3. Financial Statement Analysis of DILMAH CEYLON TEA COMPANY PLC

 

.0 Introduction

Interpretation and analysis of the financial statements is the process of arranging, examining and comparing the results in order that users are equipped to make such decisions. Financial statement analysis is the investigation of a company's financial statements for the purpose of decision-making. External stakeholders use it to assess an organization's overall status as well as financial performance and business value. The financial accounts of an organization contain critical financial information about every facet of the business's operations. They can thus be evaluated based on their historical, current, and prospective performance.

The balance sheet, income statement, and cash flow statement are used by businesses to manage their operations and to give transparency to their stakeholders. All three statements are interrelated and provide distinct perspectives on a business's operations and performance.

Financial statement analysis is used to determine the performance or value of a business by examining the balance sheet, income statement, or statement of cash flows. Investors can construct a more nuanced view of a company's financial profile by utilizing a variety of methodologies such as horizontal, vertical, or ratio analysis. Internal components use it as a financial monitoring tool. There are four building blocks in analyzing the financial statement. Such as solvency, liquidity and efficiency, profitability and market.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.0 Introduction of the Company

Dilmah is a world-famous Sri Lankan family-owned tea firm with an unmatched reputation for creating authentic, natural, and ethical Sri Lankan tea of the highest quality. In 1988, the Company pioneered the notion of Single Origin Tea, delivering tea that was 'picked, perfected, and packed' in Sri Lanka, reclaiming power for Sri Lankan tea growers and customers worldwide. As the world's first producer-owned tea brand, Dilmah is the only completely vertically integrated tea firm, owning stakes in several of Sri Lanka's finest tea gardens, factories, printing and packaging facilities. Dilmah products are available in over a hundred countries and are distributed through a global distribution network.

 The Company has remained faithful to its Founder, Merrill J. Fernando's vision of business as a matter of human service and recognizes that its most precious asset is its people. The Company's dedication to sustainability is evident in its fundamental pillars of Taste, Goodness, and Purpose, which balance commercial success, environmental preservation, and social responsibility. Each year, a large amount of the Group's income is donated to Dilmah Conservation and the MJF Charitable Foundation to assist their humanitarian and environmental activities. DCTC is 87 percent controlled by the MJF Group of enterprises, which includes MJF Teas (Pvt) Ltd. and MJF Exports (Pvt) Ltd.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.         Financial Statement Analysis of DILMAH CEYLON TEA COMPANY PLC

The following statement taken from their official website and the company’s financial year ends at 31^st march.

 3.1 Horizontal Analysis

Horizontal analysis is a type of financial statement analysis that examines historical data throughout many accounting periods, such as ratios or line items. Horizontal analysis can be done with absolute or percentage comparisons, with each subsequent period's values expressed as a percentage of the baseline year's value, with the baseline value set to 100%. This is commonly referred to as baseline analysis.

Table : 1

 

 

 

3.2 Vertical Analysis

Vertical analysis is a type of ratio analysis in which each line item in a financial statement is expressed as a percentage of another line item. This means that on an income statement, each line item is expressed as a percentage of gross sales, whereas on a balance sheet, each line item is expressed as a percentage of total assets.

Vertical analysis is most typically utilized inside a single reporting period's financial statement to illustrate the relative proportions of account balances. Vertical analysis is especially advantageous for trend analysis, which enables the assessment of account changes over time, such as on a five-year comparative basis.

3.3 Ratio Analysis

3.3.1 Liquidity and efficiency ratio

Liquidity ratio mainly used to determine the ability of the company to pay its short tem debt.

There are several ratios can be used to determine the liquidity of the company.

3.3.1.1 Working Capital

Working Capital = Current Assets – Current Liabilities

Table : 2

Graph : 1

Over the years the working capital seems to be increasing after 2018. Increasing working capital is a good sign for the increasing efficiency of a company. A high working capital ratio indicates that a business is prudently managed and also indicates that it has the potential for rapid growth.

3.3.1.2 Current ratio

The current ratio is used to compare a company's current assets and current liabilities.

Current Ratio = Current Assets / Current Liabilities

Table : 3

Graph : 2

A value greater than one implies that current assets exceed current liabilities. This indicates us to which extent the entity is able to meet its current liabilities as they fall due. Dilmah PLC having a ratio greater than 1 which means they have enough current assets to pay off their current liabilities. On average they are maintaining their current ratio in a good level. From 2017 to 2019 there’s a increase in the current ratio and in 2020 a dramatic drop in the current ratio and again a increase in the ratio. The significant drop in 2020 is mainly due to the short term borrowing of 1,895,000 Mn in the year.

3.3.1.3 Acid Ratio / Quick ratio

This compares the current assets, excluding inventory, to current liabilities. The quick ratio gives a better indicator of the liquidity if the inventory of an entity is difficult to realize into cash

Acid Ratio = (Current Assets – Inventory) / Current Liabilities

Table : 4

Graph : 3

Dilmah PLC having a ratio greater than 1 which means they have enough current assets excluding inventories to pay off their current liabilities. On average they are maintaining their acid ratio in a good level. From 2017 to 2019 there’s an increase in the acid ratio and in 2020 a dramatic drop in the acid ratio and again an increase in the ratio. The significant drop in 2020 is mainly due to the short term borrowing of 1,895,000 Mn in the year.

3.3.1.4 Accounts Receivable Turnover

This ratio indicates how frequently a business converts receivables to cash each year.

Accounts receivable Turnover = Sales on Account / Average Accounts Receivable

Table : 5

Graph : 4

During the last 5 years account receivable turnover ratio kept around 2.5. but a considerable drop occurs in the year of 2021. This is primarily due to a decline in revenue. Several reasons may affect the revenue reduction, but COVID 19 pandemic could have played a major role in this. This reason seems acceptable as it affected every business across the globe. 

3.3.1.5 Merchandise turnover

This ratio indicates the frequency with which merchandise is sold and replaced during the year.

Merchandise turnover = Cost of goods sold / Average Inventory

Table : 6

 

Graph : 5

During the last 5 years merchandise turnover ratio kept around 5.0. But a considerable drop occurs in the year of 2021. This is primarily as a result of the rise in inventories. The increase in the inventory may be due to lack of budgeting where the COVID 19 may not take into account.

3.3.1.6 Days Sales Uncollected

Days Sales Uncollected = (Accounts receivable / Net Sales) * 365

Table : 7

 

 

 

 

 

 

Graph : 6

The Days Sales Uncollected decrease along the years from 2017 to 2019 and then gradually increase till 2021. This tells when companies receive cash from its creditors. The increasing trend of the Days Sales Uncollected is not favourable for the company.

3.3.1.7 Days Sales in inventory

Days Sales in inventory = (Ending Inventory / Cost of sales) * 365

Table : 8

Graph : 7

The days sales in Inventory is slightly steady in the 2017 and 2018 and then suddenly decreases in the year 2019, gradually rising thereafter till 2021. This shows how many days the sales inventory of a company will last. Increasing trend is not good for a company as it shows less sales happened.

3.3.1.8 Total Asset Turnover

This ratio indicates the efficiency with which assets generate revenue.

Total Asset Turnover = Revenue / Average Total Asset

Table : 9

Graph : 8

During the last 5 years total asset turnover ratio kept around 0.7. but a considerable drop occurs in the year of 2021. This is primarily due to a decline in revenue. Several reasons may affect the revenue reduction but COVID 19 pandemic could have played a major role in this. This reason seems acceptable as it affected the every business across the globe. 

3.3.2 Solvency Ratios

3.3.2.1 Debt ratio

Debt Ratio = Total Liabilities / Total Assets

Table : 10

Graph : 9

The debit ratio is showing a sharp decrease from 2017 to 2018 and then showing a zig zag movement till 2021. It is an expression of the relationship between a company's total debt and its assets. The decreasing debit ratio is a good sign for the financial situation of the company which means that a larger part of the company’s assets are financed by equity.

3.3.2.2 Equity Ratio

Equity Ratio = Total Shareholders’ equity / Total Assets

Table : 11

 

Graph : 10

The shareholder equity ratio indicates how much of a company's assets are supported through stock issuance rather than debt. As this ratio is closer to 100% as an overall over the period even though there are variations, the it means that more assets of the company are financed with stock rather than debt. This shows a stable financial level in the long run.

3.3.2.3 Times Interest Earned

Times Interest Earned = Net Income before Interest expense and Income taxes / Interest expenses

Table : 12

Graph : 11

Only in the year 2019, the company shows a high ratio which implies the company is able to meet obligations because earnings are significantly greater than annual interest obligations. In the other years, the ratio is really low which implies that fewer earnings are available to meet interest payments.

3.3.3 Profitability Ratios

3.3.3.1 Profit margin

Profit Margin = (Net Income / Net Sales) * 100

 

Table : 13

Graph : 12

The profit margin ratio is a measure of what percentage of sales is made up of net income. This company’s profit margin gradually increases over the years.

3.3.3.2 Gross Margin

Gross Margin = (Gross profit / Revenue) * 100

Table : 14

Graph : 13

The Gross margin is decreasing from 2017 to 2018 and then shows a significant increase till 2020, then a sharp decrease from 2020 to 2021. This ratio tends to be more or less constant from one year to the next within an entity. Even if there is an increase in the direct cost an efficicent entity could be expected to pass on the increases in the form of increased sales prices. However this may not be the case in reality.

In order to comprehend variations in the gross profit margin, a detailed breakdown is required. In a perfect world, the analyst would need data on opening and closing inventories, purchases, direct wages, and overheads. In order to completely evaluate gross profit margin, more information on the following items is required.-breakdown by product geographically

-inventory valuation policies

-overhead allocation mentod

-purchasing details such as bilk discount,purchasing errors, wastage

-selling price of different products over the period.

Obviouslsy much of this information is not available from an entity’s annual report. Dilmah also didn’t report these information in their annual report. Therefore cannot come to a conclusion with the information provided in the annual report.

3.3.3.3 Return on total assets

Return on total assets = Net Income / Average Total Assets

Table : 15

Graph : 14

The Return on Total Assets ratio increases over the years from 2017 to 2019, then decreases in the year 2020 and again increase in the year 2021.

This ratio depicts the asset's productivity in terms of generating sales. It's worth noting that this ratio isn't always accurate and useful. The ratio is likely to be high if a company is employing assets that are towards the end of their useful lives and have been exposed to annual depreciation charges for a long time. Similarly, asset valuations are likely to be low when a company adopts the historical cost convention, which is unaffected by revaluation, an effect that becomes more pronounced as the assets age. In labor-intensive businesses with a small noncurrent asset base, the ratio is often meaningless.

 

 

3.3.3.4 Return on Common shareholders’ Equity

Return on Common Shareholders Equity = (Net Income – Preferred Dividends) / Average Shareholders’ Equity

Table : 16

Graph : 15

The return on Common Shareholders’ Equity gradually increases over the years from 2017 to 2019, decreases in 2020 and maintains approximately at the same level in 2021.

3.3.3.5 Book Value Per Common Share

Book Value Per Common Share = Total Equity / Number of Shares

Table : 17

 

Graph : 16

The books value per common share is highest at 2017 and then suddenly decreases significantly in 2018, then slightly increasing from 2018 to 2021.

3.3.3.6 Basic Earnings per share

Investors can see how much of a company's net income was allocated to each share of common stock using basic earnings per share (EPS). It appears on a company's income statement and is particularly useful for companies with solely common stock as a capital structure.

Basic Earnings per share = Net profit for the year / Number of shares

Table : 18

 

 

 

 

 

Graph : 17

 

 

Basic earnings per share is the highest in the year 2017 and then suddenly decreases slightly towards 2021.

3.3.4 Market ratios

3.3.4.1 Price Earnings Ratio

The price-to-earnings ratio (P/E ratio) is a valuation ratio that compares a company's current share price to its earnings per share (EPS). The price-to-earnings ratio, also known as the price multiple or the earnings multiple, is a ratio that compares the price of a stock to its earnings.

Price Earnings Ratio = Market Price per Share / Earnings per Share

Table : 19

Graph : 18

Price Earnings Ratio is the Lowest in 2017 and then significantly increases to 2018 and then shows a gradual deceases till 2020 and increase at 2021.

3.3.4.2 Dividend Yield

The dividend yield is a financial ratio (dividend/price) that shows how much a company pays out in dividends each year as a percentage of its stock price.

Dividend Yield = Annual Dividends per share / Market price per share

Table : 20

Graph : 19

The Dividend Yield shows a Zigzag movement over the years, while showing an overall decreasing movement from 2018 to 2021

3.3.5 Z-score Test

Investors compute and analyze a variety of financial parameters, including working capital, profitability, debt levels, and liquidity, to discover any indicators of impending bankruptcy. The problem is that each ratio is different and conveys a different picture about the financial health of a company. They can even appear to be contradicting each other at times. Whether an investor is forced to rely on a slew of different ratios, it can be complicated and difficult to determine when a stock is about to crash. I introducing the Z-score formula is an attempt to overcome this problem. Instead of looking for a single optimal ratio, Altman created a model that combines five important performance ratios into a consolidated single score. As it turns out, the Z-score provides investors a pretty good picture of a company's financial health. The Z-score is a heuristic calculation used to predict if a company would go bankrupt. Working capital, retained earnings, and EBIT (Earnings Before Interest and Tax)  are all measured in relation to a company's total assets in this formula. A Z-score of 3.0 or higher depicts strong financial health, but a score of less than 1.8 indicates a significant chance of bankruptcy.

Z = 1.2 T1 + 1.4 T2 + 3.3 T3 +0.6 T4 + 0.999T5

 

Table : 21

 

Graph : 20

Over the years the Z-score has been showing variations around 2-3 which shows an approximate solid financial positioning.

 

 

4.0 Conclusion

 

Analysis of financial accounts is beneficial because it highlights links between items in the financial statements. They do, however, have several limits that should be considered when producing or utilizing them. Ratios are calculated using accounting statistics from financial statements. Accounting figures, on the other hand, are prone to flaws, approximations, variation in practice, and even manipulation to some level. As a result, ratios aren't very useful for making solid conclusions. The difficulty of comparability is inherent in ratios. Companies that are generally comparable may use various accounting methods, which can make it difficult to compare key linkages. For example, inventory turnover for a company utilizing the FIFO method of inventory valuation may differ from that of a company using the LIFO method of inventory valuation. The usefulness of accounting ratios may be hampered by inflation. Historical cost-based financial statements and accounting data do not reflect current value figures due to inflation, especially when assets are purchased at different times by different firms. Accounting ratios calculated (using different costs or prices) have distortions and are deceptive since financial statements are not adjusted for inflation. The utility of accounting ratios is also influenced by the varied techniques of computation. Even under identical scenarios, the differing concepts utilized to determine the numerator and denominator in a certain accounting ratio will not aid in making meaningful conclusions.

According to the above evaluation, a decrease in the progress of the financials of the DILMAH CEYLON TEA COMPANY PLC is visible in the years 2019, 2020 and recovering in the year 2021. With the Z-score, we can interpret the overall financial state of the company as in a good financial state in 2021, even though it has been in a decreased state than the previous years. But the company management can enhance the financial situation of the country with proper plans and strategies with the downset of the Covid-19 situation.