Analysis based on Top Glove's financial data between 2017 and 2020.
Top Glove Corp Bhd is one of the largest manufacturers of gloves globally through several product lines to a diverse group. The company selling different types of gloves include latex, nitrile, vinyl, and surgical. Top Glove’s products are utilized in an array of end markets such as aerospace, food, beauty, medical, and home care. Traditionally, the company has derived more than half of its sales from its nitrile and powdered latex product lines, with customers in Europe and North America generating the most demand out of it. Products like powdered latex gloves are built to meet quality standards and provide comfort and protection.
The company owns and operates 47 manufacturing facilities in Malaysia, Thailand, China, and Vietnam. One of their names is low glove, Top Glove also has sales & marketing offices in these countries except for Vietnam as well as the United States, Germany, and Brazil.
Dupont Model
Profitability Analysis
The analysis and my decisions making will be driven by the analysis of profitability, financing risk and liquidity of the company itself. The best way to analyse whether the company is good or bad is to look at the company’s performance and its historical data.
Share Price
For most of the companies under current Covid-19 pandemic circumstances, we would expect the share price plummet in the share price from 2019 to 2020 but Top Glove is not the case. Top Glove having an inclined share price tremendously based on the share price graph shown above. Top Glove is expected to show a significant inclined in share price from 2019 to 2020 reflecting the significant increase in revenue because the glove demand surged in the healthcare sector. However, the company experienced fluctuation in share price from 2017 to 2019 while return on shareholder’s funds has been showing a slight decreased over this period until 2020 it shows that having the major increase of return on shareholders’ funds. We are able to see a problem clearly with the company’s performance as well as management’s performance over this period.
The rate of return equity on total shareholders’ funds is the simplest and essential to evaluate that able to give insight into how well the company performed and how much the investors able to receive the investment return. Besides, return on equity driven by earnings and earnings are the essential and significant part of every business including Top Glove which the company’s earnings are quite constant.
The operating performance of Top Glove is represented by the rate of return on assets (ROA). The ROA shows how the firm performs by generating income that correlated to asset turnover from the company’s assets before we look at debt is taken into the company’s account itself. ROA was also able to see how well the company turns the income (sales) into profits before interests and taxes that correlated to operating profit margin.
Trend Indicator
As we look at its trend analysis section above contains sales, EBIT and assets, we are able to see improvement in sales yearly till 2020 which is expected. We are able to see Top Glove’s assets and EBIT have remained improving yearly till 2020. Usually companies with this good improvement of sales, EBIT and Assets would lead us to the inclined ROA and inclined profit margin but Top Glove wasn’t the case despite 2020 growth as we can look at the ROA value driver analysis below.
Core Value Drivers
The profit margin and asset turnover are decomposed by the return on assets. As we can see the asset turnover having a sign of decline significantly. The operating profit margins are remained constant from 2017 till 2019 and had an impressive profit margin in 2020 during the Covid crisis which is expected. One of the aspects that is pretty odd which is the company return on assets (ROA) was dropping yearly from 2017 till 2019, it clearly shows that the company was not relying on their assets to generate their increased revenue during that period of time. For this, we are able to relate to the company’s total assets based on company data, which has significantly inclined in the company’s assets in 2018 as they have acquired a company called Aspion by purchase amount of RM1 billion above (I knew this based on my personal investment experience). After the acquisition, Top Glove sued Aspion management because the actual company valuation was much lower than the acquisition price.
Other than that, the market seems to be reacted by their operating profit margin instead of assets turnover by looking at their share price movement. To analyse a detailed analysis and identify a specific problem, usually, analysts would need to examine different business segments, especially for listed holding companies. Also, management typically would only focus on business segments that having a major contribution to the company.
In conclusion, even though, without the Covid-19 crisis occurred. The company still having optimal performance as the company’s NPAT are remained constant and improving on the revenue yearly that likely continues to the following years until the Covid-19 crisis resolved. After everything back to normal, Top Glove might have a slight drop in terms of their revenue.
Debt Analysis
The next thing to examine Top Glove is to identify how the company uses the debt to its advantage. Refer to the Dupont Model attached above.
Top Glove’s debt to asset ratio from 32.83% in 2017 and have a big jump to 69.96%, debt to asset ratio of 2017 and 2018 increased is driven by the acquisition has been made. After 2018, the company management still improving its debt to asset ratio. In 2020, its debt to asset ratio of 34.95% which means the company’s total of assets 34.95% of them are financed by the liabilities. Typically the lower percentage, the better it is. If a company has no debt in their capital structure should have a return on shareholders’ funds equal to ROA multiply by (1-tax rate). During the year 2017, the company was earning 16.17% on shareholders’ funds to the expected return of 8.76% relatively. As it has decreasing debt levels which resulted in improvement on the return on shareholders’ funds. The shareholders’ funds significantly increased to 28.85% compared with 20.01% if there are no debt structure in the company.
The company’s long-term debt is not much different compared to short-term debt. One of the significant company data we can look at is their short-term debt and long-term debt drop tremendously as they’ve earned a lot in 2020 to paid off the debt quickly to achieve their debt advantage. The management has done a good job by realized their short-term and long-term debts were increasing from 2017 to 2019. Short-term debt from RM1 billion to RM300 million and long-term debt from RM1.3 billion to RM200 billion. However, I would suggest the company enforce a debt structure strategy to convert short-term debt of RM300 million to long-term debt.
The debt risk of Top Glove would be considered low. Top Glove able to pay higher dividends to its shareholder compares with no debt structure which means the company is having good debt management.
Cash Flow Analysis
Cash flows analysis shows the company’s net cash flow is not healthy as expected. Despite the huge gains during the 2020 covid crisis, the company’s net cash flow has remained constant at 0. As we looking at the net investing cash flows from 2017 till 2019, Top Glove spent its cash by purchases physical assets or investments in securities. Even though the net cash flow was not healthy as expected, but understand they’re trying to generate more earnings in the future for the growth of the company.
Liquidity Analysis
For the liquidity ratios such as current ratio and acid test ratio, refer to the Dupont Model attached above. It shows the company’s ability to meet the needs of short-term liquidity. As we can see from their 2020 liquidity ratios of 2.01 and 1.73, the company should have no liquidity issues in near future. Moreover, the company’s time interest shows the times a company is able to pay the interest before the income tax. Usually, the normal industry standard is three or above. For Top Glove, they’re having positive that more than three. Since we have a null of time interest earned data in 2020, we are still able to do the analysis from 2017 to 2019. As we can see the number from 51.88 to 6.21, it shows that the company is having high-interest expense started from 2018 as they had a heavier debt for facilities purchased during that period.
Conclusion & Recommendation
To conclude, even without the Covid-19 pandemic crisis, Top Glove would still be growing with the profitability of the company and performance segmentations such as sales, profitability, and assets investment, debt structure, and liquidity.
Depends on an individual’s investment appetite and holding power, the company share price quite fluctuates may not be suitable for inventors who have low holding power especially those who buy shares with margin. However, Top Glove is one of the potential companies in KLSE that worth to invest as it’s having an improvement of growth every year. Besides that, the company keep investing in facilities and technology to grow even more in the future.
To buy, sell or hold decision of the company’s shares depends on whether the one already has the shares invested in the company or the one is not a current shareholder. If the one invested in the company suggested to keep holding the shares as the company keep growing in earnings every year. However, regarding the recent drop of its company share price from its highest point during the Covid crisis, current shareholders are advisable to buy more shares to lower down the average share price and hold it for long term. Those who are not current shareholders is a good opportunity to buy and hold Top Glove’s shares now. Not only of its current share price but its performance indicators such as ROA and ROE.
In my personal view, I would recommend buy and hold the company shares since Top Glove is improving constantly and having an optimum management board that is able to grow the company further. Even though the Covid crisis slowly resolves that may affect its earnings in the near future but the company constantly acquiring market shares globally. As a long-term investor, I’m not worried about holding the company shares.
Comments