividends Paid 0 258,400 344,600 440,330 0
Appendix 2: Profit and Loss Statement of Cocoa Processing Company Limited from year 2004
to year 2008 in Ghana Cedis
2004 2005 2006 2007 2008

TURNOVER 34,222,000 27,964,400 29,043,600 48,217,223 59,264,796
Cost of Sales (31,339,200) (24,938,400) (26,072,400) (44,534,444) (54,463,578)
GROSS PROFIT 2,882,800 3,026,000 2,971,200 3,682,779 4,801,218
Other Income 396,400 275,800 292,700 390,674 2,565,466
Selling and Distribution
Costs (330,700) (340,100) (700,600) (558,639) (555,418)
Administrative Expenses (2,193,800) (2,161,500) (1,697,000) (1,520,413) (1,566,053)
Other Expenses 0 0 0 (1,180,533) (168,483)
PROFIT/LOSS FROM
OPERATIONS 754,700 800,600 866,300 813,868 5,076,730
Financial Costs (101,400) (40,700) (51,000) (166,675) (3,803,633)
PROFIT/LOSS BEFORE
TAX 653,300 759,900 815,300 647,193 1,273,097
Provision for Tax/National
Reconstruction Levy (190,200) (19,000) (20,400) 0 0
NET PROFIT 463,100 740,900 794,900 647,193 1,273,097
Appendix 3: Structure of Statement of Changes of Equity
Total
Redeemable Attributed to
Preference Income Equity
Stated Capital Shares Surplus holders
GHC GHC GHC GHC
Balance at 1st October 20XX
Debt/Equity Conversion
Prior Year Adjustments
Dividend Paid
Profit for the Year
Balance at 30th September
20XW
Appendix 4: Structure of Cash Flow Statement
20XX 20XW
AMOUNTS AMOUNTS
NOTES GHC GHC
OPERATING ACTIVITIES
Profit before tax
Adjust for Non-cash Transactions
Depreciations
Interest Received
Prior Year Adjustments
Finance Costs
Changes in Working Capital
Increase/Decrease in Inventories
Increase/Decrease in Account Receivables
Increase/Decrease in Account Payables
Redundancy Cost
Net Cash Flows from Operating Activities
INVESTING ACTIVITIES
Interest Received
Purchases of Property, Plant & Equipment
Proceeds on Disposal of Property, Plant &
Equipment
Increase/Decrease in Fixed Deposits
Net Cash Flows for Investing Activities
FINANCING ACTIVITIES
Issue of Shares
Dividend Paid
Finance Costs
Increase/Decrease in Medium Term Loans
Net Cash Flow Received from Financing
Activities
Net Increase/Decrease in Cash and Cash
Equivalents
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period

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MENDEL UNIVERSITY IN BRNO

Faculty of Business and Economics

Department of Business Economics

Evaluation of the Financial Position and Performance of Cocoa

Supervisor: Ing. Michaela Beranová, Ph.D.

Author: Kojo Addae Asamoah

In Brno, on 24th May, 2010 Signature:

2 Theoretical Background to Financial Analysis ..................................................................... 10

2.1 Financial Analysis .......................................................................................................... 10

2.1.1 Objectives of Financial Analysis ............................................................................ 10

2.2 Users of Financial Analysis ........................................................................................... 11

2.2.1 Internal Users .......................................................................................................... 12

2.2.2 External Users ......................................................................................................... 12

2.3 Financial Statements used in Financial Analysis ........................................................... 13

The Balance Sheet................................................................................................................. 14

The Income Statement .......................................................................................................... 14

The Cash-Flow Statement ..................................................................................................... 15

Statement of Shareholders‟ Equity ....................................................................................... 15

The Annual Report ................................................................................................................ 15

2.4 Tools of Financial Statement Analysis........................................................................... 16

2.4.1 Comparative Financial Statement Analysis ............................................................ 17

2.4.2 Common-size Financial Statement Analysis .......................................................... 19

2.4.3 Financial Ratio Analysis ......................................................................................... 20

2.4.4 Du Pont System of Evaluating Financial Situation................................................. 23

2.4.5 Prediction of Financial Distress .............................................................................. 25

3.1 Aim ................................................................................................................................. 26

3.2 Methodology .................................................................................................................. 26

4 Characteristics of Selected Company ................................................................................... 28

4.1 Brief History and Objective of Company ...................................................................... 28

4.2 Management of the Company ........................................................................................ 29

4.3 Current Situation of the Cocoa Industry in Ghana ......................................................... 29

5 Financial Analysis of Cocoa Processing Company Limited................................................. 32

5.1 Comparative Financial Statement Analysis ................................................................... 32

5.1.1 Horizontal Analysis of Assets ................................................................................. 32

5.1.2 Horizontal Analysis of Equity and Liability ........................................................... 34

5.1.3 Horizontal Analysis of Profit and Loss Statement .................................................. 36

5.2 Common-size Financial Statement Analysis.................................................................. 38

5.2.1 Vertical Analysis of Assets ..................................................................................... 38

5.2.2 Vertical Analysis of Equity and Liabilities ............................................................. 40

5.2.3 Vertical Analysis of Profit and Loss Statement ...................................................... 42

5.3 Financial Ratio Analysis ................................................................................................ 45

5.3.1 Liquidity Ratios ...................................................................................................... 45

5.3.2 Leverage Ratios ...................................................................................................... 47

5.3.3 Profitability Ratios .................................................................................................. 49

5.3.4 Activity Ratios ........................................................................................................ 51

5.5 Prediction of Financial Distress ..................................................................................... 54

Altman Z-Score ..................................................................................................................... 54

6 Conclusion and Recommendation ........................................................................................ 55

7.1 Literature ........................................................................................................................ 60

7.2 Internet ........................................................................................................................... 61

8 List of Diagrams, Graphs and Tables ................................................................................... 62

8.1 Diagrams ........................................................................................................................ 62

8.2 Graphs ............................................................................................................................ 62

8.3 Tables ............................................................................................................................. 62

2.1 Financial Analysis

Financial analysis consists of tools and techniques applied analytically to commonly-used

2.1.1 Objectives of Financial Analysis

A comprehensive analysis of a company‟s financial statements, first of all, shows its

A summarization of the main reasons for financial analysis is as follows [2]:

 To find out reasons for a company‟s need of additional financing;

 To assess how previous debts were handled;

b. For current and potential shareholders:

 To view the company‟s present and long-term operations;