Financial Statement Analysis DANKOTUWA PORCELAIN PLC

 

Executive summary

The companies face a high competitiveness in modern economy. Therefore, the accounting and reporting has become increasingly relevant to enterprises. Moreover, how the environmental performance of an enterprise affects its financial health is of growing concern to investors, creditors, governments, and the public at large. The Annual/Financial Report of a company is the principal way in which stakeholders keep themselves informed of the activities, progress, and future of a company.

This report provides an analysis and evaluation of the current and prospective profitability, liquidity, and financial stability of Dankotuwa Porcelain PLC. Horizontal, vertical and ratio analyses are the methods which are used to analyze the financial statements results. Further, the liquidity and efficiency, solvency, market, and profitability ratios are considered under ratio analysis.  

Results of data analyzed according to the percent change of the horizontal analysis of total assets show the growth rate of the company, Dankotuwa Porcelain. The year 2019 shows a growth rate of 24.54% which have been increased in the recent years. Trend analysis reflects the trends of turnover, gross profit and cost of sales for the recent ten years which display an incensement. The results for vertical analysis reflect that the company has managed a proper distribution of assets, liabilities and the equity throughout the company. Working capital, Current ratio, acid – test ratio, accounts receivables ratio, merchandise turnover ratio results show good results. Even though, the ratios; accounts receivables turnover, merchandise turnover, days of sales uncollected, days of sales uncollected, total assets turnover including all the solvency, profitability and market ratios do not reflect much good results.

The analyzed results show that most of the ratios are below the industry averages. Hence, the company reflects a comparative poor performance within the areas of liquidity, profit margins, solvency, credit control and inventory management. Therefore, the current position of the company is not positive. The company must implement immediate remedies such as improving the average collection period for accounts receivables and improving inventory turnover to overcome the current situation.

 

Analysis overview

The Dankotuwa Group consists of Dankotuwa Porcelain PLC and Royal Fernwood Ltd and its subsidiaries. Both Dankotuwa Porcelain and Royal Fernwood are engaged in the manufacture of porcelain tableware for the local and export markets. The Dankotuwa Group is the largest porcelain producers in the country. The company produces world class tableware and export over 30 countries: UK, USA, Germany, France, Japan, Italy, Poland, UAE, India, Australia, Brazil, Czech Republic, Moldova, Maldives, Switzerland, Mexico, Pakistan, Egypt, Greece, Kuwait, South Africa, Norway, Russia, Ukraine, and many others. The group has a rich heritage of craftsmanship with a total combined production capacity of over 12 million pieces per year. Therefore, company dominates the industry over 30 years. The group obtains 60% of its revenues from exports, ensuring the premium quality of products which compete with traditional producers such as Japan and European countries.

The primary product range of the two companies is Porcelain Tableware and manufacture Porcelain gift items, jewelry, and souvenir items. The vastly improved imprinting techniques of decals and the elegance, sophistication, and superiority of Dankotuwa Porcelain, especially in its gold and platinum range, have earned the company a reputation for being one of the best in Asia and Europe.

The company was established in 1984, the name Dankotuwa Porcelain is synonymous with upscale dining culture and is a household name in Sri Lanka. Dankotuwa Porcelain continues to create timeless and modern collections of tableware from superior glazing technologies, personalized designs, and endless options. Dankotuwa Porcelain items are distinguished by its high whiteness levels, intricate hand painting and luxurious gold and platinum applications. As a result of that Dankotuwa Porcelain has become a preferred choice for gifts, both as extravagant indulgences and as tokens of appreciation.

Dankotuwa has won many national and international awards such as the Presidential Export Awards and awarded Most Outstanding Exporter (NCE).

 

Dankotuwa Porcelain is safe for all aspects of dining as raw materials used for white products are lead and cadmium safe [based on international standards such as ISO 6486 – 1:1999, ISO 6486 – 2:1999, ASTM C 738 – 94(Re-approved 2016) and California Proposition 65 Compliance]. The company has the unparalleled distinction of being the first tableware manufacturer in Sri Lanka to obtain ISO 9001/2008 certification through maintaining high quality standards where products can be used in a microwave or a dishwasher.

 

Evidential Matter

Horizontal Analysis

The horizontal analysis results can compare and contrast among the previous year horizontal analysis results of the company. Further, results can compare with an equivalent company in the same period.  The dollar change and the percent change values are equal for both total assets and total equity and liabilities. The percent change of the horizontal analysis of total assets show the growth rate of the company, Dankotuwa Porcelain. The years 2019, 2018, 2017, 2016, 2015 years show growth rates of 24.54%, 7.93%, 6.66%, 23.23%, and 4.10% respectively.

The percent change of the non – current assets and the current assets of year 2019/ 18 are 30.66% and 13.56% respectively. The percent change for total equity, current liabilities and non – current liabilities are 25.92%, 77.24% and -34.97% respectively for the year, 2019/ 18. The percent change of the non – current assets and the current assets of year 2018/ 17 are 21.51% and 7.53% respectively. The percent change for total equity, current liabilities and non – current liabilities are – 0.04%, 23.99% and 25.81% respectively for the year, 2018/ 17. The percent change of the non – current assets and the current assets of year 2017/ 16 are 0.43% and 6.66% respectively. The percent change for total equity, current liabilities and non – current liabilities are – 0.59%, 67.27% and 0.31% respectively for the year, 2017/ 16. The percent change of the non – current assets and the current assets of year 2016/ 15 are 22.46% and 24.62% respectively. The percent change for total equity, current liabilities and non – current liabilities are 95.98%, 23.23% and 46.63% respectively for the year, 2016/ 15. The percent change of the non – current assets and the current assets of year 2015/ 14 are 8.66% and 4.10% respectively. The percent change for total equity, current liabilities and non – current liabilities are 0.85%, 4.10% and 11.15% respectively for the year, 2015/ 14. The percent change for equity and liabilities of the previous periods seem to be lower values compared to the current and non – current assets.

 

Trend analysis

The base period amounts are taken as 100%. The base period amount is compared with the other period values. Trend analysis reflects the trends of turnover, gross profit and cost of sales, of Dankotuwa Porcelain PLC for several years according to the calculation. The trend values for the year 2019 of turnover, cost of sales and gross profit are 1.85, 1.60 and 2.93 times larger respectively, compared to the base period amount of year 2009.  The trend values for the year 2018 are 1.77, 1.68 and 2.18 times higher for turnover, cost of sales and gross profit respectively, compared to the base period amount of year 2009. When year 2008 is taken as the base period amount, the trend values for turnover, cost of sales and gross profit are obtained as 1.40, 1.42 and 1.36 times higher for the year 2018 and 1.59, 1.60 and 1.58 for the year 2017. The trend values for the year 2017 for turnover, cost of sales and gross profit are 1.74, 1.81 and 1.54 times larger respectively, compared to the base period amount of year 2007 while turnover, cost of sales and gross profit values for year 2016 are 1.75, 1.88 and 1.38 respectively. Then the trend values for the year 2016 of turnover, cost of sales and gross profit are 2.21, 2.31 and 1.90 times larger respectively, compared to the base period amount of year 2005. The trend values for the year 2015 of turnover, cost of sales and gross profit are 2.15, 2.43 and 1.33 times larger respectively, compared to the base period amount of year 2005. Finally, the trend values for the year 2015 for turnover, cost of sales and gross profit are 2.15, 2.43 and 1.33 times larger respectively and trend values for the year 2014 for turnover, cost of sales and gross profit are 1.67, 1.83 and 1.20 times larger respectively when the base period is taken as 2005.  

As an overview of the results obtained for trend analysis, it shows that there is a growth of all the three variables considered; turnover, cost of sales and gross profit from year 2005 to 2019. It shows the company has both good and bad effects.

 

Graph 01 – Trend Analysis for the year 2015

 

Graph 02 – Trend Analysis for the year 2016

 

The calculated values of Horizontal analysis for five years of Dankotuwa Porcelain PLC can be found out from the attachments below.

 

Vertical Analysis

Vertical analysis results support to compare the financial statement results from one year to the next year of the company. Further, common – size percent analysis involve comparison – either of the same company in different periods or different companies in the same period. The common base figure selected from the balance sheet is total assets or the total equity and liabilities value. The common base figure selected from the income statement is the value for net sales/ net income / revenue. Then the amounts are expressed as a percentage of the selected base amount.  These percentages are compared. The percentages for the base periods are taken as 100%. According to the results obtained from the annual reports of Dankotuwa Porcelain Plc, the below conclusions can be filtered out.

The common – size percentages for the balance sheet values for the year 2014 shows that out of the total assets, 24.27% for property plant and equipment and 20.74% for inventory. Out of the total equity and liability values for year 2014, 48.94% is for equity, 32.59% for non – current liabilities and 18.46% for current liabilities. The income statement for 2014 shows the highest accumulation of common – size percentage value of 81.50% for cost of sales and 18.50% value for gross profit.

According to the common – size percentage values of the balance sheet for the year 2015, out of the total assets, 21.74% for property, plant and equipment and 19.13% for inventories. Out of the total equity and liability values for year 2015, 47.41% is for equity, 34.80% for non – current liabilities and 17.78% for current liabilities. The income statement for 2015 shows the highest accumulation of common – size percentage value of 82.24% for cost of sales and 17.76% value for gross profit.

The common – size percentage values of the balance sheet for the year 2016, shows 28.79% for property, plant and equipment and 14.99% for inventories out of total assets. Out of the total equity and liability values for year 2016, 72.96% is for equity, 16.58% for non – current liabilities and 10.47% for current liabilities. The income statement for 2016 shows the highest accumulation of common – size percentage value of 74% for cost of sales and 26% value for gross profit.

 

The common – size percentage values of the balance sheet for the year 2017, shows 28.79% for property, plant and equipment and 14.99% for inventories out of total assets. Out of the total equity and liability values for year 2017, 68% is for equity, 15.59% for non – current liabilities and 16.41% for current liabilities. The income statement for 2017 shows the highest accumulation of common – size percentage value of 76% for cost of sales and 24% value for gross profit.

The common – size percentage values of the balance sheet for the year 2018, shows 30.34% for property, plant and equipment and 11.16% for inventories out of total assets. Out of the total equity and liability values for year 2018, 62.98% is for equity, 18.17% for non – current liabilities and 18.86% for current liabilities. The income statement for 2018 shows the highest accumulation of common – size percentage value of 83.83% for cost of sales and 16.16% value for gross profit.The common – size percentage values of the balance sheet for the year 2019, shows 33.19% for property, plant and equipment and 12.02% for inventories out of total assets. Out of the total equity and liability values for year 2019, 63.68% is for equity, 9.49% for non – current liabilities and 26.83% for current liabilities. The income statement for 2019 shows the highest accumulation of common – size percentage value of 72.85% for cost of sales and 27.15% value for gross profit.

The results for the years 2014, 2015, 2016, 2017, 2018 and 2019 reflect that a proper distribution of assets, liabilities and the equity within the company, Dankotuwa Porcelain PLC through the vertical analysis data. The calculation is attached to the attachement below.

                   

Graph 03 – Common – size percent for assets for the year 2019

Ratio Analysis

i)                   Liquidity and efficiency ratios

Liquidity is the amount of cash a company can put its hands on quickly to settle its debt. The liquid funds are consists of cash, short – term investments for which there is a ready market, fixed deposits with a bank, trade receivables and bills of exchange receivables.

a.       Working capital

The short – term assets can be quickly converted into cash and the short - term liabilities should be paid soon. This ratio reflects whether there are adequate amount of cash to play day – to – day activities. The working capital ratio values for the years 2019, 2018, 2017, 2016, 2015, and 2014 of Dankotuwa Porcelain PLC are 212,969,452, 497,999,469, 722,902,969, 739,334,747, 402,784,073 and 431,338,071 rupees respectively. The working capital values show the debt paying ability of the company is in a good position.

b.      Current ratio

This ratio gives an idea that the company must have enough current assets to pay off its current liabilities in future. The current ratio values for the years 2019, 2018, 2017, 2016, 2015, and 2014 of Dankotuwa Porcelain PLC are (1.22:1), (1.89:1), (2.62:1), (3.77:1), (1.99:1) and (2.07:1). All of the current ratio values are greater than one. It shows that the company has an ability to pay its debt on time. If the ratio become lower than one it says that the company has more debts and if the ratio become very higher than one it says that the company has too much of assets.

c.       Acid – test ratio

All the current assets cannot quickly turn into cash. This ratio shows an indication of the company’s liquidity position. It is better to have at least one as the value of the acid – test ratio for the companies with a slow inventory turnover. If the value of the ratio becomes lower than one, the company could be in a cash flow trouble. The company may depend on its inventory.

 

The acid - test ratio values for the years 2019, 2018, 2017, 2016, 2015, and 2014 of Dankotuwa Porcelain PLC are (0.77:1), (1.31:1), (1.65:1), (2.33:1), (0.92:1) and (0.95:1) respectively. This shows that the company is not in a good position in 2014, 2015 and 2019 years. The company depends on the inventory. If the inventory could not be sold, the company will be in danger. The company was in a good position in 2018, 2017 and 2016 years which can survive even without inventory.

d.      Accounts receivables turnover

This ratio expresses how many times company can convert its receivables into cash each year. If the value of this ratio becomes equal to one, the company has not credited any. The accounts receivables turnover ratio values for the years 2019, 2018, 2017, 2016 and 2015 of Dankotuwa Porcelain PLC are 3.328199, 3.56952, 4.402661, 4.97197 and 4.831134 times respectively. The ratio values are not much higher in this company. It reflects that the company does not collect money faster from the receivables. Company is less efficient in collecting money from receivables.

e.       Merchandise turnover

This ratio gives an idea that how many times a company sell and replace its inventory during a year. If the value for this ratio becomes higher, it shows that all inventory of the company is sold quickly and the inventory level is very lower. The merchandise turnover ratio values for the years 2019, 2018, 2017, 2016 and 2015 of Dankotuwa Porcelain PLC are 2.343359, 2.815765, 3.066198, 2.94083 and 2.888414 times respectively. The merchandise turnover ratio values are not much higher according to the results. It shows that high amount of inventory is left and not sold much.

f.        Days of sales uncollected

This ratio indicates the number of days a company requires to collect its money back. The days of sales uncollected for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 129, 88, 91, 78, 73 and 74 days respectively. The results of the calculation reveal that the company has a very higher value for this ratio. Company does not collect money faster. The company has not managed to decrease the collection period year to year. This indicates the poorly managed credit control function. This is an indication of a poorly managed company.

 

If this ratio becomes lower it shows that the company can collect money within few days. The company can provide several discounts, and tricks such as buy one and get one free to motivate receivables to give money back.

g.      Days of sales in inventory

The ratio indicates the liquidity of inventory. The time period that inventory is kept before selling. It is better if value of the ratio become lower. The days of sales in in inventory for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 179, 112, 127, 117, 124 and 122 days respectively. The results for this ratio of the company are much higher. The values have increased from year by year shows that there is a slowdown in trading or a build – up in inventory levels or the investment in inventories has become excessive. Several aspects of inventory holding policy must be balanced to lower the ratio values such as lead times, seasonal fluctuations in orders, alternative use of warehouse space, bulk buying discounts, likelihood of inventory perishing or becoming obsolete.

The above two ratios, days of sales in inventory and days sales uncollected give an indication of how soon inventory is converted into cash/ companies liquidity. According to the company theses values of these ratios are not in a good position.

h.      Total assets turnover

This ratio measures the efficiency of the assets in producing sales. If the value of this ratio is greater than one, it is god for the company and the company is more efficient. The ratio value become very much higher is also not good for the company. The total assets turnover for the years 2019, 2018, 2017, 2016 and 2015 of Dankotuwa Porcelain PLC are 0.374225, 0.451335, 0.627116, 0.635946622 and 0.699617 respectively. The calculation reflects the revenue of the company is not much higher compared to average total assets.

ii)                 Solvency ratios

The solvency ratios reflect the long – term debt paying ability of a company.

 

a.       Debt ratio

This shows what potions of company’s assets are contributed by creditors. Assets of a company consist of non – current and current assets. Debts consist of current and non – current liabilities. There is no absolute guide to the maximum safe debt ratio. In practice, may companies operate successfully with a higher debt ratio than 50%. Therefore, the debt ratio has to be fallen in between 50% - 60%. If the ratio shows beyond these limits, the debt position of the company should pay high attention. The total debt ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 36.32%, 37.02%, 32.00%, 27.04%, 52.59% and 51.06% respectively. The values indicate that the debt percentage of the company’s assets have a lower percentage when concerned the recent years.

b.      Equity ratio

This ratio indicates that what potions of company’s assets are contributed by owners. These assets must be financed by long – term capital of the company, which is one of two things; issued share capital (ordinary shares plus other equity, non – redeemable preference shares) and long – term debt. The total debt ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 63.68%, 62.98%, 68.00%, 72.96%, 47.41% and 48.94% respectively. These values show a higher percentage when compared with the debt ratio.

According to the debt and equity ratios the contribution for the total assets from debt is about 40% and from equity is about 60%.

c.       Times interest earned

This ratio reflects the ability of firm’s operations to provide protection to long – term creditors. It simply expresses how much the company is strong enough to pay the interest. The times interest earned ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 5.730066191, -6.0374499, 7.7929333, 3.55131425, 0.765755765 and 1.8684776 times respectively.

 

According to the results obtained, the ratio values are lower in years 2018 and 2015 that the company was not strong to pay the interest. Therefore, the company may not be able to get a loan in those years. Even though, the company has a higher value in the other years. Therefore, the company is strong enough to pay the loan and the interest in those years.

iii)               Profitability ratios

These ratios give an idea about the profit of the company related to another variable.

a.       Profit margin

The ability of a company to earn a net income from sales is shown here. Therefore the company needs to know the efficiency and profitability of the company before and after taxes. This further reflects how much net profit the company earns out of total sales. The profit margin ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 19.35%, -6.35%, 7.63%, 6.90%, -1.05% and 1.65% respectively. According to the calculations, the 2008 and 2015 ratio values are lower than one which reflects a loss of the company. Anyhow, they have managed to earn more profit in the recent years (2019) according to the higher values obtained for the ratio values.

b.      Gross margin

This ratio indicates the amount remaining from one rupee that is left to cover operating expenses and a profit after considering cost of sales.  The gross margin ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 27.15%, 16.16%, 24.40%, 25.55%, 182.24% and 181.50% respectively. The values for this ratio are higher which is good for the company. Even though, the value has become lower year by year.

c.       Return on total assets

This is an overall measure of the company’s profitability which is the return on total assets or the amount company has earned out of its total assets. The return on total assets ratio values for the years 2019, 2018, 2017, 2016 and 2015 of Dankotuwa Porcelain PLC are 4.66%, -2.86%, 3.59%, 1.98% and -0.50% respectively. The ratio values of the company are lower which is not good for the company.

d.      Return on common shareholders’ equity

The ratio reflects how well the company employed the owners’ investments to earn income. The return on common shareholders’ equity ratio values for the years 2019, 2018, 2017, 2016 and 2015 of Dankotuwa Porcelain PLC are 7.34%, -4.38%, 5.10%, 3.15% and -1.04%  respectively. The values for the years 2018 and 2015 are lower which is not good for the company and the values for the years 2019, 2017 and 2016 are higher which is good for the company.  

e.      Book value per common share

Liquidation at reported amounts. If the company is bankrupted the amount get for one shareholder is reflected through this ratio values. The book value per common share ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 211699.0217, 168116.8734, 168183.70, 169186.50, 98097.99 and 97275.96 rupees per share respectively. The values are higher according to the calculation which is good for the company.

f.        Basic earnings per share (BES)

This ratio is very important in stock exchange in stock market when buying and selling stock market shares. The value provides an idea about how much income is earned for each share of common stock. It is the amount of net profit for the period that is attributable to each ordinary share which is outstanding during all or part of the period. The basic earnings per share ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 21700.06, -7363.62, 8604.69, 6494.09, -1016.31 and 2169.396 rupees per share respectively. According to the calculation, the ratio values obtained for the years 2018 and 2015 are a very lower value because the company was on a loss in these years. Therefore, buying shares may also make a loss. Anyhow, in the other years, there is a higher value per share. It is good to buy shares in 2019, 2017, 2016 and 2014.

 

iv)               Market ratios

The value of an investment in ordinary shares in a company listed on a stock exchange is its market value, and so investment ratios must have regard not only to information in the company’s published accounts, but also to the current price, and the PE ratio and the dividend ratios involve using the share price.

a.      Price – Earnings ratio (PE ratio)

The PE ratio indicates strong shareholder confidence in the company and its future, in profit growth and a lower PE ratio indicates lower confidence. The PE ratio of one company can be compared with the PE ratios of other companies in the same business sector and other companies generally. It is often used in stock exchange reporting where prices are readily available. Therefore, this ratio is often used by investors as a general guideline in gaining stock values. It is important in buying and selling shares. The price – earnings ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 24.4239, -93.7039, 0.697294, 1.047105, -11.02028224 and 5.301014 times respectively. There are very lower values in years 2018, 2017, 2016, 2015 and 2014, according to the calculation. It reflects that the shares of this company were not in a suitable condition to buy. Anyhow, the company has managed to increase the PE ratio in the recent years (2019).

b.      Dividend yield

Divided yield is the return a shareholder is currently expecting on the shares of a company. The dividend per share is taken as the divided for the previous year. Dividend yield is an important aspect of a share’s performance. Further, this ratio identifies the return, in terms of cash dividends on the current market price of the stock. The dividend yield values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 0%, 0%, 10.83%, 0%, 0% and 3.48% respectively. The values for this ratio indicate that buying shares of this company is not much good for the investor.   

The calculations required for this analysis are attached at the bottom of this this document.

 

Assumptions

Accounting assumptions state how a business is organized and operates. They provide structure to record business transactions. If any of these assumptions are not true, the financial information produced by a business and reported in its financial statements should make a bit change. These key assumptions are:

• Accrual assumption. Transactions are recorded using the accrual basis of accounting. The recognition of revenues and expenses arises when earned or used, respectively. If this assumption is not true, a business should use the cash basis of accounting to develop financial statements that are based on cash flows instead of the above. The latter approach will not result in financial statements that can be audited.
• Consistency assumption. The same method of accounting will be used from period to period unless it can be replaced by a more relevant method. If this assumption is not true, the financial statements produced over multiple periods are probably not comparable.
• Economic entity assumption. The transactions of a business and those of its owners are not intermingled. If this assumption is not true, it is impossible to develop accurate financial statements. This assumption is a particular problem for small, family-owned businesses.
• Reliability assumption. The transactions that can be adequately proven should only be recorded. If this assumption is not true, a business is probably artificially accelerating the recognition of revenue to bolster its short-term results.
• Going concern assumption. A business will continue to operate for the foreseeable future. If this assumption is not true (such as when bankruptcy appears probable), deferred expenses should be recognized at once.
• Conservatism assumption. Revenues and expenses should be recognized when earned, but there is a bias toward earlier recognition of expenses. If this assumption is not true, a business may be issuing overly optimistic financial results.
• Time period assumption. The financial results reported by a business should cover a uniform and consistent period. If this is not the case, financial statements will not be comparable across reporting periods.

Even though, these preceding assumptions appear obvious to be obeyed, they are easily violated, and produce the financial statements that are fundamentally unsound. The auditors will be looking for violations of these accounting assumptions when a company's financial statements are audited.  They will refuse to give a favorable opinion on the statements until any issues found are corrected. The new financial statements must be produced that reflect the corrected assumptions.

 

Important Factors

The calculations reflect the current situation of the company is not much positive because most of the ratio values are below the required standard industry averages. Therefore, company should pay more attention towards the major areas of weaknesses and apply remedial actions in order to overcome the current situation. Improving the average collection period for accounts receivables, increasing inventory turnover and reducing prepayments, provide discounts or other benefits to gather money back on time and increasing inventory levels only up to requirement are several remedies that can be implemented.

The analysis conducted may also have some limitations. The analysis does not consider and included enough information and details related to the current economic situation and the type, nature and the size of the organization. Therefore, the analysis is mostly based on past documented data not on the present data. Further, the calculations are based on several assumptions of accounting.  Hence, several limitations of this analysis can be identified.

 

Inferences

Financial Statement analysis is a process to select, evaluate and interpret financial data in order to assess a company’s past, present and future financial performance. Common size analysis of horizontal analysis is restating the financial information in a standardized format. This could be done by horizontal analysis which compares two or more years of financial data in both Rupee and percentage form and vertical where each category of accounts on the balance sheet is shown as a percentage of the total accounts. This can be complimented with the DuPont model and also ratio analysis. Furthermore, we then use relationships among financial statement accounts, forecasting the company’s future income statements and balance sheets, to see how the company’s performance is likely to evolve. This step is normally based on the guidance given by the company management.

 

Discussion

The financial statement analysis is conducted mainly according to horizontal, vertical and ratio analysis. The results help to get an idea about the current financial status of the company according to its annual reports.

The percent change analysis within horizontal analysis of total assets show the growth rate of the company, Dankotuwa Porcelain. The years 2019, 2018, 2017, 2016, 2015 years show growth rates of 24.54%, 7.93%, 6.66%, 23.23%, and 4.10% respectively. It reflects that the growth rate of the company has gradually increased when considering the recent years. Trend analysis of horizontal analysis reflects the trends of turnover, gross profit and cost of sales, of Dankotuwa Porcelain PLC which reflects a growth of all the three variables considered from year 2005 to 2019. The vertical analysis results for the years 2014, 2015, 2016, 2017, 2018 and 2019 reflect that a proper distribution of assets, liabilities and the equity within the company, Dankotuwa Porcelain PLC.

In line with the working capital values, the debt paying ability of the company is in a good position. All of the current ratio values are greater than one that shows the company has an ability to pay its debt on time. The acid – test ratio shows that the company is not in a good position in 2014, 2015 and 2019 years. The company depends on the inventory. If the inventory could not be sold, the company will be in danger. The company was in a good position in 2018, 2017 and 2016 years which can survive even without inventory. The accounts receivables turnover values are not much higher in this company. It reflects that the company does not collect money faster from the receivables. Company is less efficient in collecting money from receivables. The merchandise turnover ratio values are not much higher according to the results. It shows that high amount of inventory is left and not sold much. The results of the days of sales uncollected reveal that the company has a very higher value for this ratio. Company does not collect money faster. The company has not managed to decrease the collection period year to year. This indicates the poorly managed credit control function. This is an indication of a poorly managed company.

 

The results for days of sales in inventory ratio of the company are much higher. The values have increased from year by year shows that there is a slowdown in trading or a build – up in inventory levels or the investment in inventories has become excessive. The two ratios, days of sales in inventory and days sales uncollected give an indication of how soon inventory is converted into cash/ companies liquidity. According to the company theses values of these ratios are not in a good position. The total assets turnover reflects the revenue of the company is not much higher compared to average total assets.

The debt ratio values indicate that the debt percentage of the company’s assets have a lower percentage when concerned the recent years. These equity ratio values show a higher percentage when compared with the debt ratio. According to the debt and equity ratios the contribution for the total assets from debt is about 40% and from equity is about 60%. The times interest earned results are lower in years 2018 and 2015 that the company was not strong to pay the interest. Therefore, the company may not be able to get a loan in those years. Even though, the company has a higher value in the other years. Therefore, the company is strong enough to pay the loan and the interest in those years.

The profit margin calculations for the 2008 and 2015 ratio values are lower than one which reflects a loss of the company. Anyhow, they have managed to earn more profit in the recent years (2019) according to the higher values obtained for the ratio values. The values for gross margin ratio are higher which is good for the company. Even though, the value has become lower year by year. The returns on total assets values of the company are lower which is not good for the company. The return on common shareholders equity values for the years 2018 and 2015 are lower which is not good for the company and the values for the years 2019, 2017 and 2016 are higher which is good for the company.  The book values per common share values are higher according to the calculation which is good for the company.

The basic earnings per share values obtained for the years 2018 and 2015 are very lower values because the company was on a loss in these years. Therefore, buying shares may also make a loss. Anyhow, in the other years, there was a higher value per share. It is good to buy shares in 2019, 2017, 2016 and 2014.

 

The PE ratio reflects that the shares of this company were not in a suitable condition to buy. Anyhow, the company has managed to increase the PE ratio in the recent years (2019). The values for dividend yield ratio indicate that buying shares of this company is not much good for the investor.  

 

Conclusion

The calculations reflect the current situation of the company is not much positive because most of the ratio values are below the required standard industry averages. The comparative performance is poor in the areas of profit margins, solvency, liquidity, credit control, and inventory management. Therefore, company mush concern highly on the week areas of the company and implement remedies to overcome the hard situation of the company, Dankotuwa Porcelain (Pvt) ltd. 
Improving the average collection period for accounts receivables, increasing inventory turnover and reducing prepayments, provide discounts or other benefits to gather money back on time, implementation of proper management practices as a whole and increasing inventory levels only up to requirement are several remedies that can be implemented.