Siwar had to pinch herself to confirm she was in a real executive meeting at headquarters when she first walked into the executive conference room in early $2020.$ Following the completion of her MBA, Siwar was hired for her ideal position as a lead manager at Bilal's Business, a leading brand in food industry.

Siwar's initial months at work had fulfilled all of her expectations. She'd wrestled with important decisions and witnessed the drama of marketing a real premium brand. It had really been incredible. But what surprised her the most was what was going on in the conference room at the time. Things were clearly not going well at Bilal's.

Bilal's family had founded the business in the middle of the $1970$s$.$ The current management group persisted in upholding the company's long$-$standing dedication to quality. Buyers for the company were uncompromising in their demands that suppliers provide ingredients of the highest quality. Carefully considered inventory management was used to maintain enough product to promptly satisfy customer demands while ensuring freshness. Negative feedback from customers was extremely uncommon for Bilal's business, even with his demanding clientele. Customer satisfaction had actually appeared to be unrestricted since the business invested in a totally renovated

The Meeting

Siwar was shocked by the negative atmosphere at today's meeting because Bilal is known as a symbol of corporate success. The foreign food company Droob International, which owns $25\%$ of Bilal's equity, recently expressed how unhappy it is with the current management group. Mohammed, the managing director of Droob, had publicly criticized Bilal's management in a very noticeable statement: Yes, it's true that the Bilal's team has created an amazing business, but isn't financial performance now more important than ever? Shouldn't a dominant brand generate revenue?

A copy of Bilal's most recent financial statements $($Exhibit $1)$ was spread across the table, along with some business peer and capital market benchmark statistics $($Exhibit $2).$ Siwar obtained the financial statements and used them to calculate financial ratios and assess the company's financial health $($Exhibit $3).$ To structure her analysis, she used a clever algebraic decomposition of ROE she learned

in a finance course $($Exhibit $4).$ She never expected to be in charge of evaluating financial performance. But now that she was looking at the ratios, she realized she had something to say. She quickly scratched out some more notes and, feeling brave, raised her hand.

Questions

$1.$ Is Bilal$$s Business a healthy business? Why or why not?

$2.$ How do you view Mohammed's assessment of Bilal's management team? Is Mohammed's disappointment justified?

$3.$ How do the financial statements in Exhibit $1,$ ratio analysis in Exhibit $3,$ and performance benchmarks in Exhibit $2$ provide insights into Bilal's operating performance? How does the ROE decomposition in Case Exhibit $4$ inform your analysis?

$4.$ How would Siwar address the committee??

Exhibit $2$

Bilal$$s Business

Benchmark Performance Figures for Sample of Premium Food Producers

Financial Returns for Sample of Premium Food Producers for $2019$

ROE

RONA

Low$-$Return Firms $(25$th percentile$)$

$1\mathrm{.}2\%$

$2\mathrm{.}3\%$

Median$-$Return Firms $(50$th percentile$)$

$8\mathrm{.}9\%$

$7\mathrm{.}1\%$

High$-$Return Firms $(75$th percentile$)$

$19\mathrm{.}4\%$

$13\mathrm{.}3\%$

Capital Market Benchmarks for January $2020$

Estimated Cost of Equity $($based on beta estimate of $0\mathrm{.}9)$

$8\mathrm{.}0\%$

Estimated Weighted Cost of Capital $($WACC$)$

$6\mathrm{.}1\%$

Exhibit $3$

Bilal$$s Business

Siwar$$s Financial Analysis of Bilal$$s Business

$2015$

$2016$

$2017$

$2018$

$2019$

Growth and

Returns

Revenue Growth

$[$percentage change in revenue$]$

$5\mathrm{.}5\%$

$-2\mathrm{.}6\%$

$13\mathrm{.}0\%$

$18\mathrm{.}4\%$

$9\mathrm{.}5\%$

Return on Assets

$[$net profit $/$ total assets$]$

$15\mathrm{.}4\%$

$9\mathrm{.}3\%$

$1\mathrm{.}7\%$

$1\mathrm{.}1\%$

$1\mathrm{.}4\%$

Return on Net

Assets

$[$NOPAT $/$ net assets$]$

$19\mathrm{.}0\%$

$11\mathrm{.}9\%$

$3\mathrm{.}5\%$

$2\mathrm{.}6\%$

$2\mathrm{.}8\%$

Return on Equity

$[$net profit $/$ shareholders$$ equity$]$

$24\mathrm{.}2\%$

$12\mathrm{.}6\%$

$4\mathrm{.}5\%$

$3\mathrm{.}0\%$

$3\mathrm{.}9\%$

Margins

Gross Margin

$[$gross profit $/$ revenue$]$

$28\mathrm{.}1\%$

$26\mathrm{.}8\%$

$25\mathrm{.}3\%$

$23\mathrm{.}8\%$

$22\mathrm{.}0\%$

SG&A Percentage

$[$SG&A expenditures $/$ revenue$]$

$9\mathrm{.}9\%$

$15\mathrm{.}5\%$

$18\mathrm{.}3\%$

$19\mathrm{.}1\%$

$17\mathrm{.}3\%$

Operating Margin

$[$operating profit $/$ revenue$]$

$18\mathrm{.}3\%$

$11\mathrm{.}3\%$

$7\mathrm{.}0\%$

$4\mathrm{.}6\%$

$4\mathrm{.}7\%$

Net Profit Margin

$[$net profit $/$ revenue$]$

$13\mathrm{.}7\%$

$8\mathrm{.}4\%$

$2\mathrm{.}8\%$

$1\mathrm{.}6\%$

$2\mathrm{.}0\%$

Asset Efficiency

Asset Turnover

$[$revenue $/$ total assets$]$

$1\mathrm{.}1$

$1\mathrm{.}1$

$0\mathrm{.}6$

$0\mathrm{.}7$

$0\mathrm{.}7$

PPE Turnover

$[$revenue $/$ net PP&E$]$

$2\mathrm{.}1$

$2\mathrm{.}1$

$0\mathrm{.}8$

$0\mathrm{.}9$

$0\mathrm{.}9$

NWC Turnover

$[$revenue $/$ net working capital$]$

NA

NA

NA

$34\mathrm{.}0$

$35\mathrm{.}8$

$[$accounts receivable $/$ revenue $\backslash$times

AR Days $($DSO$)$

$365]$

$19\mathrm{.}2$

$19\mathrm{.}1$

$17\mathrm{.}6$

$20\mathrm{.}3$

$20\mathrm{.}1$

Inv Days $($DIO$)$

$[$inventory $/$ COGS $\backslash$times $365]$

$17\mathrm{.}9$

$20\mathrm{.}7$

$19\mathrm{.}6$

$21\mathrm{.}0$

$20\mathrm{.}7$

AP Days $($DPO$)$

$[$accounts payable $/$ COGS $\backslash$times $365]$

$32\mathrm{.}5$

$36\mathrm{.}0$

$35\mathrm{.}8$

$27\mathrm{.}8$

$21\mathrm{.}2$

Leverage

Debt $/$ Total

$[$debt $/($debt $+$ shareholders$$

Capital

equity$)]$

$22\%$

$7\%$

$59\%$

$60\%$

$60\%$

Summary Accounts $($in millions of US dollars$)$

NOPAT $($t $=25\%)$

$[$operating profit $\backslash$times $(1$ tax rate$)]$

$26$

$16$

$11$

$9$

$10$

Net Working

Capital

$[$current assets $$ current liabilities$]$

$(2)$

$(5)$

$(1)$

$7$

$8$