Financial Statement Analysis Of BinDawood Holding: Industry Overview And Sensitivity To Macroeconomic Factors (Essay).

Conceptual Overview of Financial Statement Analysis

The main purpose and objective of this report is to conduct a thorough secondary analysis of a public limited company which is listed and trading in the stock exchange of the Kingdom of Saudi Arabia. Further, this report requires the author to select a listed company which belongs to the manufacturing or retail sector thus having inventories and receivables as a major line item in its financial statement. This report looks to extract the financial statements of the listed company for the previous five financial years in order to undertake a detailed financial statement analysis. This report makes use of the financial ratio analysis tool in order to analyze the financial statements of the selected company. Further, these financial ratios will be compared against prior year results in order to understand the trends in financial performance as well as benchmarked against industry peer results so as to understand its financial performance relative to the other key players from the same industry. The public limited company selected for the purpose of this report is BinDawood Holding. Lastly, prior to performing a through financial analysis, a general understanding with the help of secondary research has been conducted in order to discuss the industry and company in general.

The annual financial statements of any particular organization is prepared and presented with intent of communicating the financial performance and position of the organization for a particular financial period. Different stakeholders have varied level of interests in the financial performance of any organization. For instance, the board of directors & management are interested in understanding the financial performance in order to undertake financial decision making, establishing budgets and creating long term strategic initiatives. Shareholders and potential investors are concerned about their own returns while creditors and financial institutions care about the creditworthiness of the organization under review (Yhip and Alagheband 2020).

Although, the financial statements of an organization are primary sources of financial information for these stakeholders to make use of in order to understand the financial state of affairs, the results reported in these statements do not qualify sufficiently for these stakeholders to base their decisions concerning their respective stakes in the organization. For instance, the financial statements do not reflect upon the sources of strengths and weaknesses concerning the financial performance of an organization. Hence, the need to analyze the financial statements arises wherein stakeholders make use of different analytical tools to evaluate the competencies and weaknesses in financial performance. Financial ratio analysis is quite a common and popular tool for analyzing the financial statements of the organization.

Financial ratios are a quantitative analytical tool which makes use of financial information extracted from the annual financial statements in order to mathematically calculate results based on predetermined and universally accepted formulas which therefore provide meaning and depth to the financial numbers reported in the financial statements. The tool helps stakeholders in understanding an organization’s position of profitability, liquidity, solvency, efficiency and market prospects which can help in making informed and effective decisions. These figures can be used as means for facilitating trend analysis wherein results are compared against historical results to evaluate the trends in performance. Lastly, they can also help with benchmarking wherein results can be compared against industry average results in order to understand the positioning of the organization within the industry when competing against key rival players (Robinson 2020).

BinDawood Holding pertains to the retail industry operating multiple retail outlets of hypermarkets and supermarkets. The retail industry in the Kingdom of Saudi Arabia is anticipated to be growing over a period of next five years. Some of the prominent formats of retail stores in the country include Bakalas, Souqs, Department Stores, High-Street, Discount Stores, Supermarkets, Hypermarkets and Malls. The retail industry is divided into further sub categories on the basis of products whose main market segments include home improvement, apparel, footwear, groceries, consumer electronics and personal care (Marketresearch.com, 2022). The retail industry in general is expected to reach SAR 331.6 billion by the end of year 2025 with an expected compound annual growth rate of 4.5% through the years 2020-2025 (Businesswire.com, 2022). Furthermore, within the retail sector, the food & groceries segment tends to dominate majority of retail revenue with SAR 202.7 billion in the year 2020 and an expected growth rate of 5.9%. It is also worth mentioning that the Covid19 pandemic has also accelerated the growth of this market as the market grew by 4.6% in the year 2020 because of demand driven spending. Also, the Covid19 pandemic has presented several opportunities as the demographic is in need of convenience which these retailers can capitalize upon with the help of e-commerce and digitalization (Marmore MENA Intelligence, 2022). Some of the key players operating within this market are Bin Dawood Stores, Al Othaim Markets, Panda Stores, Al Raya stores and Farm stores. Some relevant key performance indicators which help in keeping track of industry progress are industry revenue, growth rate and industry valuation.

When it comes to the retail industry in the Kingdom of Saudi Arabia, the industry is quite volatile owing to its sensitive nature which can be elucidated and thoroughly discussed on the basis of the following variables which affect the sensitivity of the industry. These variables have been outlined as follows:

Industry Sensitivity to Macroeconomic Factors

Political Factors: The government of the Kingdom of Saudi plays a significant role whereby their initiatives can support the socioeconomic and demographic factors which translates to the group’s earnings. The government has made various investments in the western regions of the country for boosting religious tourism and the company’s presence in those regions allows it to capitalize based upon increasing pilgrim population. Another popular initiative taken by the Kingdom through its Vision 2030 is most likely to proper growth in the non oil sectors of the country. The provision of continual subsidization from the government with respect to new residential areas represents an added opportunity to target new expansion spaces within the country. Lastly, the government has also granted permission to retail shops for operating 24 hours a day since the year 2019 seeing the industry’s contribution and future growth prospects.

Economic Factors: The country is significantly exposed to economic risk which is because of the Covid19 pandemic. The pandemic has caused an economic uncertainty worldwide with almost all industries getting affected. These risks prevailing have affected the spending power of not just individuals but also manufacturers and suppliers. The retail industry was also affected especially because of initiatives to curb the virus spread and because of temporary store closures. However, Saudi Vision 2030 is a step in the right direction in order to promote other non oil industry sectors which specially include the retail industry. Further, the current economic and financial environment has partially recovered and it is anticipated that the company will report buoyant earnings performance over the course of next five financial years.

Social and Technological Factors: Off late, an $800 billion plan has been drawn in the city of Riyadh which is hopeful of doubling the population size of the city from 7 million to 15 million. Any positive and favourable change will depend upon the retail industry as it is expected that diversity when it comes to regional and international brands will contribute to the economy. Also, the demand for necessities have also spiked up post the pandemic phase with a surge in groceries and food items. A new health conscious demographic has also emerged off late who prefer healthy lifestyle and health friendly food items which are organic and gluten free. Lastly, consumers have also started preferring online shopping with most businesses looking to provide value to customers with convenience. This also opens a window of opportunity for retailers to make e-commerce investments to meet the changing preferences of customer buying habits (BDHG, 2022).

The retail industry especially groceries & supermarkets are quite saturated with several key players competing within the industry. The industry not just comprises of national names but also comprises of international names as well. Some of the key national players in the industry who are major competitors of Bin Dawood are Al Sadhan, Al Jazera, Danube, Lulu Hypermarket, Tamimi Markets, Al Othaim Markets, Farm stores and Al Raya stores. Further, there are several international brands which have also made a mark within the industry and consists of Amazon and HyperPanda (Saudi Scoop, 2022). The competition within the industry is quite stringent as it is expected that it will grow with years to come owing to the different opportunities surrounding digitalization and e-commerce which is worth capitalizing upon. The state of competitiveness within the industry can be further evaluated with the help of following factors:

The threat of new entrants in the industry is high because of the attractiveness of the industry as a result of the prevailing opportunities. Further, the barriers to entry is also quite low as the government is supporting the retail industry.

The competitiveness within the industry is also high owing to several different numbers of players which results in price wars. Further, these players cater to both, the online as well as offline demographic.

The bargaining power of consumers can be considered as medium. This is because most of the customers are individual buyers who are not buying in bulk. However, it also needs to be considered that the switching costs of customers is very low.

Further, suppliers have a low bargaining power as there are several numbers of suppliers in the market which dilutes their individual bargaining power. Also, retailers have low switching costs when it comes to suppliers.

Lastly, the threat of substitutes can be considered as medium. This can vary from products to products as a supermarket sells variety of groceries and food products.

The company is regarded as one of the leading retailers of grocery operating through hypermarkets and supermarkets in the Kingdom of Saudi Arabia. The company in total has 74 different stores among which 51 are hypermarkets and 23 are supermarkets which are located strategically across multiple locations in the KSA. With a total employment of 10,000 people, the company is located in major cities which include the likes of Riyadh, Jeddah, Makkah, Medina, Dammam and Khobar. The principal activities of the company comprises of FMCG trading, fresh food and non food products which also includes household consumables and owning & managing in-store bakeries. The company has a rich heritage which spans for almost over 50 years with 35 years in retail business. The mission of the company is to offer their core customers with exceptional shopping experience by striving upon standards which are unmatched pertaining to service, value and convenience. The vision of the company is to be regarded as the best grocery retailer in all of KSA and GCC and growing as a market leader. It intends to be known for its commitment to product quality, supplier relationships and customer service (BinDawood Holding, 2022).

In the financial year 2020, the total estimated revenue for food and grocery retail in the retail industry amounted to SAR 202.7 billion (Finance.yahoo.com, 2022). The total revenue which the company has generated for the financial year 2020 is worth SAR 5.2 billion (Investors BDHG, 2022). Hence, one can obtain a vague idea about the estimated market share of the company. This is calculated by dividing both the figures resulting in an estimated market share of 2.57% for the financial year 2020. One has to however be mindful that these market share calculations are mere estimates to obtain a rough idea as these do not represent accuracy.

There are three common strategies which an organization can make use of in order to position themselves in the industry and attain a competitive advantage. These strategies are cost leadership, product differentiation and the focus strategy. From among the three alternatives, BinDawood adheres to the cost leadership strategy. These are validated on the basis of the following points extracted from secondary research and the company’s annual report:

The mission of the company clearly states that one of the building blocks for them is to provide value to its customers whose main determinant is the cost of offerings.

Further, the company’s business model reflects upon their strategic intent of catering to an increased demand on the basis of competitive pricing of their offerings.

The company makes use of several sales promotion strategies which are price oriented in order to increase the average basket size of customers shopping in-store. These initiatives comprise of promotional initiatives, seasonal offers and festive events to drive sales.

Throughout 2020, the company’s long-term strategy and plans revolved around in-store experience and efficient pricing strategies (Investors BDHG, 2022).

The financial ratio analysis of an entity provides an exhaustive detail of financial health and financial position of an entity. Through financial ratio analysis the existing and future operating efficiencies and other details related to an entity can be done to understand the investment strategies to be adopted for the entity. The details of financial ratio analysis of the Bin Dawood Group for the financial years 2017, 2018, 2019 and 2020 in reference to the industry average are given in the following paragraphs and the calculations of the same are given in the appendix section.

The liquidity ratios consider the short-term financial position of any entity. The various liquidity ratios show an entity’s ability to pay its short-term obligations by using the current assets held by it without raising additional funds from external sources. Analysis of various liquidity ratios in reference to the industry average liquidity ratios are done in the following paragraphs (Ready ratios 2022), (BinDawood Holding 2022):

Working capital investment is the difference between the current assets held and current liabilities owed by an entity. The scale of the same is dependent upon the level of business operation conducted by any entity. Though, the working capital investment by any entity at any level of activity should remain positive in any point of time. Further, entities engaged in the retail business operations requires to maintain high amount of working capital investments to eliminate any bankruptcy risks. The Bin Dawood Group has maintained a positive working capital investment level in all the financial years after 2017. The negative working capital investments in the 2017 has been recovered sharply in the immediate next financial year and the situation has not occurred in any other operating cycle.  

The current ratio represents the amount of current assets held by an entity in comparison to the current liabilities owed by the entity. Current ratio requires to be remained higher than 1. As the same, shows the times current assets holding in reference to the current liabilities. Further, turnover rate of entities operating in the retail industry remain high. Hence, the liability repayment cycle in retail industry also remains high. The industry average current ratio for retail industry is 0.7289. Bin Dawood Group has exceeded this level in the year 2020 and other financial indicators are showing positive indications for maintenance of the same by the entity in future operating years.

Quick ratio also determines the liquidity position of an entity in extension to the current ratio. The quick ratio does not consider the sale of inventories to pay current obligations. The retail industry always remain inventory extensive. Hence, the quick ratio remains less than current ratio. The industry average quick ratio is 0.3876. The Bin Dawood Group has exceeded this level of quick ratio in the year 2020. Further, the financial indicators are also showing positive indications to maintain the given level of quick ratio.

The cash ratio is also an extension of the current ratio. The cash ratio only considers the liquid current assets in hand by an entity in comparison to the current liabilities owed by an entity. The cash ratio ignores the proceeds from inventories, cash realization from trade receivables and other cash collection from current assets. The industry average cash ratio for retail industry is 0.1193. Bin Dawood Group has not met this level in the financial year 2017. As per studies, entities can maintain a good financial position without maintaining industry average cash ratio. As retail industry operates in high liquidity position. The financial statements issued by Bin Dawood Group has not provided details of any default by it in repayments of current liabilities in any of the financial year under consideration.

In addition to the liquidity ratios, which determines an entity’s ability to repay its current obligations, the solvency ratios analyze an entity’s ability to pay its long-term obligations by using its own funds without raising any capital investments from external sources. The analysis of solvency ratios for Bin Dawood Group is given in the below paragraphs (Ready ratios 2022), (BinDawood Holding 2022):

Debt ratio shows an entity’s leverage position. This ratio varies with industries and entity strategies. Though, a debt ratio lower than 1 is desirable for entities. As the same shows that, the entity owes a lower value of its debts than the assets in possession of the entity. Further, debt ratio below 1 provides lower risk of default risk for investors. The industry average debt ratio for retail industry is 0.3531. Bin Dawood Group has maintained a lower-level debt ratio than industry average in the financial years 2017 and 2018. This will help the entity to raise additional investments from external sources without negatively impacting its risk position. Hence, the cost of debt of the entity will remain low than its industry.

Debt-to-equity ratio compares an entity’s debt liability in comparison to its equity funds. An entity’s debt-to-equity position highly depends upon the entity strategies. Entities engaged in retail industry in the country or across the globe admires a debt position lower than 2.0342 in comparison to its equity funds. In other words, an entity engaged in the retail industry requires to maintain half of equity fund than its debt funds. In the years 2017 and 2018, Bin Dawood Group has maintained this level. Though, in 2019 and 2020 due to expansion of the business, Bin Dawood Group has raised external debts. The financial indicators are positive for Bin Dawood Group to show the abilities of the entity to repay this debt obligation in time.

Time interest earned ratio shows the amount of pre interest earning of an entity in comparison to the interest expenses of the entity. In other words, this ratio shows an entity’s ability to pay its interest obligations in comparison to the revenues earned by the entity. With high investments in the working capital, entities engaged in the retail industry requires to maintain twice pre interest earning than the interest obligations of the entity. The time interest ratio of the Bin Dawood Group is quite higher than the industry average. The same is showing the entity’s higher reliance on its equity funds rather than debt funds.

Equity ratio shows the proportion of equity in the assets held by an entity. Higher equity ratio means higher equity investments by an entity into its assets and raising external debts become easy at affordable rate by the entity. Bin Dawood Group has maintained a good equity ratio in all the financial years under consideration. By the same, Bin Dawood Group will be able to raise debt funds from external sources at affordable rate.

Efficiency ratios determines an entity’s ability to generate revenue from the assets used by the entity. The various efficiency ratios applicable to Bin Dawood Group are given in the below paragraphs (Ready ratios 2022), (BinDawood Holding 2022):

The accounts receivable turnover ratio shows an entity’s efficiency in recovering the trade receivables. The turnover of entities engaged in the retail industry remain high with lower margin of profitability. Hence, the entities engaged in the retail industry should be efficient in recovering the receivables owned by it. The industry average accounts receivable turnover ratio is 18.29 days. Bin Dawood Group has exceeded this level in all the operating years under consideration.

With increased sales the inventory turnover ratio for an entity engaged in the retail industry should remain low. The industry average inventory turnover ratio applicable is 5.86 days. In other words, an entity in the retail industry should hold inventories in its stock for maximum of 5.86 days. Bin Dawood Group has achieved this level in all the operating years under consideration.

With high turnover of inventories, entities engaged in the retail industry should maintain a lower level of accounts payable turnover ratio and the desired level of accounts payable turnover ratio for entities engaged in the retail industry is 7.14 days. As if any entity does not pay its obligations on regular basis, the entity will not be able to acquire inventories in required manner. Bin Dawood Group is regular in paying its payables in all the years under consideration and has maintained the desired level of accounts payable turnover ratio.

Retail industry does not require high investments in plant and machinery items. Retail industry requires to maintain a high level of working capital investment. The desired level of asset turnover ratio for retail industry is 0.81, which is higher than other industries. Bin Dawood Group has failed to achieve this level in the years under consideration. The management of Bin Dawood Group has identified the Covid situation as the reason of the same and positive to recover this position in future operating years.

Profitability ratios measures an entity’s earnings in comparison to the revenues generated by the entity. The various profitability ratios of Bin Dawood Group in reference to the industry average is given in the below paragraphs (Ready ratios 2022), (BinDawood Holding 2022):

Gross profit is the percentage of gross profit earned in reference to the sales made by an entity. In other words, gross profit margin shows the extent of cost of sales an entity requires to incur to achieve the given revenue level. The desired gross profit margin of an entity in the retail industry is 21.38%. Bin Dawood Group has over achieved this level in the years 2018 to 2020 and financial indications are positive to achieve this level in future operating years.

The net profit margin ratio considers the cost of sales and operating expenses in reference to the revenue level of an entity. The desired level of net profit margin for retail industry is 4.71%. Bin Dawood Group has achieved this level in all the years under consideration and expected to over achieve this level in future operating years.

Retail industry requires heavy investment in infrastructures. Hence, the required return level remains lower in case of retail industry in comparison to other industries. The desired level of return to assets for entities in retail industry are 3.77%. Bin Dawood Group has over achieved this level with significant margin in all the financial years under consideration.

With significant level of revenue margin by Bin Dawood Group, the entity has over achieved return level in comparison to its equity investments in all the financial years under consideration. The desired level of return on equity for retail industry in the country is 11.14%.

Conclusion

In the conclusion of the financial analysis of Bin Dawood Group, it can be observed that, the entity has over achieved in all the financial indicators in most of the years under consideration. The profitability level is significantly high for Bin Dawood Group in all the financial years. The debt position of Bin Dawood Group is also lower than the industry average. Due to the same, the entity is incurring lower interest cost and raising debt funds for future expansion projects to be undertaken by the entity will be affordable for the entity. As, with lower level of debt, the required debt cost and risks for the entity will be lower than its competitors. Overall efficiency position of the Bin Dawood Group is good. The high infrastructure investment made by the entity has made the entity’s return on asset lower than the industry average. The position is expected to get recovered in the future course of operations. Further, the independent auditor has not included any negative remarks for revenue position of the entity. The liquidity position of Bin Dawood Group has also positive in all the years under consideration and the same is expected to remain same in future operating years.    

Reference

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