BUA vs. Flour Mills: Which Is a Better Stock?

Is profitability and high dividend yield sufficient to determine which company to invest in?

In this article we analysed BUA and Flour Mills financials and we were able to come up with ratios that could help you make good investment decisions.

History of BUA

BUA Foods PLC is a Lagos, Nigeria based company that was founded in 2008.

The company processes, manufactures, produces, and distributes various foods and food materials in Nigeria. It offers fortified and non-fortified sugar, as well as by-products, such as bagasse, molasses, and mud cakes under the BUA brand name. The company is into production of wheat flour and bran; pasta, rice; edible oils,, stearin, distilled fatty acid, and other products for direct and industrial uses, including soap manufacturing; and packaged foods.

History of Flour Mills

Flour Mills Nigeria Plc was incorporated in 1960 and is headquartered in Lagos, Nigeria. The company is into flour milling business in Nigeria and internationally.

The company operates through Food, Agro Allied, Support Services, and Sugar segments. It produces pasta, snacks, noodles, edible oil, and livestock feeds; produces and distributes fertilizers; and manufactures and markets laminated woven polypropylene sacks and flexible packaging materials.

The company is also involved in the farming of maize, cassava, and soya products, as well as in other agro-allied activities. In addition, it cultivates and processes sugarcane and oil palm fresh fruit bunches, as well as poultry; refines and sells sugar; and sells by-products from sugar refining.

The Various Ratios and What They Mean

Financial ratios offer investors a way to evaluate their company’s performance and compare it to other similar businesses in their industry. It measures the relationship between two or more components of the financial statement.

Financial ratios are grouped into the following category:

• Liquidity ratios
• Leverage/Debt ratios
• Efficiency ratios
• Profitability ratios
• Market value ratios

In this article we will consider three important ratios, namely, profitability, efficiency and debt ratios

Profitability ratios

Profitability ratios measure a company’s ability to generate income relative to revenue, balance sheet assets, operating costs, and equity. Some of the ratios under this category are:

• Return on Equity (ROE)
• Return on Capital Employed (ROCE)
• Net Profit Margin

ROE measures how efficiently a company is using its equity to generate profit, while ROCE shows how much operating income is generated for each amount invested in capital. Net Profit Margin is used to calculate the percentage of profit a company produces from its total revenue.

**Figures for Flour Mills are annualised.

Based on the above computed ratios, BUA outperformed Flour Mills. This implies that BUA is more profitable when compared to Flour Mills. Its high net profit margin is due to high revenue, generated from the sales of sugar.

Efficiency ratios

Efficiency ratios are used to measure how well a company is utilising its assets and resources. These ratios generally examine how many times a business can accomplish a metric within a certain period of time. Two of these ratios are given below:

• Asset Turnover Ratio: This measures how efficient a company uses its assets to generate sales.
• Inventory Turnover Ratio: This measures how many times a business sells and replaces its stock of goods in a given period of time.

**Figures for Flour Mills are annualised.

When analysing asset turnover ratio, a higher ratio is generally favourable as it indicates efficient use of assets. Conversely, a low ratio may imply poor utilisation of assets, poor collection methods, or poor inventory management. Based on our analysis, Flour Mills efficiently utilised its assets more than BUA.

However, computed inventory turnover ratio indicates that BUA sold its entire stock of inventory 5.08 times as against Flour Mills that sold 1.57 times in a year.

Debt Ratios

This measures the amount of capital that comes from debt. In other words, leverage financial ratios are used to evaluate a company’s debt levels. Some of these ratios are:

• Debt-to-Equity Ratio, which calculates the weight of total debt and financial liabilities against shareholders’ equity.
• Interest Coverage Ratio, which shows how easily a company can pay its interest expenses.
• Debt Service Charge Ratio, which reveals how easily a company can pay its debt obligations.

**Figures for Flour Mills are annualised.

A higher debt-to-equity ratio indicates a leveraged firm — a firm that is financed with debt. Based on our analysis, the two companies are highly leveraged.

Interest Coverage Ratio revealed that BUA can pay its interest expenses (borrowings from banks and other institutions) 37 times as against Flour Mills which can pay only 2.5 times.

Debt Service Charge Ratio revealed that it is easier for BUA to pay its debt obligation compared to Flour Mills. However, their (BUA and Flour Mills) debts are not well covered by operating income judging by the low ratios of 0.32 and 0.17 respectively.

A deep dive into debt composition of the two companies reveal how aggressive they have been in financing their growth with debt, which could pose a threat to investors. The breakdown is given below:

**Figures for Flour Mills are annualised.

Conclusion

In conclusion, BUA appears to be more profitable than Flour Mills based on our computed ratios. BUA’s high profit margin can be attributed to high revenue from the sales of sugar. Our analysisT further revealed that Flour Mills efficiently used its assets compared to BUA. Although inventory turnover gave a different picture as findings revealed that BUA turned over its inventories more than Flour Mills.

However, both companies are highly leveraged and their debts are not well covered by operating income. This could be considered risky for lenders and investors because it suggests that the company is financing a significant amount of its potential growth through borrowing.