Noble Case

NOBLE CASE QUESTION & ANSWERS By:- Abhijeet prakash 1.

How does Noble’s financial health compare to that of its competitors? Please consider measures of asset efficiency and net margins.

Comparing the financial health of a company and its competitors based on measures of asset efficiency basically asks us to define the utilization of the assets of the company to boost the financial performance of the company. Asset turnover ratio is one such ratio which gives us an idea about how well a company can use its assets which includes both current assets and non-current assets to boost the sales of the company. Generally if a company can generate higher revenue using less assets, it means that it is a good company because it is using its assets efficiently.

Noble group

total revenue total assets

2005 2006 2007 116,90,929 13765433 23497142 2847824 3811409 6703078 3329617 5257244

Asset turnover ratio ADM

total revenue total assets

35944 18598

Asset turnover ratio bunge

total revenue total assets

24377 11446

Asset turnover ratio cargill

total revenue total assets

71066 48123

Asset turnover ratio Olam

total revenue total assets Asset turnover ratio

3369.24 2142.44

4.13424

4.469479

36596 21269 19933.5

44018 25118 23193.5

1.835904

1.897859

26274 14347 12896.5

37842 21991 18169

2.037297

2.082778

75208 48298 48210.5

88266 55795 52046.5

1.559992

1.695907

4361.1 2358.16 2250.3

5455.51 3177.59 2767.875

1.849366

1.71687

Thus in the table above I have calculated the Total assets turnover of the company and some of its major competitors which clearly compares the financial health of the two companies using the ratio. The table clearly shows that the total asset turnover ratio for Noble group is much higher than that of any other company and thus the company is very efficiently managing its assets. The ratio of 4.5 indicates that for every dollar of the assets for Noble group its generating 4.5 Dollar of revenue which is much higher than the same for any of its competitors. Using net margin as a tool to explain the financial health of the company I have calculated the Net margin of the company and its competitor.Net margin is basically the ratio of Net profits of the company divided by revenues of the company. The ratio basically shows what percentage of each dollar earned by the company has translated into profits for the company.

noble group

total revenue net profit net margin

2005 2006 2007 116,90,929 13765433 23497142 239996 133440 258485 2.05% 0.97% 1.10%

ADM

total revenue net profit net margin

35944 1044 2.90%

36596 1312 3.59%

44018 2162 4.91%

Bunge

total revenue net profit net margin

24377 530 2.17%

26274 521 1.98%

37842 778 2.06%

Cargill

total revenue net profit net margin

71066 2103 2.96%

75208 1537 2.04%

88266 2343 2.65%

Olam

total revenue net profit net margin

3369.24 65.91 1.96%

4361.1 87.23 2.00%

5455.51 109.05 2.00%

While comparing financial health of companies in same industry, net margin is a good reflector of the efficiency of the company. In the above calculation we can see that ADM and Cargill has a much higher Net margin than Noble group for all three years. One another hand the net margin of Noble group for 3 successive years has been falling down constantly. Thus we can say that ADM and Cargill can convert their Sales into profit much effectively than Noble group.

2.

What are the purposes and consequences of using receivables facilities?

The main purpose of using receivable facility by noble group was to provide an immediate boost to the cash flow of the company. These receivable facilities could solve short term cash problems of the company and help fuel the growth of the company. Basically the primary objective behind setting up of a receivable facility by the noble group was to increase the inflow of cash into the company. Working capital, which is the difference of current assets and current liabilities, decreases when the current liabilities of the company increase. On the other hand it decreases when the current liabilities of the company go down. Thus noble took to discounting its account receivable, or to sell its accounts receivable to financial institutions for cash. Noble group used insurance company to insure its receivable by paying about 60 basis points for every dollar of insurance it provided. Thus by setting up a receivable facility the company could get cash from financial institutions in lieu of the invoices of the accounts receivable. This way company was able to receive the required cash amount within no time instead of waiting for months for the money as per the terms laid down in the agreement. The primary consequence of this cash inflow was that the amount was not reflected in the balance sheet as debt and and thus it gave a major upward push to the working capital strength of the company. One another major consequences of this set up was that the company started insuring its accounts receivable and thus the failure of loss due to non-payments of a part of that account receivable decreased drastically as the insurance provided the assurance of payment. There were some limitations on what kind of receivables could be funded which was laid down by the financial company. Company generally used to take a part of the account receivable amount as funding in lieu of the charges by the finance providers.

3. What are the purposes and consequences of entering into the soy prepurchase agreement? The main purpose behind the soy pre purchase agreement by Noble group was to provide financing to its suppliers of soya who were located in countries that lacked a deep Capital market. In many instances the farmers were unable to finance their soy farming on their own. In such cases Noble used to provide them the required loan to fund their operations. Noble used to provide this funding either on its own or by entering into an agreement with any other financial institute. The repayment of this loan was met either with production or supply of the product to the noble. One of the main consequences of this system was that the pre purchase agreement fuelled the funding needs of many farmers for whom the credits were very

scarce. Rising prices of fertilizers and other inputs was making it difficult for many farmers in brazil to fund their farming. Under the terms of the plan , farmer received advance payments as loans to cover the purchase of production inputs and working capital needs, and they were obligated to deliver a pre specified quantity of soybeans once they were harvested.