15Original scientific paper Economics of Agriculture 2/2012
UDC: 631.11:631.164(497.113)
THE ANALYSES BUSINESS PERFORMANCES OF AGRICULTURAL ENTERPRISES IN VOJVODINA DURING THE CURRENT CRISIS
Jasenka Bubic,1 Jasmina Hajnrih2
Summary
Since the global economic crisis has spilled out into the real sector of Serbia, companies are facing a significant worsening of the financial situation and business efficiency, affecting the country's overall economic activity. Agricultural activity, as the pillar of the successful development of the Vojvodina region, is also experiencing the negative effects of crises that have only deepened the already existing problems of bad privatization and its failure to restrict the level of companies' total debt, especially short-term debt. The goal of this paper is to estimate, by using indicators of financial health, the corporate success of leading agricultural enterprises in Vojvodina in the period 2008-2010 and to determine the prospects for their business efficiency for the next two years. Based on financial statements, analysis and assessment of business performances shell be done using BEX index in the selected sample of agricultural enterprises, with the prognostic expectation for the further period.
Key words: agricultural enterprises, analysis, business success, prognosis JEL: Q12
Introduction
The global economic crisis hit the economy of Serbia at the moment of accession process to the European Union. Rather than correcting a number of negative trends in national economy in this period of time and concentrate on development and improvement of agricultural activity, especially in Vojvodina, crisis is allowed to deepen the problems that agricultural enterprises are facing during the transition period. Due to reduction of financial resources for developing programmes, financial efficiency of agricultural producers deteriorated, which caused decrease in number of agricultural machines and employees. The negative trend was also reflected in the purchasing power decline, which contributed to the decline
1 Jasenka Bubic, Ph.D., University Center for Professional Studies Split, Kopilica street 5, 21000 Split, Croatia, E-mail: [email protected]
2 Jasmina Hajnrih, M.Sc., Accounting agency Korekta, Aleksa Santic street 40, 21000 Novi Sad, phone: +381-21-63-10-699, E-mail: [email protected]
in demand for higher quality and more profitable agricultural and food products. Thereby the qualitative structure of agricultural production has significantly deteriorated. This paper analyzes the problem of (un)threatened business efficiency of agricultural enterprises in Vojvodina in the period covering the three relevant years- 2008, 2009 and 2010. Business performances and business efficiency of these enterprises have been analyzed by using Business Excellence Index (Belak, Aljinovic, Barac, 2008), their ranking was done with the prognostic expectations for the coming period, in order to determine the prospects for corporate success of leading agricultural enterprise in Vojvodina.
Review of the current situation of agricultural enterprises in Vojvodina
At the beginning of July 2011, there were 1537 registered agricultural enterprises in Vojvodina. Regarding the field of plant production, most of them are in the grain-growing business, while in the field of livestock are far fewer companies and most of them are in the business of cow breeding (Table 1).
Table 1. Registered enterprises in Vojvodina (in July 2011)
Code Activity name Number of enterprises Code Activity name Number of enterprises
0111 Wheat production 1.224 0141 Breeding of dairy cows 25
0113 Production of vegetables 82 0142 Breeding of cattle otherwise not classified 1
0115 Tobacco production 2 0143 Breeding of horses and other hoofed animals 0
0119 Production of annual plants otherwise not classified 19 0145 Breeding of sheep and goats 16
0121 Production of grapes 20 0146 Pig breeding 31
0124 Production of apples and nuts 45 0147 Poultry breeding 61
0127 Production of plants for beverages 1 Total of cattle breeding 134
0128 Production of spice plants and aromatic herbs 10
Sum of plant production 1.403
Source: Statistical Office of the Republic of Serbia
The negative effects of the economic crisis resulted in a reduction in profits of agricultural enterprises, significant decline in the purchasing power of consumers of agricultural products and inflow of foreign direct investment in this sector. Serious problems are in the area of profitability due to business losses, that companies cannot leave unless they reduce the level of indebtedness. However, in order to leave the loss zone as soon as possible, in the absence of equity, management is using loans to finance increased investment in production.
Large financial losses do not cause profit enlargement, in spite of an increase in production volume, but the need for new short-term loans to maintain first liquidity and then solvency, which have deteriorating effects on financial structure and financial performance of companies. Due to large financial losses and realized business losses in the last three years, agricultural enterprises in Vojvodina are facing the existential problems affecting employment downsizing and reduction of agricultural machinery in the assets structure.
Analyzing the current situation of agricultural enterprises in Vojvodina, as the largest consequences of current economic events at global and national level, the following trends have been crystallized:
- Modernization of agricultural production is stagnating, considering the fact that the number of machines have decreased considerably during this period and that the high financial losses of this development have influenced further decline in financial strength of enterprises.
- Although these companies have a very significant asset, the following table shows the structure of agricultural machinery in companies in Vojvodina per year and its undoubted decline, which is certainly a consequence of poor results in business and reduced credit potential.
Table 2. Agricultural machinery in agricultural companies in Vojvodina
Year Tractors Fertil. spreaders Planters Cutters Sprayers Combines Tractor sidecars Tracks
2005 6.181 884 765 360 1.003 1.475 6.829 405
2006 5.641 769 677 333 901 1.240 6.074 391
2007 5.167 708 650 307 832 1.028 5.520 355
2008 4.807 658 604 302 781 889 5.266 334
2009 4.362 620 557 318 766 804 4.713 252
Source: Statistical Office of the Republic of Serbia
The number of employees is reduced and it has been decreasing constantly over the last five years. Educational structure of the workforce has been characterized by the declining share of workers with secondary education, while the number of highly educated workers (with university education) has declined to a lesser extent.
Table 3. Employees in enterprises and agricultural cooperatives in Vojvodina
Year No of enterprises in the research sample Workers Permanent workers in agriculture Agriculture experts with Veterinarians Economy experts with
College or university Secondary school College or university Secondary school
2005 464 30.512 26.436 1.679 3.055 691 537 1.702
2006 459 26.293 22.412 1.470 2.725 512 507 1.417
2007 434 23.156 19.557 1.397 2.494 444 452 1.291
2008 440 20.802 17.429 1.360 2.300 397 452 1.124
2009 441 19.638 16.025 1.334 2.085 345 497 921
Source: Statistical Office of the Republic of Serbia
Since the development of agriculture is associated with other industries, such as transport & communications, telecommunications, etc. it is necessary to draw attention to the importance of macroeconomic stability improvement and the encouragement of inflow of FDI in agriculture.
Goals and research methodology
The aim of this study is to determine, by using financial health indicators, business prospects for success or failure of leading agricultural enterprises in Vojvodina in the next two years.
First, companies are ranked by business efficiency using BEX indicator as the prognostic model for the base year 2008, the year in which the current economic crisis began to express its negative consequences. The BEX index calculated in this manner is correlated to the trend index for 2009 and 2010 to determine whether the prognosis for 2008 based on BEX index was correct. Based on the defined objective, derives a working hypotheses which should answer the question whether there is a reasonable correlation between prognosis for the future based on the business performance index, used by management to improve business, and performance indicators in the next two years, after the prognoses had been determined by BEX model. In short, whether it will be possible to prove empirically that the prognostic model could be successfully applied to the economy of Serbia and that using it, the corporate management could conduct successfully further activities to improve and advance the business, in order to leave the zone of poor performance and enter the zone of continuous successful performance that can be expected in the coming years.
Hypotheses X1: Business excellence of an enterprise could be successfully estimated for the period of two years by using combination of different financial ratios and BEX index for the companies in the Republic of Serbia.
For the purposes of research and proof of hypothesis, it is common to take into account the specific time period and qualified sample. The period includes three years- 2008, 2009 and 2010. By defining the sample for this research, two criteria were taken into
account: company has more than 50 employees and the company has a higher income than the average in the industry.
Thus, the basic unit of observation is an agricultural enterprise in the territory of AP Vojvodina with 1537 enterprises registered in 01- Agriculture, hunting and services in the middle of the year. Companies in bankruptcy or restructuring have also been excluded from the research. The selected sample of the research consists of the following companies:
1) PIK Moravica ad, Stara Moravica 5) Basta doo, Zrenjanin
2) Agrobacka ad, Backa Topola 6) Dijamant-agrar ad, Zrenjanin
3) PD Halas Jozef doo, Ada 7) Sava Kovacevic ad, Vrbas
4) AD Djuro Strugar, Kula 8) Nicco agrar doo, Banatski Brestovac
Different methodology that has been used in this paper was based on different aspects of the paper. The methods of analysis, parsing and comparison have been applied. Ratio analysis has been used in the segment in which the overall condition of agricultural enterprises in Vojvodina has been estimated. Prognosis for the future was based on BEX index for the sampled agricultural enterprises for the years 2008, 2009 and 2010. In this paper data from balance sheets for three-year period (2008 - 2010) have been used, which are obtained from the website of the Agency for Business Registers. Farms and entrepreneurs have been excluded from the study, meaning that the sample relates only to the agricultural enterprises whose financial statements are prepared in accordance with International Accounting Regulation. The introduction of these regulations in our legislation has improved the transparency and credibility of the data in the financial statements, especially in agricultural enterprises, and the results obtained by their analysis are more objective and of higher quality.
The theoretical starting point of the model
BEX model was created in 2007, by the authors Vinko Belak, PhD and Zeljana Aljinovic Barac, PhD. The main goal was to create a model for business excellence assessment based on financial indicators calculated on the basis of data from financial statements that are easily accessible to all external users. In addition, the intention was to create a model which is relatively easy to use (Belak, Aljinovic Barac, 2008). This model is primarily intended for analyzing business excellence of Croatian companies quoted on the capital market, but it subsequently got its confirmation in the companies that are not quoted in the capital market or have just entered it. Its application is also possible to assess the success of business enterprises in all similar capital markets. Since the market of Serbia is similar to the market of Croatia the intention was to test its application on the selected sample in this research. According to the authors Belak and Aljinovic Barac (2008) BEX index shows and estimates business excellence in two dimensions - current and expected.
BEX model structure consists of four indicators:
exl (profitability) = EBIT/total assets
ex2 (value creation) = net operating profit/equity x price
ex3 (liquidity) = working capital/ total assets
ex4 (financial strength) = 5(profit + D + A)/total liabilities
A special advantage of this model is that it contains a completely new indicator of financial strength, based on the theoretical correlation between free money from all activities, which is equal to profit plus depreciation and amortization, and coverage of liabilities with that money.
The final expression is obtained by applying specific weights: BEX = 0,388 exl + 0,579 ex2 + 0,153 ex3 + 0,316 ex4 BEX index greater than 1 - good enterprises BEX index between 0 h 1 - improvement needed BEX less than 1 - threatened existence
Detailed ranking of business excellence with prognostic expectations can be done in the following way:
Table 4. Ranking of business excellence with prognostic expectations
BEX index Ranking of business excellence Prognosis for the future
Greater than 6,01 4 years consecutively World class The company operates with superior results what can be expected in the next four years if management continues with improvements
Greater than 6,01 Candidate for world class The company operates excellently what can be expected in the next three years if management continues with improvements
4,01 - 6,00 Excellent The company operates excellently what can be expected in the next three years if management continues with improvements
2,01 - 4,00 Very good The company operates well what can be expected in the next two years if management continues with improvements
1,01 - 2,00 Good The company operates well but the advancement can be expected only with serious improvements
0,00 - 1,00 Bordering area Business excellence is positive, but not satisfying. Serious improvements are necessary.
Less than 0,00 (negative) Bad Existence is threatened. It is necessary to start with restructuring and improvements, otherwise bad business will continue and there is a risk of failure (probability> 90%)
Source: Belak, Aljinovic Barac (2008)
Research results
Further in this paper, the results of BEX index for sampled agricultural enterprises for the year 2008 as the base comparison year have been presented, with special emphasis on each of the four indicators of the BEX index structure.
Profitability is an "inert indicator" that does not have a major impact on final height of BEX index and its contribution is to the stabilization of BEX model. However, it is considered that the good continuous return on total capital is a strong indicator that the company can maintain long-term competitive advantage (Buffet, Clark, 2002). Control measure of this indicator is 17% or higher for the developing market.
Table 5. BEX index for 2008 for sampled companies with rating
Company name Profitability Value creation Liquidity Financial strength BEX 2008 Rating by BEX
Basta do 0,1012 4,0593 0,4480 1,0430 2,7877 4
Djuro Stragar ad 0,1134 2,8952 0,3062 2,7114 2,6240 4
Sava Kovacevic 0,6670 2,4817 0,0366 0,4705 1,6171 3
PIK Moravica 0,0348 2,2253 0,0318 0,2599 1,3889 3
Agrobacka -0,0019 -0,5160 0,3995 1,4272 0,4815 2
Nicco agrar 0,0334 1,3544 0,0623 0,3191 0,9075 2
Halas Jozef -0,0030 -0,1428 -0,1187 0,4276 0,0331 2
Dijamant-agrar 0,0015 -0,0945 0,2064 -1,9330 -0,6334 No rating
Source: calculation of the author
In 2008, only one company had threatened existence ranked by business excellence and was threatened with bankruptcy. All four indicators are below the limit values, and certainly the most vulnerable company is the one with the financial strength indicator -1.9330 (it should be at least 1 or more). This means that the company is unable to cover its liabilities with untied (free) money from the profit in 2008 which doesn't exist, because the company operated at a loss. Also, all liabilities are long-term liabilities, meaning that the company was overburdened with debt, regarding its low financial strength to settle these liabilities from earnings. BEX index calculated in this manner is a signal for the management that serious improvements must be done in 2009.
Companies which operated on the verge of survival and ranked as "sufficient 2" are Nicco agrar, Halas Jozef and Agrobacka. Although they had positive business results in 2008, it wasn't satisfying and a serious improvement and restructuring was required.
Agrobacka has a good financial strength because most of its liabilities in the balance sheet for 2008 were 86% of short-term character, but its ability to create value is jeopardized, because even though the company achieved a positive financial result, it was the operating loss which influenced a negative indicator in 2008. This means that a company "eats" its substance and does not create value above the cost of equity. The situation is even worse with the company Hallas Jozef which besides generated
operating losses, has a liquidity risk, because its current liabilities exceed current assets, so its BEX index is at the upper limit of "the limiting area" and the situation must be taken seriously.
Two companies were ranked as "3" (PIK Moravica and Sava Kovacevic). Based on BEX index, these companies operated well in 2008, but in order to achieve advancement in the coming years, it was necessary to start with the improvements. The ability to create value above the cost of equity capital is good, because they both made big business profit, but it resulted in a very small net gain due to high financial expenses. And this is why the financial strength is also below the expected value.
Basta Zrenjanin and Djuro Strugar Kula are the best ranked companies marked as "very good 4". Their quality business can be expected and in the next 2 years if the management continues to implement improvements in areas that require that. Company Djuro Strugar has greater financial strength, since it generated higher revenue from which it covers its liabilities successfully, but the company Basta Zrenjanin has a greater ability to create value that enables its best ranking in the table. Net operating profit is four times higher than the cost of equity, so the company is successfully developing its economic substance through profit.
Below are the calculations for BEX index of sampled enterprises for the base year 2008 and the next two years 2009 and 2010, which will be used for comparison and empirical confirmation of BEX index in our country.
Table 6. Comparative view of trend of BEX index for 2008, 2009 and 2010
Company name BEX 2008 BEX 2009 BEX 2010 Mark by BEX 2010
Avarage 1,1508 0,1660 2,5516 4
Basta doo Zrenjanin 2,7877 3,0390 7,5830 World class
AD Djuro Strugar Kula 2,6240 0,5477 2,0441 4
Sava Kovacevic ad Vrbas 1,6171 2,3757 2,1630 4
PIK Moravica ad Stara Moravica 1,3889 3,9132 5,2640 Excellent
Agrobacka ad Backa Topola 0,4815 -6,0850 1,6938 3
Nicco agrar doo Banatski Brestovac 0,9075 -2,8826 0,7129 2
PD Halas Jozef doo Ada 0,0331 -0,1461 0,8282 2
Dijamant-agrar ad Zrenjanin -0,6334 0,5660 0,1234 2
Source: calculation of the author
Chart 1. Comparative view of trend of BEX index for 2008, 2009 and 2010
1 1 - ^
1
□ BEX 2008
□ BEX 2009
□ BEX 2010
Djuro Strugar PK Moravica Nicco agrar Dijamant-agrar
Basta Sava Kovacevic Agrobacka PD Halas Jozef
Dijamant-agrar Zrenjanin, as the worst ranked company in 2008, had to make serious improvements in business in 2009, what have been done, because the management was able to completely eliminate long-term liabilities, make recapitalization of the company and realized profit from operating activities. Financial strength of the company has been particularly improved (1,7223) in 2009, because the company achieved profit and reduced long-term liabilities to zero. A new decline of BEX index has been noticed in 2010 due to threatened liquidity (current liabilities exceed current assets) and decline in funding strength (decrease in profit and increase in total liabilities). What we can predict for this company for the next two years is that continuous working on serious improvements and restructuring of the business must be done if the company wants to survive during the economic crisis.
Companies that operated on the verge of survival in 2008 and have been marked as "sufficient 2" are Nicco agrar, Halas Jozef and Agrobacka. Although the signal that serious improvements must be done had been sent to the management, none of these three companies were able to improve their performances in 2009 and their business was quoted as very bad, where the probability of failure is 90%.
Agrobacka experienced the largest decline in operating loss and net loss, and its financial strength was seriously threatened (-11.0890) in 2009, as well as its ability to create value, that is, company does not create value beyond equity (-4.4250), as a result of generated operating loss. Operating income decreased, but the decline was not accompanied by a proportional reduction in operating and other expenses. However, although Agrobacka experienced the largest decline and had the lowest ranking by BEX in 2009, in 2010 it was able to complete the planned improvements and to achieve a net profit at the end of
10
8
6
4
2
0
the fiscal year. This caused stabilization of the company's financial strength (5.2169) and besides operating with a profit, it achieved to reduce its total liabilities in 2010, especially short-term liabilities, and thereby brought the liquidity to an enviable level of 34.01%. Nicco agrar and Halas Jozef have also managed to shift from negative to positive rank, but further improvements were required. In particular, they should improve their financial strength, and although both companies achieved operating profit in 2010, due to high level of financial expenses the final business result was negative. Thus one cannot expect settlement of obligations from earnings. Prognosis for the future is uncertain unless serious improvements are made.
PIK Moravica and Sava Kovacevic are marked as "3" in 2008. Both companies improved their business performance in 2009. and increased their rankings at a very good level of "very good 4". Company PIK Moravica made a bigger progress not only in 2009, but in particular in 2010, when it ranked by business excellence as very successful. This company succeeded to triple its operating profit in 2009 which affected its ability to create value, that is net operating profit was 6.3 times higher than the cost of equity (6.3839). This indicator has reached even greater proportions (8.5687) in 2010, because the operating profit in 2010 compared to 2009 was doubled. The company managed to increase its operating income, ensuring itself excellent business performances with the prognosis that the same trend can be expected in the next 3 years If the management continues to improve business in a high quality manner.
In the case of the two best ranked companies for 2008 (Basta Zrenjanin and Djuro Strugar Kula), there was a drastic decline in business performance of the company Duro Strugar, which moved from the ranking "very good" to "limiting area". What happened in 2009? Although the company achieved operating profit and net profit from operations, they were much smaller than in the previous year. This resulted in the deterioration of the financial strength, and although it was above 1 in 2009 (1.3764), it was still significantly lower than in 2008 (2.7114). The company lost the ability to create value because the operating profit declined by 47% in 2009, resulting in its insufficiency to create value above the cost of equity. The company won't be back on the old track until 2010, achieving the rank as "very good 4" by BEX index, though slightly worse than the one it had in 2008. Operating and net profit increased, and the indicators of financial strength (2.9095) and value creating (1.7920) returned to the safe operating zone. However, the company must continue to improve its business if it wants to reach an exceptional level of business success.
The only company rated as the world-class and whose financial statements undoubtedly show that, is Basta Zrenjanin. The company continues to grow, improve and expand its business in each segment, taking into account all the parameters of business success. Financial strength of the company was at an enviable level in 2010, because the company fully covered all of its liabilities with free cash flow from earnings (8.9872). Operating and net profit continues to grow constantly, liabilities are reduced, assets is fund from its own resources, operating revenues increases, operating expenses maintains at almost the same level. In the year 2010, company had an excellent ability to create value, 7.8 times higher net operating profit compared to the cost of equity. Prognosis for the future of this company is that it currently
operates with high performance, what can be expected in the next 4 years if the management continues to improve and analyze the business.
Concluding Remarks
The conducted research in function of the set goal and working hypothesis has proven beyond doubt that analysis and prognosis for business excellence and financial health of companies based on BEX index are fully acceptable for our market. Thereby we can say that this model got empirical confirmation on the Serbian market through this research, and thus in the Vojvodina region, which has been taken into consideration. All the results that have been explained in detail in the paper show the justifiability of the calculated parameters and the companies that are really successful, with a growth path of development, and those operating on the limits, needing improvements and restructuring.
This is primarily because the BEX index was modeled under the conditions prevailing in the Croatian capital market which is very similar to ours both by the degree of transparency and the development trend. It may be noted that 2009 was an extremely difficult year, and that the leading agricultural enterprises of the region of Vojvodina, which are not in bankruptcy or restructuring, demonstrated a huge decline in performances in an attempt to survive and preserve their business efficiency. During 2010, the situation has been improved considerably. On the basis of good business decisions, management reduced the high financial expenses, which had been the biggest problem of agricultural enterprises in Vojvodina for a long time and reduced long-term liabilities to a minimum.
It remains to be seen how the further development of the crisis will affect the decisions of the state leadership and consequently the company's management to impose a new strategy of development in the agrarian economy of Vojvodina and the whole of Serbia.
Leading agricultural enterprises in Vojvodina, which were analyzed by random sample method in this paper show that there is potential for agricultural development and that the additional investments and grants are necessary so that this plant would demonstrate its full contribution to our country's approach to the international integration processes and enhance its export potential, which is certainly one of the main conditions for the development of our economy and exit from the crisis.
References
1. Belak, V., Aljinovic Barac, Z. (2008): Secrets of Capital Markets, Belak doo, Zagreb, Hrvatska.
2. Buffet, M., Clark, D. (2002): The New Buffettology, CBS Company, London, UK.
3. Statistical calendar of the Republic of Serbia (2011), Statistical Office of the Republic of Serbia, Belgrade, Serbia.
4. Registers of companies -financial reports (2011), The Serbian Business Registers Agency, taken on 01.12.2011. http://www.apr.gov.rs/Registri/ Finansijskiizvestajiibonitet.aspx
5. Vukoje, V., Zekic, V. (2010): Economic Situation of Agricultural Enterprises in Vojvodina, Economics of Agriculture, no. 3/2010, Belgrade, p. 411-425.
ANALIZA POSLOVNE USPESNOSTI POLJOPRIVREDNIH PREDUZECA U VOJVODINI U PERIODU AKTUELNE KRIZE
Jasenka Bubic,3 Jasmina Hajnrih4
Rezime
Od kada se savremena ekonomska kriza prelila na realni sektor Srbije, preduzeca se suocavaju sa znatnim pogorsanjem finansijskog polozaja i uspesnosti poslovanja sto se odrazava ne celokupnu ekonomsku aktivnost zemlje. Poljoprivredna delatnost, kao nosilac uspesnog razvoja vojvodanske regije takode prozivljava negativne efekte krize koji su samo produbili vec postojece probleme lose privatizacije i propusta da se prilikom iste ogranici stepen ukupnog zaduzenja preduzeca, a narocito kratkorocnog. Cilj ovog rada je da se primenom indikatora za utvrdivanje finansijskog zdravlja proceni korporacijski uspeh vodecih poljoprivrednih preduzeca u Vojvodini u periodu 2008-2010. godina i da se utvrdi perspektiva uspesnosti njihovog poslovanja za naredne dve godine. Na onovu finansijskih izvestaja izvrsice se analiza i procena poslovne uspesnosti za uzorkovana poljoprivredna preduzeca pomocu BEX indeksa, s prognostickim ocekivanjima za naredni period.
Kljucne reci: poljoprivredna preduzeca, analiza, poslovna uspesnost, prognoza
3 Dr Sc Jasenka Bubic, Sveucilisni odjel za strucne studije Split, Kopilica 5, 21000 Split, Hrvatska, E-mail: [email protected]
4 Jasmina Hajnrih, M.Sc., Racunovodstvena agencija Korekta, Alekse Santica 40, 21000 Novi Sad, Srbija, Telefon: + 381-21-63-10-699, E-mail: [email protected]
