TERM PAPER

FINANCIAL STATEMENT RATIO ANALYSIS

BAMBURI CEMENT

BETA GROUP

Members:

1. Stacy Tallam- 162429

2. Michelle Bachaberi- 165919
3. Stacy Kirii- 167870
4. Cyrus Muchiri- 164869
5. Myers Muchiri- 168064
6. Betty Gitonga- 166896
7. Hellen Waweru- 167061
8. Adams Junior- 161248

Ratio Analysis of Bamburi Cements Financial Statements:

Introduction:

Bamburi Cement Limited is an industrial company that specializes in the manufacturing

and distribution of cement and concrete products. It has operations in Mombasa and has
its headquarters in Nairobi. It is listed on the Nairobi Securities Exchange (with a current
share price of 30.95/-) and has been since 1970. The following are ratio analyses to
analyse company performance.

Liquidity ratios:

Working capital (= Current assets- current liabilities)

Working Capital is the difference between a company’s current assets and current
liabilities.

Ratios/year 2018 2019 2020 2021 2022

Working 3021.00 3694.00 5267.00 6872.00 4905.00
 capital

Working capital
8000

7000

6000

5000

4000

3000

2000

1000

0
2018 2019 2020 2021 2022

Interpretation:

For the 5-year period, the average working capital for the firm was 4,751.80 million
ksh..This indicates the company is healthy, short-term, as their current assets exceeded
their current liabilities. Finally, the company was at its optimum health in 2021 with a
working capital of almost 7.000 million ksh.

Current Ratio:

The current ratio is a liquidity ratio that measures the ability of a company to pay off its
current liabilities, which should be payable within one year, with its current assets like
cash, trade or accounts receivables, and inventories.

Current ratio calculations: (Current assets/ Current liabilities)

Year 2018 2019 2020 2021 2022

Current 1.32 1.97 2.49 1.87 2.34
ratio
 Current ratio
3

2.5

1.5

0.5

0
2018 2019 2020 2021 2022

Interpretation :

Bamburi Cement's current ratio is an average of 2.00, which is generally considered a

good ratio, meaning the company has high liquidity. Hence, it is able to settle its debts
given its current assets.

Quick Ratio:

The quick ratio is a measure of the company's short-term obligations given its most liquid
assets, therefore, excluding inventories from its current assets.

Quick ratio calculations: = (Current assets-inventory)/current liabilities

Year 2018 2019 2020 2021 2022

0.59 1.09 1.84 1.25 1.48
 Quick ratio
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2018 2019 2020 2021 2022

Interpretation:

The average quick ratio of the company, from 2018 to 2022, is an average of 1.25. This is
generally acceptable because it is above 1. However, in certain years like 2018, their
quick ratio was below 1 indicating that it was difficult for them to settle their short-term
obligations. Nevertheless, as the years progress their quick ratio remains high from 2019
to 2022 showing an increase in their ability to settle obligations. Therefore, the form was
more liquid in 2019 to 2022 than in 2018 indicating a good ability to generate cash
quickly in case of anything.

Leverage ratios:

Debt-to-Asset Ratio:

Debt-to-asset ratio is the measure of the extent to a company’s financial strength.

Debt-to-Asset Ratio Calculations: (=Total debt/ total assets)

Year 2018 2019 2020 2021 2022

0.34 0.25 0.23 0.32 0.23
 Debt to asset ratio
0.4

0.35

0.3

0.25

0.2

0.15

0.1

0.05

0
2018 2019 2020 2021 2022

Interpretation:

Bamburi Cements has an average ratio of 0.27 which is 27% for the 5-year period (2018-
2022). This is good because a ratio below 1.0 (100%) shows that the company has more
assets than it has debt. Therefore, generally for the period the company's debt-to-asset
remained below 35% showing that the company is in a good position in that regard.

Debt to equity ratio:

Debt-to-equity ratio is the measure of the extent to a company’s financial leverage.

Debt-to-Equity Formula: (= Total debts/ Total equity)

Year 2018 2019 2020 2021 2022

0.5 0.33 0.29 0.47 0.23
 Debt to equity ratio
0.6

0.5

0.4

0.3

0.2

0.1

0
2018 2019 2020 2021 2022

Interpretation:

Bamburi Cement’s ratio for the period is .38 or 38%. This means that over the period the
company is utilizing more debt than equity finance because their average is above .2 or
20%. Moreover, in 2018 and 2021, the firm used a greater amount of debt financing than
in 2019, 2020, and 2022 where the debt-to-equity ratio was relatively low.

Activity ratios:

Asset turnover ratio:

Asset turnover ratio measures the value of a company’s sales or revenues relative to the
value of its asset’s. A high asset turnover ratio shows the company is more efficient at
generating sales from its assets while a low ratio indicates the opposite.

Asset Turnover Ratio Calculations: (= Net sales/ total average assets)

Year 2018 2019 2020 2021 2022

0.44 0.72 0.67 0.48 0.59
 Asset turnover ratio
0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0
2018 2019 2020 2021 2022

Interpretation:

The average revenue for the period is .58. A good use of assets to generate revenue would
be greater than 1 while less than 1 indicates an inadequate use. Thus, for the period
Bamburi Cement has not been adequately utilizing its assets to greater sales. Moreover, as
seen in Figure 1.6, they had the best turnover ratio of approximately 0.70, therefore,
making the most use of their assets.

Days sales outstanding ratio:

The day's sales outstanding ratio (DSO) is the average number of days a company takes to
collect payment after selling goods on credit.

Days Sales Outstanding Ratio Formula: (= (Account receivables/net sales) *365)

Year 2018 2019 2020 2021 2022

47.92 28.22 39 35.88 47.32
 Days sales outstanding ratio
60

50

40

30

20

10

0
2018 2019 2020 2021 2022

Interpretation:

Bamburi Cement’s average number of days, from 2018-2022, is 39.67 days

approximately 40 days. This is an acceptable period as it is below 45 days. Moreover, in
2019 and 2022, the company's DSO exceeded 45 days indicating that during those
periods they would have longer periods of time before collecting payment. From 2019 to
2021, however, their DSO remained steadily below 40 days indicating an adequate or
acceptable period before collection. These DSO values indicate that the company is
currently in a concerning position when it comes to collecting receivables because its
current DSO period is greater than 45 days.

Inventory Turnover Ratio: (=Cost of goods sold/ Average inventory)

Inventory turnover shows how many times a company turned over its inventory relative
to its cost of goods sold in a specified period.

Year 2018 2019 2020 2021 2022

2.29 4.64 6.74 3.84 5.1
 Inventory Turnover Ratio
0
2018 2019 2020 2021 2022
-1

-2

-3

-4

-5

-6

-7

-8

Interpretation:

Bamburi Cement’s inventory over the 5-year period (2018-2022) is an average of -4.52.
This could indicate weak seals or excess inventory. In the year 2020, the inventory
turnover is at the lowest value of -6.74 of the 5-year period. This shows that there were
low sales or excess inventory during that period. Moreover, the low inventory turnover
for the period could also be evidence that the company is overstocking, has an issue with
its sales strategy or has poor marketing.

Profitability ratios:

GROSS PROFIT MARGIN: (= ((Revenue-cost)/ revenue)*100)

A company’s gross profit margin is a profitability ratio which compares its gross profit
with its total revenue, showing the percentage of each dollar of revenue that the company
retains as gross profit.

Year 2018 2019 2020 2021 2022

0.12 0.18 0.15 0.14 0.12
 Gross profit margin
0.2
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
2018 2019 2020 2021 2022

Interpretation:

A higher gross profit margin is ideal as it means that the company retains a larger
percentage of the revenue. Bamburi’s gross profit margin is currently at the lowest it has
been in five years, meaning that they are retaining less revenue than they are losing to the
cost of goods sold. In order to remedy this, Bamburi can either purchase inventory at a
lower rate or sell their products at a higher price, which will lower the cost of goods sold
and increase their revenue, respectively.

EBIT Margin:

The Earning Before Interest and Taxes (EBIT) Margin allows companies to assess their
efficiency and profitability as a result of its business’ core operations. It shows the
percentage of gross income that will be retained as operating profit.

EBIT Margin Formula: (= EBIT/Revenue)

Year 2018 2019 2020 2021 2022

0.08 0.06 0.08 0.06 0.04
 EBIT Margin
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0
2018 2019 2020 2021 2022

Interpretation:

A higher EBIT margin means that a company’s core business operations are yielding a large
amount of operating profit. It also aids in comparing companies in the same industries; for
example, some manufacturing companies (of which Bamburi is one) have a margin of up to
40%. Bamburi’s highest EBIT margin was 8.18% and has been decreasing since. One way to
increase their EBIT margin could be to focus on reducing their operating expenses, such as
their administrative expenses (which take up a majority of their expenses), in order to have
higher earnings.

PROFIT MARGIN:

Profit margin is a profitability ratio that shows the portion of a company’s sales revenue that
it retains as profit, after subtracting all of its costs. It shows the percentage of each unit of
revenue that is retained as profit.

Profit Margin Formula: (= (Net income/net sales) *100)

Year 2018 2019 2020 2021 2022

0.07 0.05 0.06 0.04 0.03
 Profit margin
0.08

0.07

0.06

0.05

0.04

0.03

0.02

0.01

0
2018 2019 2020 2021 2022

Interpretation:

Bamburi’s profit margin has decreased significantly over the past five years, with 2018’s and
2022’s margins differing by more than 4%. In order to increase profitability, Bamburi could
focus on cutting their operating expenses in order to increase their net income and have a
higher profit margin (which is net income to net sales).

RETURN ON ASSETS:

Return on assets is the profitability that shows how profitable a company is in relation to its
assets; that is, it measures a company’s productivity and efficiency in generating profit from
its economic resources or assets.

Return on Assets Formula: (=Net income/ Average total assets)

Year 2018 2019 2020 2021 2022

0.05 0.03 0.04 0.04 0.02
 Return on assets
0.06

0.05

0.04

0.03

0.02

0.01

0
2018 2019 2020 2021 2022

Interpretation:

Their return on assets is currently lower than it has been in the past five years at 1.798%.
Bamburi can improve their return on assets by increasing their net income, which can be done
by reducing their operating expenses and increasing their revenue.

RETURN ON EQUITY:

Return on equity is the ratio that demonstrates financial performance in relation to equity,
dividing net income by shareholder’s equity.

Return on Equity Formula: (= Net income/ Average total equity)

Year 2018 2019 2020 2021 2022

0.07 0.05 0.05 0.05 0.02

Return on equity
0.08

0.07

0.06

0.05

0.04

0.03

0.02

0.01

0
2018 2019 2020 2021 2022
Interpretation:

Bamburi’s ROE over the last five years peaked in 2018 at 7.30%; it’s 2022 is 5 units less at
2.33%, indicating a decrease in the productivity in shareholder’s equity. This can be improved
by, once again, increasing their net income.

Return on capital employed:

Return on capital employed (ROCE) is a profitability ratio which compares net operating
profit to capital employed (total assets subtract total liabilities). It is a measure of how well a
company uses its capital to generate profit.

Return on Capital Employed Formula: (= Operating earnings/ capital employed)

Year 2018 2019 2020 2021 2022

0.07 0.05 0.05 0.06 0.02

Return on equity
0.08

0.07

0.06

0.05

0.04

0.03

0.02

0.01

0
2018 2019 2020 2021 2022

Interpretation:

Bamburi’s most recent ROCE was 2.26%, which, compared to the manufacturing company’s
benchmark of 10%, is less than ideal. It can increase its ROCE margin by increasing its EBIT,
which can be done by reducing their operating expenses.

Asset ratios

Asset efficiency ratio:

The asset efficiency ratio is a financial metric that measures how well a company uses its
assets and liabilities to generate sales. It is typically used to analyze a company's short-term
or current performance. This efficiency ratio measures a company's ability to use its assets to
generate income. For example, an efficiency ratio often looks at various aspects of the
company, such as the time it takes to collect cash from customers or the amount of time it
takes to convert inventory to cash.

Equity ratios:

Dividend payout ratio: (= Dividends/Net income)

Year 2018 2019 2020 2021 2022

10 25 0.01 17 -480

Return on equity
100

0
2018 2019 2020 2021 2022
-100

-200

-300

-400

-500

-600

Interpretation:

The payout ratio saw a sustained downward trend after 2019 and reached an all-time low in
2022, which discouraged investors due to the low value of the ratio. However, the year 2019
also saw the best payouts to firm investors, which increased from the value it was in 2018
within this sample set.

Comparative industries and benchmarking: Inspection of the payout ratio of the company
in relation to peers and industry averages. Payout ratios in consumer goods and utility
industries are likely to be larger than those in technology or growth-oriented industries, which
tend to have more variable cash flows. The state of the economy: Be mindful of the financial
landscape. Companies may review their dividend policy during recessions, which could result
in adjustments to payout ratios. In erratic economic times, a cautious payout ratio may prove
beneficial.

General analysis of the decline in performance for Bamburi:

Increased local and worldwide inflationary pressure on input resources, such as fuel,

transportation, and imported clinker in both Kenya and Uganda, led to an abrupt rise in

direct production costs, which had a negative effect on the Group's earnings and operating

profit.

The unrealized foreign exchange loss of the Kenyan and Ugandan shillings against other

major currencies also had a negative effect on the bottom line. Due to the weakening of the

Kenyan shilling compared to the US dollar; Egypt is the primary supplier of imports for

some component materials required in the manufacturing of Bamburi cement. These imports

have become somewhat more expensive.

Because the transaction was completed in dollars, the table above shows the relationship
between the US dollar and the Kenyan shilling, which directly contributed to the cost of
purchasing raw materials for Bamburi. The US dollar appreciated by 3% annually between
2020 and 2021, indicating a moderate growth rate. However, in 2023, the currency
appreciated by 12.7%, indicating an extremely strong depreciation of the Kenyan shilling.

This reduction is having a negative impact on Kenya's business environment, forcing

companies to deal with unforeseen rises in production costs and a decline in consumer
purchasing power that forces reduced sales.

The increased rate of fuel cost directly affects firms in their operations and causes an
increased cost in terms of transportation, production and storage of sensitive chemical
products. An increase in fuel costs can have several implications for Bamburi cement, as the
production of cement is an energy-intensive process. As seeing that the fuel cost in the
country increased 38.7% affect firms directly.

EFFECTS TO MARKET AND FIRM

● Operating Expenses: The depreciation of local currency and rising fuel prices have an
impact on the overall operating expenses of Bamburi cement. This could have an effect on
profit margins, especially if the company can't boost prices to offset growing expenses.

● Competitiveness: Since cement is a product that is traded internationally, businesses

frequently have to contend with competition from both local and foreign producers. The
competitiveness of a Bamburi cement firm in relation to others with lower production costs
may be impacted if costs rise more noticeably.

● Environmental Considerations: Cement businesses may investigate and invest in more

environmentally friendly and sustainable manufacturing methods in response to rising fuel
costs, particularly if those costs are associated with fossil fuels. To cut expenses and lessen
the impact on the environment, this can involve using cleaner technology and alternative
fuels like biomass or fuels obtained from trash.

For the half year that ended in June 2022, Bamburi Cement Group declared a profit of Sh95
million, which represents an 87.7% decrease from the Sh776 million reported during the
same period in 2021.

High operating expenses are mostly to blame for the decline; operating profit was only Sh210
million, about five times less than the Sh1.17 billion reported the year before. Additionally,
there was a decrease in cash flow from operations, amounting to a loss of Sh1.8 billion as
opposed to Sh1.43 billion in the previous year. Bamburi beat economic odds to report a
marginal gain in revenue during the period, despite the decline in earnings.

Conclusion:

For the half year that ended in June 2022, Bamburi Cement Group declared a profit of Sh95
million, which represents an 87.7% decrease from the Sh776 million reported during the
same period in 2021. High operating expenses are mostly to blame for the decline; operating
profit was only Sh210 million, about five times less than the Sh1.17 billion reported the year
before. Additionally, there was a decrease in cash flow from operations, amounting to a loss
of Sh1.8 billion as opposed to Sh1.43 billion in the previous year. Bamburi beat economic
odds to report a marginal gain in revenue during the period, despite the decline in earnings.