Financial Analysis And Liquidity Of Dutch Lady Milk Industries Bhd Essay.

Write an essay on Liquidity and financial resources.

Dutch Lady Milk Industries Bhd is involved in production and distribution of milk product, milk powder, condensed milk, fruit juice etc. The organization was incorporated during the year of 1963 having its base in Petaling Jaya, Malaysia. Dutch Lady Milk Industries Bhd operates as subsidiary of Frint Beheer IV BV. The organization provides dairy products under the brand name of Dutch Lady, Frisolac, Friso. Dutch Lady Milk Industries Bhd was earlier known as Dutch Baby Milk Industries (Malay) Berhad and altered its name to Dutch Lady Milk Industries Bhd in the year 2000.

The financial statement of Dutch lady Milk is assessed on the basis of historical cost as disclosed by the organization in its report. All the financial information is represented to the nearest of thousand unless or otherwise stated by the organization. It is to be noted that the financial statement is prepared in accordance with the accounting policies. This requires management to make judgments and estimations, which affects the utilities of accounting policies and the reported amount of assets, liabilities, income and expenses. However, the actual results may differ from these estimates (Frank and Pamela 2016). According to the financial report analysis, it is understood that no contingent liabilities in relation to the companies has appeared at the end of the financial year.

According to reports no other liabilities is enforceable during the span of five years in the opinion of directors, affecting the sustainability of the organization to meet the liabilities when they fall due. As stated by directors of Dutch Lady Milk Industries Bhd, the financial performance of the organization over the span of five years has not been substantially effected by any financial tools, transactions or events of material and extraordinary nature, nor has any event took place during the interval of the financial year and as per the date of the report.

According to McDonnell et al. (2015), it is to be understood that the profit and loss account represents fair value of the financial assets, which are used for trading purpose. Revenues generated by the organization shows that during the financial year of 2011, the net amount of revenues was 810.6 million which continued its rising trend and after the span of five years, it stood for 1007.7 million. This shows that revenues grew by 191 million in the span of five years.

5 year financial analysis

Items of plant and equipment are considered at cost. The analysis of financial statement shows that cost also consists of expenses, which is proportionately related to the acquirement of assets and any other cost. These are directly related to the assets, which are intended to use in the working condition. It is to be also noted that the cost of self-constructed assets also consists of the cost of materials and direct labour involved in the production procedure. According to the financial report, significant part of items of property, plant and equipment have different useful lives, they are accounted as separate items of property, plant and equipment. The analysis of financial reports shows that profit and loss on sales of item property, plant and equipment is determined by comparing the financial revenues obtained from the disposal with the carrying cost of plant and equipment. It is recognized in the form of “other income” and “other expenses” respectively in the statement of profit and loss account.

According to the financial report, depreciation is calculated based on the cost of an asset after deducting the residual value (Radu and Marius 2011). Several elements of individual assets is evaluated and if the component is believed to have a useful life, which is dissimilar from the reminder of that fixed asset, then those assets, are depreciated independently.

As per the financial reports the earnings per share of Dutch Lady Milk Industries Berhad during the financial year of 2011 shows 398.5 million. However, it rose to 412.5 million in the span of five years by 14 million. This shows that the revenues earned through share capital is stable and it is projected to grow more during the next five years.

On the other hand the net assets backing per share stood 259.2 in the financial year of 2011 however, it fell down to 157.2 million which represents a negative amount as there is a sharp decline in net assets backing per share.
Liquidity and financial resources:

As on 31st December 2015 Dutch Lady Milk Industry’s cash and cash equivalents amounted to RM 47.8 million which was comparatively 9.2 million higher from the last fiscal year. The effective tax rate for the fiscal year of 2015 stood at 25.3% (Dutchlady.com 2016). The analysis of financial report on the parameters of five years shows that the excess cash were transferred based on short-term fixed deposit. The deposits were placed with the certified monetary institutions, carrying the interest rate at an average of 3.7% in the fiscal year of 2015.

Recognition and measurement

In the financial of 2015, Dutch Lady Milk Industries is focused on making innovations on the company’s product portfolio. It took the major investment policy of re-launching some of the growing range of milk products with the help of enhanced formula, the first in the Malaysian markets to offer nutrition customized milk to meet the child’s mental growth needs (Adibah Wan Ismail et al. 2013). On the other hand, the corporation also undertook investment policies by introducing the new Dutch Lady Pure Farm brand for both flavored and unflavored milk. This shows the organization degree of commitment to continue delivering delicious and nutritious milk. Dutch Lady Milk Industries also employs high quality expertise so that it can improve the quality of the product, reinforce its positions as one of the leaders in powder milk under the category of children, and ready to drink milk.

Dutch Lady Milk Industries continued its indulgence in the dairy advancement program by assisting the domestic dairy farmers to ensure the sustainability of operation. Expansion program also consists of introducing the concept of farmer-to-farmer program in association with the branch of veterinary services. On the implementation of development program, it has been observed that domestic farmers have managed to increase the quality of local fresh milk.

Dutch Lady Milk Industries marked its steps towards making optimized operating systems in factory by upgrading it to automated and robotic powder line. Speaking about the shareholders, the organization made a payment of RM140.8 million in the form of interim dividends during the fiscal of 2015. The organization also wishes to inform its shareholders that the payment of special interim dividend is almost dependent on the operational needs and business activities during the financial year of 2015 (Raei and Pouyanfar 2012).

Investment also includes investment made in plant and equipment of business, which are completely depreciable assets. The estimated sum of investment is approximately RM 60,238,000. On the other hand, leasehold land consists of the land with unexpired lease for a period of 20 years for organizations factory premises, office premises and storehouse that is located in “Petaling Jaya”. The lease is expected to end in the year of 2035 and the organization does not have the choice of purchasing the leased land at the end of lease span. During the year of 2015, the company has also invested in the optimization of newer productions machinery for higher capacity and efficiency.

Depreciation

Dutch Lady Milk Industries foresees the next ten years ahead in the prospect of present financial outlook. Nevertheless, from the fiscal year 2016 onwards the organization will stay devoted towards improving the strength of organization by offering quality products to its consumers. Dutch Lady Milk Industries is looking forward to invest in product portfolio innovation of its powdered milk brand. Dutch Lady Milk Industries is looking to execute the launch of two major products for refreshment purpose, which includes 73% of the corporation’s product portfolio (Dutchlady.com 2016). As it was observed that during the fiscal year of 2015 the process of re-branding of Dutch Lady Milk where the organization re-invented all its flavored and unflavored fluid milk under the new brand of Dutch Lady Pure Farm brand name. The organization is looking forward to bring up its commitment alive through implementing programs of Dutch Lady Pure Farm so that Malaysian households can take pleasure from the same quality of milk that Dutch Farmers share with the families.

On the other hand, future investment opportunities for the organization includes launching of children’s powder milk by introducing new Dutch Lady Nutri-Plan with improved formula of 5x DHA (Dutchlady.com 2016). Perhaps enhancing the range of formulated milk for children will bring about an innovating change in nutritional level aimed at improving the milestones and mental growth needs. The above stated product launches will be supported by diversity of in-store advertising and channel customized with sales promotional activities. Some of the major investment projects identified by Dutch Lady Milk Industries over the course of next ten years is listed below;

Dutch Lady Milk Industry financial analysis also covers the aspects of competitiveness based on the income statement, balance sheet and cash flows illustrates on five year trends. The current report outlines that profitability, margin analysis, assets turnover and the organizations long-term solvency. This kind of information will help in strengthening and assisting the strength of the organizations decision-making process. The report also takes into the account Dutch Lady Milk Industries competitors along with the industry as whole, the information gained after the analysis of the company’s financial statement based on the detailed information about the interior and exterior factors, which affects the relevancy of the industry (Walker and Madsen 2016).

The financial report also provides that the relevant analysis has been conducted on the PR-activities and stock price movements of the Dutch lady Milk Industries. Stock price movements are interrelated with the pertinent news and press release from the annual and quarterly forecast, which offers the market experts with the concept of competitive environment and analyzing the market research framework of the organization. The vitality of such information helps in creating the principle trends of Dutch Lady Milk Industries Berhad business entity.

The financing activities states that the organization engages in the production and distribution of sweetened condensed milk, milk powder, toned milk with reduced fats, dairy milk product and fruit juice drinks used centrally in Malaysia (Huo et al. 2013). The financial report of the organization gives a reflection of the organization other areas of business, which represents that it also manufactures “UHT milk”, “infant formula”, “cultured milk” and “yoghurt”. The financial report provides that direct comparison can be made amid Dutch Lady Milk Industries and its competitors. Such competitive environments provide the clients with a clear understanding of the company’s competitive information in the food and beverage industries.

Liquidity and financial resources

Dutch Lady Milk Industries Bhd agreed to adopt certain policies on the monetary risk management for the purpose of numerous risk exposures over the span of ten years. During the current financial year the company has made its entry in the “US dollar forward exchange contracts” in order to administer the foreign exchange exposure. This arises from the organizations receipts and payments denominated in the currency apart from the operational foreign exchange of the organization.

Credit risk: Dutch Lady Milk Industries Bhd has undertaken the policy of dealing with the credit worthy customers over the span of ten years on the basis careful assessment of consumer’s monetary condition and the historical credit records. Such historical credit records can be used to mitigate the danger of fiscal loss from default of payments (Haimes 2015). The corporation is also looking forward to expand its customer’s base and limit the credit concentration on single consumers.

The organization is looking forward in the span of ten years to mitigate the credit risk by making an arrangement of the licensed financial institution. Such financial institutions enable the selected trade customers to pay goods invoice through corporate purchasing cards issued by the financial institution. Dutch Lady Milk Industries Bhd is also looking forward to establish a credit supervising policies and process concerning its other trade consumers.

Liquidity risk: Dutch Lady Milk Industries Bhd is looking forward in the direction of preserving the degree of “cash and cash equivalents” along with facilities provided by bank whichever the administration may deem adequate to make sure maintaining a level of sufficient liquidity of funds. Creating and maintaining the liquidity of funds will enable the organization to meet its liabilities whenever it falls due. The organizations exposure to liquidity of risk arises principally from both trade and other payables.

Market risks: Market risk can be defined as the risk that shifts with the market requirement such as overseas currency rates and policies, rate of interest and other charges that will be effecting the monetary position and cash flow statement of Dutch Lady Milk Industries Bhd. During the financial year of 2015, the raw materials prices have fallen in comparison to the last fiscal year (Chugh 2016). However, to further avoid any such fall in prices the organization undertakes the market risks to combat the changing market prices.

Currency risk: Dutch Lady Milk Industries Bhd is currently exposed to the risk of the foreign currency during the sales and purchase which are denominated under the domestic currency apart from the operating currency of the business entity. Hence, the currency paves the rise of risk denominating from US dollars and Euro that significantly contributes to 64.5% of the overall exposure. Dutch Lady Milk Industries Bhd has implemented the monitoring of foreign currency risk over the next decades in order to review the exchange rate of foreign currency by comparing with the unfavorable rate of the previous financial year.

Risk relating to interest rate: Dutch Lady Milk Industries Bhd is currently not exposed to the risk of changes in cash flow as because the organization currently has no borrowing at the end of the financial year 2015. It has put in place short term deposits with the licensed financial institutions, which are potentially not vulnerable to the risk of changes arising in interest rate. Therefore, short-term receipts and payments are not considerably open to the elements of interest rate risk.

Capital commitments: Dutch Lady Milk Industries Bhd is total capital commitment is authorized but it is not contracted for 31 December 2020 amounted to RM 20.5 million (Dutchlady.com 2016). This is centrally the investment made in order to maintain the existing factory premise located in the Petaling Jaya. As on 31st December 2016 onwards, the organization is also looking forward to pledge any assets in order to expand its current financial institutions.

Capital management: Dutch Lady Milk Industries Bhd financial objectives is to preserve a strong base of working capital and safeguard its assets so that it continues to exists as a going concern in order to maintain the investors relations, credit and market confidence to sustain the future of business. The board of directors observes the return on capital, which the organization has defined the resource activities after dividing the total activity, which is attributable to the owners of the company. The owners of the organization ensure that an adequate balance is made to assists the future course of expansion of organization and payment of dividend to the shareholders of corporation.

Dutch Lady Milk Industries Bhd has proposed in the latest annual general meeting of the company held in Atlanta Ballroom for commencing the project on product portfolio innovation. The organization is assisting the domestic farmers to ensure sustainability of operational functions of milk production. The organization foresee as a challenging investment opportunity in contrast to the current economic outlook in the next decade to increase its volume of productions. The origination is devoted to leveraging the strength of the Dutch Lady Brand in order to improve the quality of product and introduce diversified range of products to offer customers with the variety of products to choose.

The organization is looking forward to continue its investment in product innovation portfolio to educate and make the consumers aware of the significance of quality dairy product. This enables the Malaysian populations to move ahead in their daily life with the help of trustworthy dairy nutrition products. Speaking about the amount of investment to be made in the proposed projects for product portfolio innovation a sum of RM 5,000,000 million is estimated to be initial sum of investment, which will be required for this project (Dutchlady.com 2016). The proposed project is based on a span of ten years to achieve the desired goal of bringing innovation in its current milk product. Below is the projected cash flow and cost summary of the project.

Major investment undertaken by the corporation

Dutch Lady Milk Industry board of directors is committed to implementing responsible and sustainable corporate practices. The organization has undertaken the financial policy to sustain the stakeholder’s engagement under current financial information. According to the current financial policy undertaken, the total amount of debt equity fund for the financial year 2015 is 64,000 RM however the retained earnings for the financial year represent 93,219 RM. This signifies that the organization liquidity position is sustainable over the next five or ten years. As per the financial report Dutch Lady Milk Industries has also kept a reserve of Financing cost of 3,608 RM which form a vital source of fund for financing its future prospects of business undertakings.

Assumptions for different scenarios of NPV analysis:
The net present value represents the variance between the present value of overall cash inflow and the present value of the overall cash outflow from the business. Therefore, NPV represents a mechanism of capital budgeting to evaluate profitability of a project. In this case, the realistic scenario assumes the required rate of return to be 10%. Consequently, we calculate the discounted cash flow based on the required rate of return and thereby the total discounted cash flow. The initial investment is deducted from the total discounted cash flow to get the net present value of the project. The net present value of the project is enumerated to be 5116786 in case of the realistic scenario that assumes 10% required rate of return for the project. However, in case of the optimistic scenario, the required rate of return is assumed to be 12%. Consequently, we arrive at the discounted cash flow based on the present value factor calculated on the required rate of return. Thereafter, we get the net present value of the project by subtracting the initial investment from the total discounted cash flow from the project. The net present value of the project in case of the optimistic scenario is calculated to be 4177471. Again, in case of the optimistic scenario, the required rate of return is expected to be 8% and accordingly the net present value from the project is calculated to 6203005.

It is noteworthy to denote that the dairy sector is understood as one of the important industry, especially in relation to the rural and semi-urban development. Dutch Lady Milk Industry current aim is to offer high quality protein and micro nutrients which generally lacking in cereal-based diets as diet milks are usually vital for children’s and child bearing mother. The organization has also aimed to improve the productivity level to 1 million liters of milk production annually with the implementation of new product innovation.
The business is viable as the ultimate factor that drives the optimization production and the business willingness to adopt new technologies, which enables more productivity with less reduced investment cost (Brown 2012). Farmers are producing more volume of milk per cow and the dairy process has managed to maximize the dairy process by increasing the output and minimizing the cost of operations. According to the reports obtained, it is estimated that the worldwide sales of dairy products have forecasted to pass the reach $600 billion annually soon. The decision undertaken by the organization is centrally aimed at enhancing the productivity of dairy milk.
Below listed are the underlying reasons for the increasing demand for dairy products and increase in the rise of the exports are due to the following reasons;
a. Growth in populations
b. Popularity of dairy products
c. Westernization of diets in order to include more dairy
d. Generating broader array and application of dairy products

Future investment opportunities over the next decade

It is believed that substantial growth for expansion of dairy industry exists in Malaysia by bringing the old and primitive cattle systems into the formal dairy systems. In a country like Malaysia, the report suggests that dairy products contributes majority of the domestic household sector at a percentage of 45-50% of the livestock (Born and feifer 2014). Hence, dairy products are an important source of livelihood for urban and semi-urban sector which dynamically contributes the Malaysian economy.
According to reports, the ever-changing landscape of dairy farming is significant to clearly establish the factors which influence the profitability of Dutch Lady Milk Industries. The organization also takes into the account the various regional variations such as cultures, different types of animal breeds, infrastructure livestock and commercial orientations determining the viability of business. In order to ensure that the complete analysis of the factors surrounding the profitability and viability of business the proposed projects involves the following considerations;

A database has been built by the organization to uphold the fixed cost and gross margin analysis is conducted to record the outputs an variable cost that has been allocated to each job specified under the proposed project.
Possible risk affecting the NPV of project undertaken by the corporation:

Economic risk: It is noteworthy to denote that the risk in the economic environment is related to the market namely demand and supply (Fei et al. 2012). Hence, the prices of farms inputs and outputs inflation and prevailing rate on interest, which affects the NPV of the “Business Corporation” and productivity through the availability of merit and new technology.

Political risk: Political risk, which could affect the NPV of the project undertaken by the corporation, consists of the government policies, which can considerably affect the price of the commodity, credit cost, exchange rates and market availability (Dorfman and Cather 2012). On the other hand, other political risk, which can influence NPV, is the political ideology of moving from a socialistically planned economy to a capitalistically free market economy.

Long-term and Short-term risk: Altering the price of the product and yields are considered as short-term risk because the cost of vital variable inputs such as concentrated fertilizers are either known or determined by the farmer during the time of decision-making (Haimes 2015). While in the long-term yield process, the price and cost variables are uncertain due to the uncertain climatic cost. All these factors may affect the NPV of the business.

Increasing the variety of processing channels:
 Dutch Lady Milk Industries should promote and engage itself into vertical integration of raw milk products such as infant milk, toned milk etc. This will help the company to sell their dairy products at a relatively lower price than currently increasing the profitability of the dairy farmer.

 Implementing transparency in the distribution chain: It is recommended that the Dutch Lady Milk Industry should increase more transparency in the distribution chain through implementing co-operative and processor chain. This could encourage the mutual benefits of maximizing the quantity and quality of milk produced and equal benefits of the distribution chain can be achieved.

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www.Dutchlady.com, (2016). [online] Available at: https://www.dutchlady.com