yanbu cement company

Yanbu Cement Company 1

YANBU CEMENT COMPANY

Bashier Abdulsalam as

A team work

commercial bank management

4th January, 2015


TABLE OF CONTENTS

1. Purpose of the project................................................................................................................ 3

1.1. Details about the loan application ........................................................................................ 3

3. Financial Statement Review:...................................................................................................... 6

3.1. Balance Sheet:.................................................................................................................... 6

3.2. Income Statement ............................................................................................................... 9

4. Financial Ratio Analysis .......................................................................................................... 13

1. Business Customer’s Control over Expenses: ........................................................................ 13

2. Operating Efficiency ........................................................................................................... 14

3. Marketability of Customer’s Products or Services: ................................................................ 15

4. Coverage Ratios: ................................................................................................................. 16

4. Liquidity Ratios: ................................................................................................................. 17

5. Profitability Indicators: ........................................................................................................ 18

6. Financial Leverage Ratios:................................................................................................... 19

5. Loan Decision ........................................................................................................................ 21

6. Conclusion ............................................................................................................................. 21

REFERENCES........................................................................................................................... 22


1. Purpose of the project

The project is part of the Commercial Bank Management II Module wherein the

students will be able to apply the course learning into evaluating a loan application. It is

aimed at providing students a first-hand experience of evaluating a loan application based on

the financial statements provided by a company. Through the use of relevant ratio analysis,

the student will carry out thorough due diligence of the financial records to assess the

viability of extending credit the company.

As an outcome of the project, the students will be able to decide on whether the

company can be extended a line of credit for expansion purposes in order to increase its

market presence and sales. Yanbu Cement Company is the chosen company for the project,

the last 3 years (2013, 2012 and 2011) audited financial statements will be analysed for the

purposes of arriving at the loan decision.

1.1. Details about the loan application

Yanbu Cement Company is seeking a loan for SR75, 000,000 from “A Bank”. The

credit is required for a period of 18 months from the date it is approved; in other words,

Yanbu Cement Company will pay the principal loan amount of SR75, 000,000 and the

accumulated interest of SR380, 000 in stipulated instalments to the bank by the end of the 18

month period (YCC, 2013).

Yanbu Cement Company has a loan with another bank that will be paid off at the end

of the current fiscal year, the amount of SR15, 000,000 was taken for a period of 15 years.

Yanbu Cement Company needs to pay back to the concerned bank SR15, 380,000 at the end f

the maturity of 15 years. This will cover the principal amount and long term debt of

instalments (YCC, 2013).


2. Introduction of Company

Yanbu Cement Company (YCC as it will be referred hereafter) was established in

1977 about 70 kilometre north-west from the sea port of Yanbu Al Bahr in the Western

region of Saudi Arabia. It started commercial operations in 1979, two years after being

commissioned. The company has expanded its production capacity from the time it was

established of 3000 tonnes clinker per year to 3.8 million tonnes clinker installed capacity

serving the markets of the Western region of Saudi Arabia. The company is amongst one of

the largest ISO 9002 certified cement company in the Kingdom. In addition to this, the

company is ranked within the top 50 companies in the country. The board members are HRH

Prince Mishaal bin Abdul-Aziz Al-Saud, Deputy Chairman Suliman Al-Rajhi, Executive

Board Member Abdul-Raouf AbouZinada and Director General, Dr. Ahmed Zugail (YCC,

2013).

The company is the largest cement producer in the Western region of the country and

is the 4th largest in the Kingdom with a market share of 12% local dispatches. The expansion

projects of YCC have enabled it to meet increasing market demand and its operating at a 85-

100% capacity utilization. The company is also exploring options to refurbish its old plants

and this will provide it additional milling lines at much lower costs (YCC, 2013).

The company has been very adaptive in expanding its production capacity based on

the market demands. Saudi Arabia has witnessed an economic boom. There are nearly SR33

billion worth of projects that have been commission to meet the development needs of the

country, there is a huge demand for cement for these projects. In addition to this, the country

has also embarked on the expansion of the Holy Mosque in Makkah over a period of 5 years

that will require a steady stream of cement supplies (Husein, 2013).


The company has a paid up capital of SR1.575 billion and operates with a net profit of

SR821 million in the financial year ending 2013. There is no change in its paid up capital

based on its Q3 2014 interim reports that were published on Tadawul. For the period of

9months ending 2014 compared to 2013, its gross profits has dropped from SR714 million to

SR643 million that is due to a drop in sales and this has led to a drop in net income from

SR661 million to SR 609 million; however for the 3month period ending September 14

versus 13, its performance has been better in terms of improving its bottom line profit. Its

gross profits went up from SR156 million to SR181 million, its net income went up from

SR139 million to SR162 million, despite a net sales drop. This indicates that its operating

efficiencies are increasing and it is making better returns on assets (YCC, 2014).

Figure 1: Net Income Statement for YCC

Source: http://www.bloomberg.com/quote/YNCCO:AB

http://www.bloomberg.com/quote/YNCCO:AB


3. Financial Statement Review:

3.1. Balance Sheet:

The financial statements that are the balance sheet and income statement are the most

important statements that can reveal the performance of the company. One can just look at

the total assets and liabilities and their performance.

Reviewing the asset base of the company, there has been a slight decline in the total

assets in 2013 and this has been due to sales and non-commissioning of old lines. The

reduction has resulted in a slight drop in net sales but the company has improved its net

income from the sale of the asset.

Figure 2: Current and Total Assets

Upon reviewing the total liabilities of YCC, it is observed that the company that

liabilities of YCC has dropped significantly from SR1.68 billion in 2011 to SR0.99 billion in

2013. This implies that the company is self-sufficiency in its performance has improved

significantly. This has resulted in a reduction of its total base of liabilities and equity, as

Equity has remained constant in 2013 over 2012. It can be observed that the company is


reducing its reliance on external debt to finance its operations, and this is a positive sign as

the overall net profit from this strategy should improve in the long run.

Figure 3: Liabilities and Current Liabilities


Table 1: Balance Sheet:


3.2. Income Statement

The income statement provides information about the regular business expenses and

the also reflects the revenue. It also provides information about the cost of goods sold, the

administrative expenses and all other miscellaneous expense and income. The most important

thing to look at is the organizational sales revenue

The statement reveal that the sales of YCC has been growing steadily, there was a

huge increase from 2011 to 2012 of 32%, but a relatively smaller increase in sales from 2012

to 2013 of 9%.

Figure 4: Sales Revenue

In reviewing the cost of goods sold, there is an increase and that is in relation to sales

but on further review, it is evident that the cost of goods sold as a percentage of total sales is

reducing. This means that the company is reducing costs. From 51% COGS to Sales in 2011,

it has dropped to 45% in 2013 and this is a good progress.

Figure 4: Cost of Goods Sold


The total expenses have also been increasing, this is logical as the company’s sales in

increasing. It is vital to understand the reason for the increase in expenses, and when they are

reviewed against the sales, it is observed that they have gone up slightly from 2.8% as Total

Expenses to Sales in 2011 to 3.1% in 2013. The reason for its increase is the increase in

financial charges in 2012 and 2012 over 2011.

Figure 5: Total Expenses


In order to really understand whether the company is performing well, it is important

to review the net income. There has been a significant growth on the net income of YCC. It

has grown 88% in 2013 over 2012 as compared to 73% in 2012 over 2011.

Figure 6: Net Income


Table 2: Income Statement

SAR (M) % SAR (M) % SAR (M) %

1,620.30 1,496.50 1,132.30

1,620.30 100% 1,496.50 100% 1,132.30 100%

735.5 45% 705.2 47% 577.5 51%

884.8 55% 791.3 53% 554.7 49%

37.8 2% 33.8 2% 30.4 3%

37.8 2% 33.8 2% 30.4 3%

847 52% 757.5 51% 524.3 46%

-12.6 -1% -11.9 -1% -0.3 0%

-12.6 -1% -11.9 -1% -0.3 0%

0.2 0% 0.6 0% 0.9 0%

6.9 0% 2.4 0% 29 3%

841.5 52% 748.7 50% 553.8 49%

0.1 0% 0.6 0%

0.9 0%

0.9 0%

841.6 52% 750.2 50% 553.9 49%

16.4 1% 24.5 2% 19.2 2%

-3.9 0% -5.2 0% -5.4 0%

825.2 51% 725.7 48% 534.7 47%

821.3 51% 720.5 48% 529.3 47%

821.3 51% 720.5 48% 529.3 47%

All Values in SR Millions31/Dec/13 31/Dec/12 31/Dec/11

NET INCOME

NET INCOME TO COMMON EXCLUDING EXTRA

Other Unusual Items, Total

Insurance Settlements

EBT, INCLUDING UNUSUAL ITEMS

Zakat

Minority Interest in Earnings

Earnings from Continuing Operations

Interest Expense

NET INTEREST EXPENSE

Currency Exchange Gains (Loss)

Other Non-Operating Income (Expenses)

EBT, EXCLUDING UNUSUAL ITEMS

Gain (Loss) on Sale of Assets

TOTAL REVENUES

Cost of Goods Sold

GROSS PROFIT

Selling General & Admin Expenses, Total

OTHER OPERATING EXPENSES, TOTAL

OPERATING INCOME

Revenues


4. Financial Ratio Analysis

The loan officer will carry out a detailed analysis of YCC financial performance

based on the 7 main ratio classes. The ratios will reveal the financial health and performance.

1. Business Customer’s Control over Expenses:

Three ratios will be used to understand how well YCC manages its expenses, how

effectively YCC is able to manage its expenses vis-à-vis its earnings. This test will also cover

how the expenses are covered from its source of revenues, are the going up or down. Another

test is how well the business covers its financing expenses; this is vital information for the

loan officer.

I) Cost of Goods Sold / Sales: Looking at the data from 2011 to 2013, a 3 year period, the

cost of goods sold is going down progressively. This is a good sign that YCC is managing its

cost of goods effectively, implying that its performance is improving.

II) Selling, Administrative, Other Exp / Sales: Over a 3 year period from 2011 to 2013, the

expenses are declining as a percentage of sales. It was stagnant in 2012 to 2013, but overall

it’s performing well in managing its expenses.

III) Interest Expense / Sales: YCC has increased its financing cost as it took a loan in 2012,

however, from 2012 to 2013, its cost is going down, this implies that its covering its

financing costs effectively, its revenues can cover the cost of financing effectively.

Expense Ratios 2013 2012 2011 Trend

Impact on

Performance


Cost of Goods Sold / Sales 45.4% 47.1% 50.9% Positive

Selling, Administrative, Other

Exp / Sales 2.3% 2.3% 2.7% Positive

Interest Expense / Sales 0.78% 0.79% 0.03% Positive

Table 3: Expense Ratio

2. Operating Efficiency

How well is YCC managing its operations is analysed through the operating ratios by

the loan officer of the bank. Three different ratios will be used to analyse the operational

YCC

I) Annual COGS / Average Inventory or Inventory T/O Ratio: The inventory turnover

ratio is used to understand how many times YCC is able to turn around its inventory. It’s a

mixed performance, as there was a significant increase from 2011 to 2012 and that was

positive; however YCC inventory turnover ratio dropped versus its 2012 and even dropped

lower than its 2011 ratio. This is not a positive sign as it implies that a lot of capital is tied up

in inventory. It can also send a wrong signal of a poor demand for its products, thus the loan

officer can ask for further clarification on the subject. Maybe the firm increased its output

from its capacity increase, its sales increased and thus it was required to keep more inventory

levels.

II) Net Sales / Total Assets: The turnover of total assets is going up over the 3 year period,

and this is a very positive sign. YCC is using its assets better and better over the 3 year period

in the business. This means that its investment in capacity expansion is being utilized. The

impact of effective utilization of assets and its increasing trend has a positive impact on the

performance.


III) Net Sales / Fixed Assets: The turnover of fixed assets is also increasing and this measure

is a reflection of how effectively the firm is using its fixed assets to generate sales revenue.

The fixed assets are essentially the land, plant and machinery.

Efficiency Ratio 2013 2012 2011 Trend

Impact on

Performance

Annual COGS / Average

Inventory

1.53X

2.18X

1.89X Negative

Net Sales / Total Assets

0.38X

0.32X

0.25X

Positive

Net Sales / Fixed Assets

0.49X

0.44X

0.32X Positive

Table 4: Efficiency Ratio

3. Marketability of Customer’s Products or Services:

The marketability ratios determine how effectively YCC is able to manage its total

cost of goods sold. It provides information about the bottom line of the company. There are

two ratios that are used to determine this

I) Gross Profit Margin (Net Sales – COGS) / Net Sales: The gross margin percentage has

been going up, the loan officer can infer that the company is increasing its sales and at the

same time it is improving the cost of goods sold, meaning that it is controlling the cost of the

gods sold effectively. From 49% in 2011, it has improved it to 55% in 2013. The impact on

the performance of the company is positive.


II) Net Profit Margin: Net Income after Tax / Net Sales: The net profit margin is a

measure of the actual revenues that YCC has left after meeting all is operating expenses

including financing costs. From 2011, it can be observed that YCC has improved from 47%

in 2011, 48% in 2012 and 51% in 2013. As a loan officer, this is positive performance by

YCC management in improving the overall efficiency of the company.

Marketability Ratio 2013 2012 2011 Trend Impact on

Performance

Gross Profit Margin (Net

Sales – COGS) / Net Sales 55% 53% 49% Positive

Net Profit Margin: Net

Income after Tax / Net Sales 51% 48% 47% Positive

Table 5: Marketability Ratio

4. Coverage Ratios:

The coverage ratio provides the loan officer information regarding how effectively

YCC covers its creditors; i.e. institutions that extend credit to the organization. It measures

the financial ability of the organization to cover its financing costs.

I) Interest Coverage: Income before int. & taxes / Interest Payments: In 2011, YCC

didn’t have any significant liability, the organization took a loan in 2012 and that is why the

coverage dropped significantly in 2012 over 2011. In 2013, the trend is declining and this is

positive sign of YCC ability to cover its credits costs.

Coverage Ratios: 2013 2012 2011 Trend

Impact on

Performance


Interest Coverage: EBIT /

Interest Payments

66X 63X 1855X Positive

Table 6: Coverage Ratio

4. Liquidity Ratios:

Liquidity ratios reveal how well the organization is managing it assets for achieving

the objectives of the company. There are 3 different ratios that the loan officer can use to

determine whether YCC is utilizing its assets effectively in business operations.

I) Current Ratio: Current Assets / Current Liabilities:

Current ratio measures how effectively YCC covers its short term liabilities like the debts and

trade payables through its own short term assets like cash on hand, finished goods inventory

and trade receivables. It is observed that YCC is able to meet its current liabilities with its

current assets. Over the last 3 years, it was increasing from 2011 to 2012 but it declined in

2013, however, it is still better than 2011. It was 1.79X in 2011, it increased to 2.40X in 2012

and slightly dropped to 1.95X in 2013 and this was still better than its 2011 coverage. The

impact is positive on the performance of YCC. Anything below 1 is a cause of concern for a

business, as it is closer to 2, it reflects a healthy business performance.

II) Acid Test Ratio: Current Assets – Inventory / Current Liabilities: The difference

between current ratio and acid test ratio is the exclusion of inventories in current assets often

companies rely heavily on their inventories to cover their current liabilities and this can be

deduced from the difference gap between working capital ratio and acid test ratio. If the ratio

is closer to one, it means that without inventories, the current liabilities just cover the current

liabilities. It was better in 2011 and has steadily declined. As far as it is above 1, it is still a

positive sign.


III) Net Working Capital: Current Assets – Current Liabilities: It is apparent from the

net working capital that YCC has enough funds to cover its working capital requirements. It

has been growing from 2011 but spiked in 2012. The 2013 value of 504SRM is still greater

than its 2011 and thus is positive sign.

Table 7: Liquidity Ratios

Liquidity Ratios: 2013 2012 2011 Trend

Impact on

Performance

Current Assets / Current

Liabilities 1.95X 2.40X 1.79X Positive

Current Assets – Inventory /

Current Liabilities

1.04X 1.80X 1.27X Negative

Net Working Capital: Current

Assets – Current Liabilities

504.05 758.32 465.89 Positive

5. Profitability Indicators:

The profitability ratios are used to determine whether the business is profitable or not,

it looks at its earnings before tax and after tax. Tax in Saudi Arabia refers to Zakat. There are

2 ratios that will be used to determine the profitability of the business.

I) Before Tax Net Income / Total Assets, Net Worth or Total Sales: The pre-tax return on

net worth is an indication of profit before tax against its total net equity. The trend is going up

from 2011 to 2013. This indicates a positive performance of YCC by its management

II) After Tax Net Income / Total Sales: The Return of YCC of its net earnings as a ratio of

its total sales is going up. The company is making more money from 2011 to 2013 where it


has increased from 46.7% to 50.7%, this is a strong performance where it has improved its

performance by 4% points in just 3 years.

Table 8: Profit Ratios

Profit Ratios 2013 2012 2011 Trend Impact on

Performance

Before tax net income / Net

Equity

25.4% 22.5% 19.3% Positive

After tax net income / Total

Assets 19.0% 15.3% 11.6% Positive

After tax net income / Total

Sales 50.7% 48.1% 46.7% Positive

6. Financial Leverage Ratios:

The financial leverage ratios will determine the financial leverage of YCC through the

use of 3 different ratios. Leverage ratios aim at determining how the business is using its

credit policies and debt to manage its assets.

I) Leverage Ratio: Total Liabilities / Total Assets: The leverage ratio is indicative of YCC

reducing its dependency on liabilities and debt. The declining trend is an indication that YCC

is reducing its liabilities depending on the assets. This is a positive sign for the loan officer as

it reflects the ability of the firm to adhere to their commitment to pay back their long term

financial commitments.

II) Debt Equity: Total Liabilities / Net Equity: When there is a high debt equity ratio, it

implies that the business is heavily reliance on debt to finance its operations. For YCC, it has


dropped by nearly half from 0.59X in 2011 to 0.30X in 2013. This is a significant

improvement of the business reliance on debt and a good sign of an improvement in

performance.

III) Debt to Sales Ratio: Total Liabilities / Net Sales: Debt to sales ratio of YCC for the

past 3 years has been declining this is positive sign and reflects that YCC is not depending on

its debt to finance its sales. It was a high 148% in 2011and dropped to 91% in 2012 and in

2013 its only 62%. This is a strong indicator of a good performance of YCC and reflects that

its debts are covered significantly by the sales of the company.

Leverage Ratio 2013 2012 2011 Trend Impact on

Performance

Leverage Ratio: Total

Liabilities / Total Assets

23.1% 29.0% 36.9% Positive

Total liabilities/Net Equity 0.30X 0.41X 0.59X Positive

Debt to Sales Ratio: Total

Liabilities / Net Sales

61.6% 91.1% 148.8% Positive

Table 9: Leverage Ratios


5. Loan Decision

Based on the financial statements submitted by YCC for the preceding 3 years and a

detailed ratio analysis, YCC has a strong base. It has progressively increased its capacity to

meet market demands and thus maintained its market presence. It is the 4 th largest cement

producer in the country. The company ratio analysis has reveal that YCC will not have any

challenges paying back its loan once it is issued; it has the ability of covering all its interests

that will be due on the loan amount as well. Thus the decision is to grant YCC the loan.

6. Conclusion

The course and projected has enables us to review a company’s financial statement in

detail through relevant ratio analysis that reveal information that is not evident in the

financial statements. The ratios that are used to carry out the due diligence are based on

different parameters and also reveal information about different aspects of the business. In

addition to looking at the ratios, it is also advised to look at the performance of the company

in its industry and the economy overall as this will give an insight on the long term success of

the firm and thus can provide loan officers in banks to take the most correct decision on

whether to extend credit to a firm or not. Often business depend on external finances thus

exposing them volatility in the face of changing market conditions, ratios are able to reveal


how well a company has financed its operations and whether it has the ability to cover its

commitments to its stakeholders.

REFERENCES

Husein, A. (2013). Construction and projects in Saudi Arabia: Overview. Retrieved January

1, 2015, from www.practicallaw.com/construction-mjg

YCC. (2014). Financials - Q3-2014. Retrieved December 30, 2014, from

http://www.yanbucement.com/financials.html

YCC. (2013). Yanbu Cement Company Profile. Retrieved December 28, 2014, from

http://www.yanbucement.com/profile.html

yanbu cement company

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