An Analysis of Uchumi Supermarkets’ Financial Ratios

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alysis of Analysis of Analysis of Analysis of Analysis of Analysis of Analysis of Analysis of Financial RatiosFinancial RatiosFinancial RatiosFinancial Ratios Financial Ratios Financial RatiosFinancial RatiosFinancial Ratios Financial Ratios - Uchumi Supermarkets Uchumi Supermarkets Uchumi Supermarkets Uchumi Supermarkets Uchumi Supermarkets Uchumi Supermarkets Uchumi Supermarkets Uchumi Supermarkets Uchumi Supermarkets Uchumi Supermarkets Financial Ratios are relative magnitudes of select numeric items of a company’s financial statements. The assessment of the operating performance of a company is based on five main types of ratios. These are liquidity, gearing or solvency, activity, profitability and investor ratios. Profitability ratios include margins and return on investments or resources. In addition to the financial statements or annual reports, the analysis uses information from management notes, auditor reports, and pertinent macro-level or industrial-level analysis and legislation or policies. An understanding of the financial health of a company draws from a combination of the ratios (not assessed in isolation) and the qualitative information available. Uchumi Supermarkets

Uchumi, Kenya’s only publicly listed retail chain, was incorporated in 1975 with the main objective of facilitating in the equitable distribution of essential and locally produced commodities at affordable prices in the country. In a quest to meet this objective, in the early 2000s the company undertook an ambitious countrywide and regional expansion. During the same period it began to experience financial and operational difficulties. This was later associated with its decision on the expansion method and weak internal controls. As a result, the company was put under receivership in 2006, suspended from the Nairobi Stock Exchange (NSE) and work started to restore it. Five years later, the company has been removed from receivership (in 2010) and relisted on the NSE (in 2011) with the today’s average market share price at KES 7.30. Financial Ratios

The 2004 financial statements of the company indicate that the company was experiencing difficulties. In retrospect, the company eventually went into receivership in 2004. Below are computations on some of the aforementioned key groups of financial ratios of the company and notes on how they reflect on the perceived difficulties as at the time. Table 1 uses values from table 2. Table 2 reflects the provided financial reports. MBA 8101 Assignment: Financial Ratios - Uchumi Supermarkets 3 Table 1 Uchumi Supermarkets Computed Ratios and Percentages Ratio/Percentage Type Formula (Ref Tbl 2) Year Notes 2004 2003 2002 2001 2000 A.

Liquidity Ratios Ability to meet short-term obligations using easily cash convertible assets. IDEAL = 1 : 1 or > 1 These are decreasing with time and moving from the desired 1:1 to 1.6 ratios for retail companies where cash sales are the norm. This suggests the inability of the company to meet its current liabilities on demand, without affecting its non-current assets. Not good. 1

Current Ratio
CA / CL
0.52
0.58
0.72
0.98
1.17
2
Acid Test Ratio
(CA - Stk)/CL
0.17
0.11
0.19
0.28
0.43
3
Cash Ratio
(Cash + SFA) / CL
0.03
0.04
0.07
0.12
0.35
B.
Gearing Ratios Ability to meets short and long term maturing obligations plus how much financial risk taken or level of reliance on debt financing. These are increasing with time. The higher the ratio the better but too much may mean an over-dependency on external funds. High gearing is also not good when interest rates are high or the company profitability is falling. The negative interest coverage values are due to the making of losses. The negative means there's no coverage at all irrespective of the number. Overall, not good. 1

Debt Ratio
TL / TA
0.97
0.80
0.63
0.52
0.56
2
Debt Equity
TL / TE
28.68
3.94
1.74
1.08
1.28
3
Interest Coverage
EBIT / AIE
(26.96)
(3.26)
26.67
n/a
n/a
C.
a....
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