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Statement of Profit or Loss 2015

It's obvious that there has been a healthy jump in revenues of just under 15% between 2014 and 2015. At the same time, the increase in operating costs has not been as high:

• cost of materials: increased by 13% between 2014 and 2015. The increase is still not insignificant and given the fact that these costs now represent 54% of revenues great care must be taken to control this cost. We would be talking here mainly about the costs associated with obtaining the main component for solar cells i.e. polysilicon

• personnel expenses: increased by 11%

• amortisation and depreciation: increased by 7%

• other operating expenses: increased by 5%

So, given the higher growth in revenues than in operating expenses this means that the operating margin (operating profit/revenues) has greatly improved from a loss making position in 2014 to 3.2% in 2015. Still, that is a thin margin and it's whittled down further once we consider the very high financing costs in particular.

Those finance costs of F$1,978,000 in 2015 eat into the improvement in operating profits to such an extent that Marici is left with almost nothing once tax has also been paid. We see a net profit margin (net profit/revenues) of just 0.2% for 2015! The interest coverage ratio (operating profit/finance costs) further underlines just what a problem debt currently is for Marici as it stands at just 1.13. This means Marici is barely turning enough of an operating profit to pay off its debts nevermind fund future investments and expansions.

So, in summary we can say that while 2015 certainly represents an improvement in performance (with revenue growth especially solid), a net profit of just F$151,000 on revenues of F$69,993,000 is truly pitiful. Marici needs to reconsider its debt position as its repayments are completely nullifying that positive upward trend in revenues. As it stands Marici has little scope for funding the necessary big capital outlays to ensure their products stay up-to-date. They cannot take on more debt and are reliant on Wala Solar for funding.

Statement of Financial Position 2015

Looking at non-current assets what jumps out is the high level of intangible assets the company has. Most likely this is made up of patents, software, trade formulas etc. That's logical given the fast-moving, innovative, high-tech industry Marici is operating in.

The current assets section is where things get really interesting - and unfortunately for Marici, I only see problems here. Inventories are really very high. When you consider that budgeted sales for 2017 are F$81,225,000 and that revenues in 2015 were F$69,993,000 that means the current inventories represent 26% and 30% of those revenue figures respectively. Given the importance of constant innovation in this market we can assume that products quickly become obsolete, so it's dangerous for Marici to have such a high stock of inventory sitting there as there is no guarantee at all it will sell. The only ray of light is that the inventory days (inventories/cost of materials x 365) has come down slightly from 228 days in 2014 to 206 days in 2015.

Trade receivables is also high but again, at least receivable days (Receivables/Revenues x 365) is decreasing (from 65 days in 2014 to 55 days in 2015). It's also sub-optimal for receivables to be high as you take the risk of running up bad debts. You can assume that a certain percentage of customers will not pay their debts and the higher your absolute figure is for receivables the larger the hit you will take for those bad debts. Marici could usefully consider offering less generous credit terms to customers and should pay particular attention to longer standing debts.

Finally, we come to cash in the current assets section. Again, I am worried when I see this amount - just F$206,000! That's peanuts when you compare it to some of the current liabilities that are set to fall due very soon e.g. trade payables and short-term borrowings. What would Marici do in the instance of one of those powerful suppliers demanding settlement of an outstanding payment due? The low cash position is not surprising given the storm the solar industry has weathered in recent times, but Marici needs to reinforce that cash position very soon. They could do so by shifting some of those inventories or calling in some of those long-standing receivables.

It's interesting to see that Marici has a big pool of retained earnings built up over the years. Given the loss in 2014 and the tiny profit in 2015 we can safely assume that Marici must have done quite well in the period from its inception in 1996 up to around 2011. This is when the whole industry started to suffer due to overcapacity in the market and the influx of cheap imports from China pushed prices lower. So, this leads us to conclude that Marici has staying power and has turned profits in the past and can do so again.

Looking at non-current liabilities we can see another problem area for Marici: the high level of long-term debt which is of course leading to the high finance costs that are eating into profits. Gearing (long-term debt/equity) for the company is almost 59%. This is a highly-leveraged firm and Marici simply cannot afford to take on any more debt. But at least they are making some progress as gearing is down from 62% in 2014.

What we see in the current liabilities section of the balance sheet is that some of the long-term debt is being replaced with short-term borrowings, which have increased by F$527,000. Marici is likely to be charged a higher interest rate for short-term debt so some care should be taken there to ensure it doesn't rise much more.

Trade payables looks a little problematic for the company as it's increasing by quite a bit. You may ask why it's a bad thing? After all, isn't the company lagging cash payments to suppliers and improving it's cash conversion cycle (inventories + receivables - payables) in the process at a time when cash is short? That's true, but Marici needs to take care to retain good relations with what are very powerful suppliers. The payable days (payables/cost of materials x 365) figure has jumped from 74 days in 2014 to 81 days in 2015. The payables figure is catching up with the receivables figure and may soon cancel it out. Remember, we want to turn that high receivables figure into cash payment to improve the cash position for Marici, but what is the point if the outstanding payments to suppliers is more or less the same therefore cancelling out the cash gain?

All in all, Marici's balance sheet indicates to me that the company has endured a rough couple of years but is showing a slight improvement in its financial situation. Cash is too low, inventories are way too high and in danger of becoming obsolete, receivables and payables are almost cancelling each other out and should be lowered and debt levels are still high. The good news is that the company may well have turned a corner as all of those figures have improved in 2015 with the exception of payables. Having said that, the company needs to do even more to improve its liquidity position. We can see that the quick ratio (current assets - inventories/current liabilities) has actually declined from 1.4 in 2014 to 1.1 in 2015. This means the company has barely enough in the way of liquid assets to cover its immediate obligations.

Statement of Cash Flows 2015

When we analyse the cash flow statement we see that the cash generated from operations has improved very nicely between 2014 and 2015, indicating improved trading conditions for the year. Of course, the big interest payments on that large stock of debt and necessary capital outlays on Property, Plant and Equipment that are needed to keep up with competitors in such a high-tech industry, quickly burn through the cash generated from operations.

We commented on the increase in payables in the section on the statement of financial position. You can see the positive impact it has on the cash position but at what cost to supplier relations? To me the increasing payables and high debt implicate the company as one struggling to get by and pay their bills rather than it being a case of aggressively negotiating longer credit terms with suppliers voluntarily.

It's good that long-term debt has come down by F$1,342,000 even if it does eat into cash. But at the same time you see short-term borrowings go up by F$527,000 which goes some way to undoing the good work done on reducing debt levels.

All in all, the company is still on thin ice with its cash position but it is at least starting to move in the right direction. It remains to be seen if they can build on the upturn in trading demonstrated in 2015 although I have my doubts if they continue to rely on the Freeland market given the heavy cuts to subsidies announced by the government there.

I hope you found this financial analysis useful. Don't forget to check out our other OCS Nov16 articles here and here.

 

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