Kent Limmuel B.

Tan
2010 44012
BA 141 Final Examination (Working Capital Management)
Reference Company: Universal Robina Corporation (URC)
I. Examine the Working Capital composition for the past 3 years of the company you have invested in. Prepare a comparative
common size analysis of the working capital components and derive a conclusion with regards to any Working Capital policy
which you can see from your analysis (this may be hypothetical). List down your observations and make a comment on your
observations.
Working capital refers to the current assets which represent the portion of investment that circulates form one form to
another in the conduct of business. Usually this deals with the conversion of cash to inventories, then to receivables, then
back to cash itself and the cycle goes on. It is different to net working capital which is derived by getting the difference of
current asset and current liability.
Net Working capital is an indicator of the short-term financial health of the company. One of the most commonly used
ways to determine the success or failure of an entity is by looking and analyzing this ratio. It gives investors an idea of the
companys underlying operational efficiency and shows whether a company has enough short term assets to cover its short
term debts.
The net working capital ratio is calculated as:
Net Working Capital = Current Assets Current Liabilities
The working capital (current assets) of the Universal Robina Corporation (URC) for the past three years (2010-
2012) and a comparative common size analysis are as follows:
Current Assets 2012 % Compostion 2011 % Compostion 2010 % Compostion
Cash and Cash
equivalents 5,345,833,397 13.47% 4,546,881,527 11.54% 4,459,254,984 11.91%
Financial assets at fair
value through profit or
loss 10,812,402,265 27.24% 5,511,551,122 13.98% 10,022,605,224 26.78%
Available-for-sale
investments 4,797,876,621 12.09% 10,652,071,697 27.02% 6,748,394,466 18.03%
Receivables 7,461,032,915 18.80% 7,419,824,815 18.82% 6,550,949,865 17.50%
Inventories 9,759,334,152 24.59% 9,724,784,656 24.67% 7,888,923,770 21.08%
Biological assets 1,057,007,658 2.66% 911,265,129 2.31% 846,876,801 2.26%
Other current assets 454,142,702 1.14% 651,357,138 1.65% 908,713,064 2.43%
Total Current Assets 39,687,629,710 100.00% 39,417,736,084 100.00% 37,425,718,174 100.00%
Based on the table for the comparative common size analysis for current assets shown above, financial assets at fair
value through profit and loss comprised the largest percentage composition to the total current assets for the years 2012 and
2010 while in 2011, available for sale investments covered the largest percentage for current assets.
Inventories and receivables also take a great part of the percentage composition of current assets and is somewhat
consistent throughout the three-year period. These could be true since URC ventures as a manufacturing firm for both food
and commodity products and agro-industrial products and so, inventories and receivables were evident as among the
components with large percentages.
Cash and cash equivalents, on the other hand, also comprised a significant portion of the current assets composition
while biological assets and other current assets comprised a significantly less portion of the current assets.
As further analysis of the current asset compositions, it can be personally inferred that the compositions are due to
specializations of divisions in the company and with high regards given to some divisions. The Branded Consumer Foods
Group is the largest business and the key driver of growth and profitability and so, this could regard to a high percentage
composition of the inventory accounts.
It is composed of the Philippine, international and packaging businesses. In the Philippine BCFG, the main divisions
are Snack Foods, Beverages, Grocery (which include the joint ventures Nissin-URC and Hunts URC), Exports, and
Packaging. The greater composition of the inventory account could also be attributed to the division since it provide URC with
consistent supply of raw materials with regards to commodities.
For the other two divisions, the Agro-Industrial and Commodity Food Group, they were consistent for contributing with
the cash flows. The Agro-Industrial Group is composed of hog and poultry farms, branded feeds, and animal health products
while the Commodity Foods Group has both flour and sugar.
As we compare percentage composition differences of the current asset compositions for the three-year period and
determining the percentage increases for the three periods together with the over-all increase or decrease as shown below:
Current Assets
2012 (%
Compostion)
2011 (%
Compostion)
% Inc
(Dec)
2011 (%
Compostion)
2010 (%
Compostion)
% Inc
(Dec)
Overall %
Inc (Dec)
Cash and Cash
equivalents 13.47% 11.54% 1.93% 11.54% 11.91% -0.38% 1.55%
Financial assets at
fair value through
profit or loss 27.24% 13.98% 13.26% 13.98% 26.78%
-
12.80% 0.46%
Available-for-sale
investments 12.09% 27.02%
-
14.93% 27.02% 18.03% 8.99% -5.94%
Receivables 18.80% 18.82% -0.02% 18.82% 17.50% 1.32% 1.30%
Inventories 24.59% 24.67% -0.08% 24.67% 21.08% 3.59% 3.51%
Biological assets 2.66% 2.31% 0.35% 2.31% 2.26% 0.05% 0.40%
Other current
assets 1.14% 1.65% -0.51% 1.65% 2.43% -0.78% -1.28%
Total Current
Assets 100.00% 100.00% 100.00% 100.00%
It is shown that there is a decrease for financial assets at FV through profit or loss from 2010-2011 that brought about for the
available for sale investments, inventories and receivables to increase in percentage composition but increased with a higher
percentage by 2011-2012. In overall, it increased by 0.46%.
Furthermore, the other components of the current assets were in overall increasing especially receivables and inventories that
are part of the cash conversion cycle, cash also increased significantly. On contrary, there were overall decreases in some
components especially the available for sale investments and the other current assets.
Further evaluation of the composition of the current assets based on the notes on the financial statements, increase in cash
and cash equivalents was due to increase in cash in banks sourced from operating activities. While the significant decrease in
available-for-sale investments was primarily due to maturity of certain bond investments, net of increase in market values and
amortization of bond discount. The decrease in other current assets was due to decline in input taxes.
As a result, total current assets increased by 0.68% or P269 million from P39.42 billion in 2011 to P39.69 billion in 2012. An
overall, increase in the three-year period in the current assets will lead to an increase in net working capital, thereby reducing the risk
of insolvency.
Components of Net Working Capital:
2010 2011 2012
2010-2011
Percentage
Change
2011-2012
Percentage
Change
Current Assets 37,430,000,000 39,420,000,000 39,690,000,000 5.32% 0.68%
Current Liabilities 12,000,000,000 23,080,000,000 20,070,000,000 92.33% (13.04%)
Current Assets Current Liabilities Working Capital (CA
CL)
2010 37,430,000,000 12,000,000,000 25,430,000,000
2011 39,420,000,000 23,080,000,000 16,340,000,000
2012 39,690,000,000 20,070,000,000 19,620,000,000
II. Discover the Working Capital financing policy of the company (whether it is aggressive or conservative).
Show evidence of your findings and explain.
If the firm finances fixed assets and part of permanent current assets with long-term debt and equity, it means that it is
using the aggressive policy. The remaining part of permanent current assets and temporary current assets are financed by
short-term financing. The more aggressive the firm is, the more it will rely on short-term financing.
If the firm uses the conservative policy, short-term credit could be used to finance all current assets (both temporary
and permanent), and even to finance a portion of the fixed assets. This would make a firm very risky due to volatile short-
term interest rates & loan renewal problems. Here is the illustration of a conservative policy:
By looking at its positive working capitals for the past three years (P25,430,000,000 for 2010, P16,340,000,000 for
2011 and P19,620,000,000 for 2012), we can see that URC is using the conservative policy because the sum of its
current assets is greater than the total of its current liabilities.
III. List down the sources of current liabilities of your company for the past 3 years and classify them into the catergories as:
Spontaneous, Secured and Non-secured. Make a comparative analysis of these sources as to their percentage composition
and peso value magnitude. What conclusions can you draw from your listing and analysis? Explain.
The sources of the URCs current liabilities from 2010-2012 are its short term debt and the current portion of it long term
debt, its accounts payable, income tax payable and other current liabilities such as its dividends payable, accrued payroll and
miscellaneous current liabilities. Here are the amounts of each source for the last 3 years:
ST Debt & Current Portion LT Debt 5,120,000,000 13,960,000,000 12,050,000,000
Short Term Debt 5,110,000,000 5,750,000,000 12,050,000,000
Current Portion of Long Term Debt 7,400,000 8,210,000,000 -
Accounts Payable 4,070,000,000 4,750,000,000 5,210,000,000
Income Tax Payable 363,720,000 408,700,000 428,180,000
Other Current Liabilities 2,450,000,000 3,970,000,000 2,380,000,000
Dividends Payable 0 0 0
Accrued Payroll 0 0 0
Miscellaneous Current Liabilities 2,450,000,000 3,970,000,000 2,380,000,000
Total Current Liabilities 12,000,000,000 23,080,000,000 20,070,000,000
The spontaneous liabilities of the company are the Accounts Payable, Income Tax Payable, Dividends Payable, Accrued
Payroll and Miscellaneous Current Liabilities. The unsecured liabilities are the short-term debt and the current portion of the long-
term debt.
Spontaneous Liabilities (2012): 5,210,000,000 + 428,180,000 + 2,380,000,000 = 8,018,180,000.00
Unsecured Liabilities (2012): 12,050,000,000.00
Looking at the classifications of URCs current liabilities, we can see that URC has been focusing on its operating and
financing activities. To further prove the conclusion, here is URCs Comparative Statement of Cash Flows for the past 3 years:
The cash from operating activities comprises the largest amount and the cash from financing activities (if excluding the
dividends) shows a positive amount.
Percentage Composition of Current Liabilities:
The largest component of the total current liabilities is the short-term debt which means that the company is minimizing long-
term debts to avoid risks. That is why they have more unsecured short-term debts.
Short-term Debt
This account consists of:
2012 2011
US Dollar denominated loans - with interest rates
ranging from 0.65% to 1.45% in 2012 and
0.49% to 1.01% in 2011 P6,078,141,358 4,409,925,140
Philippine Peso denominated loan with interest rate
at 3.00% in 2012 1,000,000,000
Euro denominated loans - with interest rates ranging
from 0.41% to 0.57% in 2012 and 1.44% to
1.76% in 2011 523,168,875 720,498,759
Thai Baht denominated loans - with interest rates
ranging from and 3.30% to 3.85% in 2012 and
3.90% to 4.10% in 2011 803,161,391 391,364,325
Singaporean Dollar denominated loans - with
interest rates at 0.78% in 2012 and 0.45% in
2011 184,065,260 189,830,928
Vietnam Dong denominated loans with interest rate
at 4.35% in 2011 38,013,483
P8,588,536,884 P5,749,632,635
Interest is based on prevailing market rates. Accrued interest payable on the Groups short-term debt (included under Accounts payable and
other accrued liabilities in the consolidated statements of financial position) amounted to P10.8 million and P5.1 million as of September 30,
2012 and 2011, respectively. Interest expense from the short-term debt amounted to P431.5 million, P58.8 million and P54.7 million in 2012,
2011 and 2010, respectively
Accounts Payable and Other Accrued Liabilities
This account consists of:
2012 2011
Trade payables P5,205,697,374 4,753,740,196
Accrued expenses 1,457,090,391 1,544,764,922
Due to related parties 284,599,807 335,279,536
Customers deposits 207,167,134 244,869,140
Advances from stockholders 218,904,217 223,218,179
Derivative liabilities 4,680,533 24,387,060
Others 208,702,670 144,559,244
P=7,586,842,126 =7P,270,818,277
As of September 30, 2012 and 2011, Others include withholding taxes payable amounting to 121.8P million and P86.7 million, respectively. The
accrued expenses account consists of:
2012 2011
Advertising and promotions P899,226,122 831,935,964P
Freight and handling costs 191,287,113 160,409,857
Contracted services 150,812,491 304,028,503
Interest payable 24,254,634 145,914,993
Others 191,510,031 102,475,605
P1,457,090,391 1,544,764,922
As of September 30, 2012 and 2011, Others include accrued utilities amounting to P96.6 million and P76.5 million, respectively.
Long-term Debt
This account consists of:
Maturities Interest Rates 2012 2011
Parent Company:
Philippine Peso:
=3.0P billion loan facility
2014
8.75%
P2,990,455,926 2,984,699,202
Subsidiaries:
Foreign currency:
URC US$200 million guaranteed
notes
2012 8.25% 8,197,807,089
Philippine Peso:
Philippine Sugar Corporation
restructured loan
2013
7.50% 25,704,433
8,223,511,522
2,990,455,926 11,208,210,724
Less current portion 8,205,763,578
P2,990,455,926 3P,002,447,146
Long-term debt is shown net of unamortized debt issuance costs totalling to P9.5 million and 19.0 million as of September 30, 2012 and 2011,
respectively.