Accra, Ghana, July 7, 2019//-Ghana’s Cocoa Processing Company Limited (CPC) is in steep financial trouble making it difficult to generate revenue to sustain its operations in the country.
This sorry state of the once major processor of the country’s cocoa beans into semi-finished and finished cocoa products is revealed by analysis conducted on the financial performance of the company spanning from a five-year period (2013-2017).
WEAKNESSES
Profitability
The annual income statements of CPC when benchmarked against Produce Buying Company Limited (PBC), a key buyer of cocoa beans from farmers, reveal that the former is not profitable.
The CPC’s return on assets (ROA) which is an indicator of how profitable the company is relative to its total assets is very low.
Its ROA has shown that the managers of the company are not using the assets efficiently in trusted in their care to generate earnings.
Also, the income statements of PBC for the period under review indicated that it recorded a higher ROA, while CPC recorded lower ROA.
Table (A) below is the profitability ratios of CPC and PBC for the past five years:
CPC (2017) PBC (2017)
- (a) Return on asset 2.84% (a) Return on asset 50.54%
- (b) Return on equity 0.11% (b) Return on equity 21.63%
- (c) Asset turnover 0.11 times (c) Asset turnover 3.53 times
CPC (2016) PBC (2016)
- (a) Return on asset -1.36% (a) Return on asset 67.95%
- (b) Return on equity 0.15% (b) Return on equity 448.02%
- (c) Asset turnover 0.10 times (c) Asset turnover 4.08 times
CPC (2015) PBC (2015)
- (a) Return on asset 3.33% (a) Return on asset 58.94%
- (b) Return on equity 0.25% (b) Return on equity 27.17%
- (c) Asset turnover 0.20 times (c) Asset turnover 3.44 times
CPC (2014) PBC (2014)
- (a) Return on asset 2.94% (a) Return on asset 51.57%
- (b) Return on equity 0.26% (b) Return on equity 181.19%
- (c) Asset turnover 0.25 times (c) Asset turnover 3.41 times
CPC (2013) PBC (2013)
- (a) Return on asset 2.18% (a) Return on asset 50.23%
- (b) Return on equity 0.16% (b) Return on equity 16.27%
- (c) Asset turnover 0.37 times (c) Asset turnover 3.43 times
The above table further illustrates that PBC utilizes its assets very well as its ROA for the five year period lays out how profitable the company is relative to its total assets. CPC on the other hand, is in sharp crisis as shown by the company’s ROA data.
Similarly, the company’s return on equity (ROE) which is considered a measure of how effectively management is using a company’s assets to create profits is also disappointing.
CPC’s ROE figures are terribly low but its peer PBC has been posting significant growth in its ROE figures.
Additionally, PBC’s asset turnover ratio which measures the value of the company’s sales or revenues relative to the value of its assets is high, meaning that it is more efficient.
However, the asset turnover ratio of CPC is low, indicating that the company is not adding value to the assets in its disposal to generate revenues.
Liquidity
Liquidity is another weakness of the CPC. The company’s ability to use its current assets to meet its current or short-term liabilities is wobbling. CPC’s cash flow from its activities is too small making it difficult to expand and pay dividends to its shareholders.
The company’s current ratio also known as working capital ratio which measures the liquidity of its when it is divided by its current assets and current liabilities, indicated that CPC is illiquid.
For instance in 2017, the company’s current ratio dropped to 0.81 from 0.85 days in the previous year, depicting that its short-term assets or liabilities were consumed (assets) and paid off (liabilities) in less than 0.81 days within the year.
The current ratio is used to provide a company’s ability to pay back its liabilities (debt and accounts payable accounts) with its assets (cash, marketable securities, inventory, and accounts receivables).
Industry standards vary, but a company should ideally have a ratio greater than 1, meaning they have more current assets to current liabilities.
But when compare CPC’s current ratios to PBC which is also operating within the cocoa industry, show significant variations.
CPC’s quick ratio fell to 0.81 in 2017 as against 0.83 in 2016, while PBC recoded quick ratios of 0.45 and 0.50 in 2017 and 2016 respectively. (See data below).
The quick ratio sometimes called the acid-test ratio is identical to the current ratio, except the ratio excludes inventory. The inventory is removed because it is the most difficult to convert to cash when compared to the other current assets like cash, short-term investments, and accounts receivable.
In other words, inventory is not as liquid as the other current assets. A ratio value of greater than one is typically considered good from a liquidity standpoint, but this is industry dependent. So, the quick ratio of CPC is too weak.
In fact, liquidity risk which is the risk that the company (CPC) would either not have sufficient resources available to meet all its obligations and commitments as they fall due or can access them only at excess cost, according to the financial statement of CPC.
Table (B) shows liquidity of CPC and PBC below:
CPC (2017) PBC (2017)
- (a) Current ratio 0.81 (a) Current ratio 0.50
- (b) Quick ratio 0.81 (b) Quick ratio 0.46
CPC (2016) PBC (2016)
- (a) Current ratio 0.85 (a) Current ratio 0.51
- (b) Quick ratio 0.83 (b) Quick ratio 0.50
CPC (2015) PBC (2015)
- (a) Current ratio 0.91 (a) Current ratio 0.66
- (b) Quick ratio 9.13 (b) Quick ratio 0.65
CPC (2014) PBC (2014)
- (a) Current ratio 1.09 (a) Current ratio 0.66
- (b) Quick ratio 1.04 (b) Quick ratio 0.59
CPC (2013) PBC (2013)
- (a) Current ratio 0.40 (a) Current ratio 0.81
- (b) Quick ratio is 0.29 (b) Quick ratio is 0.43
Activity
The CPC’s ability to sustain its business depends on how it converts different accounts within its balance sheet into cash or sales. The activity ratios which measure the relative efficiency of CPC based on its use of its assets, leverage, or other similar balance sheet items are not encouraging.
The activity ratios reveal that company’s management is doing little job at generating revenues and cash from its resources.
Apart from 2017 in which CPC made a significant inventory turnover of 346.30, it has been recording lower inventory turnover for the past four years.
The low turnover recoded by CPC from 2016-2013 could attribute to weak sales and possibly excess inventory, also known as overstocking. It may also indicate a problem with the chocolate products offered for sale at that time or be a result of too little marketing.
A high inventory turnover ratio implies either strong sales or insufficient inventory. The former is desirable while the latter could lead to lost business.
But, sometimes a low inventory turnover rate is a good, such as when prices are expected to rise (inventory pre-positioned to meet fast-rising demand) or when shortages are anticipated.
The speed at which a company can sell inventory is a critical measure of business performance.
Table (C) illustrates activity of both CPC and PBC:
CPC (2017) PBC (2017)
Rate of Inventory/Stock turnover 346.30 26.37
CPC (2016) PBC (2016)
Rate of Inventory/ Stock turnover 6.96 27.12
CPC (2015) PBC (2015)
Rate of Inventory/ Stock turnover 6.29 21.96
CPC (2014) PBC (2014)
Rate of Inventory or Stock turnover 5.32 29.55
CPC (2013) PBC (2013)
Rate of Inventory/Stock turnover 6.53 17.76
Market/investment
However, the income statements of CPC and PBC did not capture dividends and earnings per share (ESP) in their annual financial statements.
The boards of directors of the companies did not recommend the payment of dividends which are the distribution of reward from portions of companies’ earnings to their shareholders.
“The directors cannot recommend the payment of a dividend whilst there remains a deficit balance on the earnings (Income Surplus) account”, the 2017 financial statement said.
Similarly, their earnings per share (EPS) have not been recorded. EPS calculated as a company’s profit divided by the outstanding shares of its common stock.
The resulting number serves as an indicator of a company’s profitability. The non-capturing of dividends and EPS in the financial statement reports means that CPS is in serious financial problem.
It stated: “The calculation of basic and diluted earnings per share at 30th September 2017 was based on the loss attributed to ordinary shareholders of US$7,383,759 (2016:2,038,074,176)”.
Economy
The CPC’s weak performance for the past five years can be partly attributed to slow growth of the Ghanaian economy
Ghana achieved a record high growth of 15% in 2011, but this could not be sustained in the subsequent years. The country’s growth has, however, been consistently above the average (median) for the sub–Saharan Africa region.
In 2013, Ghana’s growth rate was 5.4%, against the target of 8.8% (IMF, 2014a; GSS, 2014) and much lower than the rate in 2011, or even the 7.9% rate in 2012.
After two years of sluggish growth from 2014 to 2016, real GDP growth recovered to 8.5% in 2017 and was estimated to be 6.2% in 2018, driven mainly by the oil sector.
Political interference
The Ghana Cocoa Board (COCOBOD) and the Government of Ghana through the Ministry of Finance currently hold 83.86% whilst various institutions and individuals hold the rest of the 16.14%.
PBC on the other hand, is controlled by Social Security & National Insurance Trust (SSNIT) and the Government of Ghana through the Ministry of Finance. They both currently hold about 75% whilst various institutions and individuals hold the rest of the 25%.
One cannot say that the two companies are free from political interference. So, the government of day would have hands in the day-to-day activities of the CPC and PBC.
It is vital to add that the board chairmen of the boards are always appointed by the government.
From 2013 to 2017, the companies’ boards of directors have been changed two times from the previous government to the current one.
Coupled with this, the programmes and strategies of these boards can be altered when there is a political change. That explains why political interference and political is one of the weaknesses of CPC.
Low consumption of chocolates
Over decades, the consumption of locally made chocolate remains low in spite of efforts aiming at improving the consumption. One such effort is the annual celebration of the National Chocolate Day on Valentine’s Day (14th February).
Ghanaians consume only 400 grams of chocolate daily compared other developed countries that consume twice the number, according to figures from the CPC.
Therefore, the local chocolate market is experiencing low patronage compared to higher consumption of imported chocolate.
Ghana imported US$45 million worth of chocolate into the country in 2017 while the tones of chocolates produced by the CPC left un-patronage. CPC produces 2000 metric tonnes of chocolate annually.
However, it is faced with numerous challenges including the use obsolete machines and lack of space, capital and modern technology to take advantage of the US$103.28 billion global chocolate market.
STRENGTHS
Support from COCOBOD and government
COCOBOD has undertaken to provide CPC with continuous supply of cocoa beans to meet its operational demand and will not demand payments of amounts due it in a manner that would jeopardize the operations of the company.
Additionally, government’s favourable posture towards industrialization and value addition to cocoa is one of the strengths of the CPC.
For instance recently, Ghana’s Minister of Trade and Industry, Alan Kyeremanten announced that government was looking at CPC to more cocoa beans into chocolates and other products in the country.
This he explained would enable Ghana to move from its current 40% cocoa value addition to at least to 50% within the next two years.
Product diversification
Unlike its competitors which focus on chocolate productions, CPC has diversified into the production of several products.
Its strong diversification drive has led to the processing of cocoa beans into semi-finished products, such as cocoa liquor, cocoa butter, cocoa cake, and cocoa powder.
These semi-finished products are used as ingredients for the production of chocolate and other cocoa-based food products for domestic and foreign markets.
The company sells these semi-finished products under Portem brand name to foreign markets, whilst its traditional chocolate confectionery-chocolate bars, chocolate spread, drinking chocolate, and chocolate dragees are sold under the brand name GoldenTree in Ghana and other parts of the world.
FINANCIAL PERFORMANCE AND POSITION
The CPC is going through serious financial challenges, while its PBC is making gains. Therefore, CPC’s financial position is too weak.
RECOMMENDATIONS
To address the weaknesses and improve the performance of the company, the management of CPC should adopt and implement some useful strategies to improve the efficiency and to reduce the weaknesses of the company.
The CPC should review the profitability on the various products it produces for sale on both local and for markets.
This review will enable the management to assess where prices can be increased or maintained to improve the profitability. As the CPC’s costs increase and markets change, prices may need to be adjusted as well.
The company should also pay its huge liabilities by doing away with its unproductive assets. After storing unproductive assets including buildings and equipment for years, it time for the management to get rid of them to generate revenue.
The CPC should increase its liquidity by adopting financial instruments including sweep accounts through it financial institutions to enable it earn interest on any excess cash balances by “sweeping” or transferring the funds into an interest-bearing account when the funds are not needed and sweeping them back to operating account for business activities.
Additionally, the management should reduce overhead costs in order to increase liquidity in a more comprehensive manner.
CONCLUSION
On the basis of the overall comprehensive analysis of the CPC, it indicated that the company is not doing well in this complex and competitive business environment.
Although the country is now enjoying stable economy which is likely to have positive impact on the company, it is still not a suitable investment for shareholders.
By Masahudu Ankiilu Kunateh, African Eye Report
Email: mk68008@gmail.com
