1.0 Introduction
1.1 Company Profile of Convenience Foods (Lanka) PLC
Convenience Foods (Lanka) PLC is engaged
in the manufacturing and marketing of textured vegetable protein (TVP) and
other food products. The Company is engaged in the manufacturing of textured soya
nuggets, and produces a range of jelly crystals, instant soup mixes and snacks.
The Company operates in Sri Lanka. Soy Products (Pvt) Ltd is its subsidiary.
The Company’s parent undertaking is Ceylon Biscuit Ltd. Convenience Foods
(Lanka) PLC has 308 total employees across all of its locations and generates
$11.19 million in sales (USD).
They started their operations in 1991 as Soy
Foods Forbes and Walker Limited, a public quoted, a subsidiary of Forbes and
Walker Limited and it was the Sri Lankan pioneer in textured vegetable protein
(TVP) and popularly termed as Soya meat. The locally manufactured product was
originally introduced to domestic consumers in bulk form under the brand name
“Lankasoy”, as an alternative source of protein.
A paradigm shift occurred in 2000, when
Ceylon Biscuits Limited (CBL) acquired a 79% controlling stake of the Company
and re-launched 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 in attractive and
convenient package sizes. 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.
The Company exports a range of products to the Middle East, Europe, USA, Asia
and Australia and thereby contributes a notable percentage towards CBL exports.
In
2017 CBL Investments Limited (CBLI) purchased 71.38% of the issued share
capital of CFL from CBL, thereby transferring majority ownership of CFL, to
CBLI. Today the Company further diversified its product ranges by adding Sera
Kottu, Sera Salt, Sera Coconut oil and Sera Coconut Milk to the portfolio.
1.2 About This Report
This report provides a comparative
analysis of financial performances over five years of Convenience Foods (Lanka)
PLC which is operating in manufacturing sector from 2016 to 2020. This is done
by thoroughly examining the company’s financial statements-the income statement
and balance sheet.
Business
organizations are carrying out financial analysis to evaluate businesses,
projects, budgets, and other finance related transactions to determine their
performance and suitability, to evaluate economic trends, set financial policy
and build long term plans for business activity. Typically, financial analysis
is used to analyse whether an entity is stable, solvent, liquid, or profitable
enough to warrant a monetary investment.
Internally
conducted financial analysis can help managers make future business decisions
or review historical trends for past successes. Externally conducted financial
analysis can help investors choose the best possible investment opportunities.
Business
organizations can use various analytical techniques such as horizontal
analysis, vertical analysis, trend analysis, ratio analysis and cash flow
analysis to figure out financial strengths and weaknesses.
This
assignment intends to carry out an internal financial analysis including
horizontal analysis, vertical analysis, trend analysis and ratio analysis
including liquidity and efficiency ratios, solvency ratios, profitability
ratios and market ratios of Convenience Foods (Lanka) PLC over the past five-year
time period from 2016 to 2020. This financial analysis enables financial users
to make their decisions regarding this business organization.
2.0
Horizontal Analysis
Horizontal analysis is an approach used to analyse
financial statements by comparing specific financial information for a certain
accounting period with information from other periods. Analysts use such
approach to analyse historical trends.
Dollar
Change = Analysis Period Amount - Base Period Amount
Percent
Change = Dollar Change/ Base Period Amount *100
The
statements for five year periods are used in this horizontal analysis. The
earliest period is used as the base period and the items on the statements for
all later periods are compared with items on the statements of the base period.
The base year of this analysis is 2016.
2.1
Horizontal Analysis for the Statement of Financial Position
|
Statement
of Financial Position |
|||||
|
As at 31
March |
|||||
|
|
Percent
Change |
||||
|
2016 |
2017 |
2018 |
2019 |
2020 |
|
|
Assets |
|||||
|
Non-Current Assets |
|||||
|
Property, plant and equipment |
0.00% |
-6.94% |
-13.02% |
-24.81% |
-12.43% |
|
Right of use assets |
- |
- |
- |
- |
- |
|
Leasehold land |
0.00% |
-2.52% |
-3.84% |
-5.16% |
|
|
Intangible assets |
0.00% |
-5.88% |
-4.25% |
-10.71% |
-22.83% |
|
Investment in subsidiary |
0.00% |
0.00% |
0.00% |
0.00% |
0.00% |
|
Total non-current assets |
0.00% |
-6.83% |
-12.59% |
-24.04% |
-9.78% |
|
|
|||||
|
Current assets |
|||||
|
Inventories |
0.00% |
-11.11% |
29.02% |
40.51% |
71.07% |
|
Trade and other receivables |
0.00% |
22.47% |
57.33% |
80.92% |
184.49% |
|
Amounts due from related parties |
0.00% |
-55.52% |
9.16% |
9.58% |
155.79% |
|
Other financial assets |
0.00% |
1.52% |
54.70% |
91.86% |
96.67% |
|
Cash in hand and at bank |
0.00% |
1590.89% |
2868.75% |
626.86% |
13402.51% |
|
Total current assets |
0.00% |
7.81% |
54.89% |
78.77% |
141.47% |
|
Total assets |
0.00% |
3.05% |
32.92% |
45.30% |
92.23% |
|
|
|||||
|
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% |
0.00% |
0.00% |
0.00% |
0.00% |
|
Retained earnings |
0.00% |
14.27% |
41.57% |
61.13% |
98.81% |
|
Total equity |
0.00% |
12.24% |
35.66% |
52.44% |
84.76% |
|
|
|||||
|
Liabilities |
|||||
|
Non-current liabilities |
|||||
|
Deferred tax liabilities |
0.00% |
27.53% |
16.65% |
10.64% |
-47.33% |
|
Lease liabilities |
|||||
|
Interest bearing borrowing |
0.00% |
- |
- |
- |
0.00% |
|
Retirement benefit obligations |
0.00% |
-9.15% |
19.29% |
17.64% |
43.09% |
|
Total non-current liabilities |
0.00% |
-1.97% |
15.81% |
13.09% |
25.73% |
|
|
|||||
|
Current liabilities |
|||||
|
Trade and other payables |
0.00% |
-11.03% |
39.66% |
43.04% |
109.36% |
|
Lease liabilities |
|||||
|
Interest bearing borrowings |
0.00% |
- |
- |
- |
0.00% |
|
Current tax liabilities |
0.00% |
458.45% |
1587.97% |
62.41% |
1465.40% |
|
Amounts due to related parties |
0.00% |
38.02% |
54.17% |
926.24% |
1595.13% |
|
Bank overdrafts |
0.00% |
- |
- |
-31.86% |
134.38% |
|
Total current liabilities |
0.00% |
-23.85% |
29.48% |
32.72% |
134.77% |
|
Total liabilities |
0.00% |
-18.89% |
26.38% |
28.27% |
110.05% |
|
Total equity and liabilities |
0.00% |
3.05% |
32.92% |
45.30% |
92.23% |
According to the above table, horizontal analysis of
the Statement of Financial Position of Convenience Foods (Lanka) PLC shows that;
·
There
is a significant decline in total non-current assets from 2016 to 2019. However
it drastically increases in 2020.
·
There
is no change in investment in subsidiary over the last five-year period.
·
Property,
plant and equipment and intangible assets show negative percent change compared
to 2016 over the study period. Property, plant and equipment indicate a decline
from 2017 to 2019 and a significant increase in 2020.
·
There
is a significant increase in total current assets over the last five years. And
it records the highest increment (141.47%) in 2020.
·
Cash
in hand and at bank shows a significant increase (13402.51%) in 2020 when
compared to previous years. This is because the money market savings account
with HNB is operated as a savings account linked with the current account where
a minimum balance of Rs. 500,000 at any time is maintained.
·
Inventories,
trade and other receivables, amounts due from related parties and other
financial assets show a significant increment over the study period even though
inventories and amounts due from related parties show negative percent change
in 2016.
·
However
total assets shows that it considerably increases over the study period from
2016 to 2020. It shows that there is a considerable growth in total assets of
the company.
·
Total
equity also shows a considerable increment over the last five years when
compared to the base year. It is a good condition for a company.
·
Deferred
tax liabilities shows a gradual decline over the study period and it shows a
negative percent change in 2020 while other years show a positive percent
change.
·
Total
current liabilities and non-current liabilities show a significant increase
over the study period while there is a negative percent change in 2017 compared
to the base year. But it is not a good condition for a company to have upward
trend in percent change of total liabilities.
·
However
bank overdraft shows a negative percent change (-31.86%) in 2019 and it
drastically increases in 2020 with a positive percent change (134.38%).
·
However
there is a positive percent change and significant increment in total equity
and liabilities over the study period.
2.2 Horizontal Analysis for
the Statement of Profit or Loss
|
Statement
of Profit or Loss |
|||||
|
Year ended
31 March |
|||||
|
|
Percent
Change |
||||
|
|
2015/2016 |
2016/2017 |
2017/2018 |
2018/2019 |
2019/2020 |
|
Revenue |
0.00% |
-6.57% |
15.74% |
20.63% |
46.86% |
|
Cost of
sales |
0.00% |
-8.45% |
9.08% |
26.50% |
45.34% |
|
Gross
profit |
0.00% |
-2.65% |
29.63% |
8.40% |
50.01% |
|
Other
income |
0.00% |
88.55% |
140.90% |
195.37% |
260.93% |
|
Total gain
on disposal of shares held by the trust |
- |
- |
- |
- |
- |
|
Distribution
expenses |
0.00% |
3.88% |
35.71% |
18.56% |
43.33% |
|
Administrative
expenses |
0.00% |
7.27% |
-13.04% |
17.48% |
34.27% |
|
Finance
expenses |
0.00% |
-37.54% |
-89.48% |
-87.90% |
-40.50% |
|
Profit
before tax |
0.00% |
-7.85% |
71.50% |
13.34% |
110.61% |
|
Income tax
expense |
0.00% |
-5.80% |
60.10% |
-5.25% |
59.40% |
|
Profit for
the year |
0.00% |
-9.00% |
77.97% |
23.89% |
139.66% |
According to the above table, horizontal analysis of
the Statement of Profit or Loss of Convenience Foods (Lanka) PLC shows that;
·
The
revenue has a considerable increment over the study period while it has a
negative percent change in 2017 compared to the base year.
·
Gross
profit in 2020 shows a significant increment (50.01%) when compared to the base
year.
·
Other
income shows a positive percent change over the study period and it shows a
significant increment during each year compared to the base year.
·
Distribution
expenses and administration expenses show a considerable increment in 2020 when
compared to other years within the study period. But finance expenses shows a
negative percent change during the study period and shows a huge decline during
2017/2018 and 2018/2019.
·
Income
tax expenses shows a significant increment during 2017/2018 and 2019/2020 while
it show a negative percent change during 2016/2017 and 2018/2019.
·
However,
Convenience Foods (Lanka) PLC shows a considerable growth in profit after tax during
the study period and a huge increment shows during the 2019/2020 (139.66%).
3.0 Vertical Analysis
Vertical analysis also known as common-size analysis
is a popular method of financial statement analysis that shows each item on a
statement as a percentage of a base figure within the statement.
Common-Size
Percent = (Analysis Amount / Base Amount) * 100
A basic vertical analysis needs an individual
statement for a reporting period but here, comparative statements over the last
five years from 2016 to 2020 are used to increase the usefulness of the
analysis.
3.1 Vertical Analysis for the Statement of Financial
Position
To conduct a vertical analysis of statement of
financial position, the total of assets and the total of stockholders’ equity
and liabilities are generally used as base figures. All individual assets are
shown as a percentage of total assets. The current liabilities, non-current
liabilities and equities are shown as a percentage of the total stockholders’
equity and liabilities.
The following table shows the common-size percentages
of the Statement of Financial position over the period from 2016 to 2020.
|
Statement
of Financial Position |
|||||
|
As at 31
March |
|||||
|
|
Common-Size
Percent |
||||
|
|
2016 |
2017 |
2018 |
2019 |
2020 |
|
Assets |
|||||
|
Non-Current
Assets |
|||||
|
Property,
plant and equipment |
30.98% |
27.98% |
20.27% |
16.03% |
14.11% |
|
Right of
use assets |
- |
- |
- |
- |
0.76% |
|
Leasehold
land |
0.56% |
0.53% |
0.41% |
0.37% |
- |
|
Intangible
assets |
1.01% |
0.92% |
0.73% |
0.62% |
0.40% |
|
Investment
in subsidiary |
0.00% |
0.00% |
0.00% |
0.00% |
0.00% |
|
Total
non-current assets |
32.56% |
29.44% |
21.41% |
17.02% |
15.28% |
|
|
|||||
|
Current assets |
|||||
|
Inventories |
13.21% |
11.40% |
12.83% |
12.78% |
11.76% |
|
Trade and
other receivables |
20.89% |
24.82% |
24.72% |
26.01% |
30.91% |
|
Amounts due
from related parties |
0.44% |
0.19% |
0.36% |
0.33% |
0.59% |
|
Other
financial assets |
32.79% |
32.30% |
38.17% |
43.30% |
33.55% |
|
Cash in
hand and at bank |
0.11% |
1.85% |
2.52% |
0.56% |
7.91% |
|
Total
current assets |
67.44% |
70.56% |
78.59% |
82.98% |
84.72% |
|
Total
assets |
100.00% |
100.00% |
100.00% |
100.00% |
100.00% |
|
|
|||||
|
Equity and
liabilities |
|||||
|
Equity
attributable to equity - holders of the parent |
|||||
|
Stated
capital |
5.59% |
5.43% |
4.21% |
3.85% |
2.91% |
|
Other
reserves |
4.43% |
4.30% |
3.33% |
3.05% |
2.30% |
|
Retained
earnings |
60.44% |
67.03% |
64.38% |
67.03% |
62.51% |
|
Total
equity |
70.46% |
76.75% |
71.92% |
73.93% |
67.72% |
|
|
|||||
|
Liabilities |
|||||
|
Non-current
liabilities |
|||||
|
Deferred
tax liabilities |
1.70% |
2.11% |
1.49% |
1.30% |
0.47% |
|
Lease
liabilities |
- |
- |
- |
- |
0.31% |
|
Interest
bearing borrowing |
0.16% |
- |
- |
- |
- |
|
Retirement
benefit obligations |
4.84% |
4.26% |
4.34% |
3.92% |
3.60% |
|
Total non-current
liabilities |
6.70% |
6.37% |
5.83% |
5.21% |
4.38% |
|
|
|||||
|
Current
liabilities |
|||||
|
Trade and
other payables |
17.18% |
14.83% |
18.05% |
16.91% |
18.71% |
|
Lease
liabilities |
- |
- |
- |
- |
0.20% |
|
Interest
bearing borrowings |
1.89% |
- |
- |
- |
- |
|
Current tax
liabilities |
0.30% |
1.64% |
3.85% |
0.34% |
2.47% |
|
Amounts due
to related parties |
0.30% |
0.40% |
0.35% |
2.13% |
2.66% |
|
Bank
overdrafts |
3.16% |
- |
- |
1.48% |
3.86% |
|
Total
current liabilities |
22.84% |
16.88% |
22.25% |
20.86% |
27.90% |
|
Total
liabilities |
29.54% |
23.25% |
28.08% |
26.07% |
32.28% |
|
Total
equity and liabilities |
100.00% |
100.00% |
100.00% |
100.00% |
100.00% |
According to the above table, vertical analysis of the
Statement of Financial Position of Convenience Foods (Lanka) PLC shows that;
·
Higher
portion of the total assets consists of total current assets than the non-current
assets.
·
The
portion of the total non-current assets shows a decline over the study period
while the current assets show a gradual growth over the last five years. It
shows that the company has high liquidity over the period the company is able
to invest more on non-current assets.
·
Property,
plant and equipment demonstrate the highest portion out of the total non-current
assets while other financial assets indicates the highest portion out of the
total current assets during the study period.
·
The
total of equity consists around 70% of the total equity and liabilities while
the total liabilities consist around 30% over the last five years. This is a
good condition as they have more equity contribution towards the organization.
·
Retained
earnings show the highest portion out of the total equity of the company during
the study period.
·
Total
current liabilities indicate the highest proportion when compared to total non-current
liabilities over the last five years.
3.2 Vertical Analysis for the
Statement of Profit or Loss
To conduct a vertical analysis of statement of Profit
or Loss, revenue (sales) figure is generally used as the base and all other
components of income statement like cost of sales, gross profit, operating
expenses, income tax, and net income etc. are shown as a percentage of sales.
The following table shows the common-size percentages
of the Statement of Profit or Loss over the period from 2016 to 2020.
|
Statement
of Profit or Loss |
|||||
|
Year ended
31 March |
|||||
|
Common-size
Percent |
|||||
|
2015/2016 |
2016/2017 |
2017/2018 |
2018/2019 |
2019/2020 |
|
|
Revenue |
100.00% |
100.00% |
100.00% |
100.00% |
100.00% |
|
Cost of
sales |
67.58% |
66.22% |
63.69% |
70.87% |
66.88% |
|
Gross
profit |
32.42% |
33.78% |
36.31% |
29.13% |
33.12% |
|
Other
income |
1.44% |
2.90% |
3.00% |
3.52% |
3.54% |
|
Distribution
expenses |
17.50% |
19.46% |
20.52% |
17.20% |
17.08% |
|
Administrative
expenses |
7.11% |
8.16% |
5.34% |
6.92% |
6.50% |
|
Finance expenses |
0.19% |
0.13% |
0.02% |
0.02% |
0.08% |
|
Profit
before tax |
9.06% |
8.94% |
13.43% |
8.52% |
13.00% |
|
Income tax
expense |
3.28% |
3.31% |
4.54% |
2.58% |
3.56% |
|
Profit for
the year |
5.78% |
5.63% |
8.89% |
5.94% |
9.44% |
According to the above table, vertical analysis of the
Statement of Profit or Loss of Convenience Foods (Lanka) PLC shows that;
·
The
cost of sales fluctuates around 65% out of the revenue during the study period.
Therefore the gross profit fluctuates around 35% out of the revenue over last 5
years. There is no significant growth in gross profits over the last 5 years.
·
Other
income has a gradual increment over the past 5 years.
·
Distribution
expenses have a gradual increment from 2015/2016 to 2017/2018 and it shows a
decline from 2018/2019 to 2019/2020.
·
Profit
for the year has a significant growth during the last 5 years even though it shows
some fluctuations.
4.0 Trend Analysis
Trend analysis is an analysis
of the trend of the company by comparing its financial statements to analyse
the trend of market or analysis of the future on the basis of results of past
performance and it’s an attempt to make the best decisions on the basis of
results of the analysis done.
Trend analysis in accounting
compares the overall growth of key financial statement line item over the years
from the base year.
In a trend analysis, the trend percentage is computed
by using the following formula;
Trend
Percent =( Analysis Period Amount / Base Period Amount) * 100
The
statements for five year periods are used in this trend analysis. The earliest
period is used as the base period and the items on the statements for all later
periods are compared with items on the statements of the base period. The base
year of this analysis is 2016.
4.1 Trend Analysis for the Statement of Financial
Position
|
Trend
Analysis of Statement of Financial Position |
|||||
|
As at 31
March |
|||||
|
Trend
Percent |
|||||
|
2016 |
2017 |
2018 |
2019 |
2020 |
|
|
Assets |
|||||
|
Non-Current
Assets |
|||||
|
Property,
plant and equipment |
100% |
93% |
87% |
75% |
88% |
|
Right of
use assets |
- |
- |
- |
- |
- |
|
Leasehold
land |
100% |
97% |
96% |
95% |
- |
|
Intangible
assets |
100% |
94% |
96% |
89% |
77% |
|
Investment
in subsidiary |
100% |
100% |
100% |
100% |
100% |
|
Total
non-current assets |
100% |
93% |
87% |
76% |
90% |
|
|
|||||
|
Current
assets |
|||||
|
Inventories |
100% |
89% |
129% |
141% |
171% |
|
Trade and other
receivables |
100% |
122% |
157% |
181% |
284% |
|
Amounts due
from related parties |
100% |
44% |
109% |
110% |
256% |
|
Other
financial assets |
100% |
102% |
155% |
192% |
197% |
|
Cash in
hand and at bank |
100% |
1691% |
2969% |
727% |
13503% |
|
Total
current assets |
100% |
108% |
155% |
179% |
241% |
|
Total
assets |
100% |
103% |
133% |
145% |
192% |
|
|
|||||
|
Equity and
liabilities |
|||||
|
Equity
attributable to equity - holders of the parent |
|||||
|
Stated
capital |
100% |
100% |
100% |
100% |
100% |
|
Other
reserves |
100% |
100% |
100% |
100% |
100% |
|
Retained
earnings |
100% |
114% |
142% |
161% |
199% |
|
Total
equity |
100% |
112% |
136% |
152% |
185% |
|
|
|||||
|
Liabilities |
|||||
|
Non-current
liabilities |
|||||
|
Deferred
tax liabilities |
100% |
128% |
117% |
111% |
53% |
|
Lease
liabilities |
- |
- |
- |
- |
- |
|
Interest
bearing borrowing |
100% |
- |
- |
- |
- |
|
Retirement
benefit obligations |
100% |
91% |
119% |
118% |
143% |
|
Total non-current
liabilities |
100% |
98% |
116% |
113% |
126% |
|
|
|||||
|
Current
liabilities |
|||||
|
Trade and
other payables |
100% |
89% |
140% |
143% |
209% |
|
Lease
liabilities |
- |
- |
- |
- |
- |
|
Interest
bearing borrowings |
100% |
- |
- |
- |
- |
|
Current tax
liabilities |
100% |
558% |
1688% |
162% |
1565% |
|
Amounts due
to related parties |
100% |
138% |
154% |
1026% |
1695% |
|
Bank
overdrafts |
100% |
- |
- |
68% |
234% |
|
Total
current liabilities |
100% |
76% |
129% |
133% |
235% |
|
Total
liabilities |
100% |
81% |
126% |
128% |
210% |
|
Total equity
and liabilities |
100% |
103% |
133% |
145% |
192% |
According to the above table, trend analysis of the
Statement of Financial Position of Convenience Foods (Lanka) PLC shows that;
·
Total
non-current assets have a gradual decline from 2016 to 2019 and it has a sudden
growth in 2020 compared to the base year. This is because of the gradual
decline of intangible assets and property, plant and equipment over the study
period. But property, plant and equipment show a significant increment in 2020
when compared to 2019.
·
Total
current assets have a considerable increment over the study period. Therefore
they have a chance to invest more in non-current assets of the organization as
cash in hand and at bank shows a huge increment (13503%) in 2020.
·
Total
assets of the organization have a significant growth over the last 5 years. It
is a good condition for the company.
·
Total
equity has a considerable increment during the last 5 years when compared to
2016. This is mainly due to the gradual increment of retained earnings over the
study period. Stated capital and other reserves remained unchanged during the
last 5 years. Therefore they show no growth or decline during the period. The
gradual increment of total equity over time shows that the company is growing
over time.
·
Total
non-current liabilities have an upward trend during the last 5 year period even
though it shows some fluctuations.
·
The
trade and other payables have a significant increment throughout the period and
it has increased by 109% in 2020. Increases in trade and other payables means
the company purchased goods on credit, conserving its cash.
·
Total
current liabilities have a considerable growth during the study period and it has
increased by 135% over the 5 years. This is mainly due to the increment of bank
overdraft in 2020.
·
Total
liabilities have an upward trend during the study period. Finally total equity
and liabilities also have an upward increment during the last 5 years. And it
has increased by 92% over the last 5 years.
4.2 Trend Analysis
for the Statement of Profit or Loss
|
Trend
Analysis of Statement of Profit or Loss |
|||||
|
Year ended
31 March |
|||||
|
Trend
Percent |
|||||
|
2015/2016 |
2016/2017 |
2017/2018 |
2018/2019 |
2019/2020 |
|
|
Revenue |
100% |
93% |
116% |
121% |
147% |
|
Cost of
sales |
100% |
92% |
109% |
126% |
145% |
|
Gross
profit |
100% |
97% |
130% |
108% |
150% |
|
Other
income |
100% |
189% |
241% |
295% |
361% |
|
Distribution
expenses |
100% |
104% |
136% |
119% |
143% |
|
Administrative
expenses |
100% |
107% |
87% |
117% |
134% |
|
Finance
expenses |
100% |
62% |
11% |
12% |
59% |
|
Profit
before tax |
100% |
92% |
172% |
113% |
211% |
|
Income tax
expense |
100% |
94% |
160% |
95% |
159% |
|
Profit for
the year |
100% |
91% |
178% |
124% |
240% |
According to the above table, trend analysis of the
Statement of Profit or Loss of Convenience Foods (Lanka) PLC shows that;
·
Revenue
has increased by 47% over 5 years from 2015/2016 to 2019/2020.
·
Cost
of sales also has increased by 45% over the last 5 year period from 2015/2016
to 2019/2020.
·
Other
income has an upward trend over the last 5 years and it shows an unusual
increment in 2019/2020. This is because of the profit on disposal of assets in 2019/2020.
·
Distribution
expenses and administrative expenses have an upward trend over the study period
even though they have some fluctuations during the study period. It is not a
good sign to have an increment in expenses. So the company should take some
measures to decrease these expenses.
·
Finance
expenses have a huge reduction from 2015/2016 to 2017/2018 and have a sudden
increment from 2018/2019 to 2019/2020. This sudden increment may be due to the
increase of bank charges, lease interest and interest on security deposit.
·
Income
tax expense has an upward trend while there are some fluctuations over the last
5 years. And it has increased by 59% in 2019/2020.
·
The
overall profit for the year has increased by 140% over the last 5 years from
2015/2016 to 2019/2020. This is a good sign to this company as it shows an
upward trend over the last 5 years.
5.0 Ratio Analysis
Ratio analysis refers to the
analysis of various pieces of financial information in the financial statements
of a business. They are mainly used by external analysts to determine various
aspects of a business, such as its profitability, liquidity and solvency.
Analysts rely on current and past financial statements to obtain data to
evaluate the financial health is on an upward or downward trend and to draw
comparisons to other competing firms.
Ratio analysis can mark how a
company is performing over time, while comparing a company to another within
the same industry or sector.
Under the ratio analysis,
performance of Convenience
Foods (Lanka) PLC is going to evaluate using four specific types of
ratios.
1.
Liquidity & Efficiency Ratios
2.
Solvency Ratios
3.
Profitability Ratios
4.
Market Ratios
5.1 Liquidity
& Efficiency Ratios
Liquidity & efficiency
ratios measure a company’s ability to pay off its short term debts as they
become due, using the company’s current or quick assets and evaluate how
efficiently a company uses its assets and liabilities to generate sales and
maximize profits.
Under the liquidity &
efficiency ratios, following ratios are being used to measure the liquidity and
efficiency of Convenience Foods
(Lanka) PLC from 2016 to 2020.
|
Liquidity & Efficiency Ratios |
2016 |
2017 |
2018 |
2019 |
2020 |
|
|
1) |
Working Capital (Rs.) |
418,951,002 |
519,632,423 |
703,426,210 |
847,768,802 |
1,026,008,888 |
|
2) |
Current Ratio |
2.95:1 |
4.18:1 |
3.53:1 |
3.98:1 |
3.04:1 |
|
3) |
Acid-Test Ratio |
2.37:1 |
3.51:1 |
2.96:1 |
3.36:1 |
2.62:1 |
|
4) |
Accounts Receivable Turnover (times) |
7.52 |
7.09 |
6.65 |
6.02 |
5.32 |
|
5) |
Merchandise Turnover (times) |
5.79 |
8.94 |
9.02 |
8.46 |
8.41 |
|
6) |
Days' Sales Uncollected (days) |
43 |
57 |
62 |
65 |
84 |
|
7) |
Days' Sales in Inventory (days) |
41 |
39 |
48 |
45 |
48 |
|
8) |
Total Asset Turnover (times) |
1.80 |
1.62 |
1.65 |
1.53 |
1.53 |
5.1.1 Working Capital
Working capital is the amount
of cash a business can safely spend. It represents operating liquidity
available to a business or organization to run the day to day activities, especially
in settling the short term liabilities.
Working
Capital = Current Assets - Current Liabilities
Convenience Foods (Lanka) PLC has positive figures for
all the five years. That is a good condition for the company because they have
adequate money to run the day to day activities and to settle the short term
liabilities of the business. It shows a significant increment over the last 5
years from 2016 to 2020.
5.1.2 Current Ratio
Current ratio is used to
measure whether a firm has enough resources to meet its short term obligations.
In other words, it reflects a company’s ability to generate enough cash to pay
off all its debts once they become due. It used as a way to measure the overall
financial health of a company.
Current
Ratio = Current Assets / Current Liabilities
The range of acceptable
current ratios varies depending on the specific industry type.
As a conventional rule the
current ratio of 2:1 is more considered as financially healthy. But the ratio
between 1.5 and 3 is generally considered healthy. A ratio values lower than 1
may indicate liquidity problems for the company. A ratio over 3 may indicate
that the company is not using its current assets efficiently or not managing
its working capital properly.
When referring to the current ratios of Convenience
Foods (Lanka)
5.1.3 Acid-Test Ratio
The acid-test ratio is an
indicator of a company’s short term liquidity position and measures a company’s
ability to meet its short term obligations with its most liquid assets. Simply
it measures the company’s capacity to pay its current liabilities without
needing to sell its inventory or obtain additional financing.
The higher ratio result, the
better a company’s liquidity and financial health; the lower the ratio, more
likely the company will struggle with paying debts.
Acid - Test Ratio = Quick
Assets/ Current Liabilities
Quick Assets = Current Assets -
(Inventory + Pre Paid Expenses)
A result of 1 is considered to be the normal acid-test
ratio. It indicates that the company is fully equipped with exactly enough
assets to be instantly liquidated to pay off its current liabilities. A company
that has an acid-test ratio less than 1 may not be able to fully pay off its current
liabilities in the short term, while a company having an acid-test ratio higher
than 1 can instantly get rid of its current liabilities.
When referring to the acid-test ratios of Convenience
Foods (Lanka)
5.1.4 Accounts Receivable
Turnover
The accounts receivable
turnover measures a company’s effectiveness in collecting its receivables or
money owed by clients. This ratio shows how well a company uses and manages the
credit it extends to customers and how quickly that short term debt is
collected or being paid.
A firm that is very good at
collecting on its payments due will have a higher accounts receivables turnover
ratio.
Accounts Receivable Turnover =
Sales on Account / Average Accounts Receivable
When referring to the receivables turnover ratios of
Convenience Foods (Lanka)
5.1.5 Merchandise Turnover
The
merchandise turnover ratio indicates how many times a company sells and
replaces its stock of goods during a particular period.
Higher
merchandise turnover ratio indicates a company is having a good inventory
management thus the company maintain an acceptable level of inventory
management.
Merchandise Turnover = Cost of
Goods Sold / Average Inventory
When referring to the merchandise
turnover ratios of
Convenience Foods (Lanka)
5.1.6
Days’ Sales Uncollected
The days’ sales uncollected ratio measures how long
the company will collect their accounts receivable. This information is used by
creditors and lenders to determine the short term liquidity of a company and
used by management to estimate the effectiveness of its credit and collection
activities.
An unusually high figure in proportion to the standard
days allowed to pay indicates either an issue with lax credit standards or
inadequate collection activities.
Days' Sales Uncollected =
(Accounts Receivable / Net Sales) * 365
When referring to the days’ sales uncollected ratios of Convenience Foods (Lanka)
5.1.7
Days’ Sales in Inventory
The days’ sales in inventory ratio indicates the average time required
for a company to convert its inventory into sales.
Days' Sales in Inventory =
(Ending Inventory / Cost of Sales) * 365
When referring to
the days’ sales in inventory ratios of Convenience Foods (Lanka)
5.1.8
Total Assets Turnover
The total assets turnover ratio is used to understand how effectively
companies are using their assets to generate sales. Investors use this ratio to
compare similar companies in the same sector or group.
If this ratio is greater than 1, that company is efficiently using their
assets to generate sales.
Total Assets Turnover =
(Revenues / Average Total Assets)
When referring to
the total
assets turnover ratios
of Convenience Foods (Lanka)
5.2 Solvency
Ratios
Solvency ratios indicate whether
a company’s cash flow is sufficient to meet its long term liabilities and thus
is a measure of its financial health. An unfavourable ratio can indicate some
likelihood that a company will default on its debt obligations.
Under the solvency ratios,
following ratios are being used to evaluate the creditworthiness of Convenience Foods (Lanka) PLC from 2016 to 2020.
|
Solvency Ratios |
2016 |
2017 |
2018 |
2019 |
2020 |
|
|
1) |
Debt Ratio |
29.54% |
23.25% |
28.08% |
26.07% |
32.28% |
|
2) |
Equity Ratio |
70.46% |
76.75% |
71.92% |
73.93% |
67.72% |
|
3) |
Times Interest Earned (times) |
49.23 |
72.16 |
787.12 |
452.89 |
171.74 |
5.2.1 Debt Ratio
The debt ratio is a financial
ratio that measures the extent of a company’s leverage. The debt ratio can be
interpreted as the proportion of a company’s assets that are financed by debt.
Debt Ration = (Total
Liabilities / Total Assets) *100
When referring to the debt ratios of Convenience Foods (Lanka)
5.2.2 Equity Ratio
The equity ratio indicates that
how much of a company’s assets are funded by issuing stock rather than
borrowing money. This ratio is an indicator of how financially stable the
company may be in the long run.
Equity Ratio = (Total
Shareholders' Equity / Total Assets) * 100
When referring to the equity ratios of Convenience Foods (Lanka)
5.2.3 Times Interest Earned
The times interest earned
ratio is a measure of a company’s ability to meet its debt obligations based on
its current income. This ratio shows how many times a company could cover its
interest charges with its pre-tax earnings.
Times Interest Earned = (Net
profit before tax + Finance Cost) / Finance Cost
When referring to
the times interest earned ratios
of
Convenience Foods (Lanka)
5.3 Profitability
Ratios
Profitability ratios assess a
company’s ability to earn profits from its sales or operations, balance sheet
assets, or shareholder’s equity. Profitability ratios indicate how efficiently
a company generates profit and value for shareholders.
Under the profitability
ratios, following ratios are being used to evaluate how efficiently the
Convenience Foods (Lanka) PLC
generates profit and value for shareholders from 2016 to 2020.
|
Profitability
Ratios |
2016 |
2017 |
2018 |
2019 |
2020 |
|
|
1) |
Profit Margin |
5.78% |
5.63% |
8.89% |
5.94% |
9.44% |
|
2) |
Gross Profit Margin |
32.42% |
33.78% |
36.31% |
29.13% |
33.12% |
|
3) |
Return on Total Assets |
2.60% |
9.14% |
15.37% |
9.08% |
14.47% |
|
4) |
Return on Common Shareholders' Equity |
15.48% |
12.40% |
20.77% |
12.44% |
20.56% |
|
5) |
Book Value per Common Share (Rs.) |
240.68 |
270.14 |
326.50 |
366.89 |
444.67 |
|
6) |
Basic Earnings per Share (Rs.) |
34.81 |
31.68 |
61.96 |
43.13 |
83.43 |
5.3.1 Profit Margin
Profit margin is used to gauge
the degree to which a company or a business activity makes money. It represents
what percentage of sales has turned into profits. The percentage figure
indicates how many cents of profit the business has generated for each rupee of
sale.
Profit Margin = (Net Profit
after Tax / Net Revenue) * 100
When referring to the profit
margin of Convenience Foods (Lanka)
5.3.2 Gross Profit Margin
Gross profit margin is used to
assess a company’s financial health by calculating the amount of money left
over from product sales after subtracting the cost of goods sold. This is
frequently expressed as a percentage of sales.
Gross
Profit Margin = ((Net Revenue - Cost of Sales) / Net Revenue) * 100
When referring to the gross profit
margin of Convenience Foods (Lanka)
5.3.3 Return on Total Assets
The return on total assets
ratio provides how much profit a company is able to generate from its assets.
It measures how efficient a company’s management is in generating earnings from
their economic resources or assets on their balance sheet.
Return
on Total Assets = (Net Profit for the Year / Average Total Assets) * 100
When referring to the return
on total assets ratios of Convenience Foods
(Lanka)
5.3.4 Return on Common Shareholders’
Equity
The return on common shareholders’
equity ratio shows how much money is returned to the owners as a percentage of
the money they have invested or retained in the company. It is a measure of the
profitability of a business in relation to the equity.
Return
on Shareholders' Equity = (Net Profit for the Year / Average Shareholders'
Equity) * 100
When referring to the return
on common shareholders’ ratios of Convenience Foods
(Lanka)
5.3.5 Book Value per Common
Share
The book value per common share
effectively indicates a firm’s net asset value on a per-share basis. This
indicates the value of a business according to its books or accounts, as
reflected on its financial statements. This is mainly used by stock investors
to evaluate company’s stock price.
Book
Value per Share = Total Shareholders' Equity / No. of Ordinary Shares
When referring to the book
value per common share of Convenience Foods
(Lanka)
5.3.6 Basic Earnings per Share
The basic earnings per share
tells investors how much of a firm’s net income was allotted to each share of
common stock. This is informative for businesses with only common stock in
their capital structures.
Basic
Earnings per Share (Rs.) = Net Profit for the Year / No. of Ordinary Shares
When referring to the basic
earnings per share of Convenience Foods
(Lanka)
5.4 Market Ratios
Market ratios are used to
evaluate the economic status of publicly traded companies and can play a role
in identifying stocks that may be overvalued, undervalued, or priced fairly.
Under the market ratios,
following ratios are being used to evaluate the economic status of Convenience Foods (Lanka) PLC from 2016 to 2020.
|
Market
Ratios |
2016 |
2017 |
2018 |
2019 |
2020 |
|
|
1) |
Price Earnings Ratio (times) |
10.49 |
9.79 |
6.94 |
9.27 |
4.04 |
|
2) |
Dividend Yield |
1.51% |
1.29% |
0.93% |
1.25% |
1.33% |
5.4.1 Price-Earnings
Ratio
The price-earnings ratio also
known as P/E ratio, P/E, or PER is used for valuing companies and to find out
whether they are overvalued or undervalued.
Price-Earnings
Ratio = Market Price per Share / Earnings per Share
When referring to the price-earnings
ratio of Convenience Foods
(Lanka)
5.4.2 Dividend Yield
The dividend yield shows how
much a company pays out in dividends each year relative to its stock price. It
is displayed as a percentage and it is the amount of money a company pays
shareholders for owning a share of its stock divided by its current stock
price.
Dividend
Yield = (Annual Dividend per Share / Market Price per Share) * 100
When referring to the dividend
yield of Convenience Foods
(Lanka)
6.0 Conclusion
Analysis and interpretation of
financial statements is an important tool in assessing company’s performance.
It reveals the strengths and weaknesses of an organization. It helps the
investors and clients to decide in which firm the risk is less or in which one
they should invest so that maximum benefit can be earned. It is known that
investing in any company involves a lot of risk. So before putting up money in
any company one must have thorough knowledge about its past records and
performances. Based on the data available the trend of the company can be
predicted in near future.
This report provides a comparative analysis of
financial performances over five years of Convenience Foods (Lanka) PLC which
is operating in manufacturing sector from 2016 to 2020. This is done by
thoroughly examining the company’s financial statements, especially the income
statement and balance sheet.
From the horizontal analysis
over the period from 2016 to 2020, Convenience
Foods (Lanka) PLC shows a significant increment in total assets, total
liabilities and total equity. It is a good condition for the company to have an
upward trend in total assets and total equity. But it is not a good condition
to have an upward trend in total liabilities. And also the revenue of the company shows a considerable
increment over the study period. Distribution expenses and administration
expenses show a significant increment over the study period while finance
expenses shows a huge downward trend. Increasing distribution expenses and
administration expenses is not a good for the company and having an increment
in revenue and decline in finance expenses is a good condition for the company.
Overall profit for the company shows a huge increment over the study period. It
shows the financial health of the organization.
From the vertical analysis
over the period from 2016 to 2020, Convenience
Foods (Lanka) PLC shows that the higher
portion of the total assets consists of total current assets than the
non-current assets and total current liabilities indicate the highest
proportion when compared to total non-current liabilities over the last five
years. The total of equity consists around 70% of the total equity and
liabilities while the total liabilities consist around 30% over the last five
years. This is a good condition as they have more equity contribution towards
the organization.
From the liquidity &
efficiency ratio analysis over the period from 2016 to 2020, Convenience Foods (Lanka) PLC shows that the
liquid position of the company is at a good condition. But they are not
efficient in managing inventory
as it shows a decline of merchandise turnover ratio over the study period. And
also they don’t have a proper collection process of money from their
receivables. So they have to improve their collection process as well as credit
policies. And this company is taking longer time to collect money from their
receivables and it may lead to cash flow problems. So the company can give
discounts and offers to collect money within short time period.
According to the solvency ratio analysis over the
study period from 2016 to 2020, Convenience
Foods (Lanka) PLC shows an upward trend in debt ratio and downward trend in
equity ratio. So it indicates that the company’s long-term position of solvency is at danger in in the future. This will be an
issue in the future when they apply for loans. Because most of the financing companies
like banks consider this TIE number when giving loans for businesses. Convenience Foods (Lanka) PLC has the ability to
meet its debt obligations based on its current income as it has higher values for
times interest earned ratio.
According to the profitability
ratio analysis over the
study period from 2016 to 2020, Convenience
Foods (Lanka) PLC efficiently generates
profit and value for shareholders.
According to the market ratio
analysis over the study
period from 2016 to 2020, Convenience
Foods (Lanka) PLC indicates that the investors aren’t very confident about the company’s
prospects.
This financial statement analysis of Convenience Foods
(Lanka) PLC including horizontal analysis, vertical analysis, trend analysis of
balance sheet and income statement and ratio analysis over the last five years
from 2016 to 2020 will help the stakeholders to make better decisions regarding
this company.
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