ANALYZING FINANCIAL REPORTS OF SOFTLOGIC HOLDINGS PLC

 

Company Profile

 

Softlogic Holdings PLC, rated as one of Sri Lanka’s most dynamic and reputed conglomerates, commenced operations in 1991 as a software developer with just 12 employees; now has enlarged its footprint holding leading positions in domestic growth oriented sectors such as ICT, Healthcare, Retail, Financial Services, Automobiles and Leisure.

The Group now provides employment to over 8,000 individuals generating a turnover of more than USD300 mn. The Group’s representations and strategic alliances with reputed global institutions and large multinational corporations confirm its unparalleled local stature.

Softlogic Holdings PLC’s vision is to be “To be the most preferred and trusted product and service provider, delivering high quality solutions to corporates and retail customers so as to set new industry standards and enhance shareholder value.”

Their mission is “Making the right decisions to increase returns on money invested. Employing and rewarding the best, to leverage market potential and become the most admired corporate in Sri Lanka..”

 

1) Horizontal Analysis

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Since this entire Statement Analysis is done by analyzing 5 years data including years 2015 to 2019, 2014 has been taken as the base year.

1.1) Horizontal Analysis of the Financial Position

 

According to the above table Softlogic Holdings PLC  had an incremental growth by considering the past five years annual report details. They  have a positive percentage of Total assets. The percent change of total has increased 32.27% to 165.38%. At the same time the current liabilities percent change is increased 6.78% to 124.03%. Then in 2017 the current liabilities have reduced to a low amount. In 2016 it has taken a rapid growth to 21.68% to 115.99%. That depicts that in 2017 current liabilities have dropped down when compared to 2014.

According to the above table almost all the figures have an upward trend. As a leading company it has increased current liabilities drastically.

1.2) Horizontal Analysis of the Income Statement

According to the above table profit for the year has an upward trend along the five years. But in 2019, it shows the decreased revenue percent change when comparing to 2018. Also Softlogic Holding PLC has an upward trend in the profit. According to above table the company has shown quick growth in the past five years..

 

2) Vertical Analysis

Vertical analysis is a method of financial statement analysis in which each line item is listed as a percentage of a base figure within the statement. Thus, line items on an income statement can be stated as a percentage of gross sales, while line items on a balance sheet can be stated as a percentage of total assets or liabilities, and vertical analysis of a cash flow statement shows each cash inflow or outflow as a percentage of the total cash inflows.

2.1) Vertical Analysis of the Financial Position

Softlogic  Holdings PLC is having a figure above 50% for Total Non - Current Assets in all the five years. It is a good condition for a company. That depicts even their production and sales come down, still they have these assets with them to build up the company back.

The total equity is over 20% from the total equity and liabilities. But their stated capital is low than the revenue reserves in the past five years. It is a good condition for the company. It implies that they have paid a low dividend amount and high amount is invested on business growth.

 

2.2) Vertical Analysis of Income Statement

 

 

Softlogic Holdings PLC is having a figure of around 30% for cost of sales compared to the total revenue.

Gross profit is above 60% in the past five years.The other operating incomes have been increased. It is a good thing for a company. Net profit for the year has been increased along the four years. It is a good condition for the company. But in 2019, the net profit has drastically reduced to loss .It may happen due to the ester attacks. But the administrative expenses are not having a much variation along the five years.The company should  try to reduce those expenses and increase the profit for the year.

3) Ratio Analysis

Ratio analysis is the comparison of line items in the financial statements of a business. Ratio analysis is used to evaluate a number of issues with an entity, such as its liquidity and efficiency of operations, profitability, solvency and market. Trend lines can also be used to estimate the direction of future ratio performance.

3.1) Liquidity and Efficiency Ratios

·         Working Capital

Working capital, also known as net working capital (NWC), is the difference between a company’s current assets, such as cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable.

 Softlogic Holdings  PLC has negative  figures for 2015,2016 and 2018. That is not a good condition for the company because they don’t have money to settle the short term liabilities and to run the day to day business. In 2015 and 2016 they have a negative amount of working capital and it has increased to positive amount in 2017.

·         Current Ratio and Acid Test Ratio

The current ratio is a liquidity ratio that measures whether a firm has enough resources to

meet its short-term obligations. It tells, investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables.

The quick ratio or acid test ratio is a liquidity ratio that measures the ability of a company to

pay its current liabilities when they come due with only quick assets. Quick assets are current

assets that can be converted to cash within 90 days or in the short-term.

Current Ratio and Acid Test Ratio have the same pattern throughout the five years.

·         Accounts Receivable Turnover and Merchandise Turnover

Receivable Turnover Ratio or Debtor's Turnover ratio is the number of times per year that a business collects its average accounts receivable.

The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.

Merchandise turnover indicates how many times a company sells and replaces its stock of

goods during a particular period. The formula for merchandise turnover ratio is the cost of

goods sold divided by the average inventory for the same period.

Accounts Receivable Turnover is around 1 times throughout the four years & in 2019 it has decreased to 0.71. Merchandise turnover is around 3 and 4 times. It is a not a good condition for the company because they are collecting account receivable from their customers around 3 or 4 times compared to their total sales. And also they are selling their inventory more than 3/4 times compared to the cost of sales.

·         Days’ Sales Uncollected and Days’ Sales in Inventory

Days' sales uncollected is a liquidity ratio that is used to estimate the number of days before

receivables will be collected.

The day’s sales of inventory (DSI) is a financial ratio that indicates the average time in days

that a company takes to turn its inventory, including goods that are a work in progress, into

sales.

Both Days ‘sales uncollected and Days ‘sales in inventory is around 200 times. That implies that

the company can collect their trade receivables as well as can sell their inventory within less

than one year. It is a good condition in a business.

·         Total Assets Turnover

The asset turnover ratio  measures the value of a company's sales or revenues relative to the value of its assets. The asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to generate revenue. In other words, this ratio shows how efficiently a company can use its assets to generate sales.

All the five years are having a figure around 0.2 as the Total Assets Turnover. That implies that

the average total assets are higher than the revenue. This is not a much preferred condition

for a company. It is better if the company can have a figure more than 1.

 

3.2) Solvency Ratios

 

Debt Ratio and Equity Ratio

The debt ratio is a financial ratio that measures the extent of a company’s leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company’s assets that are financed by debt.

Debt Ratio is around 60% and 70 % in all the years except in 2019. It is not a good condition because if the debt ratio is high it shows that a high portion of assets have been contributed by

creditors.

 

The equity ratio is a financial metric that measures the amount of leverage used by a company. It uses investments in assets and the amount of equity to determine how well a company manages its debts and funds its asset requirements. The Equity Ratio is above 130% in all five years. It is also a very bad condition because it implies that higher portion of company’s assets have been contributed by the owners. It gives a bad situation because when this ratio is high the company has to pay a higher amount of dividends to the shareholders.

 3.3) Profitability Ratios

 

Profit Margin and Gross Profit Margin

The net profit margin is equal to how much net income or profit is generated as a percentage

of revenue. Net profit margin is the ratio of net profits to revenues for a company or business

segment. Net profit margin is typically expressed as a percentage but can also be represented

in decimal form. The net profit margin illustrates how much of each dollar in revenue

collected by a company translates into profit.

Gross profit margin is a metric used to assess a company's financial health and business model

by revealing the amount of money left over from sales after deducting the cost of goods sold.

The gross profit margin is often expressed as a percentage of sales and may be called theg ross margin ratio.

Profit Margin shows an upward trend along the four years. It is a good situation for the company which depicts that the company can make a reasonable profit on sales, as long as it is possible to control the overhead costs. But, in 2019, it has negative profit margin.

Gross profit margin shows figures above 100% and it is a very good condition because the company is generating profit even after reducing the production costs. It indicates how efficient and effective they are on controlling the overhead costs.

 

·         Return on Total Assets

 

Return on total assets (ROTA) is a ratio that measures a company's earnings before interest and taxes (EBIT) relative to its total net assets. It is defined as the ratio between net income and total average assets, or the amount of financial and operational income a company receives in a financial year as compared to the average of that company's total assets.

In all five years this ratio takes a figure around 1% for four years. It is a good condition for the company, because the company is able to generate more income out of fewer assets. But in 2019, it has negative value.

 

·         Return on Common Shareholder Equity

This ratio indicates the proportion of the net income that a firm generates by each dollar of

common equity invested.

In all five years this ratio shows a figure more than 5% for four years. In 2019 it has a -4.2% ratio. It is not a good condition for the company because the company is able to make profit out of investors ‘money.

3.4) Market Ratios

 

·         Price Earnings Ratio

The price-earnings ratio, also known as P/E ratio, P/E, or PER, is the ratio of a company's share

price to the company's earnings per share. The ratio is used for valuing companies and to find

out whether they are overvalued or undervalued.

This table depicts upward trend along the five years. It is not a good condition for the

company because it implies that investors need to spend more in order to get more as the

return.

·         Dividend Yield

 

The dividend yield is the amount of money a company pays shareholders for owning a share of its stock divided by its current stock price.

This company has upward dividend yield trend. It may be because of their share price is declining price is declining, or both. It may be seen as a positive or negative sign by investors.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONCLUSION

 

By analyzing the annual reports, we can see that Softlogic Holdings PLC has shown a growth during the past five years. Almost all the ratios have the same behavioral pattern along the five years.

Softlogic Holdings PLC is having a high debt and equity ratios. It can adversely affect the company. This study concludes that Softlogic Holdings PLC should give special attention on company’s existing credit policy and as well as market strategies to develop the profit of the company. The company should give special attention on their business strategies and making policies to increase the profit of the company.

As per the liquidity and efficiency ratios Softlogic Holdings PLC is currently having a good condition as a company.

To continue this the company should give special attention on their business strategies and

making policies to increase these figures of the company.