KOTMALE HOLDINGS PLC.

 Horizontal Analysis of Financial Statements

Using this technology, the changes form one year to the next within each line item in the financial statements are analyzed on either as a currency or as a percentage. It   is a financial statement analysis technique that shows changes in the amounts of corresponding financial statement items over a period of time. It is a useful tool to evaluate the trend situation

Horizontal Analysis of Income Statement

Percentage Change

14/15 15/16 16/17 17/18 18/19

Revenue 6% 22% 16% 9% 10%

Cost of sales 3% 19% 18% 7% 9%

 

Gross profit 18% 32% 9% 14% 12%

Other income 15% 38% 16% 11% -98%

Distribution expenses -16% 45% 3% 13% 9%

Administrative expenses 20% -4% 23% 6% 20%

Result from operating activities 60% 76% 13% 18% 47%

Net finance income 32% 12% 71% -30% -74%

 

Profit before taxation 51% 59% 24% 5% -39%

Tax expense 159% 26% 70% 18% -57%

   

Profit for the year 24% 76% 6% -3% -26%

 

Other comprehensive income / (expense)

Actuarial losses on employee benefits -74% 12% 181% -84% -532%

Tax on other comprehensive income -74% -738% -149% -1677% -100%

 

Other comprehensive income / (expense) for the year, net of tax -74% -5134% -106% -5072% -46%

 

Total comprehensive income for the year 26% 98% -6% 34% -6%

We can clearly see that the gross profit and the operating profit have increased up to 2016 but again decrease in the 2018 and 2019. There is no significant increase in the revenue percentage value over the 5 years’ time. Company does not show significant growth according to percentage change figures. 

Horizontal Analysis of Statement of Financial Position

  14/15 15/16 16/17 17/18 18/19

ASSETS

Non-current assets

Property, plant and equipment -11% 12% 29% 32% 34%

Intangible assets 0% 0% 0% 0% 0%

Investments in subsidiaries  

Total non-current assets -9% 10% 24% 28% 31%

Current assets

Inventories -8% 28% 49% 2% 7%

Trade and other receivables 19% 4% 48% 26% 49%

Amounts due from related companies -57% 14% 41% -76% 90%

Short term investments 39% 21% -44% -56% -41%

Cash and cash equivalents -34% 85% -5% -32% -59%

Total current assets 15% 21% -2% -31% 0%

Total assets 7% 18% -9% -11% 19%

 

EQUITY

Stated capital -75% 0% 0% 0% 0%

Reserves 0% 27% 0% 65% 0%

Retained earnings -82% 793% 24% -51% 56%

Total equity 13% 21% 9% -21% 20%

 

LIABILITIES

Non-current liabilities  

Deferred tax liabilities 19% -7% 0% 32% 5%

Employee benefits 13% 20% 24% 7% 16%

Total non-current liabilities 17% 2% 9% 21% 9%

Current liabilities

Trade and other payables -19% -55% 2492% -9% 2%

Amounts due to related companies -63% -100% 0% -47% 1235%

Current tax liabilities 140% 25% 51% 24% 9%

Bank overdrafts -98% 1655% 3123% 71%

Total current liabilities -11% 6% 17% 11% 18%

Total liabilities -7% 8% 16% 13% 16%

Total equity and liabilities 7% 18% -9% -11% 19%

Though the cash and cash equivalence have decrease over the 5 years’ time which is bad for the company. The total assets percentage also have dropped for past 5 years. The total equity also has dropped for 5 years’ time. Total liability has increase over the period a percentage of while the total equity and liability is a decrease over 5 years’ time from last year. This shows that the company’s financial position is not stable, and it has a lot of debts to be paid in coming years.

06. Trend Analysis of Financial Statements.

This allows investors and analysts to see what has been driving a company’s financial performance over a few years, as well as spotting trends and growth patterns such as seasonality. It enables analysts to assess relative changes in different line items over time and project them. By looking at the income statement, balance sheet and cash flow statement at the same time, one can create a complete picture of operational results and see what has been driving a company’s performance and whether it is operating efficiently and profitably.

It is used to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparison or percentage comparison, where the number in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

Assume that base year is 2015/16

2014/15 2015/16 2016/17 2017/18 2018/19

 

Revenue 100% 122% 141% 154% 169%

Cost of sales 100% 94% 165% 177% 186%

   

Gross profit 100% 100% 175% 179% 189%

Other income 100% 138% 160% 178% 4%

Distribution expenses 100% 145% 150% 169% 185%

Administrative expenses 100% 96% 117% 124% 149%

   

Result from operating activities 100% 176% 199% 235% 160%

Net finance income 100% 112% 191% 133% 35%

   

Profit before taxation 100% 159% 197% 207% 126%

Tax expense 100% 126% 215% 253% 108%

   

Profit for the year 100% 176% 187% 182% 135%

 

There is an overall increase in the trends of all the above sections. But in 2019 all sections have decreasing trend.  Profit before taxation shows a higher increase compared to the others while the net revenue has a decreasing trend.

07. Vertical Analysis of Financial Statements

Here each line item is listed as a percentage of a base figure within the statement. Thus, line item 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 inflow.

Vertical analysis makes it much easier to compare the financial statement of one company with another as across industries because one can see the relative proportions of account balance. It also makes it easier to compare previous periods for time series analysis, in which quarterly and annual figures are compared over a number of years- in order to gain a picture of whether performance metrics improving or deteriorating.

Vertical Analysis for Statement of Profit or Loss and Other Comprehensive Income

2019 2018 2017 2016 2015

Revenue 100% 100% 100% 100% 100%

Cost of sales -74% -75% -76% -74% -79%

Gross profit 26% 25% 24% 26% 21%

 

Other income 0% 5% 5% 5% 4%

Distribution expenses -12% -12% -12% -13% -14%

Administrative expenses -6% -5% -5% -5% -6%

 

Result from operating activities 8% 13% 12% 12% 6%

 

Net finance income 1% 3% 4% 3% 3%

Profit before taxation 9% 16% 16% 15% 8%

Tax expense -3% -7% -6% -4% -2%

Profit for the year 6% 9% 10% 11% 7%

 

Other comprehensive income / (expense) 0% 0% - 1% -

Revaluation of land and building 0% 0% 0% 0% 0%

Actuarial losses on employee benefits 0% 0% 0% 0% 0%

Tax on other comprehensive income 6% 12% 0% 1% 0%

Other comprehensive income / (expense) for the year, net of tax 8% 10% 10% 12% 6%

Based on the revenue earned there is an increase of profit for the year, total comprehensive income for the year and gross profit when considered data over a 5 years’ span.

Vertical Analysis for Statement of Financial Position

  2019 2018 2017 2016 2015

ASSETS  

Non-current assets  

Property, plant and equipment 42% 29% 21% 26% 36%

Intangible assets 6% 4% 4% 5% 5%

Total non-current assets 47% 33% 24% 31% 41%

Current assets  

Inventories 13% 11% 7% 7% 9%

Trade and other receivables 15% 13% 8% 8% 12%

Amounts due from related companies 9% 6% 4% 10% 5%

Short term investments 46% 34% 54% 41% 30%

Cash and cash equivalents 4% 3% 3% 3% 2%

Total current assets 68% 67% 76% 69% 59%

Total assets 100% 100% 100% 100% 100%

 

EQUITY  

Stated capital 34% 22% 20% 25% 29%

Reserves 12% 8% 8% 8% 9%

Retained earnings 52% 40% 50% 38% 35%

Total equity 86% 71% 77% 71% 73%

 

LIABILITIES  

Non-current liabilities  

Deferred tax liabilities 2% 2% 2% 3% 2%

Employee benefits 2% 2% 1% 1% 1%

Total non-current liabilities 4% 4% 4% 4% 3%

Current liabilities 1% 0% 13% 0% 0%

Trade and other payables 17% 15% 1% 19% 20%

Amounts due to related companies 0% 0% 0% 4% 0%

Current tax liabilities 6% 9% 6% 2% 3%

Bank overdrafts 0% 0% 0% 0% 0%

Total current liabilities 27% 25% 19% 25% 24%

Total liabilities 27% 29% 23% 29% 27%

 

Total equity and liabilities 100% 100% 100% 100% 100%

Over the years the total non-current assets have fluctuated between 30-40% but does not show a drastic change. The total current assets round up to a 60% of total assets. Over the years the total equity and the total liability is steady without drastic fluctuations. And equity takes the majority % of total equity and liabilities which is favorable for the company.

08. Ratio Analysis for financial statements

Liquidity Ratios:

They usually focus on current assets and current liabilities. This measures the company’s ability to pay debt obligations and its margin of safety and repay its debts in the short-term.

Liquidity Ratios 2015 2016 2017 2018 2019

Current ratio (times) 2.8 4.0 2.7 2.4 2.9

Acid ratio (times) 2.5 3.6 2.3 2.4 2.1

Days sales uncollected 69.1 69.7 88.9 77.3 92.1

accounts receivables 1.3 1.6 1.3 1.7 2.1

total asset turnover 13.1 10.5 11.4 10.2 10.7

inventory turnover 9.5 13.3 12.9 13.1 13.7

days sales inventory 26.8 33.9 27.0 33.8 42.1

 

The current ratio indicates the ability of a company to repay the current liabilities out of the current assets. Over the past 4 years, this ratio has decreased which is not favorable. The acid ratio is a modified current ratio that takes into account the fact that inventory may be relatively difficult current asset to convert into cash. This ratio therefore reflects a more conservative view of the ability to repay the current liabilities within a short period. Here the acid ratio also has drastically dropped. The company should pay more attention to this.

Accounts receivable turnover, this ratio indicates the entity’s credit and collection efficiency. And it has fluctuated over the period.

Inventory turnover this indicated how fast inventory is turned to cash. Over time this has increased. A low turnover indicates over stocking and a high turnover indicates under stocking. In comparison to this days sales inventory brings us an indication as how long the stock will be held. As the company has a no

 

of days around 1 month it is acceptable. This can help to understand how investments should be done on inventory. Day’s sales uncollected has reduced over time which is favorable as it shows how fast we can collect the credit sales. Asset turnover ratio measures the value of a company’s sales or revenue generated relative to the value of its assets. This ratio shows only a slight fluctuation over the years.

Solvency Ratios:

These ratios measure the ability of the entity to repay its debts in the long-term. They usually deal with total assets and total liabilities. This shows the whether the company’s cash flow is sufficient to meet its long-term and short-term liabilities.

Solvency Ratios 2015 2016 2017 2018 2019

Debt ratio (%) 28.6 22.7 29.0 26.9 27.1

Equity ratio (%) 71.4 77.3 71.0 73.1 72.2

Time interest earned 3.2 5.1 3.7 9.7 9.4

 

Debt to asset ratio is the inverse of the debt ratio. It indicates how much of the liabilities are covered by assets- in essence the capacity of the company to repay its debts in a long run.it can be interpreted as the potion of a company’s assets that are financed by debts. It measures the extent of a company’s leverage. This ratio does not take in to account the timing of repayments and therefore the company appear to be solve and at the same time be liquid. Over the 5 years the ratio does not show any significant change meaning the ratio remains constant over five years.

Time interest earned ratio has decreased drastically over 5 years. This ratio indicated the company’s ability to meet the interest payment on its debts.

Profitability Ratios:

These are a class of financial metrics that are used to assess a business’s ability to generate earnings relative to its associated expenses. For most of these ratios having higher value relative to a competitor’s ratio or relative to the same ratio from a previous year indicate that the company is doing well.

Profitability Ratios 2105 2016 2017 2018 2019

profit margin 81.6 61.9 110.5 101.4 112.2

gross profit margin 295.6 199.2 245.1 236.5 247.6

Net margin/Net profit 0.28 0.31 0.43 0.42 0.47

return on total asset 7.3 8.1 14.6 14.6 15.7

return on common shareholders’

equity 0.11 0.11 0.20 0.20 0.20

Book value per common shares 25.1 28.0 38.4 31.9 41.1

Profit margin ratio calculated as net income divided by revenue. This ratio compares the earnings reported by a business to its sales. It is a key indicator of financial health of an organization. Over the 4 years profit margin is increased. This is a good indication.

Gross profit margin is a profitability ratio that calculates the percentage of sales that exceeds the cost of goods sold. In other words, it measures how efficiently a company uses its materials and labor to produce and sell products profitably. Over the 4 years it had decreased. But by a small amount.

Return on assets ratio shows how efficiently the company utilizes its assets. Here in Kothmale Company, this ratio has increased over time which is favorable for the company.

Return on common shareholder’s equity measure the success of a company in generating income for the benefit of common stakeholders. This ratio has increased over 3 years but by a small amount and the ratio value is not a large value as well. Based on its equity available to common shareholders. Book value per share is a market value financial ratio and the purpose of calculating it is to relate shareholder’s equity to the number of shares of common stock outstanding. This ratio has increased from 2015 to 2019 but reduced in 2019 by 6.8 percent.

Market Ratios:

This ratio asses the performance of the company’s shares.

Market Ratios 2015 2016 2017 2018 2019

earnings per share 3.7 3.0 6.5 6.9 7.2

dividend yield - - - 14.7 13.2

price earnings ratio 17.5 16.3 - 13.1 14.3

Earnings per share is the portion of a company’s profit allocated to each outstanding share of a common stock. Earnings per share serves as an indicator of a company’s profitability. The earnings per share had doubled from 2015/2016 to 2016/2017. Which is beneficial for the company. And it will attract more customers and investors to the company.

The company does not give dividend from 2015 to 2016 and provide 14.3 to shareholders in 2019. This indicate how much a company pays out in dividends each year relative to its share price. Dividend yield is represented as a percentage and can be calculated by dividing the dollar value of dividends paid in a given year per share of stock held by the dollar value of one share of stock.

 

Price earnings ratio indicates the amount an investor can expect to invest in a company in order to receive one dollar of that company’ earnings. This is why the P/E is sometimes referred to as the price multiple because it shows how much investors are willing to pay per dollar of earnings. The amount has reduced during 4 years which is good because more investors will invest because they can gain one dollar by investing less money that pervious years.

Conclusion

This examination investigates the impact of financial ratio of Kotmale Holdings PLC on corporate capital structure since 2015 to 2019, have secured that almost 72.2% of changes in capital structure could be depicted by selected independent variables.

The study also presents that the GDP growth rate has a significant and positive association with the capital structure which indicates that when the economy is at a growth phase, companies may tend to portray high profits so that it creates less demand for debt. As well as, interest rate has presents the negative relationships with capital structure decision (equity and debts financing ratio). Further, the inflation has demonstrated a negative but statistically significant association with the capital structure measures of the Kothmale Holding PLC in the manufacturing sector.

Since capital structure is one of the most questionable issues in corporate account there is a space for concentrate from various viewpoints. Accordingly, the creator further proposes that further examination on the impacts of financial ratio on the expense of capital should be executed to get a comprehensive view on how financial conditions influence firms' financing choices and in this way the estimations of the firms.

In organization perspective parties such as Mangers/Accountants of listed manufacturing firms are able to determine what type of accounting information that they should disclose in their annual reports or other publications. It can be suggest using these research findings to construct an industry bench mark for listed manufacturing firms in Sri Lanka. Furthermore, the disclosure of accounting ratios also can do in an informative manner by identifying which ratios are important and which are not important for determine capital structure. 

The ratio analysis laid out is a scheme for using ratios in an efficient and orderly manner in valuation analysis. It has a normative flavor to it but it is not offered as the definitive analysis. It does not suggest that a ratio not identified as an element of the decomposition here - the current ratio, for example - is not useful in forecasting future residual earnings.