Financial Statement Analysis of

Convenience Food Lanka PLC

Executive Summary

Convenience Food Lanka PLC was selected for the financial statement analysis. This company is a FMCG company which involved in mainly manufacturing and marketing of textured vegetable protein (TVP). During the period it has diversified its production portfolio.

The company’s financial stalemates of five years which was starting from 2016/17 to 2020/21 were taken into consideration for the analysis. The horizontal analysis was conducted for both Income statement and Statement of Financial Position. Here trend of operating performance components, total asset components, equity components and liability component were identified and the factors for the changes were discussed in the report. The vertical analysis for the income statements also conducted to identify changes in cost composition and profits relative to the revenue over five-year period. Further vertical analysis conducted in Statement of Financial Position to identify the changes in the assets components and liability components during the five-year period.

A detailed ratio analysis was conducted identify the liquidity status, profitability, solvency market analysis of the company. During the period working capital was increased. But in 2020/21 both current ratio and quick ratio were declined compare to base year but they are more standard level. Trade receivable turnover and merchandise turnover both improved during the year which is good sign for liquidity. Profit margin in year reported a highest level compare to previous years because of the control over the cost. Which is indicates company’s resilience to covid-19 pandemic situation. Market price for the company achieved milestone in the period 2020/21 which is higher price reported during the period under consideration.

Company Over view

Convenience Foods Lanka PLC (CFL) is a FMCG company which involved in mainly manufacturing and marketing of textured vegetable protein (TVP) and other food products. In 1991, Soy Foods Forbes and Walker Limited, a public quoted, a subsidiary of Forbes and Walker Limited, started its operation to manufacture textured vegetable protein (TVP). This product is introduced under brand name ‘Lankasoy’.

A paradigm shift occurred in 2000, when Ceylon Biscuits Limited (CBL) acquired a 79% controlling stake of the Company and relaunched the Company as Soy Foods Lanka Limited. In 2001 and 2002 CBL revolutionized the slow-moving soya meat market by introducing nugget shaped fish, chicken and vegetarian flavoured soya products. The new, flavoured soya products transformed and expanded the domestic soya market, leading to many accolades for Lankasoy. In 2008, the Company changed its name to Convenience Foods Lanka PLC (CFL), to reflect its growth plans of diversifying beyond Soya based foods, into the convenience foods segment. The Company then expanded its product portfolio to manufacture soups, extruded snacks, nutritional cereal, and other convenience products under the brand names of Lankasoy, Tetos Snack, Sera Soup and Nutriline Cereal. In 2017, CBL Investments Limited purchased 71.38% of the issued share capital of CFL from Ceylon Biscuits Limited, thereby transferring majority ownership of CFL, to CBL Investments Limited.

1.Horizontal Analysis

	2016/17	2017/18	2018/19	2019/20	2020/21
Revenue	100.00	118.02	129.11	157.19	207.39
Cost of sales	100.00	119.15	138.18	158.76	202.58
Gross profit	100.00	115.81	111.35	154.09	216.84
Other income	100.00	127.76	156.65	191.42	202.50
Distribution expenses	100.00	100.50	114.13	137.97	138.75
Administrative expenses	100.00	81.06	109.51	125.16	133.19
Finance expenses	100.00	16.85	19.37	95.25	266.75
Profit before tax	100.00	186.10	122.99	228.54	457.77
Income tax expense	100.00	169.96	100.59	169.22	228.80
Profit for the year	100.00	195.58	136.15	263.38	592.23

1.1Trend Analysis and Comparative Analysis

	2016/17	2017/18	2018/19	2019/20	2020/21
Revenue	-6.57%	18.02%	9.40%	21.74%	31.94%
Cost of sales	-8.57%	19.15%	15.97%	14.90%	27.60%
Gross profit	-2.39%	15.81%	-3.85%	38.39%	40.72%
Other income	73.34%	27.76%	22.61%	22.19%	5.79%
Distribution expenses	7.09%	0.50%	13.55%	20.89%	0.57%
Administrative expenses	-0.63%	-18.94%	35.10%	14.29%	6.41%
Finance expenses	-37.54%	-83.15%	14.97%	391.82%	180.04%
Profit before tax	-7.85%	86.10%	-33.91%	85.82%	100.30%
Income tax expense	-4.40%	69.96%	-40.82%	68.24%	35.20%
Profit for the year	-9.75%	95.58%	-30.39%	93.45%	124.86%

Rs. Million	2016/17	2017/18	2018/19	2019/20	2020/21
Revenue	-108.78	278.68	171.56	434.11	776.45
Cost of sales	95.97	-196.10	-194.85	-210.80	-448.66
Gross profit	-12.81	82.58	-23.29	223.31	327.79
Other income	19.00	12.47	12.98	15.62	4.98
Distribution expenses	-19.93	-1.52	-40.99	-71.75	-2.35
Administrative expenses	0.80	23.91	-35.91	-19.76	-10.13
Finance expenses	1.17	1.62	-0.05	-1.47	-3.33
Profit before tax	-11.77	119.06	-87.27	145.95	316.96
Income tax expense	2.36	-35.79	35.49	-35.11	-30.48
Profit for the year	-9.42	83.27	-51.78	110.83	286.48
Other comprehensive income Items that will not be reclassified subsequently to profit or loss: Actuarial gain/(loss) on defined benefit plan	-0.74	-12.92	14.77	-13.07	-7.16
Deferred tax effect for actuarial gain/(loss) on defined benefit plan	0.21	3.62	-4.13	3.66	0.85
Total other comprehensive income for the year, net of income tax	-0.54	-9.31	10.63	-9.41	-6.31
Total comprehensive income for the year	-9.95	73.96	-41.15	101.43	280.17
Profit for the year attributable to:	0.00	0.00	0.00	0.00	0.00
Owners of the company	-9.42	83.27	-51.78	110.83	-240.99
Non-controlling interest
	-9.42	83.27	-51.78	110.83	-227.36
Total comprehensive income for the year attributable to:	0.00	0.00	0.00	0.00	0.00
Owners of the company	-9.95	73.96	-41.15	101.43	-235.75
Non-controlling interest
	-9.95	73.96	-41.15	101.43	-235.75

Table 1.2 Comparative Analysis of Statement of Income in absolute terms

According to Table 1.1 Revenue of the company has increased to 207.39 whereas the profit for the year has gone up to 592.23 between 2016/17 and 2020/21.Accordind to Table1.1 cost of sales has increased more than proportionately to base year compare to the revenue increase except for the period 2020/21. In Table 1.2, the revenue decline in period 2016/17 resulted due to extreme competition in TVP product category as lower competitors gained short term profits through the fluctuation of Value Added Tax (VAT) in 2016. During that period VAT was increased from its original rate of 11% up to 15% effective from May 2016 before that decision was subsequently reversed in July and the original 11% rate was once again applied subsequently, in November 2016. Competitors used that opportunity to capture the market share. Further, increasing in food inflation in the period also resulted the reduction of consumption of TVP product. Entire TVP product category market recorded decline of 6.9% during the period compared to previous year. This also contributed to the decline in the revenue in 2016/17.

According to Table 1.1 for the period 2018/19 the cost of sales has increased more than proportionate increase in revenue compare to the other years. In Table 1.2 we can observe that revenue for the year increased only increased by 9.49% but the cost of sales has increased by 15.97% compare to previous year. This increase was caused by the steep increase in depreciation of Sri Lankan Rupee against the US Dollar which increased from Rs.157.47 (March 2018) to Rs.180.00 (March 2019). That increased the price of Soy flour which was the main raw material for TVP production. During the period the furnace oil price also increased which resulted in increase in cost of sales.

In Table 1.2, we can observe that administrative expense has increased by 35.10% compare to previous period which was a significant increase comparing to other periods. Its resulted due to increase in cadre which increased the staff cost by 16%. Further according to the Table 1.1 the distribution expense has increased 137.97 in 2019/20 from base year. It can be observed in the comparative analysis which indicates 20.89% increase compared to previous year. This also increased same proportionately has the revenue for that year. During that period company has introduced new range of product, for that extensive advertising and promotion were carried out and further the company has invested in the delivery vehicles.

Finance cost has dropped significantly from base year 2016/17 to the period 2017/18 but it increased from 2018/19 again. This resulted due to the elimination of interest bearing borrowing by the company in the period 2016/17.

Figure 1.2 Trend Analysis of Expenses

Figure 1.1 Trend Analysis of Profit Figures

Figure 1.1 illustrates that except the period 2018/19 the profit for the company has increased from base year. This was caused because the increase in cost of sales, distribution expense and administrative expense which increased more than proportionately compare to the increase in revenue. In the period of 2020/21 profit has been increased drastically. During these 5 years’ period company reported highest revenue during this period. The distribution expense and administrative cost did not increase same as revenue, as a result profit for the year increased to 592.23 compare to base year and increased by 127.86% compare to earlier year.

	2016/17	2017/18	2018/19	2019/20	2020/21
Assets
Non-Current Assets
Property, plant and equipment	100.00	93.46	80.79	94.10	182.62
Right of use				100.00	293.20
Leasehold land	100.00	98.65	97.30	0.00	0.00
Intangible asset	100.00	101.74	94.87	82.00	72.18
Investment in subsidiary	100.00	100.00	100.00	100.00	100.00
Total non-current assets	100.00	93.81	81.53	96.84	190.00
Current assets Inventories	100.00	145.15	158.07	192.46	219.39
Trade and other receivables	100.00	128.46	147.72	232.28	312.96
Amounts due from related parties	100.00	245.40	246.34	575.02	505.74
Short term investments	100.00	152.39	189.00	193.73	300.78
Cash in hand and at bank	100.00	175.57	42.99	798.55	225.30
Total current assets	100.00	143.66	165.81	223.96	290.49
Total assets	100.00	128.99	141.00	186.54	260.91
Equity and liabilities
Equity attributable to equity - holders of the parent Stated capital	100.00	0.00	0.00	0.00	0.00
Other Reserves			100.00	0.00	0.00
Retained earnings	100.00	116.42	132.51	163.49	234.66
Total equity	100.00	120.86	135.81	164.60	230.74
Liabilities
Non-current liabilities
Deferred tax liabilities	100.00	91.47	86.75	41.30	28.17
Lease Liabilities				100.00	564.44
Retirement benefit obligations	100.00	131.30	129.49	157.50	216.94
Total non-current liabilities	100.00	118.13	115.36	128.25	206.29
Current liabilities
Trade and other payables	100.00	156.98	160.77	235.31	426.21
Lease Liabilities				100.00	169.82
Current tax liabilities	100.00	302.26	29.08	280.31	241.09
Amounts due to related parties	100.00	111.70	743.55	1228.18	707.42
Bank overdrafts			100.00	343.98	0.00
Total current liabilities	100.00	170.03	174.29	308.30	418.71
Total liabilities	100.00	155.81	158.14	258.97	360.51
Total equity and liabilities	100.00	128.99	141.00	186.54	260.91

Table 1.4 Trend Analysis of Statement of Financial Position

	2016/17	2017/18	2018/19	2019/20	2020/21
Assets
Non Current Assets
Property, plant and equipment	-6.94%	-6.54%	-13.55%	16.47%	94.08%
Right of use				100.00%	193.20%
Leasehold land	-2.52%	-1.35%	-1.37%	-100.00%
Intangible asset	-5.88%	1.74%	-6.75%	-13.57%	-11.97%
Investment in subsidiary	0.00%	0.00%	0.00%	0.00%	0.00%
Total non-current assets	-6.83%	-6.19%	-13.09%	18.77%	96.20%
Current assets
Inventories	-11.11%	45.15%	8.90%	21.75%	13.99%
Trade and other receivables	22.47%	28.46%	15.00%	57.24%	34.73%
Amounts due from related parties	-55.52%	145.40%	0.38%	133.43%	-12.05%
Short term investments	1.52%	52.39%	24.02%	2.51%	55.25%
Cash in hand and at bank	1591%	75.57%	-75.52%	1757.65%	-71.79%
Total current assets	7.81%	43.66%	15.42%	35.07%	29.70%
Total assets	3.05%	28.99%	9.31%	32.30%	39.87%
Equity and liabilities
Equity attributable to equity - holders of the parent Stated capital	0.00%	0.00%	0.00%	0.00%	0.00%
Other Reserves		100.00%	0.00%	0.00%	0.00%
Retained earnings	13.30%	16.42%	13.82%	23.38%	43.53%
Total equity	12.24%	20.86%	12.37%	21.20%	40.18%
Liabilities
Non-current liabilities
Deferred tax liabilities	27.53%	-8.53%	-5.15%	-52.40%	-31.78%
Lease Liabilities				100.00%	464.44%
Interest bearing borrowings	-100.00%
Retirement benefit obligations	-9.15%	31.30%	-1.38%	21.63%	37.74%
Total non-current liabilities	-1.97%	18.13%	-2.35%	11.17%	60.84%
Current liabilities
Trade and other payables	-11.03%	56.98%	2.42%	46.36%	81.13%
Lease Liabilities				100.00%	69.82%
Interest bearing borrowings	-100.00%
Current tax liabilities	458.45%	202.26%	-90.38%	863.88%	-13.99%
Amounts due to related parties	38.02%	11.70%	565.65%	65.18%	-42.40%
Bank overdrafts	-100.00%		100.00%	243.98%	-100.00%
Total current liabilities	-18.89%	55.81%	1.49%	63.76%	39.21%
Total liabilities	3.05%	28.99%	9.31%	32.30%	39.87%
Total equity and liabilities	3.05%	28.99%	9.31%	32.30%	39.87%

Table 1.5 Comparative Analysis of Statement of Financial Position in %

	2016/17	2017/18	2018/19	2019/20	2020/21
Assets
Non Current Assets
Property, plant and equipment	-20.20	-17.71	-34.31	36.03	239.76
Right of use	0.00	0.00	0.00	13.74	26.54
Leasehold land	-0.13	-0.07	-0.07
Intangible asset	-0.56	0.16	-0.61	-1.15	-0.88
Investment in subsidiary	0.00	0.00	0.00	0.00	0.00
Total non current assets	-20.89	-17.62	-34.99	43.60	265.43
Current assets
Inventories	-13.79	49.81	14.26	37.93	29.71
Trade and other receivables	44.09	68.38	46.28	203.16	193.84
Amounts due from related parties	-2.30	2.68	0.02	6.06	-1.28
Short term investments	4.67	163.82	114.46	14.81	334.71
Cash in hand and at bank	16.84	13.52	-23.73	135.22	-102.59
Total current assets	49.51	298.21	151.29	397.19	454.39
Total assets	28.62	280.59	116.30	440.79	719.82
Equity and liabilities
Equity attributable to equity - holders of the parent
Stated capital	0.00	0.00	0.00	0.00	0.00
Other Reserves	0.00	41.61	0.00	0.00	0.00
Retained earnings	81.03	113.38	111.06	213.90	491.32
Total equity	81.03	154.99	111.06	213.90	491.32
Liabilities
Non Current Liabilities
Deferred tax liabilities	4.40	-1.74	-0.96	-9.27	-2.68
Lease Liabilities	0.00	0.00	0.00	5.65	26.26
Interest bearing borrowings	-1.48	0.00	0.00	0.00	0.00
Retirement benefit obligations	-4.16	12.92	-0.75	11.56	24.53
Total non current liabilities	-1.24	11.18	-1.71	7.95	48.11
Current liabilities
Trade and other payables	-17.80	81.81	5.45	107.02	274.08
Lease Liabilities	0.00	0.00	0.00	3.64	2.54
Interest bearing borrowings	-17.78	0.00	0.00	0.00	0.00
Current tax liabilities	13.05	32.16	-43.43	39.94	-6.24
Amounts due to related parties	1.08	0.46	24.68	18.93	-20.34
Bank overdrafts	-29.72	0.00	20.25	49.41	-69.67
Total current liabilities	-51.17	114.42	6.95	218.95	180.38
Total liabilities	-52.41	125.60	5.24	226.90	228.50
Total equity and liabilities	28.62	280.59	116.30	440.79	719.82

Table 1.4 Comparative Analysis of SOFP in absolute terms

Company’s Statement of financial statement has doubled during this five years’ period. Table 1.3 illustrates that total non- current assets have increased for the 5 years’ period only up to 190 whereas current asset increased upto290.49 compared to base year 2016/17. This is due to the decrease in non-current asset period from2017/18to 2019/20 compare to the base year. 2020/21 was the only year contributed to the increase in the non-current asset. Property plant and equipment has increased by 94.08% in 2020/21 compared to earlier year. Right of use is a new item occurred in statement of financial position since 2019/20 period. This occurred because SLFRS-16 replaced the lease standard LKAS 17 and became effective from 2019. Hence the leasehold land recognized as right to use. Unlike non-current asset every items under the current asset were increased during the 5 years’ period. On the equity and liabilities side, total liability increased up to 360.51 and equity was increased up to 230.74.

2.Vertical Analysis- Common Size Analysis

	2016/17	2017/18	2018/19	2019/20	2020/21
Revenue	100	100	100	100	100
Cost of sales	66.22	66.85	70.87	66.88	64.68
Gross profit	33.78	33.15	29.13	33.12	35.32
Other income	2.90	3.14	3.52	3.54	2.84
Distribution expenses	19.46	16.57	17.20	17.08	13.02
Administrative expenses	8.16	5.61	6.92	6.50	5.24
Finance expenses	0.13	0.02	0.02	0.08	0.16
Profit before tax	8.94	14.10	8.52	13.00	19.74
Income tax expense	3.31	4.76	2.58	3.56	3.65
Profit for the year	5.63	9.34	5.94	9.44	16.09

Table 2.1 Common size Income statement analysis

According to Table 1.5 cost of sales is the major expense incurred by the company. This accounts for nearly 66% of revenue expect for the period 2018/19 which was the highest cost of sales incurred compare to revenue during the 5 years’ period. In that year gross profit earned was 0.29 per rupee net sales. Company reports gross profit margin of 35.32 cents per sale in 2020/21 in contrast to 33.78 cent per sale which occurred as result of decrease in cost of sales by 1.54 per sale.

The next highest expense company incurred was distribution which was drastically reduced to 13.02 per cent sale in 2020/21 compare to 19.46 per cent sale in 2016/17. This contributed to the profit margin increase in the year 2020/21.

Figure 2.1 Common size cost analysis

Finance cost has been increased during the 5-year period but it did not affect profit margin because compare to revenue it has very small proposition. Moreover, administration cost also decreased in proposition to the revenue during the period.

	2016/17	2017/18	2018/19	2019/20	2020/21
Assets
Non-Current Assets
Property, plant and equipment	27.98	20.27	16.03	14.11	19.59
Right of use				0.76	1.59
Leasehold land	0.53	0.41	0.37
Intangible asset	0.92	0.73	0.62	0.40	0.25
Investment in subsidiary	0.00	0.00	0.00	0.00	0.00
Total non-current assets	29.44	21.41	17.02	15.28	21.44
Current assets
Inventories	11.40	12.83	12.78	11.76	9.58
Trade and other receivables	24.82	24.72	26.01	30.91	29.77
Amounts due from related parties	0.19	0.36	0.33	0.59	0.37
Short term investments	32.30	38.17	43.30	33.55	37.24
Cash in hand and at bank	1.85	2.52	0.56	7.91	1.60
Total current assets	70.56	78.59	82.98	84.72	78.56
Total assets	100	100	100	100	100
Equity and Liabilities
Equity
Stated Capital	5.43	4.21	3.85	2.91	2.08
Other Reserves	0.00	3.33	3.05	2.30	1.65
Retained earnings	71.32	64.38	67.03	62.51	64.15
Total equity	76.75	71.92	73.93	67.72	67.88
Liability
Non-current liability
Deferred tax liabilities	2.11	1.49	1.30	0.47	0.23
Lease Liabilities	0.00	0.00	0.00	0.31	1.26
Retirement benefit obligations	4.26	4.34	3.92	3.60	3.55
Total non-current liabilities	6.37	5.83	5.21	4.38	5.04
Current Liability
Trade and other payables	14.83	18.05	16.91	18.71	24.23
Lease Liabilities	0.00	0.00	0.00	0.20	0.25
Current tax liabilities	1.64	3.85	0.34	2.47	1.52
Amounts due to related parties	0.40	0.35	2.13	2.66	1.09
Bank overdrafts	0.00	0.00	1.48	3.86	0.00
Total current liabilities	16.88	22.25	20.86	27.90	27.09
Total liabilities	23.25	28.08	26.07	32.28	32.12
Total equity and liabilities	100	100	100	100	100

Table 2.2 Common size analysis of Statement of financial position

Current Asset constitutes nearly 78.56% of total asset in year 2020/21 which was an increase compare to 70.56% in year 2016/17. Most of this increase comes from short term investment which was the largest component of current asset and next largest component trade and other receivables which were respectively increased up to 37.24% and 29.77% from 2016/17. In comparison, 21.44% of total asset in year 2020/21 dropped drastically from 29.44% in year 2016/17. This dropped mainly occurred due to PPE decrease which was a large component of non-current asset. PPE decreased as a percentage of total asset from 27.98% in year 2016/17 to 19.59% in year 2020/21.

Figure 2.2 Asset and Liability Composition

The company is majorly financed by equity which accounts for 67.88% of total assets in year 2020/21. Just 2.08% are financed by stated capital remaining 64.15% is retained earnings. Total liability comprises 32.12% of total assets in the year 2020/21. Majority of liability contributed by current asset of 27.09%.

3.Ratio Analysis

3.1 Liquidity Analysis

Liquidity Ratio	2016/17	2017/18	2018/19	2019/20	2020/21
Working Capital (Rs. million)	519	703	847	1,026	1,300
Current Ratio (times)	4.18:1	3.53:1	3.98:1	3.04:1	2.90:1
Acid Test Ratio (times)	3.51:1	2.96:1	3.36:1	2.62:1	2.55:1
Trade Receivable Turnover (times)	8.13	7.51	6.52	6.52	8.20
Merchandise Turnover (times)	8.74	9.02	8.46	8.41	9.13
Days' Sales Uncollected (in days)	47.89	56.67	60.09	62.59	41.63
Days' Sales in Inventory (in days)	39.32	47.90	44.98	47.67	42.59
Total Asset Turnover (times)	1.62	1.65	1.53	1.53	1.48
Liquidity Index( in days)	21.12	24.73	24.93	24.26	13.56

Table 3.1 Liquidity and Efficiency Ratios

Liquidity measures of the company for the recent 5 years reported in Table 1.6. Working capital was increased by in absolute terms Rs.780 million and in percentage 250% during five-year period.

Current ratio in year 2020/21 is at its lowest compared past five years. Its value of 2.90 is slightly lower compare to 4.18 in year 2016/17.This occurred due to the increase in current liability over the year. The current asset accounted increase up to 290.49% compare to base year 2016/17 which is lower than the increase in current liability which was reported an increase up to 418.71%. In Table 1.7 trade and other payables comprises nearly 89% of total current liability. This has increased to 426.21 % compare to its base year 2016/17 which contributed to decline in current ratio. Short term investment comprises of 47.40 % of currents assets which is the major component in current asset. This has increased to

300.78% since 2016/17 but it did not increase much has the current liability which resulted a decline in current ratio.

Current assets	2016/17	2017/18	2018/19	2019/20	2020/21
Inventories	16.15	16.32	15.40	13.88	12.20
Trade receivables *	29.71	28.88	29.03	27.25	18.44
Other receivables **	5.47	2.58	2.31	9.24	19.46
Amounts due from related parties	0.27	0.46	0.40	0.69	0.47
Short term investments	45.78	48.56	52.18	39.60	47.40
Cash in hand and at bank	2.62	3.20	0.68	9.34	2.03
Total current assets	100	100	100	100	100
Current liabilities	2016/17	2017/18	2018/19	2019/20	2020/21
Trade and other payables	87.88	81.13	81.06	67.07	89.45
Lease Liabilities	0.00	0.00	0.00	0.72	0.90
Current tax liabilities	9.73	17.30	1.62	8.85	5.60
Amounts due to related parties	2.39	1.57	10.20	9.52	4.04
Bank overdrafts	0.00	0.00	7.11	13.83	0.00
Total current liabilities	100.00	100.00	100.00	100.00	100.00

Table 3.2 Common size analysis for current asset and current liabilities

Acid test ratio is lowest in 2020/21 compare to past five years. Its value is 2.55 which was declined by 0.96 times compared to year 2016/17. Table 1.7 indicates that inventories comprise of 12.20% of current asset in 2020/21 hence the current ratio and acid test ratio small gap of 0.35 between them.

Figure 3.1

Figure 1.5 indicates the gap between current ratio and acid test ratio during 5 years period. This gap has declined from 2016/17 to 2019/20 because inventory proportion to current asset has decline to 12.20% from 16.15%.

Figure 3.2

	2017/18	2018/19	2019/20	2020/21
Change in average trade receivables	28%	26%	22%	5%
Change in Sales	18%	9%	22%	32%

Table 3.3 Comparative analysis for average trade receivable and sales

Company’s trade receivable has decline in both 2017/18 and 2018/19 compared to year 2016/17 because average trade receivables for both years grew more than the sales increase. In 2019/20 average trade receivables and sales increased in same percentage hence the trade receivable turnover remained the constant. But in 2020/21 company reported a highest sales compare to earlier years as a consequence sales increased higher proportionately compare to average trade receivable which led to the increase in trade receivable turnover. This indicates that speed of collection from trade receivable has improved in 2020/21 since 2016/17.

2017/18

2018/19

2019/20

2020/21

Change in Sales

18.0%

9.4%

21.7%

31.9%

Change in year

end trade receivables

39.7%

16.0%

26.8%

-12.2%

Table 3.4 Comparative analysis

Collection period for trade receivables worsened between from 2017/18 to 2019/20 but improved drastically in 2020/21. Days sales uncollected has increased to 62.59 days in 2019/2020 from 47.89 days 2016/17. In these three years’ period trade receivable grew faster than the sales reported that period. But in 2020/21 company reported a negative growth of trade receivable and at mean time highest sales growth for five year also reported. This resulted a drastic drop in days’ sales uncollected.

	2017/18	2018/19	2019/20	2020/21
Change in COS	19%	16%	15%	28%
Change in average inventory	15%	24%	16%	17%

Table 3.5Comparative analysis

Expect for 2018/19 and 2019/20 merchandise turnover has improved during the five-year period. Cost of sales grew less than the average inventory in aforementioned years. As a consequence, the merchandise turnover diminished in both years. But as overall merchandise turnover has improved since year 2016/17 to 9.13 times because of an increase in cost of sales which indicates an increase in sales and a decrease in average inventory. This indicates that less fund tied up as inventory this can be observed in Table 1.7 which indicates that inventory for the year ended 2020/21 was 12.2% of total current asset which is the least proportion compare to other years.

	2017/2018	2018/2019	2019/2020	2020/2021
Change in COS	19%	16%	15%	28%
Change in year end inventory	45%	9%	22%	14%

Table 3.6 Comparative analysis

Days sales inventory has increased over the past five years to 42.59 days from39.32 days. This occurred mainly because inventory to 219.39% (Table 1.3) grew more than compare to the cost of sales growth of 202.58% (Table 1.1) from year 2016/17. During the five-year period highest days’ sales inventory was recorded in 2017/18 which resulted as consequence of inventory increase of 45% which is larger than the cost of sales increase of 19% compare to previous year. Except for the base year, 2020/21 recorded a lower days’ sales inventory mainly because that year cost of sales recorded a growth of 28% which is the highest growth in the period under consideration.

Liquidity index was increased to 24 days in year 2017/18 to year 2016/17 and it was constant for following two years. This indicates a deterioration in liquidity. This was contributed by increase in trade receivable days (days sale uncollected) and inventory days. But this index declined drastically in 2020/21 to 13.56 which indicates a improved liquidity of the company. This was due to the decrease in days sales uncollected and also the decrease in the proposition of trade receivables and inventory compare to previous years.

Figure 3.3

Figure 3.3 indicates that total asset turnover was declined to 1.48 in year 2020/21 compare to 1.62 in year 2016/17. The sales increase during the period 207.39% which lower than the increase of average total asset of 227%. This caused the deterioration in total asset turnover ratio. Highest asset turnover reported in the year 2017/18 because that year, sales increased by 18.02% compared to the increase in the total asset of 16.21%. Other than 2017/18 all the period recorded a decline. This may be due to the increased proportion of current asset in the total asset composition.

Figure 3.4

Fixed asset turnover has increased to 7.85 times compare to the year 2016/17. The fixed asset reported a slight increase compared to the significant increase of sales which were respectively 138% and 207%. The total fixed asset of year 2020/21 also includes the investment undertaken for the new species project which scheduled to next financial year. This the reason that fixed asset turnover has declined compare to previous year. In year 2020/21 the average fixed assets grew by 60% which larger than the growth of sales revenue 31.9% compare to previous.

3.2 Profitability Analysis

	2016/17	2017/18	2018/19	2019/20	2020/21
Gross Margin	33.78%	33.15%	29.13%	33.12%	35.32%
Profit Margin	5.63%	9.34%	5.94%	9.44%	16.09%
Return on Assets	9.14%	15.37%	9.08%	14.47%	23.82%
Return on common shareholder's equity	12.40%	20.77%	12.44%	20.56%	35.13%
Book Value per common share	270.14	326.5	366.89	444.67	623.12
Basic Earnings per share	31.68	61.96	43.13	83.43	187.6

Table 3.7

Gross profit for the year 2020/21 was 35.32% which is the highest gross profit margin reported during the five years. Figure 3.5 highlights that in year 2020/21 cost of sales has increased by 27.61% which was less proportionately than sales which increased by 31.94%compare to previous year.

Figure 3.5

Figure 3.6

In year 2020/21, profit margin was 16.09% which has tripled compare to year 2016/17. Cost of sales have dropped as a percentage of sales from 66.22% to 64.68% over the period. And distribution expenses also have dropped as a percentage of sales from 19.46% to 13.02% over the period. Further administrative expenses have dropped from8.16% to 5.24%. The reduction in cost composition contributed to the higher margin.

Figure 3.7

Return on asset can be disaggregated to profit margin and total asset turnover to the analysis. This was disaggregated into meaningful component relative sales because sales are an important criterion to evaluate company’s performance and indicator to profitability of the company. Figure 3.8 indicates the disaggregation of return on asset’ components. During the five-year time period return on asset has been increased to 23.82% from 9.14%. Its evident that relative higher profit margin and but a lower asset turnover was achieved in 2020/21 compare to 2016/17. The higher return on asset was achieved even though there was a decline in asset utilization (indicated by asset turnover ratio) because of the higher profit margin. Only in the year 2018/19 we can observe a drop in return on asset decline in both profit margin and asset turnover. This resulted as consequences of increase in cost of sales as a percentage of sales compare to all the other years.

Figure 3.8

Return on common equity has reached its highest in year 2020/21 which reported 35.1%. Same as return on asset return on common equity can also disaggregated to analysis purpose. This can be disaggregated to profit margin, total asset turnover and total asset to equity ratio (leverage). Expect year 2018/19 we can observe increasing trend of return on common equity. The drastic in increase in return on common equity in both year 2019/20 and 2020/21 was contributed by the increase in both profit margin and the total asset to equity ratio. Compare to previous years the equity to the percentage of total asset has been declined which is evident in Table 2.2.

Figure 3.9

From the above analyzed measure its evident that profitability of the company has improved during the period under consideration even though there was some fluctuation in some years. Only based on ability of a company to earn profit we cannot measure the performance. The cash flow of the operation also need to be considered from that only we can meet the obligations, can invest in asset and can pay dividend to shareholder. This can be assed from figure 3.10. Here the operating cash flow before paying tax and gratuity and operating profit were taken into consideration for analysis. It’s evident that comparing to other years in 2019/20 there was significant variation between the operating cash flow and operating profit. This may be due to the trade receivable days (Table3.1) increase in that period which was highest days compare to earlier years. In five-year period only in year 2020/21 we can observe that the company’s operating cash flow was larger than the operating profit figure. Which suggests that both cash flow and profitability improved in the period.

Figure 3.10

3.3 Capital Structure and Solvency

	2016/17	2017/18	2018/19	2019/20	2020/21
Debt Ratio	23.25%	28.08%	26.07%	32.28%	32.12%
Equity Ratio	76.75%	71.92%	73.93%	67.72%	67.88%
Times Interest Earned	72.16	787.12	452.89	171.74	123.12

Table 3.8

Majority of company’s assets were financed by equity. But equity proportion to total assets were decline from 72.16% to 67.88 in 2020/21. Current liabilities comprise a majority of total debt. Table 1.3 shows the trend index of current liability (418.71) exceeds that of non-current liabilities (206.29) and total liability (360.51)

Figure 3.11

Figure 3.12

Even though finance cost has risen from year 2016/17 to 2020/21 because of the higher profit margin the interest coverage was improved since 2016/17. Largest interest coverage ratio was reported in year 2017/18 because that year the financial cost was declined drastically and at the same time profit margin also increased in that period. Finance cost was stated to increase from 2019/20 because of the lease interest.

3.4 Market Analysis

	2016/17	2017/18	2018/19	2019/20	2020/21
Price- Earnings Ratio (Times)	9.79	6.94	9.27	4.04	6.64
Market Price to Book value Ratio (Times)	1.15	1.32	1.09	0.76	2.00
Dividend Yield	1.29%	0.93%	1.25%	1.33%	0.44%
Dividend payout Ratio	12.63%	6.46%	11.59%	5.39%	2.93%
EPS (Rs.)	31.68	61.96	43.13	83.43	187.6
Dividend (Rs.)	4.00	4.00	5.00	4.50	5.5
Market price per share (Rs.)	310	430	399.6	337.4	1,245.00
Book value per share(Rs.)	270.14	326.50	366.89	444.67	623.12

Table 3.9 Market Ratios

Earnings per share was increased to Rs.187.6 which resulted from increase in profit for the year. Table 1.3 shows trend index of profit for the year 2020/21 is 592.23. EPS also increased in same proportion as profit increase because during the five-year period number of common shares remained constant. Market price for the company increased rapidly by 302 % in year 2020/21 compare to the year 2016/19 which was a mile stone for the company. Book value share was gradually increased from 2016/17 but in year 2020/21 it increased rapidly because of the higher retained profit. Price- Earnings ratio was decreased to 6.64 in year2020/21 compare to 2016/17. This implies that investors are prepared to pay 6.64 year of current earning to acquire the company’s share. This because EPS grew greater than the increase of market price per share the increase are respectively 492% and 302% from the base year 2016/17. The market price to book value ratio was increased to 2 times in year 2020/21. This reflects the higher profitability of the company in the market. While dividends per share increased from Rs.4 in year 20216/17 to Rs.5 in 2020/21, the dividend yield declined from 1.29% to 0.44% over the same period. And also dividend payout ratio also declined to 2.93% from 12.63%. This indicates even though company paid an increased dividend per share compare to earlier it did not reflect the earning per share growth.

Figure 3.13

3.5 Z-Score Analysis

Amounts in Rs.million	2016/17	2017/18	2018/19	2019/20	2020/21
Working Capital	519.63	703.43	847.77	1,026.01	1,026.01
Total Asset	967.93	1,248.52	1,364.81	1,805.61	2,525.42
T1	0.537	0.563	0.621	0.568	0.406
Retained Earning	690.37	803.75	914.81	1,128.70	1,620.02
Total Asset	967.93	1,248.52	1,364.81	1,805.61	2,525.42
T2	0.713	0.644	0.670	0.625	0.641
Earning Before Tax	140.21	257.65	170.44	317.86	638.15
Total Asset	967.93	1,248.52	1,364.81	1,805.61	2,525.42
T3	0.145	0.206	0.125	0.176	0.253
Market value of Equity	852.50	1,182.50	1,098.90	927.85	3,423.75
Total Liability	225.03	350.63	355.87	582.77	811.26
T4	3.788	3.372	3.088	1.592	4.220
Sales	1,546.48	1,825.16	1,996.72	2,430.83	3,207.28
Total Assets	967.93	1,248.52	1,364.81	1,805.61	2,525.42
T5	1.598	1.462	1.463	1.346	1.270
Z	5.992	5.744	5.412	4.440	6.022

Table 3.10 Z-score calculation

Five ratios were calculated which were able to identify whether company is facing any financial distress or not. In each year under consideration company has achieved a z-score higher than 2.99 which indicates that the company fall down to safe zone. This is the evident that company is in a financially healthy position.

4.Summary and Inference

This financial statement analysis considered all facets of Convenience Food PLC’ operating results and financial position. This analysis considered for five-year period from2016/17 to 2020/21. All economy in the world were impacted by Covid-19 pandemic in both years 2019/20 and 2020/21.

Liquidity and Efficiency Analysis

Working capital was increased by in absolute terms Rs.780 million and in percentage 250% during five-year period. Current ratio in year 2020/21 is at its lowest compared past five years. Its value of 2.90 is slightly lower compare to 4.18 in year 2016/17. This occurred due to the increase in current liability over the year. Acid test ratio is lowest in 2020/21 compare to past five years. Its value is 2.55 which was declined by 0.96 times compared to year 2016/17.Speed of collection from trade receivable has improved in 2020/21 since 2016/17. Collection period for trade receivables worsened between from 2017/18 to 2019/20 but improved drastically in 2020/21. Expect for 2018/19 and 2019/20 merchandise turnover has improved during the five-year period. Days sales inventory also increased in 2020/21 compared to base year but its lower than other three years. The liquidity index was calculated to assess the company’s ability to meet short term obligations. This index declined drastically in 2020/21 to 13.56 which indicates an improved liquidity of the company.

Profitability Analysis

Gross profit for the year 2020/21 was 35.32% which is the highest gross profit margin reported during the five years. In year 2020/21, profit margin was 16.09% which has tripled compare to year 2016/17. Cost of sales have dropped as a percentage of sales from 66.22% to 64.68% over the period.

During the five-year time period return on asset has been increased to 23.82% from 9.14%. It’s evident that relative higher profit margin and but a lower asset turnover was achieved in 2020/21 compare to 2016/17. Expect year 2018/19 we can observe increasing trend of return on common equity. The drastic in increase in return on common equity in both year 2019/20 and 2020/21 was contributed by the increase in both profit margin and the total asset to equity ratio. From the above analyzed measure its evident that profitability of the company has improved during the period under consideration even though there was some fluctuation in some years

Capital structure and solvency Analysis

Majority of company’s assets were financed by equity. But equity proportion to total assets were decline from 72.16% to 67.88 in 2020/21. Current liabilities comprise a majority of total debt. Hence the interest coverage ratio was increased during the period.

Market Analysis

Earnings per share was increased to Rs.187.6 which resulted from increase in profit for the year. Book value share was gradually increased from 2016/17 but in year 2020/21 it increased rapidly because of the higher retained profit. Price- Earnings ratio was decreased to 6.64 in year2020/21 compare to 2016/17. Dividend payout ratio indicates even though company paid an increased dividend per share compare to earlier it did not reflect the earning per share growth.

Overall Analysis

Z-score was computed for the five years under consideration. This the computation consists different measures which covers all area of the company. According to the computation company in safe zone from financial distress.

Colombo Stock Market Financial Research

Friday, November 12, 2021

Financial Statement Analysis of Convenience Food Lanka PLC