hada marginean, galati 2012

International Conference Risk in Contemporary Economy ISSN 2067-0532 XIIIth Edition, 2012, Galati, Romania,

Dunarea de Jos University of Galati Faculty of Economics and Business Administration

347

Profitability and Investment Risk in Beverages Retail

Teodor HADA [email protected]

Radu MRGINEAN [email protected]

1 Decembrie 1918 University of Alba-Iulia, Romania,

This paper addresses the issue of investment in beverages retail within the Romanian market, in the current economic climate. This paper contains a theoretical approach of what beverages retail means, presenting the particular aspects. Elements related to economic performance, profitability and the risk faced by the companies of this profile in the economic crisis are addressed too in the content. We presented in examples the financial impact of investments for a specialized company, by means of economic analysis, and we draw conclusions concerning the usefulness of economic analysis in making financial decisions. Key words: retail, beverage, performance, accounting, taxation.

1. Introduction

Beverage trade can be an area that attracts a large profit in the current economy, but this can only occur by carefully studying market profile and accurately assessing the managerial decisions to be adopted. A substantiation of a managerial decision from economic point of view is done by studying the performance, return and risk to which a company is subjected through a comprehensive assessment made in terms of financial position and in terms of economic activity, for a specific period of time.

The present paper aims to highlight the impact of the investment in the retail trade of beverages, by studying the financial information of companies, in a period of 2 years. At the same time, another objective of this work is to highlight the usefulness of economic-financial analysis methods by using specific indicators.

For this study have been used financial statements of a profile company and economic literature, focusing mainly on economic and financial analysis methods.

The utility of the present is found in the case study based on real and actual financial data retrieved from a specialized firm, and the conclusions can be of real interest to investors in retail beverages.

2. Particular aspects related to beverage trade 2.1. Accounting rules on trade in beverages

As far as the trade in beverages in our country is concerned, the economic activity is regulated in terms of accounting and taxation.

In accounting terms, activity of trade with beverages is organised according to the order No. 3055 of October 29, 2009 approving the regulations of accounting in accordance with the European directives, published in Official Gazette no. 766 / October 10, 2009.

Beverages shall be treated for accounting purposes as goods, loading and discharge shall be carried out in accordance with the guidelines of the OMFP 3055/2009, as follows[1]: Purchase of goods:

% = 401 Suppliers 371 Merchandise 4426 VAT Deductible

Retail price formation 371 Merchandise = %

378 Price differences in goods 4428 Unrealized VAT Selling goods with cash receipts:

5311 Cash register or 5121 Bank = % 707 Revenue from the sale of goods 4426 VAT collected



348

Discharge of goods sold

% = 371 Merchandise 607 Expenditure on goods 378 Price differences in goods 4428 Unrealized VAT

A category specific to trade in beverages is the reduction granted by the manufacturers. According to OMPF 3055/2009, paragraph 51, par. 5 and 6, the cuts are regulated in two categories: trade discounts and financial discounts.

Trade discounts are classified as follows [2]: Rebates are received for quality defects and are related to the selling price; - Discounts: received if the sales are higher than the agreed volume or if the buyer has

preferential status; -Volume discounts: the discounts calculated on all transactions with the same third party, within

a given period. Financial reductions, as required by law, "are in the form of discounts granted for payment of debt settlement prior to the deadline for charging normally. Financial discounts received from the supplier is income regardless of the time period covered (account 767 >). For the supplier, these discounts represent expenditures of the period, irrespective of the period to which they relate (account 667 >)[3].

In the case of the studied company, the commercial discount is of volume discount type, and has a value of 10% of the amount invoiced, under contract. In accounting terms, they are recorded as follows:

401 Suppliers = 609 Received trade discounts 2.2. Tax regulations on trade in beverages

Fiscally, in the case of beverages, the Romanian Fiscal Code introduces a special category called excise. Specific to excise taxes is that they are due in one phase of the economic circuit, namely by the manufacturers, importers and purchasers.

Thus, according to the Fiscal Code, article 206, paragraph 1: "harmonised excise duties, hereinafter referred to as excise duties are special taxes levied directly or indirectly on the consumption of the following products:

a) Alcohol and alcoholic beverages; b) Processed tobacco; c) Energy products and electricity[4]. In accordance with Chapter 2 of "The harmonised excise duty" of the fiscal code, in the category

alcohol and alcoholic beverages enter: beer, wine, fermented beverages other than wine and beer, intermediate products and alcohol. Whereas the wines are of interest to the studied company, we define fiscally the wines and wine excise calculation.

According to the fiscal code, art. 206, paragraph 11 the wines are classified as follows: -Still wines, which include all products of CN codes 2204 and 2205, except sparkling wine as

defined in point. b) which: have an alcohol concentration of more than 1.2% vol. but not exceeding 15% by volume, and the alcohol content in the finished product results entirely from fermentation, or have an alcohol concentration greater than 15% in volume but not exceeding 18% by volume, have been produced without any enrichment and that the alcohol contained in the finished product results entirely from fermentation;

- Sparkling wines which include all products falling within CN codes 2204 10, 2204 21 10, 2204 29 10 and 2205 and which are presented in bottles sealed with a "mushroom" shape stopper, fixed by means of bonds, or that are under pressure due to carbon dioxide in solution of or not less than 3 bar; and have an actual alcoholic strength exceeding 1.2 per cent by volume but not exceeding 15% by volume, and the alcohol content in the finished product resulting entirely from fermentation.

- Is exempted from excise duty, the wine produced by individuals and used by them and their family members, provided it is not sold[5]. For still wines, the excise is 0 [6], but for the sparkling the excise is calculated as follows [7]: A = K x R x Q, where A= Amount of excise K= Provided unit excise R= Exchange rate leu/euro Q= Quantity in hectolitres



349

3. Performance and risk in the economy Trying to summarize the performance issues, the authors M. Niculescu and G. Lavalette define

this concept as "unstable equilibrium resulting from the evolution of concepts such as efficiency and effectiveness" [8]. There is no consensus on the definition of financial analysis. Thus, the financial analysis is defined as "a condition diagnostic activity of financial performance of the company at the end of the year. It aims to determine the strengths and weaknesses of financial management for the foundation of a new strategy for the maintenance and development in a competitive environment[9].

Performance of an entity is measurable in the economy by means of economic and financial analysis. Economic-financial analysis "is a scientific discipline which aims to study the methodology for knowledge of the results of economic and financial factors, and causes that made them, and ways to increase economic efficiency of work carried out, in accordance with the requirements of objective laws[10].

Financial analysis is a tool particularly valuable for policy makers to investigate and assess the State of affairs in the field of financial accounting "[11], or it can be said that the financial analysis leads to a diagnosis.

Although economic analysis is focused on the economic activity of the entity, following a more direct cause and effect, we can say that only with financial analysis, focused on studying the information in the financial statements may outline a detailed picture of the economic entity . Thus, annual financial reporting statements are used to develop accounting diagnosis and provide database and information necessary to assess the performance and financial position of the company.

Thus, in the view of Prof. Silvia Petrescu Ph.D., for the financial-accounting diagnosis two specific approaches are allowed [12]:

1. Diagnostic analysis of performance and risk based on income statement (profit and loss) 2. Analysis and diagnosis of the situation and financial position on the basis of the balance

sheet Of economic and financial instruments that can be used to achieve economic and financial

analysis, we mention those presented and used in our case study: - Analysis of financial position through the analysis of balance sheet; - Analysis of the company's business by analyzing the Profit and loss Account; - Analysis of company performance by drawing the table of Intermediate Management

Balances; - The status of the main economic and financial indicators; - Rates calculation of economic, financial and commercial return.

4. Case Study

The company studied is a legal person with entirely Romanian capital, the organization and activity complying with the commercial and civil law existing at the time in force in Romania. The object of the company, according to NACE 4725 classification is "Retail sale of beverages in specialized stores.

The company was established in the legal form of limited liability, envisaged by the law 31/90, art. 2, let. e republished and subsequently amended. The company has two outlets, both in the city of Sibiu. Analysis based on Balance Sheet

Of the basic analysis for financial diagnosing, the analysis of the financial position of the company on the basis of the balance sheet is the most important. Abridged balance sheet on December 31, 2011 presents the following information:

Table no. 1. Indicators of abridged balance sheet on December 31, 2011 (Lei)

INDICATORS 2010 2011 Differences

FIXED ASSETS FROM WHICH:

10891 82033 +653%

ITANGIBLE ASSETS 16 16 - TANGIBLE ASSETS 10875 82033 + 654% FINANCIAL ASSETS 0 0 - CURRENT ASSETS FROM WHICH:

160822 154108 -4.17%

Stock 13122 21834 +66.40 %



350

Book debt 76235 10504 -86.22% Cash and bank accounts 71465 121770 +70.39% TOTAL ASSETS/LIABILITIES (TA-TL)

171,713 236,141 +27.28 %

DEBTS- UP TO 1 YEAR 91303 161.601 +77% LONG-TERM DEBTS 0 0 - TOTAL DEBTS 91303 161.601 + 77% NET ASSETS (YEAR) Total Assets- Total Debts

80410

74540

-0.70 %

Net Asset Coefficient NAC= AN/TA * 100

46.82% 31.98% -31.69%

EQUITY (TOTAL), FROM WHICH:

80410 74540 -0.70 %

Registered share capital 250 250 - Capital Reserve 50 50 -

Carried forward profit or loss (balance C.)

43893 68111 +55.17%

Profit or loss for the financial year

36217 6129 -83.07%

From observing the economic dynamics of the assets result the following:

Fig. 1 Analysis of Assets

10891

82033

1312221834

76235

10504

71465

121770

0

50000

100000

150000

Assets Stock Debts Cash

2010 2011

As shown in figure no. 1, we note that there have been major oscillations between the values of the assets between the years 2010-2011. Thus, in 2011 there is a major injection of capital in relation to the assets of the company. On subcategories, the companys assets increased from 10891 to 82033, by 653%, approximately seven times. Referring to the assets register on March 31, 2011, we notice that in 2011 were acquired tangible assets in the amount of 47,190.32 lei, consisting of a car, equipment, tank, joinery and furniture. It appears that the company invested heavily in tangible assets, facilities and specific work equipment, i.e. special tanks. At the same time, the investment is reflected in the structure of the assets and not just by increasing the assets, but also by decreasing the companys availability, i.e. reducing claims by 86%, and increasing the debts by 77%. Changes resulting from investments although explicable in economic terms by following the funding of investment they attract subsequent effects. Immediate or long-term effects will be analyzed in the following subsections.



351

Fig. 2 Liabilities Analysis

8041074540 91303

161601

4389368111

3621761290

50000100000150000200000

CAP.PROPRII

DEBTS REPORTEDPROFIT

FIN. PROFIT

2010 2011 EQUITY

In respect of liabilities, equity proprietary grew smaller fluctuations of 0.7%, and maintained the practical value. A significant increase, however, had debts of the company, from 91,303 to 161,601 lei, with 77%, representing an important loan contracted by the company to finance tangible fixed assets. The loan is contracted by the company in the short term, however, as shown in the abridged balance sheet. Thus, the pressure on the retention of this debt is high. To quantify this pressure which is contained in the companys level of indebtedness will be presented in the following subchapter, the analysis of main economic-financial indicators. A first sign of vulnerability is given by the debt structure (fig. 3). The problem lies in the fact that of the total debt of 197,068 lei, 129,455 lei are commercial debts (to suppliers), respectively 65.7%.

Fig. 3 Debts Structure

FURNIZORI

PERSONNEL

BUDGET

LONG-T. CREDIT

INTERESTS

The most commonly encountered problem any companys debt to suppliers entails is that the the

charging is immediate or has short terms. Thus, financially the company will be forced to pay the debts and accumulated consumption through investment and there is the possibility of being forced to enter into long-term loans. Analysis of financial activity of the company on the basis of the profit and loss account

As regards the analysis of the economic activity of the company, we will proceed to analyze the Profit and Loss accounts available at the end of 2011. It has the following economic information:

Table no.2 Profit and Loss Account Indicators on December 31, 2011 (Lei)

PROFIT AND LOSS ACCOUNT INDICATORS:

INDICATORS 2010 2011 Differences NET TURNOVER 669664 826031 +23.35 % OPERATING INCOME, from which: 669664 826231 -

Revenue from the sale of goods (account 707)

669664 826231 -

OPERATING EXPENSES, from which: 619983 818440 +32% Cost of Goods: 487722 604337 +23.9% Raw materials and consumables Expenses 34661 52142 +50.4% Received Trade Discounts 20665 19603 -5.1% Personnel Expenses 14027 26479 +88% Other operating expenses 263 2497 +949% OPERATING PROFIT: 49681 7591 -84% FINANCIAL INCOME, from which: 0 590 +



352

Interest Income 0 590 + FINANCIAL EXPENSES (interests) 521 614 +17% Financial Profit/Loss -520 -24 -95.3% EXTRAORDINARY INCOME / / / EXTRAORDINARY EXPENSES / / / Extraordinary Profit/Loss / / / TOTAL INCOME 669665 826621 +23% TOTAL EXPENSES 620504 819054 +31% GROSS PROFIT 49161 7567 -84% PROFIT TAX 12944 1438 -88% NET PROFIT 36217 6129 -83.07%

Fig. 4 Analysis of Profit and Loss Account

669604

14027

49681 36217

826861

26479

7591 6129

2010

2011

2010 669604 14027 49681 36217

2011 826861 26479 7591 6129

TURNOVER PERSONNEL EXPENSES OPERATING PROFIT NET PROFIT

From studying the Profit and Loss Account, it is firstly established that the turnover increased

significantly, 19% which shows that sales revenue increased in 2011. Then, the company invested heavily, the operating expenses increased significantly by 32%, the largest share had the expenses with goods and personnel expenses.

It is outlined at this stage of analysis, a financial involution of the company. It can be stated that while we speak of an investment assumed by the company, the expenses increased significantly, and the net profit fell sharply: 84%. Specifically, the goods necessary to the company increased significantly, by 24%, effect combined with the very rapid increase in personnel expenses, by 88%. Combining the information concerning the economic activity of the studied company, it is discovered that through the investment of cash resources in a socio-economical context less favourable, the risks that arise are significant and hardly controllable.

The Table of the Intermediate Management Balances These intermediate management balances represent successive levels in the final result, with a large role in decision-making at the level of the management entity [13]. In our case, on the basis of the Profit and Loss Account has been made the Table of intermediate management balances. For comparability, the analysis was done on the documents from 2010 and 2011.

Table no.3 Table of the Intermediate Management Balances Table of the Intermediate Management Balances

Indicators FORMULA[14] VALUE 2010

VALUE 2011

DIFFERENCES

A. Trade margin Sale of goods cost of goods sold

181942 221654 +21.8%

B. Production year Production sold +/- production in progress + production of fixed assets

0 0 There is no industrial activity

C. Value added A + B external consumption (gr. 61 and 62)

90701 91928 +1.3%



353

D. Gross operating surplus

C + operating subsidies - taxes, fees, contribution(gr.63) - personnel expenses

76411 62952 -18%

E. Operating result D +other operating income +Revenue from operating provisions other operating expenses Operating expenses for depreciation and provisions.

68363 55495 -18.8%

F. The current result of the year

E + Financial income financial expenses

67843 55441 -18.2%

G. Extraordinary result

F + Exceptional income- exceptional expenses

67843 55441 -18.2%

G. NET Result of year or the Self-financing ability

F + The current result of year Profit tax

54899 54003 -1.63%

Fig. 5 Analysis of the Intermediate Management Balances

0

200000

400000

2010 2E+05 76411 68363 67843 54899

2011 2E+05 62952 55495 55441 54003

Marja E.B.E. Oper. Curr Self-

From the analysis of the intermediate management balances it is noted that the opening of a new selling point is uninspired. In terms of an economic crisis that still shows its adverse effects, increased expenditure and increasing the cost of goods can mean a threat to society. From the chart above it can be seen that although the entity had a larger trading margin in 2011 by 21.8%, due to higher turnover, once enter into the equation expenditure taxes, staff salaries, gross operating surplus decreased by 18%. Thus, the decreasing line is maintained at the operating result and the current result until the profit tax adjusts the balance, but still in a negative sense. The operating result decreased by 18.9% and the current result by 18.2%, given that the impact at this stage is felt the influence of investments in tangible assets (depreciation influence) and financial expenses (interest expenses on the loan contract). Self-financing capacity of the unit is approximately constant over the two years, while intervening in the case of 2010 a large tax, 12,944, 88% higher than in 2011 when the value was 1,438 lei-impact of investment costs.

The Situation of Main Economic and Financial Indicators The analysis so far is growing by studying the main economic and financial indicators calculated according to accounting legislation in force, Order no. 3055 of 29 October 2009 for approval of accounting regulations compliant with European Directives, published in Official Gazette no. 766 / 10.10.2009. These indicators are 16 and are divided into five major specific groups: liquidity, risk, activity, profitability and solvency.

Table no. 4 Table with Main Economic and Financial Indicators on December 31, 2011

VALUE OF MAIN ECONOMIC AND FINANCIAL INDICATORS for year 2011 calculated acc.to O.M.F.P. 3055/2009 1. Liquidity Indicators

Indicators FORMULA[15] VALUE COMMENTS[16] 1. Current Ration Current Assets

Current Debts 0.95 Recommended acceptable

value around 2. 2. Immediate Liquidity Acid Test

Current Assets Stocks Current Debts

0.82 Recommended value around 1. As the acid test



354

is greater than 1, then the companys situation is better.

2. Risk Indicators 3. Gearing Ratio Borrowed Capital x100

Equity 38.9% The risk does not have to

rise to more than 30%. 4. Interest coverage GROSS Profit

Interest expenses 12.69 This indicator determines

how often the entity can pay interest expense

3.Indicators of business (management) 5.Stock Rotation Speed Turnover

Average stock

27.68 The indicator shows how many times the stock has been run throughout the fiscal year

6.Number of days of Storage Average stock x 365 Cost of Sales

12.86 As the number of days is less, then the situation is better.

7. Rotational speed of customer-receivables

Average balance per customer x365 Turnover

10.2 When the value of the indicator is large, then the claims are harder to be collected

8. Rotational speed of payables-supplier

Average balance per supplier x365 Turnover

57.20 The indicator represents the number of days of credit that the entity obtains from its suppliers

9. Rotational speed of fixed assets

Turnover Assets

10.07 The indicator expresses the number of rotations made by the assets to achieve turnover

10. Rotational speed of total assets

Turnover Total Assets

3.50 The indicator assesses total asset management efficiency by examining the value of turnover generated by the assets of the entity

4. Profitability Indicators 11.Return of Equity Gross Profit

Equity 0.11 The indicator represents the

profit entity obtains from the money invested in business

12. Gross margin from Sales Gross Profit x 100 Turnover

0.91% A fall in the percentage may reveal that the entity does not get optimal selling price

13.Profitability Operating Profit Permanent Capital

0.10 When profitability is lower than the basic interest rate on long-term, the entity management should study the situation for the purpose of targeting assets in another direction or even to carry out the liquidation of the company

5. Long-term Solvency 14. Ratio of debt to equity Total debts

Equity

2.16 If this ratio is too high, this could signal that the entity has consumed the entire capacity of gearing ratio



355

15. Ratio of Net Tangible Assets to equity

Tangible assets Equity

1.10 This indicator gives information about the current quality of Equity as intangible assets are eliminated

16. Degree coverage of Interests

Operating Profit Interest expenses

12.73 Degree Coverage of interest shows how stable is the entity's ability to meet its payment obligations on interest

From the values of key economic and financial indicators for 2011, one can see that the company is suffering at Liquidity Chapter and profitability and risk. The Investments made have weakened the company's financial stability, and the profitability is minimal. Thus, while the investments are not included in profit, the company is in a delicate situation, showing a high economic risk.

Performance analysis by studying the rates of return

Conclusive for this study are especially the figures provided by the calculation of the return,

commercial, financial and economic rates. For a picture of the development of the company, were calculated the rates of return for the years 2010 and 2011. The image of the company's profitability seen in three parts from three perspectives, in terms of trade, financial and economic, is shown in the following table.

Table no. 5. Table of Return Rates

ANALYSIS OF RETURN RATES

1. BUSINESS RETURN

INDICATORS FORMULA[17] VALUE 2010

VALUE 2011

DIFFERENCES

1. Trade Margin Rate Trade margin Sale of Goods

0.27 0.31 +14.8%

2. Gross margin rate of self-financing

Self-financing capital Turnover

0.081 0.065 -18.75%

3. Net trade return (Ntr) Net result for the year x100 Turnover

5.40 0.75 -86%

2. FINANCIAL RETURN 4. Net financial return Net result for the year

Equity

0.45 0.08 -82.2%

5. Financial return before tax

Current result for the year Equity

0.61 0.10 -83.6%

6. Financial return on total assets

Net result for the year Total Assets

0.21 0.025 -88%

3. ECONOMIC RETURN 7. Economic return Gross operating income

Total Assets 0.22 0.23 +4.5%

Alarming issues for any trade company are obvious particularly when the observed problems are found at the level of business and financial return. Note that financial and commercial return fall by nearly 90% in 2011 compared with 2010. At the same time, in the context of the investment, notwithstanding the significant amounts spent for the development of the company, the economic profitability increased by only 4.5%, which is insignificant. 5. Conclusions For the company studied, according to the values recorded by the indicators presented, the investment in retail beverages was profitable in the first stage. At the time of the decision to reinvest



356

capital in opening a new retail outlet, appeared important issues that translated into significant risk for the entity. Briefly, based on indicators note the following problems:

- The current liquidity is 0.95 (acceptable limit is around 2) and immediate liquidity is set to 0.82 (1 the recommended value);

- In the total debt structure, debts to suppliers is 65.7%; - Risk indicator of gearing ratio has a value of 38% (30% being the maximum recommended

value) - Trade and financial return declined by about 90%; - Staff costs increased by 88%; - Profit decreased drastically by 84%;

According to indicators calculated in the case study, from a financial standpoint the company undergoes a major liquidity crisis. In this case, the economic crisis manifests directly through higher prices of goods (24%) and increased operating costs (32%), it is indicated to halt investment and rationalize of expenditure. Also, for the second selling point because of low sales volume, it is indicated an analysis of the commercial venue. These figures reveal the existence of several risks indicators. Following this analysis, result the following significant risks for the company: liquidity risk, solvency risk, maturity risk and market risk. We believe that the objectives of the work have been reached since the usefulness of economic-financial analysis is highlighted by motivating the case study findings above. Calculated indicators helped to formulate a financial-economic diagnosis useful for the entity, particularly in the context of present economic crisis. References [1] Order no. 3055 of 29 October 2009 for approval of accounting regulations compliant with European Directives, published in Official Gazette no. 766 /10.10.2009 [2] Ibidem, point 51, paragraph 5. [3] Ibidem, point 51, paragraph 6. [4] Law 571/2003 on Fiscal Code as amended and subsequently supplemented which was published in Official Gazette no. 927/23.12.2003, art. 206.1 [5] Ibidem, art. 206.11. [6] Annex 1 of Law 571/2003 on Fiscal Code as amended and subsequently supplemented which was published in Official Gazette no. 927/23.12.2003 [7] Prof. Univ. Dr. Hada Teodor, Fiscalitatea din Romnia n anul 2011, Alba-Iulia, Edit. Aeternitas, p. 161. [8] Niculescu M., Lavalette G., Strategii de cretere, Ed. Economic, Bucureti, 1999, p. 255 [9] I.Stancu, Gestiunea financiar a agenilor economici, Editura Economica, Bucureti, 1994, p.26 [10] Conf. Univ. Dr. Camelia Burja, Analiz Economico-Financiar, Edit. Casa crii de tiin, Cluj-Napoca, 2009, p. 12. [11] M.D.Paraschivescu,W.Pvloaia, Modele de contabilitate i analiz financiar, Editura Neuron, Focani, 1994, p.419. [12] Prof. Univ. Dr. Silvia Petrescu, Analiz i diagnostic financiar-contabil, Edit. CECCAR, Bucureti, 2010, p. 22. [13] Adriana Florina Popa, Contabilitatea si fiscalitatea rezultatul ntreprinderii, Bucureti, Edit. CECCAR, 2011, p. 298. [14] Ibidem, pp. 299-303. [15]Order no. 3055 of 29 October 2009 for approval of accounting regulations compliant with European Directives, published in Official Gazette no. 766 /10.10.2009. [16] Prof. Univ. Dr. Silvia Petrescu, op. cit., pp. 247-258. [17] Adriana Florina Popa, op. cit., p. 298

hada marginean, galati 2012

Documents