Addis Ababa University

Collage of Business and Economics

Department of Accounting and Finance

MSc in Accounting and Finance

Course Title: Investment Management

Course Code: ACFN 721

Collaborative Assignment: leather industry and fundamental analysis
 Introduction and background

Ethiopia has undertaken a far-reaching program of economic reforms over the last 20 years

which have delivered strong economic growth. Measures of human development have

improved but remain unacceptably low. Poverty and food insecurity are concentrated in rural

areas, and the poorest sub-sector of rural households are chronically reliant on social safety

net plan and food aid. The agricultural sector, critically important to both overall economic

performance and poverty alleviation, has performed strongly over most of the last decade, but

there is still substantial scope to sustainably improve productivity, production and market

linkages.

Government has demonstrated strong commitment to the sector through allocation of more

than 15% of the total budget, although a significant portion of this is spent on the Disaster

Risk Management and Food Security (DRMFS) program. The sector remains dominated by a

subsistence, low input low output rain fed farming system in which droughts periodically

reverse performance gains with devastating effects on household food security and poverty

levels. However, With 75 million heads of livestock; Ethiopia has the largest concentration of

livestock on the African continent.

Ethiopia’s leather industry is in the forefront of the leather sector development within the

Eastern and Southern African region. As a predominantly agricultural economy with the

largest cattle population in Africa, Ethiopia has a strong base for semi-processed leather,

finished leather and leather products. It is no surprise, therefore, that the recent export

development strategy introduced by the Government recently has singled out this sector as a

priority area and incentive schemes have been designed accordingly However, the challenge

is how to make best use of the country’s revealed comparative advantage to build a dynamic and
competitive sector that contributes to Ethiopia's economic growth and the efforts to

promote technological capability building through increased investment.

Ethiopia has great potential for rapid development of its leather sector and has focussed its

short-term strategy on moving all leather production from the wet-blue stage to crust and
eventually to finished leather. The strategy for the long-term is to gradually convert all

available hides and skins to finished leather products shoe uppers, shoes, jackets, bags, etc.
The rapid development of any sector depends on similar growth in all related sub-sectors and

the infrastructure necessary in order to sustain the momentum of expansion. The recent

development in Ethiopia, both in terms of political and policy environment is conducive to

the development of the sector. However, its success depends on the ability of sector

enterprises to have access to good quality raw hides and skins and to favourable export

market conditions. This is especially important in light of the radical changes in the political

and market environment in Eastern Europe, which was traditionally the main source of

demand for Ethiopian leather products. The success of the sector also depends, to a certain

degree, on the strength and competitive position of the leather and leather products sector in

other African countries, which are also endowed with the resources necessary to build a

dynamic leather-based industry. Some Eastern and Southern African countries have the

potential to emerge as major suppliers of semi-processed leather to export markets, and to

produce finished leather products for domestic and gradually export markets.
Therefore, in designing policies to promote the leather sector, policy-makers in Ethiopia

should take full account of the various factors that affect the competitiveness of products in

the sector, including competition from other countries in the region. Markets for leather

goods have increasingly become more fragmented because of more variety and unique

lifestyle-related products which are in demand. Each product, such as various sports, leisure

and safety products, requires design skills, knowledge and technology and special distribution

channels. In fact, increasingly flexible specialization modes of production are necessary to

cope with rapidly changing market requirements. The fashion and business cycle in most

market segments is now shorter. Greater use of leather substitutes is also becoming common.
In addition, tighter delivery schedules and shorter production runs are the order of the day,

because of the need to reduce costs and risks of maintaining inventory.

These mentioned factors should be reflected in the strategy for building a dynamic leather sector.
According to MEDaC (1999), the livestock population of the country has risen to 34.1, 30.54,
and 21.11 million head of cattle, sheep and goats, respectively, in the year 1998/99, up from

the 1993/94 figures of 31.45, 27.5 and 19.76 million head of cattle, sheep and goats,

respectively. The annual average growth rate was 1.2, 1.4 and 0.5 %, respectively (MEDaC,

1999). Ethiopia has a long history of handcrafting and blacksmithing. The leather soaking

and tanning industry emerged with the establishment of the ASCO tannery (the current Addis

Ababa Tannery) in 1918 and Darmar/Awash (currently ELICO) tannery by Armenian traders

in 1927. In the subsequent years, several local tanneries, such as

Dire, Mojo and Kombolcha were set up. The emergency of the modern leather processing

industry also dates back to the 1930s, a period associated with the establishments of two shoe

factories, Tikure Abbay and Anbessa, by Armenian merchants. In the 1950s and the 1960s,

for example, leather and leather goods production were small in volume and largely targeted

the local market. In the 1974, all private tanneries were nationalized. The government

subsequently established the National Leather and Shoe Corporation, which assumed the

responsibility of managing eight tanneries and six shoe factories.

In 1986, the socialist regime banned the export of raw hides and skin in an attempt to

encourage the domestic production of semi-processed leather articles. This ban radically

altered the marketing structure of hides and skins by restricting exports to at least the wet-

blue level. While the ban might have forced hide and skin traders to sell directly to tanneries

for processing, it has also encouraged illegal cross-border trade in both live animals and hides

and skins.
It is by now evident that the ban had a limited impact in improving the local

leather tanning and leather goods manufacturing capacity.

The Ethiopian leather sector is composed of raw hides and skins traders, leather tanneries,

which source their supply mostly from the local market, and footwear producers, who use

both local and international markets for raw material supply. The most important source of

raw material for leather tanneries are hides and skins that are procured from skin collectors

and traders. Larger tanneries that are fitted with machines and equipment to produce leather

products higher up in the leather value chain buy semi-processed leather products from other
tanneries. The industry produces a variety of types of finished leather, both for domestic use

and for export, and leather products, amongst which the most prominent is footwear.

Investment can be affected by many different factors that are internal as well as external to

the host company. Among the things that can affect the investment: economic, market,

industry and competitive forces are some of them that we going to discuss in our industry

analysis of the selected company Ethio-Leather Industry. Company was analyzed based

economic, market, industry and competitive issues. Data sources include secondary data

collected from the Ethiopia trade and industry ministry website, the Ethiopian Investment

Agency, from different research articles, the website Ministry of Finance and Economic

Development (MOFED) and Ethio-Leather Industry PLC (ASSC) Company.

Fundamental Analysis

A fundamental analysis is all about getting an understanding of a company, the health of its

business and its future prospects. It includes reading and analysing annual reports and

financial statements to get an understanding of the company's comparative advantages,

competitors and its market environment. Fundamental analysis is built on the idea that the

stock market may price a company wrong from time to time. Profits can be made by finding

under-priced stocks and waiting for the market to adjust the valuation of the company. By

analysing the financial reports from companies you will get an understanding of the value of

different companies and understand the pricing in the stock market.

After analysing these factors you have a better understanding of whether the price of the

stock is undervalued or overvalued at the current market price. Fundamental analysis can also

be performed on a sectors basis and in the economy as a whole.

Important of fundamental analysis

The main objective of conducting a study of economic analysis is to help not only assess the
sustainability of investment projects but also to inform the design and select projects that can

contribute to a sustainable improvement in the welfare of project beneficiaries, and the

country as a whole. Economic analysis is a means to help bring about a better allocation of

resources that can lead to enhanced incomes for investment or consumption

purposes.

Therefore, it is best undertaken at the early stages of the project cycle to enable decision

makers to make an informed decision on whether to undertake a particular investment given

various alternatives and their corresponding costs.

The tools of economic analysis can help answer various questions about the project’s overall

effect on society, on various stakeholders/beneficiaries, its fiscal aspects and about the

project’s risks and sustainability. For example, economic analysis can help determine

whether the rationale for public sector intervention is justified. It can help in estimating the

project’s fiscal impact and inform government/implementing agency accordingly; it can also

determine whether there is scope for cost recovery and that arrangements are efficient and

equitable. In addition, it can help in assessing the project’s potential environmental impact

and contribution to poverty reduction.

Industry Analysis covers the structure and state of competition in the industry, nature and

prospects of demand for products and services of the industry, cost conditions and

profitability, technology and research requirements, the immediate and long term outlook for

sales and profit.

Approaches of fundamental analysis (EIC or CIE)

There are various approaches to fundamental analysis of an individual company .

Bottom Up approach to fundamental analysis

Investors focus directly on companies basic or the fundamentals. Analysis of such

information as the company’s product, its competitive position and its financial status and
performance leads to an estimate of the company’s earnings potential and ultimately its value

in the market and future outlook about it.

Top down approach to Fundamental Analysis

This is exactly opposite to the bottom up approach. Investors begin with the economy and the

overall market sentiment. All other factors such as interest rates and inflation, deflation,

demand and supply are taken into consideration

Economy/Market Analysis:

The performance of a company depends much on the performance of the economy if the

economy is BOOM, the industries and companies in general said to be prosperous. On the

other hand, if the economy is in RECESSION, the performance of companies will be

generally poor. Investors are interested in studying those economic varieties, which affect the

performance of the company in which they proposed to invest. An analysed of those

economic variables would give an idea about future corporate earnings and the payment of

dividends and interest to investors. Ethiopia's economy is based on agriculture but the

government is pushing to diversify into manufacturing, textiles, and energy

generation..

Coffee is a major export crop.

The agricultural sector suffers from poor cultivation practices and frequent drought, but

recent joint efforts by the Government of Ethiopia and donors have strengthened Ethiopia's

agricultural resilience, contributing to a reduction in the number of Ethiopians threatened

with starvation. The banking, insurance, telecommunications, and micro-credit industries are

restricted to domestic investors, but Ethiopia has attracted significant foreign investment in

textiles, leather, commercial agriculture and manufacturing. Under Ethiopia's constitution, the

state owns all land and provides long-term leases to the tenants; land use certificates are now

being issued in some areas so that tenants have more recognizable rights to continued
occupancy and hence make more concerted efforts to improve their leaseholds. While GDP
growth has
remained high, per capita income is among the lowest in the world. . Economic expansion over
the

the years has been facilitated by improved infrastructure and more effective mining and

farming techniques, but growth remains highly vulnerable to external shocks.

Macroeconomic analysis

Overview of Ethiopian Economy

Ethiopia has been one of the fastest-growing countries worldwide since 2003. Based on

official statistics; excluding oil and gas exporters, only China has grown faster in the last

eight years. The Ethiopian economy is dominated by the agriculture and services sectors-with

each accounting for about 45 percent of gross domestic product (GDP), leaving only about 10

percent for industry, of which manufacturing accounts for about 6–7 percent. Exports are
highly concentrated, with coffee alone accounting for more than 60 percent of
the total.

Moreover, Ethiopia could hardly be located in the international market for manufacturing

exports, having an industrial export share much less than the already minuscule median for

Africa. The limited change in the structure of the economy, especially with regard to

manufacturing, is partly explained by the low levels of investment flows and the sluggish

growth of the private sector, which was too little to affect its historically low share in labour-

intensive manufactures. Indeed, even after more than a decade of reforms by the current

Government of Ethiopia (GOE) private economic activities in the Ethiopian manufacturing

sector remain very small, even by African standards.

A. Ethiopia Economic Growth

Ethiopia is slowly emerging from multiple and overlapping shocks that have been occurring in
the past three years.2 However, the outlook for 2023 is projected to be less gloomy than the
previous three years. Growth is projected to reach 5% in 2023 (Figure 1).
On the negative side, industry is failing to achieve take-off due to a combination of structural and
regulatory challenges. The macroeconomic pressures have filtered down to the industry level.
Industry in Ethiopia continues to struggle due to shortage of foreign exchange, and slow growth
in construction sector (motivated by declining public investment and challenges in the cement
industry). Ethiopia’s continued AGOA export ban to the US market and administrative
bottlenecks in the industrial parks have also contributed to the slow growth of industry.

The industrial parks have underperformed in 2023. Although the target was to create 138,000
jobs by June 2023, only 55.4% of the target has been achieved. Lack of product destinations of
the factories, failure of new parks to enter operation, and high workers turnover were cited by
the Ethiopia Investment Commission Report as key reasons for weak performance of the parks.
In relation to agriculture, the government has been working on an initiative to boost wheat
production and achieve national wheat self-sufficiency. According to the United States
Department of Agriculture (USDA), Ethiopia’s wheat production is expected at 7 million tonnes
for the 2022/2023 season, an increase of 27% compared to the stock of 5.7 million tons
produced during the previous campaign. However, domestic prices of wheat have increased,
suggesting market integration challenges and increasing price of fertilizer. Cereal imports from
July to March 2023 stood at USD 1.05 billion and 42.5% below the same period in the preceding
year. This constitutes mainly humanitarian food imports. There is a persistent current account
deficit, acute foreign exchange shortages, and high risk of debt distress. If these remain
unaddressed, there will be slowed economic growth. The IMF projection shows that Ethiopia’s
GDP growth in 2023 at 6.1% will be significantly higher than that of 2022 (3.8%).

B. Ethiopia Inflation Rate

Year-on-year headline inflation in April 2023 stood at 33.5% (Figure 2). This remains lower than the

inflation rate during the same month in 2022 (36.6%) and much higher than the rate in 2021(19.2%).

Inflation has been on a generally high trajectory for the past two years. Both food and non-food

components, affected by global and domestic shocks, have contributed to the high and rising inflation.
Inflation also has a significant import component in Ethiopia. Most consumer goods, including food and

cereals, manufacturing products, and agricultural inputs are imported. The global commodity price

increase has led to increased import bills for essential goods.

Ethiopia has been experiencing among the highest inflation rates globally. Inflation in advanced

economies is estimated to slow down to 3.3% in 2023 from its level of 7.3% last year. Similarly, the Sub

Saharan African average end period inflation is projected to slow down from 16.0% in 2022 to 12.3% in

2023 according to the IMF. Ethiopia also has had the highest inflation compared to its peers in East

Africa and one of the second highest in Sub-Saharan Africa. Figure 3 shows Ethiopia’s inflation trend

compared to Kenya and Uganda

C. Ethiopia Taxation rate

Ethiopia’s top individual income tax rate is 35 percent, and its top corporate tax rate is still 30

percent. Other taxes include a value-added tax and a capital gains tax. The overall tax burden

equals 12.4 percent of GDP. Government spending amounts to 17.8 percent of total domestic

output, and the deficit has increased. Public debt amounts to about 22 percent of GDP.

D . Monetary development and banking sector

Broadly defined money supply (M2) has reached Birr 2.1 trillion at the end of March 2023

indicating 30.1% annual and 20% growth in nine months of FY2023. Of that, domestic credit

expansion was the main driver, which annually grew by 28.5%. In terms of decomposition, three-

fourths of the credit went to the private sector, and one-fourth to central government (bank

advances). These bank advances are being used to monetize and finance the deficit, which is at

1.8% of GDP, a departure from past trends. As of May 31, 2023, the total assets, deposits, and

capital of commercial banks stood at Birr 2.7 trillion, Birr 2.1 trillion, and Birr 205.9 billion,

respectively. It shows growth of 18.5%, 25.4%, and 27.9%,

respectively, from the previous year’s same period. In addition, the outstanding loan (excluding

bonds) reached Birr 1.3 trillion, which increased by 33% compared to the same period last year.

The share of

CBE in all parameters dropped compared with last year’s same period.

As per NBE, the banking sector deposits reached Birr 2.1 trillion as of May 2023 compared to

1.6 trillion in 2022. Despite negative real interest rates, bank deposits are growing, partly

because of the lack of alternatives. The minimum statutory deposit rate is 7%, while average

lending rate is 16%, which is outpaced by inflation.

.
E. Exchange Rate Development

Depreciation in the exchange rate of the Birr continued in 2023. On March 31st, 2023, the

official exchange rate reached Birr 54/USD, compared to annual average rate of Birr

48.5663/USD in 2022.3 The trade balance or the gap between export earnings and import

payments remained wide in 2022. This trend continued in 2023 with declining export earnings.

This adds to the demand and supply gap in the foreign exchange market, as reflected in the

parallel market. The premium between the parallel and official exchange rates reached a peak

(more than 100%) by June 2023.

Regulating the black-market foreign currency exchange market has been a challenge for the

authorities, particularly the National Bank of Ethiopia. In April 2022, the Government had issued

a directive allowing franco-valuta imports of essential food commodities without foreign

exchange permits or allocations. The goal was to abate inflation and release pressure on the black

market. However, the measure has not been effective.

The black-market rate continues to be used by many in the business community and remittance

providers. The possible drivers of the parallel market include Franco Valuta importers, other

private sector businesses, travellers and the diaspora who are attracted by the gap in the rates.
There is growing anecdotal evidence of smuggling and under invoicing of exports, particularly

gold, chat and coffee, to obtain foreign exchange which then enter the black market. The

National Bank of Ethiopia has expressed concerns about private sector purchase of foreign

currency from the black market and subsequent capital flight. Capital flight in Ethiopia has been

estimated to be significant even prior to the crisis (USD 1 billion, in 2016). 4

The overvalued exchange rate presents a challenge for macroeconomic management. The longer

the distortion persists, the more costly the adjustments. As a result of the chronic forex shortage,

Franco Valuta will continue, and this will make it difficult to control imported inflation and the

pressure on parallel market. Addressing the exchange rate problem as soon as possible is a key

policy imperative

F. Government Finance

The trends in government finance are not very positive. First, there is stagnant revenue

mobilization and a compressed fiscal space that is leading to declining investment in human and

public investment.

There is an overreliance on bank advances and T-bills to finance the deficit, which is inflationary.

In June 2023, the Council of Ministers has approved and referred to the House of Peoples

Representative a federal budget of Birr 802 billion (USD 15 billion) for 2024 with a significant

degree of austerity as the nominal growth is only 2% compared to 2023, thus, a major

contraction in real terms. In fact, due to the high inflation, a trend analysis shows that the budget

in 2024 is less than 8% of GDP compared to close to 10% in 2023 (Figure 6). The fiscal deficit

in 2024 at Birr 281 billion is projected to be lower than the current fiscal year. More than 85% of

the budget deficit will be financed through issuance of Treasury Bills and borrowing from the

Central Bank, and the remainder is expected to come from donors. The 2024 budget is tilted
towards recurrent spending (70%), a continuation of a previous trend. Tax revenue remained at

7% of GDP in 2023, with regional governments accounting for one-fifth of the share. This is a

similar share to 2022 and has not improved. Specific lines of tax revenue collections such as

domestic indirect taxes were only 39 % of the target by the first half of 2023. However, the

overall tax revenue collection at Birr 296.4 billion, was 48% of the target for 2023. The

Government is aiming for increases in property taxes and direct taxes.

On the expenditure side, although overall recurrent expenditure looks on track at 48% of plan,

capital expenditure lags and reaches only 31% of the target during the first half of 2023. The

slowdown is also seen in poverty targeted expenditures, with only 35.5% of the annual plan

implemented in the first half of 2023.

H .Debt

Ethiopia is facing growing liquidity challenges in servicing and paying for external debts. There

is a debt liquidity rather than solvency problem that will peak in 2023- 25. The stock of

Ethiopia’s public debt at the end of December 2022 reached USD 59.3 billion equivalent of 52%

of GDP. Of which stock of Ethiopia’s external debt was USD 27.8 billion or 24.4% of GDP in

the same period.

Although the current ratio of total debt stock to GDP does not pose a solvency risk for Ethiopia,

on the external debt side there is a liquidity risk embedded in the existing indicators. External

debt servicing to export ratio has reached 22 % which is above the IMF recommended ceiling of

15 %.

About 69% (USD 19.2 billion) of the external debt stock is owed by the central government.

External debt is USD 27.8 billion or 46.94 % of the total debt stock of which: 54% is from official

multilateral, 24.8% non- Paris Club bilateral creditors, and 2.9% from Paris Club while the

remaining 18.3% is from private creditors. Ethiopia pays above USD 2 billion yearly on debt

servicing (MoF, May 2022). A Eurobond of USD 1 billion is scheduled to mature in December
2024, posing challenges for Ethiopia’s liquidity management. According to Fitch, Ethiopia faces

debt servicing of USD 2 billion in 2023. In November 2022, Fitch, an international ratings agency,

downgraded Ethiopia’s ratings due to the lack of external financing to meet substantial external

financing gaps.

A final HIPC-lite option involves a reduction in the total volume of debt service payments

between 2024 and 2033 by 20 %. It implies haircuts and/or interest rate reductions on

outstanding debt. It assumes no debt service reduction for 2023. The scenario is based on a more

ambitious negotiation strategy with bilateral creditors like China, involving agreements on the

maximum amounts to be repaid and the number of years for repayment. This scenario leads to

lower debt service payments compared to the Common Framework scenario.

Industry analysis (leather Company in Ethiopia

Ethiopian Leather Industry: The Overview

Leather is one of the main industrial sectors in Ethiopia. The Government of Ethiopia (GoE)

has given high priority to this sector in its industrial policy and its “Export Development

Strategy”. With an annual off-take rate of nearly 10% for cattle, 33% for sheep and 38% for
goats, the country is endowed with enormous potential for cheap supply of skin
and hide.

There is a clear recognition of this potential by policy makers in Ethiopia as indicated by the

Growth and Transformation Plan (GTP) and several other national plans that preceded it. In

the country GTP document, the leather and leather products industry is one of the priority

industries that are expected to contribute considerably to export diversification and foreign

exchange earnings through greater value addition and productivity improvement

According to MEDaC (1999), the livestock population of the country has risen to 34.1, 30.54,

and 21.11 million head of cattle, sheep and goats, respectively, in the year 1998/99, up from

the 1993/94 figures of 31.45, 27.5 and 19.76 million head of cattle, sheep and goats,
respectively. The annual average growth rate was 1.2, 1.4 and 0.5 %, respectively (MEDaC,

1999).

Ethiopia has a long history of handcrafting and blacksmithing. The leather soaking and

tanning industry emerged with the establishment of the ASCO tannery (the current Addis

Ababa Tannery) in 1918 and Darmar/Awash (currently ELICO) tannery by Armenian traders

in 1927. In the subsequent years, several local tanneries, such as Dire, Modjo and Kombolcha

were set up.The emergency of the modern leather processing industry also dates back to the

1930s, a period associated with the establishments of two shoe factories, TikureAbbay and

Anbessa, by Armenian merchants.In the 1950s and the 1960s, for example, leather and

leather goods production were small in volume and largely targeted the local market. In the

1974, all private tanneries were nationalized. The government subsequently established the

National Leather and Shoe Corporation, which assumed the responsibility of managing eight

tanneries and six shoe factories.

In 1986, the socialist regime banned the export of raw hides and skin in an attempt to

encourage the domestic production of semi-processed leather articles. This ban radically

altered the marketing structure of hides and skins by restricting exports to at least the wet-

blue level. While the ban might have forced hide and skin traders to sell directly to tanneries

for processing, it has also encouraged illegal cross-border trade in both live animals and hides

and skins. It is by now evident that the ban had a limited impact in improving the local

leather tanning and leather goods manufacturing capacity.

The Ethiopian leather sector is composed of raw hides and skins traders, leather tanneries,

which source their supply mostly from the local market, and footwear producers, who use

both local and international markets for raw material supply. The most important source of

raw material for leather tanneries are hides and skins that are procured from skin collectors

and traders. Larger tanneries that are fitted with machines and equipment to produce leather

products higher up in the leather value chain buy semi-processed leather products from other

tanneries. The industry produces a variety of types of finished leather, both for domestic use
and for export, and leather products, amongst which the most prominent is footwear.

Lack of effective, efficient and coordinated support in terms of supply of raw-hides, skin and

other production inputs as well as other related problems were among the challenges faced to

achieve the target.

The leather sector has a potential in increasing the Gross Domestic Product (GDP) of the

country. It requires strong partnership among stakeholders such as domestic and foreign

investors, educational institution, and experts. To make reforms, overcoming basic challenges

and related bottlenecks should be underlined. More significantly protruding the way forward

matters most.

To maximize benefits from the sector, modern management system, adequate level of

integration among the various levels of the industry along its value chain, have to be properly

organized and administered. Besides, creating market linkages, conditions that lead farmers

to black-market should also be well assessed and addressed.

As the leather production is the potential that yet not much exploited, more contribution is

needed to attain a huge economic significance for the country. To this effect, the Ethiopian

government has already made promising strides in providing efficient support to promote

local investors to achieve the target. Currently, the government has started encouraging

manufacturing centers and expanding extension service provisions to the sector. But more

marketing centers need to be established to benefit the country more, and increase foreign

currency earnings from the sector.

Industrial policies were introduced. This is because of the presence of wide ranging and

mutually reinforcing problems at several stages of the leather value chain that have kept

production volume and quality low. The government has thus devised polices to improve the

supply and quality of raw materials and has sought to stabilize their prices. Efforts have also

been made to upgrade the production facilities and techniques of leather processing units

while attempting to improve the international marketability of leather products. In short, the
government interventions in the industry range from the point of skin and hides collection to

the leather production and marketing stages. These were problems that inhibit industrial
transformation and growth of the LLPI and that the market, left to its own devices, cannot

help overcome. Thus proactive state intervention were not only required, they are also now

recognized to have brought about extensive progress in the leather industry.

Anbessa shoe share company (ASSC)

A. Overview of the company

I. Background

Anbessa Shoe, formerly known as the Darmar Shoe Factory, was established in 1939 by an

Italian national. The factory was run by its Italian founder for only three years and was sold
in 1942 to an Armenian citizen, who ran the factory for 33 years as the Darmar Shoe
Factory.

Darmar was initially engaged in both tannery and shoe making. In 1975, Darmar was

nationalized and organized as two public enterprises: Anbessa Shoe Factory and Awash

Tannery. The firm started to export shoes, in small quantities, in the early 1980s. In 1993,

following the issuance of a new proclamation, Anbessa Shoe Factory was restructured as a

share company. The factory is located in two premises in the capital. The main factory and

administrative offices are located in the centre of the capital, Lidetta sub city. In addition, the

factory has a branch unit (MANPO Branch) in the eastern part of the city which is now being

used as local unit.

B. Analysis of the company’s Competitiveness Using Porter’s Five Forces Model

Threats of new entrants:

When examining the leather sector more closely, one can understand that it is a labour

intensive industry while requiring huge amount of capital especially when setting up or

acquiring new production plants. This high sunk cost cannot be recovered if the firm would

closed-down and exit the market.

This by itself is a barrier to entry for many small competitors. But the abundance of raw hides
and skins in the country, the availability of labour force at low cost, the focus given by the

government to the sector’s export potential and the continued increase in the number of

population of the country (as a means of creating strong and sophisticated home demand
base) results in the establishment of new giant factories owned by foreign firms particularly

that of Chinese firms. Thus, high sunk cost doesn’t function as entry barrier to giant firms,

unlike that of small firms. Entry barriers are also not functional to the company due to low

capacity utilization of the company in which the company fails to benefit from economies of

scale.

Threat of Substitute Products:

The increase in the number of competitors in shoe production both nationally and

internationally and the relative similar price of products to customers created a significant

threat of substitutes to the products of Sheba. Thus we can conclude that there is high threat

in case of substituting the products of Sheba by other competitors.

C. Financial analysis and accounting processes (use financial indicators like

ratios)
As of most Ethiopian factories, ASSC uses mostly the traditional accounting management

system to measure performance i.e. finance and accounting measures such as cost allocation

technique, income statement, statement of owners equity and statement of cash flow. In this

process financial performance measures such as sales growth, ROI, annual return on total
asset (ROA), and profit and loss are measured yearly via financial statement
format.

Financial statement of ASSC is done annually and it includes profit and loss statement,

statement of cost of goods sold, inventory or total stock check up, sales and distribution

expense of each retail shops.

D. Financial analysis

The financial analysis of the leather shoe project is based on the data presented, are the

following assumptions:-
1. Profitability

Based on the projected profit and loss statement, the project will generate a profit throughout

its operation life. Annual net profit after tax will grow from Birr 4.97 million to Birr 6.44

million during the life of the project. Moreover, at the end of the project life the accumulated

net cash flow amounts to Birr 63.16 million.

2. Ratios

In financial analysis, financial ratios and efficiency ratios are used as an index or yardstick

for evaluating the financial position of a firm. It is also an indicator for the strength and

weakness of the firm or a project. Using the year-end balance sheet figures and other relevant

data, the most important ratios such as return on sales which is computed by dividing net

income by revenue, return on assets (operating income divided by assets), return on equity

(net profit divided by equity) and return on total investment (net profit plus interest divided

by total investment) has been carried out over the period of the project life and all the results

are found to be satisfactory.

3. Break-even Analysis

The break-even analysis establishes a relationship between operation costs and revenues. It

indicates the level at which costs and revenue are in equilibrium. To this end, the break-even

point for capacity utilization and sales value estimated by using income statement projection

are computed as followed.

4. Pay-back Period

The pay- back period, also called pay off period is defined as the period required for

recovering the original investment outlay through the accumulated net cash flows earned by

the project. Accordingly, based on the projected cash flow it is estimated that the project’s

initial investment will be fully recovered within 4 years.

E. Economic and social benefits

The project can create employment for 72 persons. The project will generate Birr 13.20

million in terms of tax revenue. The establishment of such factory will have a foreign

exchange saving and earning effect to the country by substituting the current imports and

exporting its products to the international market. The project will also create backward

linkage with the livestock sector and also generates income for the Government in terms of

payroll tax.

F Non-financial analysis / Human resource development processes

In this process, issues that have to be given focus are recruiting, education and training,

payment and incentives, motivation and generally employee satisfaction, development and

proper human resource management. Unless these issues are performed well they will

directly or indirectly affect the total performance of the firm. For example, in ASSC the

payment is unsatisfactory and is not based on performance so it did not motivate production

workers towards productivity. Production workers mostly are with no training and education

for long time, no salary promotion, sometimes unsatisfactory incentives or bonus which these

all affects the satisfaction of employee. The discussions with some of the workers of the firm
show that there is no regular work progress meeting and discussion with management bodies

towards the working environment and timely problems. Trainings are mostly on job and

almost insignificant in giving educational opportunity for employee.