(a). To:           The Chief Finance Officer, Kyenku PLC
From:      Financial Accountant
Date:        31 December 2024
Subject:   Assessment of financial and sustainability performance of Kyenku PLC

Introduction
This report provides a detailed analysis of the financial and sustainability performance of Kyenku Plc over the last three (3) years ending in 2024 and in relation to its peers during 2024. The analysis specifically employs various financial and non-financial ratios to shed light on the company’s profitability, efficiency, liquidity, gearing, investor-based ratios and sustainability. The report should be read along with the attached appendix.

Profitability
Kyenku’s profitability is assessed using three different metrics: gross margin, profit before tax margin and return on capital employed. The gross profit margin has been on an increasing trend, rising from 11.23% in 2022 to 12.26% in 2024. Notably, Kyenku’s current gross margin has also toppled that of its peers. While it is not readily clear what the cause of these increments may be, it is safe to suggest that the Kyenku is likely to have experienced improved control over direct operational costs over the last three years and managed these costs better than its competitors in the current year. Regarding profit (before tax) margin, the trend has not been as consistent as the margin rose marginally between the first two years but fell dramatically from 2023 to 2024. The drop was so drastic that Kyenku’s current period’s before tax profit margin is well below the mean margin. This sharp contrast in trends and sector comparisons shown by the gross margins and the profit (before tax) margins may suggest that either Kyenku has been less impressive in managing its overheads or it probably classifies costs differently from its peers between cost of sales and other operational costs. Regardless given its lower overall operating margin, Kyenku appears to have managed operational costs less efficiently. Kyenku’s return on capital employed, which reflects how efficient Kyenku used its assets to generate returns, fell between the first two years but remained unchanged between the last two. But similar to the profit before tax margin, Kyenku’s current year’s return on capital employed is significantly below the average return. The implication is that Kyenku would be seen by providers of long-term capital to have been less efficient and less profitable over the last three years even though the return percentage remained unchanged between 2023 and 2024. More worryingly, competing firms currently return more monies on every cedi amount of the book value of long-term capital.

Efficiency
The company’s efficiency looks at how well it has managed its working capital items and, in this analysis, is assessed using two measures: accounts receivable days and inventory turnover. The accounts receivables days of Kyenku have increased throughout the three years, rising by 4 days between 2022 and 2024. The current collection period meanwhile is at par with the sector average. The rising receivables days imply that the company is now taking longer period to recover its debts even though the reduced efficiency has not made Kyenku any worse than how long competitors take to do their collection. Kyenku’s inventory turnover has seen a noticeable improvement, increasing from 7.10 times in 2022 to the current 7.79. This provides an indication that Kyenku is getting quicker in striking and completing sales deals, as cost of sales could cover average inventory approximately 8 times during 2024. Despite good efforts by Kyenku, the company’s current inventory turnover is still not good enough to outstrip the efforts of its peers. The large turnover numbers may suggest that the industry is characterized by high inventory conversion rates.

Liquidity
Liquidity measures look at the readiness of an entity to pay off its short-term commitments as they fall due. Acid-test ratio has been used to examine Kyenku’s liquidity positions during the assessment period. The ratio shows how sufficient the entity’s near-cash current assets are in meeting its short-term liabilities. Kyenku’s acid-test ratio has consistently and significantly increased over the three-year period, indicating that the company is in a good position to meet all its pressing obligations. Currently, the company’s current assets without considering inventories can be used to settle its current obligations as nearly as two times. More impressively, Kyenku’s 2024’s acid-test ratio of 1.97 puts the company well above its peers as an average company can avail 1.85 of quick assets to meet its near-term obligations.

Gearing
Gearing ratios are used to assess the mix of debt and equity constituents within an entity’s capital structure. The relationship established can help to estimate the amount of financial risk to which the company’s investors and lenders become exposed. Kyenku’s gearing is appraised using capital gearing and times interest earned. Kyenku’s capital gearing has declined from 42.10% to 41.06% after increasing initially between 2022 and 2023. It is not clear what could be behind this inconsistent behaviour of the company’s gearing, however it would be good for prediction purpose if some consistency and predictability could be found. The overall decline in gearing shows that Kyenku’s level of financial risk is now lower. But it seems Kyenku is still relatively basking in too much debt given that lenders in peer companies currently provide about 36% of total long-term capital, which represents some six (6) percentage points below Kyenku’s current gearing level. The same inconsistent pattern has been exhibited by the income-based measure of gearing as times interest earned initially increased from 2.34 to 2.55 before reducing to 2.46. So, there has been improvement in how many times finance costs are earned if 2022 is set as the base year. This is exactly in keeping with the falling gearing ratio.

Investor ratios
The company has generally witnessed an increased earnings per share over the assessment period. The company is likely not to have had any dilutive potential ordinary share instruments through the assessment years. This improvement seen is likely to be met with favourable market reaction especially if the improved indicator was driven by underlying performance. In fact, the increases in earnings per share appear a somewhat surprising given the deteriorating profitability. Unless the improvement resulted from improved earnings which in this case could result through lower allocations to taxes, preference dividends, and non-controlling interests, the better earnings per share would be down to share repurchase or consolidation. If the share adjustments were the triggers, any attracted plaudits for the increase might not be significant. Kyenku’s cash-based dividend coverage has reduced from 2.55 to 1.58 even though the company overturning the 2023 negative operating cash flows to achieve a positive coverage in 2024 deserves a commendation. The decline suggests that the company may not provide as much guarantee of a sustainable dividend payment going forward. But the ratio falling below that of peer companies makes it even more worrying.

Sustainability
Sustainability has become pivotal to many stakeholders. How a company manages its social and environmental risks and ceases sustainability-related opportunities can prove to be a game changer within the current corporate landscape. Kyenku’s direct greenhouse gas emissions have consistently increased. But such increment does not consider the expanded scope of operations as the number of the company’s manufacturing sites has also increased. Hence, a better gauge of Kyenku’s green footprints could be obtained if the emissions were considered relative to the number of emitting sites to determine emission intensity. After estimating the relative emissions (see Note below), it could be seen emission levels have broadly decreased. This indicates a reduced exposure to climate-related risk and enhanced reputation. A look at the trends in the company’s employee approval ratings and its female representation also paint a good picture about its social profile. Both employee satisfaction score and the proportion of female workers have seen clear improvement, with both indicators placing Kyenku’s social standing above its peers’. Having happier and more inclusive employee base would not only provide grounds for attracting and retaining more competent hands but also increase the value of the intangible resources of Kyenku. Unfortunately, however, the increased number of women at Kyenku has not translated into pay parity between the two genders. Even though Kyenku has a better pay gap than its competitors, that Kyenku’s gap has widened from 38.2% in 2022 to 40% in 2024 after coming down a bit in the intervening year should be a worry especially considering the increment in female representation. This could be probably due to putting more female workers on low paying roles. If this is not reverse, the bad picture painted by the now wider gap could neutralize the goodwill created through the other non-financial indicators.

Conclusion
Generally, Kyenku’s financial assessment paints a mixed picture while its sustainability management has been good to a great extent. Kyenku’s poor profitability and efficiency could be due to the company sacrificing short-term prosperity for long-term sustainability. In balance, Kyenku appears to be on good tracks especially if the improvements in its liquidity and gearing are considered and if the company plausibly tightens things up a bit regarding how it manages its operational costs and handles worker pay.
SIGNED

Note

(10 marks for financial analysis; 3 marks for nonfinancial analysis; 2 marks for introduction, conclusion and presentation)

(b). Disclosures required of Bepong Company LTD as a result of managing its climate-related risk.

• Governance:
  Companies need to disclose their governance processes, controls and procedures for monitoring, managing and overseeing sustainability-related risks and opportunities.
• Strategy:
  They should outline their strategy for managing sustainability-related risks and opportunities, including their approach to climate-related risks.
• Risk Management:
  Companies must disclose how they identify, assess, prioritize and monitor sustainability-related risks and opportunities, including those related to climate change.
• Metrics and Targets:
  They should report on their performance related to sustainability-related risks and opportunities, including progress towards any targets they have set.
• Impact on Business, Strategy, and Financial Planning:
  Companies need to disclose the actual and potential impacts of climate-related risks and opportunities on their business, strategy and financial planning.
• GHG Emissions:
  Some jurisdictions, like the SEC in the US, may require companies to disclose greenhouse gas emissions metrics (Scopes 1 and 2) and third-party verification, as well as data on expenditures related to severe weather events, carbon offsets and renewable energy credits.
• Transition Plans:
  Companies may also be required to disclose their transition plans to a low-carbon economy, including scenario analysis and the use of an internal carbon price.
  (5 marks)