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.
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