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CHAPTER I
Introduction

Nature of the Business
Central Azucarera de Tarlac (CAT) was incorporated in 1927 to operate as a manufacturing facility that processes sugar and all its by-products. The plant is located in Barrio San Miguel, Tarlac City. CAT’s segments include sugar and its by-products and real estate. The sugar and by products segment pertains to the production of sugar (raw and refined) and sugar by-products, such as molasses, alcohol and carbon dioxide. The real estate segment pertains to development, leasing and selling of real properties and other ancillary services. The Company has interest in Luisita Land Corporation (LLC), a domestic corporation engaged in developing, leasing, and selling real properties and other ancillary services.

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CAT’s sugar mill and refinery has a capacity of 7,200 tons cane and 8,000 50-kg bags per day respectively. The sugar cane is initially processed to produce sugar of which 31% represents the company’s mill share, 69% belongs to the planters. Most of the raw sugar produced is further processed in the refinery to produce refined sugar. In addition to raw and refined sugar, the mill and refinery produces molasses, a by-product.

The combined captive molasses of the mill and refinery is processed further in the distillery to produce alcohol. The distillery has a production capacity of about 65,000 gauge liters per day. The various types of alcohol regularly produced and sold are rectified spirits (purified alcohol), absolute alcohol and denatured alcohol.

The slops from the distillery are captured by the carbon dioxide plant to produce liquid carbon dioxide also in tandem with the distillery. The plant has a capacity of 30,000 kilos per day and normally operates for about 4 to 5 months of the year. Carbon dioxide sales account for about 3% of the total revenues in the last three years.

Financial Ratios
Table 1. Liquidity Ratios
2015 2016 2017
Current Ratio 2.23 2.45 1.98
Quick Asset Ratio 2.09 2.26 1.67
Solvency Ratio 1.68 1.86 1.82

The current ratio indicates a company’s ability to pay short-term and long-term obligations. The company’s current ratio has improved from 2015 to 2016 because of the increased in cash levels, receivables and inventory. While in 2017, the company’s current ratio slightly decreased because the increase in current liability exceeded the increase in current asset. The increase in liability in 2017 was due to accruals and intensified purchases in preparation for the repair season and to borrowing of short-term loan from a reputable local bank.

The quick asset ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. The company’s quick asset ratio increased by 0.17 from 2015 to 2016. In 2017, there is a decrease of 0.59 because of the slight increase of inventories due to the increase in the finished products of alcohol.

The solvency ratio measures the ability of a company to pay its long-term debt and the interest on that debt. The company’s solvency ratio from 2015 to 2016 increased from 1.68 to 1.86. The increase is caused by the slightly decreased long-term notes payable dues to the scheduled payment of amortized principal obligation.

All three liquidity ratios of the company increased from 2015 to 2016 and decreased from 2016 to 2017. This indicates that the ability of CAT to pay-off its short-term finances is higher during the year 2016.

Table 2. Profitability Ratios
2015 2016 2017
Gross Profit Margin 41% 39% 37.12%
Net Margin 14% 15% 22%
Return on Asset 3% 3% 4.38%
Return on Equity 6% 6% 9.64%

The gross profit margin is a profitability ratio that calculates the percentage of sales that exceeds the cost of goods sold. The decrease in gross profit margin from 41% in 2015 to 39% in 2016 is caused by the increase in cost of goods sold by 31%. In 2016, the salaries and wages decreased while inventory cost, spare parts and supplies increased. The decrease in gross profit margin for the year 2017 is also caused by the increase in cost of goods sold. In 2017, repairs and maintenance, inventory cost, depreciation, outside services and power and steam increased while the taxes and licenses decreased by 69%. The net margin is the percentage of revenue left after all expenses have been deducted from sales. 2017 showed a net margin of 22 percent which has increased from 14 percent in the year 2015 and 15 percent in the year 2016. Based on the previous financial statements of CAT, the company started diminishing its operating expenses and interest expenses starting the year 2015. This explains why net margin increases despite the decrease in operating margin.

The return on asset is a profitability ratio that measures the net income produced by total assets during a period by comparing net income to the average total assets. The company’s return on asset has been constant in 2015 and 2016 at 3 percent and increased to 4.38 percent in 2017. The return on equity is a profitability ratio that measures the ability of a firm to generate profits from its shareholders investments in the company. The company’s return on equity which is 6 percent for both years 2015 and 2016, increased to 9.64 percent in the year 2017. The profitability indices of 2017 as compared to prior years showed that the company’s profitability increased except for its gross profit margin which declined from 41 percent to 37.12 percent.
Table 3. Efficiency Ratios
2015 2016 2017
Receivable Turnover 1.70 2.01 1.84
Inventory Turnover 3.51 4.22 2.98
Asset Turnover 0.19 0.17 0.20
Payable Turnover 1.30 1.59 1.81

The receivable turnover ratio of the company reflects how well it can extend credit and collects debts from its credit customers. Central Azucarera de Tarlac has a receivable turnover of 1.7 in 2015 which increased to 2.01 by the end of 2016. However, the receivable turnover decreased to 1.84 in 2017. This shows that the company was more efficient in collecting receivables from its credit sales during the year 2016.

The inventory turnover ratio of the company measures the efficiency of turning its inventories into sales. In the year 2015, the inventory turnover of CAT is 3.51 which grew to 4.22 in the year 2016. The turnover declined to 2.98 in the year 2017. It can be inferred that the company was more efficient in converting its inventories into sale in the year 2016.

The asset turnover is the measurement of how efficient the company uses its assets in generating revenue for the company. As seen on the table, the company was most efficient in using its assets to generate income in the year 2017. Although the findings for receivable and inventory turnover were the complete opposite, it is assumed that all other assets aside from the two were used most efficiently in the year 2017.

In measuring the ability of the company to pay its supplier, the company uses the accounts payable ratio. This ratio assesses how the company can manage its outgoing payments. As shown in the table, the accounts payable turnover gradually increases from one year to another. It shows that CAT became more efficient in paying its suppliers from 2015 to 2017.
Table 4. Leverage Ratios
2015 2016 2017
Debt Ratio 0.6 0.54 0.55
Debt-to-Equity Ratio 1.47 1.16 1.21
Interest Coverage 3.32 3.17 3.77
Asset-to-Equity Ratio 2.47 2.16 2.21

The debt ratio is defined as the ratio of total debt to total assets. From 2015 to 2016, debt ratio decreased from 0.6 to 0.54. It indicates that the level of assets increased due to increased cash, inventory and receivables. From 2016 to 2017, debt ratio increased by 0.01 as a result of intensive purchases and short-term finances. The debt-to-equity ratio is the ratio of total debt over total equity. In the year 2015 to 2016, the ratio decreased from 1.47 to 1.16 because the total liabilities decreased by 5%. It increased from 1.16 to 1.21 in 2017.

The interest coverage ratio is used to determine how easily the company can pay their interest expenses on outstanding debt. Higher ratio indicates that the company is more capable of meeting its interest obligations from operating earnings. The asset-to-equity ratio is defined as the ratio of total assets and total liabilities. The ratio from 2015 to 2016 decreased by 0.36. It indicates that the increase in equity exceeded the increase in asset. On the other hand, in 2017 the ratio increased due to the rise in the amounts of advances, capital expenditures and cash.

Major Consumer Groups Served
Central Azucarera de Tarlac operates sugar mill and refinery, distillery and carbon dioxide plants. Raw and refined sugar produced is generally sold to industrial users through traders. Alcohol products are sold to various reputable distillers of wine and manufacturers of alcoholic beverages. The carbon dioxide produced is usually sold to industrial users.

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