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Thursday, October 4, 2012

Analysis of the Annual Reports of Chevron Lubricant Lanka PLC during 2005 – 2009


Chevron Lubricant Lanka PLC (CLLP) is a leading manufacturer and marketer of lubricants in Sri Lanka.  In this report, financial statements of CLLP were analyzed using financial accounting tools such as horizontal analysis, vertical analysis and ratio analysis.
For the analysis annual reports during year 2005 to 2009 were used. In order to perform comparison Lanka IOC was selected as it is a major industry competitor of CLLP. It was found that CLLP needs to make a huge effort to protect its current market share. It is recommended to search for and invest in product and market development in order to increase revenue in future.
Few limitations of financial statement analysis were also identified at the end.
Trend Analysis using Income Statement of CLLP; 2005 - 2009
Income Statement
2009
2008
2007
2006
2005
Sales
156.3%
160.1%
155.6%
138.4%
100.0%
Cost of Sales
136.9%
166.5%
155.8%
143.3%
100.0%
Gross Profit
210.3%
142.3%
155.3%
124.8%
100.0%
Other Operating Income
7.6%
13.7%
58.1%
26.5%
100.0%
Distribution costs
181.5%
130.6%
122.4%
107.5%
100.0%
Administrative expenses
123.3%
128.7%
130.5%
117.7%
100.0%
Operating Profit
238.0%
146.8%
170.2%
130.1%
100.0%
Finance income
196.0%
193.1%
103.5%
37.6%
100.0%
Profit before Tax
235.9%
149.2%
166.8%
125.3%
100.0%
Tax
289.4%
182.4%
197.6%
149.6%
100.0%
Net Profit
213.4%
135.3%
153.9%
115.2%
100.0%

Table 24: Trend Analysis using Balance Sheet of CLLP; 2005 - 2009
Balance Sheet
2009
2008
2007
2006
2005
ASSETS
Non-current assets
Property, plant and equipment
53.1%
66.5%
79.2%
86.0%
100.0%
Non current receivables
121.5%
82.7%
98.0%
100.1%
100.0%
Total non-current assets
65.8%
68.0%
80.2%
86.7%
100.0%
Current assets
Inventories
106.7%
126.6%
85.4%
103.6%
100.0%
Receivables and prepayments
157.8%
187.8%
134.7%
114.0%
100.0%
Short-term investments
0.0%
0.0%
0.0%
0.0%
100.0%
Cash and cash equivalents
1218.9%
79.1%
499.2%
73.1%
100.0%
Total current assets
179.6%
137.2%
119.5%
102.1%
100.0%
Total assets
156.8%
123.3%
111.6%
99.0%
100.0%
EQUITY AND LIABILITIES
Capital and reserves
Stated capital
100.0%
100.0%
100.0%
100.0%
100.0%
Retained earnings
219.5%
212.0%
168.6%
123.7%
100.0%
Total equity and liabilities
165.7%
161.6%
137.7%
113.0%
100.0%
Non-current liabilities
Deferred tax liabilities
0.0%
0.0%
22.2%
50.2%
100.0%
Defined benefit obligations
151.5%
118.0%
109.1%
99.5%
100.0%
Total non-current liabilities
85.7%
66.8%
71.3%
78.1%
100.0%
Current liabilities
Trade and other payables
139.2%
83.2%
75.9%
67.9%
100.0%
Current tax liabilities 
410.4%
182.9%
228.8%
200.9%
100.0%
Bank Borrowings
0.0%
0.0%
0.0%
60.5%
100.0%
Total current liabilities
154.9%
84.2%
85.2%
84.7%
100.0%
Total liabilities
147.2%
82.3%
83.6%
84.0%
100.0%
Total equity and liabilities
156.8%
123.3%
111.6%
99.0%
100.0%

Liquidity & Efficiency Ratios of CLLP; 2005 – 2009
Liquidity/Efficiency Ratio
2005
2006
2007
2008
2009
Current Ratio
1.87
2.25
2.62
3.04
2.16
Acid Test Ratio
0.64
0.75
1.38
1.19
1.32
Account Receivable Turnover
14.55
15.87
14.58
12.65
11.47
Merchandise Turnover
3.71
4.30
5.03
4.79
3.58
Days’ Sales Uncollected
28.63
25.31
27.57
30.92
31.96
Days’ Sales in Inventory
119.57
86.45
65.55
90.96
93.19
Total Assets Turnover
2.36
3.01
3.19
2.95
2.41

CLLP has a positive working capital and also it shows a trend of increasing for last five years. Its current ratio is more than 2 during last four consecutive years. CLLP has maintained its acid test ratio more than 1 for last 3 years. This is an evidence for good liquidity position of the organization. Table 3‑2 shows liquidity ratios of Lanka IOC during 2005 to 2010. When it is compared, CLLP shows a very strong liquidity position than Lanka IOC (Figure 3‑1). Lanka IOC has reported even negative working capital during 2006/7 and 2007/8 financial years.
Table 32: Liquidity Ratios of Lanka IOC; 2005/6 – 2009/10
Liquidity Ratio
2005-06
2006-07
2007-08
2008-09
2009-10
Current Ratio
1.06
0.63
0.8
1.04
1
Acid Test Ratio
0.78
0.14
0.19
0.13
0.62


Annual reports of CLLP during 2005 to 2009 were analyzed using financial accounting tools namely; horizontal analysis, vertical analysis and ratio analysis. In horizontal analysis, percentage change calculation and trend analysis were performed for each element of both income statement and balance sheet.
It was evident that CLLP’s market growth has stagnated by year 2009. Due to the heavy competition between many number of industry players, CLLP has a challenge to protect its current market share. Although sales have been declined, net profit has increased significantly due to lower base oil prices in year 2009.
Also CLLP faces increase in distribution cost due to the investment in its own distribution channel. During last five years CLLP has been capable of reducing administrative expenses by focusing on cost consciousness in every level of the organization. Nearly 35% potion of total assets at the end of 2009 is cash reserve which is the largest portion apart from the inventory.  This shows inefficiency of using assets for generating revenue.
CLLP is in a good liquidity position than industry competitor Lanka IOC. But its efficiency is less than Lanka IOC in term of credit collection and inventory management. Capital structure of CLLP is less risky and its profitability is far better than industry competitor Lanka IOC.
As opportunity for growth is limited with current product and market, product development and market development is important for CLLP in future. Business risk can be reduced using proper diversification. Huge cash reserve is advantageous in those investments.
It is important to mention limitations of financial analysis. Year-end values may not be representative enough in some cases which having seasonal effects. Comparing with competitors is not possible when accounting methods are different. So it is needed to look beyond financial ratios, for example industry trends, technological changes, changes in consumer tastes, changes in broad economic factors, and changes within the firm itself can be studied.