New Era University

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FINANCIAL ANALYSIS OF UNIVERSAL

ROBINA CORPORATION USING
FINANCIAL RATIOS

Submitted by:
Annie Mae Aurellana
Hannah Grace Roldan
Rogelyn Joy D. Soriano
Ferdielyn Villaruz

Submitted to:
Prof. Marie Joy P. Rosales

3FM-2
 Introduction

In the Philippines, the Universal Robina Corporation is among the pioneer and largest producers
of food and beverage. It has a significant and growing presence in Asia. For 50 years now, after it was
founded in 1954 by Mr. John Gokongwei, URC has been in existence providing quality food and beverage
products for the Filipino consumer.

Across the years, URC has engaged in a wide array of food production business that included the
production, and distribution of snacks, sugars, flours, and agro-industrial businesses that cater mainly to
animals such as feeds for hogs, and other related products. It has ventured into the renewable energy
business through its distillery and cogeneration divisions. Apart from these, the company produces and
sells Bi-axially Oriented Polypropylene (BOPP) films for the consumer goods industry. It has positioned
itself as the pioneer in manufacturing food products through the use of advanced technologies and
processes and has been the first mover in terms of the wide distribution networks in the ASEAN market
through the use of both modern and traditional markets.

Horizontal Analysis

Given in the table:

Horizontal analysis (Income Statement) (Amount in Comparison Year - Amount in Base Year / Amount in Base Year
x 100)
2016 2017 Amount Percentage 2018 2019 Amount Percentage 2019 2020 Amount Percentage
Net Sales 111.63 125.01 13.38 10.70 127.77 134.42 6.65 4.94 134.42 133.1 -1.32 -0.99
Gross Profit 36.53 39.31 2.78 7.07 37.44 40.3 2.86 7.09 40.3 41.05 0.75 1.82
Operating
Income 16.81 14.95 -1.86 -12.44 13.85 15 1.15 7.66 15 16 1 6.25
Income
Before
Income
Taxes 15.9 13.66 -2.24 -16.39 11.54 11.89 0.35 2.94 11.89 13.75 1.86 13.52
Net Income 2.44 11.5 9.06 78.78 9.46 10.1 0.64 6.33 10.1 11.6 1.5 12.93

Formula: Amount in Comparison Year - Amount in Base Year / Amount in Base Year x 100

The comparison between 2016-2017 was good because they were able to increase the net sales,
gross profit, and net income but had a little decrease in operating income and Income before tax. It means
that the year 2017 was able to contribute to growth for the company because they generated a good
income for that year. In comparison to 2018-2019, they were unable to manage their Net sales and Net
income well, as the amount decreased from 13B to 6.6B of Net sales and from 9B to 640M of Net Income.
That was a significant decrease, and it has the potential to have a cascading effect throughout the
company. Lastly, in comparison of 2019-2020 there's a negative amount of net sales and this means that
URC is spending more money than making it, which is not a sustainable business model.
Vertical Analysis

Given in the table:

Formula (Income Statement): Income Statement Item/Total Sales x 100

For the Vertical Analysis we got their Income statement and Balance sheet, since it is a method of
financial statement analysis in which each line item is listed as a percentage of a base figure within the
statement. Upon reviewing the Income statement, their gross profit percentage is not that stable since as
you can see in the table it started at 2016 with a percentage of 32.72 and it ended at 2020 with a 30.48%,
it demonstrates that the company earns less money than it spends. For the Operating Income same as
the gross profit it is not also stable since in the year of 2018 URC decreases from 15 percent to 10 percent,
it means that they spend too much money manufacturing a product or have excessive overhead costs. As
you will notice the income before taxes is not that stagnant since it's 15% up to 13% in 2020. For their net
income it is not also consistent; it means that they borrowed too much money and subsequently had its
income fall as its debt payments rose. It also may occur if the value of assets declines.

Formula (Balance Sheet): Balance Sheet Item/Total Assets (Liabilities) x 100

For the balance sheet, as we computed all, the Total Assets at 2016 is 141.44 B, 2017 with 147.64
B, 2018 they got 151.93 B, in 2019, 168.65 B, lastly 2020 they able to generate 176.19 B, gathering all the
total assets you will notice that it is increasing. It means that the company is growing, but everyone can
relate to the fact that there is much more behind the scenes than just looking at the assets. The goal is to
determine how the asset growth of a company is financed. Let’s proceed to their Total Liabilities at 2016
is 46.49%, 2017 was 42.44%, 2018 they got 47.04%, 2019 is 47.55%, and lastly 2020 they generate around
68.43%. It means that URC is exposing their company to severe trouble, even if they are otherwise
successful entities. For the Total Shareholders’ Equity, you will notice that it is continuing to increase so it
indicates more stable finances and more flexibility in the case of an economic or financial downturn.

Current Ratio

Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety
through the calculation of metrics including the current ratio, quick ratio, and operating cash flow ratio.

Current ratio is a liquidity ratio that measures a firm's ability to pay off its short-term liabilities
with its current assets. It is simply dividing the company's current assets by its current liabilities. A good
current ratio is anything over 1, with 1.5 to 3 being the ideal.

Given in the table:

Current Ratio (Current Assets/ Current Liabilities)
2016 2017 2018 2019 2020
Current Asset 52,232 53,702 54,409 64,844 65,562
Current Liabilities 28,105 27,999 31,968 34,933 53,667
Current Ratio 1.86 1.92 1.70 1.86 1.22

Since the current ratio is consistently high ranging over 1 in the span of 5 years, it means URC has
enough cash because the higher the ratio is, the more capable the company is of paying off their debts.
URC, in this case, has more than enough cash to meet its liabilities while using its capital effectively.

Quick Ratio

Next is Quick Ratio, it is a financial indicator of short-term liquidity or the ability to raise cash to
pay bills due in the next 90 days. Also known as acid-test ratio, quick ratio measures the ability of a
business to pay its short-term liabilities. Quick ratio is defined as the difference between current assets
and inventory divided by current liabilities.
 A quick ratio greater than or equal to "1" indicates a company has enough liquid assets to meet
its short-term obligations.

Given in the table:

Quick Ratio (Current Assets- Inventory/ Current Liabilities)
2016 2017 2018 2019 2020
Current Assets 52,232 53,702 54,409 64,844 65,562
(Inventory) 18,600 18,465 22,085 24,374 26,254
Current Liabilities 28,105 27,999 31,968 34,933 53,667
Quick Ratio 1.20 1.26 1.01 1.16 0.73

The interpretation of this is that URC’s quick ratio in the span of 5 years ranges into 1.0 or greater,
that typically means URC is healthy and can pay its liabilities. This indicates that the company is fully
equipped with exactly enough assets to be instantly liquidated to pay off its current liabilities.

Debt to Equity Ratio

The debt-to-equity ratio is the relationship between your debt and equity to calculate the financial
risks of your business. It calculates if your debt is too much for your company. Investors, stakeholders,
lenders, and creditors may look at your debt-to-equity ratio to determine if your business is a high or low
risk.

A debt-to-equity ratio of 1.5 would indicate that the company in question has $1.50 of debt for
every $1 of equity. To illustrate, suppose the company had assets of $2 million and liabilities of $1.2
million. Because equity is equal to assets minus liabilities, the company’s equity would be $800,000. Its
D/E ratio would therefore be $1.2 million divided by $800,000, or 1.5.

Given in the table:

Debt to Equity Ratio (Total Liabilities/Total Shareholder’s Equity)
2016 2017 2018 2019 2020
Total Liabilities 42.4 66.53 67.94 73.47 78.41
Total Shareholder’s Equity 75.27 81.68 83.99 95.18 97.78
Debt to Equity Ratio 0.56 0.81 0.81 0.77 0.80

A ratio greater than 1 implies that the majority of the assets are funded through debt. A ratio less
than 1 implies that the assets are financed mainly through equity.

From a pure risk perspective, debt ratios of 0.4 or lower are considered better, while a debt ratio
of 0.6 or higher makes it more difficult to borrow money.

So based on the table, 2016 to 2020, all of their ratios were all below 1.0 so it is considered good
because the company's assets were financed mainly through equity.
As the business owner, they use the debt-to-equity ratio interpretation to decide whether you can or
cannot take on more debt. If you have more debt than equity, you may not qualify for loans. If you have
more equity than debt, your business may be more appealing to investors or lenders.
Gross Profit Margin

It is a metric analysts use to assess a company's financial health by calculating the amount of
money left over from product sales after subtracting the cost of goods sold (COGS). It also shows the
percentage ratio of revenue you keep for each sale after all costs are deducted. It is used to indicate how
successful a company is in generating revenue, whilst keeping the expenses low. The overall average sits
above 30%, while a gross profit margin ratio of 50 to 70% would be considered healthy.

In the table below, we can see that in the year 2016, 2017, and 2020 was above 30% so it is good,
while in 2018 and 2019, we can see that it was below 30% so it is not good.

Gross Profit Margin (Gross Profit/Net Sales)*100

2016 2017 2018 2019 2020
Gross Profit 36,410 39.32 37.37 40.31 41.06
Net Sales 111,630 125.01 127.77 134.42 133.1
Gross Profit Margin 32.62% 31.45% 29.25% 29.99% 30.85%

Analysts use gross profit margin to compare a company's business model with that of its
competitors. For example, let us assume that URC and Company ABC both produce snacks with identical
characteristics and similar levels of quality. If URC finds a way to manufacture its product at 1/5 the cost,
it will command a higher gross margin because of its reduced costs of goods sold, thereby giving URC a
competitive edge in the market.

Net Sales = (Gross Sales – Returns – Allowances – Discounts)

Net Income Margin

Formula is: (Net Income/ Total Revenue)

This is the most important measure of a company's profitability. This measures how much profit
is generated as a percentage of revenue. Based on research, 10% profit margin is considered as an
‘Average’ amount while 16-20% is considered as high or good margin. As we can see, the URC’s record
shows only as an average amount.

Given in the table:

Net Income Margin (Net Income/ Total Revenue)
2016 2017 2018 2019 2020
Net Income 2,440 10,880 9,200 9,770 10,750
Total Revenue 36,530 125,000 127,780 134,175 133,140
Net Income Margin 6.68% 8.70% 7.20% 7.28% 8.07%
Sales to Asset Ratio

Formula is: (Total Assets/ Sales)

This measures the ability of a business to generate sales on as small a base of assets as possible.
Generally, it's favorable if the ratio is higher to 2.5 because it implies that the company is efficient in
generating sales or revenues from its asset base. On URC’s record it shows a high ratio for the company
which is considered good as it implies the efficiency of Universal Robina on generating sales.

Given in the table:

Sales To Asset Ratio (Total Assets/ Sales)
2016 2017 2018 2019 2020
Total Asset 141,440 147,640 151,930 168,650 176,190
Sales 36,530 125,000 127,780 134,175 133,140
Sales to Asset Ratio 3.871886121 1.18112 1.188996713 1.256940563 1.323343849

Return on Asset

Formula: Net Income/ Total Assets*100

This is a measure of how efficiently a company uses the assets it owns to generate profits.
Managers, analysts and investors use ROA to evaluate a company's financial health. A ROA of over 5% is
generally considered good and over 20% excellent. However, ROAs should always be compared amongst
firms in the same sector. As you will see in the table from 2017 to 2020 they are ranging from 5%-7% so
it means that it is considered good and the company efficiently uses the assets to generate profit. While
in the year of 2016 it is 1.72%, it indicates that the company is unable to maximize the use of its assets in
order to increase profits.

Given in the table:

Return on Asset (Net Income/ Total Asset x 100)
2016 2017 2018 2019 2020
Net Income 2.44 11.5 9.46 10.1 11.6
Total Asset 141.44 147.64 151.93 168.65 176.19
Return on Asset 1.73% 7.79% 6.23% 5.99% 6.58%

Return on Equity

Formula: Net Income/ Shareholders’ Equity x 100

It is a financial ratio that tells you how much net income a company generates per dollar of
invested capital. This percentage is key because it helps investors understand how efficiently a firm uses
its capital to generate profit. ROEs of 15–20% are generally considered good. Looking at the table, URC
didn’t able to reached the percentage considered good. Low ROE means that the company earns relatively
little compared to its shareholder's equity.
Given in the table:
Return on Equity (Net Income/ Shareholders Equity x 100)
2016 2017 2018 2019 2020
Net Income 2.44 11.5 9.46 10.1 11.6
Shareholders’ Equity 75.27 81.68 83.99 95.18 97.78
Return on Equity 3.24% 14.08% 11.26% 10.61% 11.86%

Inventory Turnover

Inventory turnover is a financial ratio showing how many times a company has sold and replaced
inventory during a given period. The inventory turnover ratio can be calculated by dividing the cost of
goods sold by the average inventory for a particular period.

Before getting the inventory turnover ratio, let’s first find the cost of goods sold and average
inventory and its meaning.

The Cost of Goods Sold (COGS) measures the “direct cost” incurred in the production of any
goods or services. It includes material cost, direct labor cost, and direct factory overheads, and is directly
proportional to revenue. The formula is: beginning inventory + purchases − ending inventory = cost of
goods sold.

Cost of Goods Sold (Beginning Inventory + Purchases − Ending Inventory)

2016 2017 2018 2019 2020
Beg. Inventory 16,034 18,600 18,465 22,085 24,374
Purchase 77,656 85,558 93,952 96,150 93,961
(End. Inventory) 18,600 18,465 22,085 24,374 26,254
COGS 75,090 85,693 90,332 93,861 92,081

We assume the previous year inventory as the beginning inventory and so on. The following
data are from the annual report of Universal Robina Corporation.

In addition, average inventory is a calculation that estimates the value or number of a particular
good or set of goods during two or more specified time periods. The formula is: Average inventory =
(Beginning inventory + Ending inventory) / 2.

Average Inventory (Beg. Inventory + Ending Inventory)/2

2016 2017 2018 2019 2020
Beg. Inventory 16,034 18,600 18,465 22,085 24,374
End. Inventory 18,600 18,465 22,085 24,374 26,254
Average Inventory 34,634 37,065 40,550 46,459 50,628

For most industries, the ideal inventory turnover ratio will be between 5 and 10, meaning the
company will sell and restock inventory roughly every one to two months. Given in the table:
 Inventory Turnover (Cost of Goods/ Average Inventory)
2016 2017 2018 2019 2020
COGS 75,090 85,693 90,332 93,861 92,081
Average Inventory 17,317 18,533 20,275 23,230 25,314
Inventory Turnover 4.34 4.62 4.46 4.04 3.64

It shows that URC has a low to balanced inventory turnover ratio. It decreases as shown in the
table which implies weak sales and possibly excess inventory, also known as overstocking. URC might have
a problem in terms of decisions on how they prices its products, its marketing strategy and budget, its
manufacturing process, and its acquisition of new inventory.

Inventory Days

Days in inventory is the average time a company keeps its inventory before it is sold. To calculate
days in inventory, divide the cost of average inventory by the cost of goods sold, and multiply that by the
period length, which is usually 365 days. Generally, a small average of days sales, or low days sales in
inventory, indicates that a business is efficient, both in terms of sales performance and inventory
management. Hence, it is more favorable than reporting a high DSI. On the other hand, a high DSI value
generally indicates either a slow sales performance or an excess of purchased inventory (the company is
buying too much inventory), which may eventually become obsolete. However, it may also mean that a
company with a high DSI is keeping high inventory levels to meet high customer demand.

Given in the table:

Inventory Days (Cost of Average Inventory/Cost of Goods Sold*365)
2016 2017 2018 2019 2020
Ave. Inventory 17,317 18,533 20,275 23,230 25,314
COGS 75,090 85,693 90,332 93,861 92,081
Inventory Days 84 79 82 90 100

We can say that these are high day sales, so it is not favorable as inventory days and cannot
indicate that the Universal Robina Corporation is efficient in terms of sales performance and inventory
management.

Account Receivables

These are the funds that customers owe your company for products or services that have been
invoiced. The total value of all accounts receivable is listed on the balance sheet as current assets and
include invoices that clients owe for items or work performed for them on credit.

Given on the table:

Accounts Receivable (Beginning Receivables+Ending Receivables)/2
2016 2017 2018 2019 2020
Starting Receivables 15.2 16.26 14 16.47 16.72
 Ending Receivables 16 18.48 18 17.65 18.56
Accounts Receivable 15.6 17.37 16 17.06 17.64

All of those amounts are the outstanding invoices a company has or the money clients owe the
company. They have a receivables, this means it has made a sale on credit but has yet to collect the money
from the purchaser. It is used in business accounting to quantify how well companies are managing the
credit that they extend to their customers by evaluating how long it takes to collect the outstanding debt
throughout the accounting period.

Collection Period

Formula is: (365/Average Receivable Turnover Ratio)

Collection period is the average of days required to collect receivables from customers. It also
defines the interval of invoice to the receipt of cash from customers. Based on research, 26 days is
considered as efficient and effective while 38 days are accounts overdue. In URC’s case we can see that
its collection period records are most likely overdue. Some research interprets this as an indicator of a
few possible problems for your company. From a logistical standpoint, it may mean that your business
needs better communication with customers regarding their debts and your expectations of payment.
More strict bill collection steps may need to be taken.

Given on the table:

Collection Period (365/Average Receivable Turnover Ratio)
2016 2017 2018 2019 2020
Accounts Receivable Turnover ratio 7.15 7.19 7.98 7.87 7.54
Collection Period 51.05 50.76 45.74 46.38 48.41

Dupont Analysis

DuPont analysis is used to evaluate the component parts of a company's return on equity (ROE).
This allows an investor to determine what financial activities are contributing the most to the changes in
ROE. An investor can use an analysis like this to compare the operational efficiency of two similar firms.

In the DuPont equation, ROE is equal to profit margin multiplied by asset turnover multiplied by
financial leverage. Under DuPont analysis, return on equity is equal to the profit margin multiplied by
asset turnover multiplied by financial leverage.

DuPont Analysis (Net Profit Margin×Asset Turnover×EM)

2016 2017 2018 2019 2020
Net Income 2,440 11,500 9,460 10,100 11,600
Sales/Revenue 36,530 125,000 127,780 134,175 133,140
Profit Margin 6.68 9.20 7.40 7.53 8.71
 Sales/Revenue 36,530 125,000 127,780 134,175 133,140
Ave. Asset 117,250 145,640 150,070 153,590 172,420
Asset Turnover 0.31 0.86 0.85 0.87 0.77
Ave. Asset 117,250 145,640 150,070 153,590 172,420
Ave. Equity 72,090 80,190 82,835 89,585 96,480
Financial Leverage 1.62 1.81 1.81 1.71 1.78
ROE 3.24% 14.08% 11.26% 10.61% 11.86%
DuPont 3.386 14.34 11.42 11.27 12.02

Profit margin is the percentage of sales that a business retains after all expenses have been
deducted. A good profit margin as a general rule of thumb is a 10% net profit margin is considered
average, a 20% is considered high or good, and a 5% margin is low.

Given in the table, given the percentage, URC indicates a low margin of safety: the higher risk that
a decline in sales will erase profits and result in a net loss, or a negative margin as it is an indicator of a
company’s pricing strategies and how well it controls costs.

Asset turnover is a financial ratio that measures the efficiency of a company's use of its assets in
generating sales revenue or sales income to the company. An asset turnover ratio of 2.5 or more could be
considered good and if the ratio is less than 1, then it's not good for the company as the total assets aren't
able to produce enough revenue at the end of the year.

Given in the table, URC therefore we assume that this means it is not good for URC because their
total assets aren’t able to produce enough revenue at the end of each of those given years.

A leverage ratio is any kind of financial ratio that indicates the level of debt incurred by a business
entity against several other accounts in its balance sheet, income statement, or cash flow
statement. These ratios provide an indication of how the company’s assets and business operations are
financed (using debt or equity). Count up the company's total shareholder equity and divide the total debt
by total equity the resulting figure is a company's financial leverage ratio.

A financial leverage ratio of less than 1 is usually considered good by industry standards. A
leverage ratio higher than 1 can cause a company to be considered a risky investment by lenders and
potential investors, while a financial leverage ratio higher than 2 is a cause for concern.

Given the percentage, we assume that URC is using debt to finance its assets and operations —
often a telltale sign of a business that could be a risky investment bet for the lender and potential
investors.
Return on Equity

In terms of Universal Robina’s return on equity, we can get it from the formula of Net Income
divided to Shareholders Equity. Generally, a ROE’s of 15-20% are considered good. We can also see in the
following year of URC's ROE in dupont analysis, it only shows below 15% which means average. Even so,
this is still considered strong because the average amount covers the cost of capital of the company of
URC. In a general Interpretation: Investors want to see a high return on ROE because this indicates that
the company is using its investors funds effectively.

CONCLUSION

In conclusion, Universal Robina Corporation's is not favorable for credit collection as it necessarily
requires a high level of effort in their financial position. The results of the five-year financial data showed
thinner margins despite the double-digit sales growth due to higher input costs, increase in selling and
distributions costs, and general and administrative expenses. The financial plan also showed a robust
balance sheet as URC expects liquidity indicators to improve. The company expects in 2021 to partially
prepay its long-term debt when it acquired Griffins Food, therefore, freeing up more cash. Moreover, the
cash conversion cycle slightly improved due to faster collection and improved payment period.

RECOMMENDATION

Universal Robina Corporation (URC) is one of the largest branded food product companies in the
Philippines, with the distinction of being called the country’s first “Philippine Multinational”, and has a
growing presence in other Asian markets. The Company operates its food business through operating
divisions and wholly-owned or majority-owned subsidiaries that are organized into three core business
segments: branded consumer foods, agro-industrial products, and commodity food products.

Although URC showed good financial reports and delivered successful implementations in their
line of work, the company still had problems based on the financial statement analysis and interpretation
we made. The following proposed solutions are made for each problem URC has encountered based on
the financial and trend analysis done:

1. URC’s collection period does not meet the company’s credit policy.

URC should observe a tight credit policy in order to avoid past due receivables even though they
are still not subject to impairment. Since the company has current 15-20 day credit terms, it might be
better for URC to extend its credit terms. Based on the five-year financial statements, the average
collection period is beyond 20 days. URC might have a hard time if they do not adjust. It might lead to
more impairment losses. The company trades only with recognized and creditworthy third parties. It
should be maintained. It is the URC’s policy that all customers who wish to trade on credit terms are
subject to credit verification procedures. The Credit and Accounts Receivable Monitoring Department
(CARMD) of the Group continuously provides credit notification and implements various credit actions,
depending on assessed risks, to minimize credit exposure. Receivable balances of trade customers should
be monitored on a regular basis and appropriate credit treatments should also be executed for overdue
accounts. Likewise, other receivable balances should also be monitored and subjected to appropriate
actions to manage credit risk.
2. Net income is not consistently in an increasing trend.

It is every goal of companies to attain higher net income or to generate more revenues to
compensate for all costs incurred. In order to maintain an increasing trend in the net income, URC should
address other problems it has created. Just like in the Vietnam food issue, URC should be confident that
their measures will help the authorities in the exercise of their mandate. URC must be committed to being
in full compliance with product safety standards and manufacturing products that are of the highest
quality as they have always been throughout the years. In the Philippines, all URC products should remain
fully compliant with food standards. We shall be reaching out proactively to our customers and partners
to assure them of this fact as well as answer questions they may have regarding the development in
Vietnam.

3. URC’s operating cycle gets longer as years pass by.

Just like how the first problem should be addressed, URC should focus on improving its day sales
outstanding or its average collection period. Since an operating cycle refers to the days required for a
business to receive inventory, sell the inventory, and collect cash from the sale of the inventory. The cycle
plays a major role in determining the efficiency of a business. A shorter operating cycle is better. Since
there is no problem with its inventory holding period, the collection period should speed up. If URC is able
to quickly collect credit sales, the operating cycle will decrease.
References:

https://www.urc.com.ph/investors/urc-annual-reports?ref=menu

https://www.investopedia.com/terms/d/dupontanalysis.asp