The analysis of financial position and profitability of agricultural and food manufacturing companies

Abstract

The analysis of financial position and profitability of companies is usually based on time and space comparison. The financial position is considered as status and relation between assets, liabilities and equity presented in the financial statement known as Balance Sheet. This financial statement is the source of basic financial position indicators such as: liquidity (acid test and current liquidity), financial stability, financial structure, interest coverage and solvency. Financial performance, i.e. profitability can be measured on the basis of Income Statement data, by using the indicators such as: revenues structure, profits (losses) and profitability ratios. In order to analyze financial position and profitability of agricultural and food producing companies in the Republic of Srpska, we have used the balance sheets and income statements of companies registered as legal entities from 2014-2018. The analysis covered 615 companies in average (330 companies in agricultural sector and 285 companies in food industry). Although among agricultural companies there are those who have good financial position, observing the whole sector as one entity, it is obvious that the majority of agricultural producers’ financial position is somewhere between acceptable and weak (acid test – 0.5 in average; financial stability indicator above 1.0; 70% of financial sources relates to debts; solvency - only 1.4 in average). Such, rather unacceptable financial position is also confirmed by profitability indicators which lead to conclusion that the agricultural sector in not successful regarding the ability to provide returns on total assets (ROA is 0% in average during the whole period). However, the returns on equity are a little bit better (ROE from 2-5%), but they can also indicate the low level of equity in large number of agricultural companies. Food industry is in a similar situation relating to the financial position – the financial position of the majority of companies is between acceptable and weak (acid test – 0.6 in average; financial stability indicator – 0.8 in average; 70% of financial sources relates to debts; solvency - only 1.5 in average). However, their profitability indicators are much better than those of agricultural sector. Return on assets (ROA) was from 1-3%, while return on equity (ROE) varied between 7% and 11%. Nevertheless, the variations between individual companies are significant. Therefore some companies have extremely good indicators of financial position and profitability, while the majority of companies are not the position to achieve such results.