Financial Statement Analysis of Lanka Tiles PLC (2016-2020)

 

1.     Introduction

Lanka Floor tiles PLC is a company that manufactures and sells ceramic glazed floor tiles. The items are sold all over the world. The company makes floor tiles for verandahs, sitting rooms, dining rooms, bed rooms, and pantries, as well as terraces, paths, and ponds in residential and commercial buildings. The company was previously known as Lanka Tiles PLC, but in January 2011 it changed its name to Lanka Floor tiles PLC. Lanka Floor tiles PLC is situated in Colombo, Sri Lanka, and was founded in 1984. Lanka Wall tile PLC owns Lanka Floor tiles PLC, which is a subsidiary of Lanka Wall tile PLC.

Being Sri Lanka's industry leader and leading ceramic wall tile maker, is a prominent player in the highly competitive worldwide arena, selling high-quality tiles to selective customers. The yearly tile production capacity is roughly 2.3 million square meters. The company is devoted in investing in Research and development in order to ensure that the product continue to achieve the high production standards demanded by the international market.

Lanka tiles PLC is similarly committed to the environment's well-being and have implemented a number of policies to keep the company on the cutting edge of green tile production. As a result, the Green Building Council of Sri Lanka (GBCSL), the local equivalent of the World Green Building Council, has awarded us the GREENSL® Label. The tiles are compliant with ISO 13006. The company now produces a wide selection of tiles in a variety of colors, textures, and sizes, as well as special trim tiles and ornamented tiles.

The following were the objectives to analyze the financial statement of Lanka Tiles PLC.

Ø  To find out the profitability position of Lanka Tiles PLC

Ø  To analyze the working capital position of Lanka Tiles PLC

Ø  To measure the returns of Lanka Tiles PLC

Ø  To study the efficiency of Lanka Tiles PLC in managing its assets

Ø  To scrutinize the Liquidity position of Lanka Tiles PLC

Ø  To study the cash position of Lanka Tiles PLC

Period of the study- A period of five years is taken for the analysis purpose from 2016- 2020

 

2.     Horizontal Analysis

	2020 % change	2019 % change	2018 % change	2017 % change	2016 % change
ASSESTS
Non-current assets
Property, plant & equipment	4	49	7	6	34
Investments in subsidiaries	0	0	-	-	-
Investments in associate	9	(1)	6	21	47
Loans given to related companies	-	(100)	(47)	(58)	(39)
Current assets
Inventories	58	55	36	54	(18)
Trade and other receivables	(5)	19	28	20	10
Income tax assets	(100)	-	-	-	-
Cash and cash equivalents	(51)	(69)	(65)	(23)	87
Total assets	17	34	4	9	28
EQUITY
Capital and reserves
Stated capital	0	0	0	0	0
Amalgamation reserve	0	0	0	0	0
Revaluation reserve	0	0	(13)	0
Retained earnings	12	5	9	23	31
Total equity	8	4	4	14	41
LIABILITIES
Non-current liabilities
Deferred income tax liabilities	9	13	43	(2)	21
Retirement benefit obligations	5	4	34	(4)	17
Current liabilities
Trade and other payables	-	(100)	34	0	8
Current income tax liabilities	-	(100)	(32)	(75)	98
Borrowings	206	287	(60)	151	(46)
Total liabilities	31	149	4	(7)	(1)
Total equity and liabilities	17	34	4	9	28

Table 01. Horizontal Analysis for the period from 2016-2020

Based on the horizontal analysis of the balance sheet of Lanka tiles PLC, the following conclusions were made.

·         28% of the total assets has been increased in 2016 when compared to the previous year

·         9% of the total assets has been increased in 2017 when compared to the previous year

·         4% of the total assets has been increased in 2018 when compared to the previous year

·         34% of the total assets has been increased in 2019 when compared to the previous year

·         17% of the total assets has  been increased in 2020 when compared to the previous year

·         41% of the total equity has been increased in 2016 when compared with the previous year

·         14% of the total equity has been increased in 2017 when compared with the previous year

·         4% of the total equity has been increased in 2018 when compared with the previous year

·         4% of the total equity has been increased in 2019when compared with the previous year

·         8% of the total equity has been increased in 2020 when compared with the previous year

·         1%  of the total liabilities has been reduced in 2016 when compared to the previous year

·         7%  of the total liabilities has been reduced in 2017 when compared to the previous year

·         4%  of the total liabilities has been increased in 2018 when compared to the previous year

·         149%  of the total liabilities has been increased in 2019 when compared to the previous year

·         31% of the total liabilities has been increased in 2020 when compared to the previous year.

 

3.     Vertical Analysis

 

	2020	2019	2018	2017	2016
Revenue from contract with customers	100.00	100.00	100.00	100.00	100.00
Cost of sales of Goods	63.91	71.38	61.17	55.26	55.71
Gross profit	36.09	28.62	38.83	44.74	44.29
Distribution costs	13.71	14.81	14.61	13.65	11.59
Administrative expenses	5.81	5.76	6.60	7.37	7.46
Other income	0.40	0.36	0.32	0.51	0.67
Operating profit	15.32	8.27	17.94	24.10	25.20
Finance income	0.00	0.11	1.80	2.91	1.50
Finance costs	5.00	0.31	0.36	0.61	0.67
Profit before income tax	11.56	8.18	22.08	29.98	28.54
Income tax expense	2.89	2.42	5.69	6.94	7.21
Profit for the year	8.68	5.76	16.39	23.04	21.33

Table 02. Vertical Analysis for the period from 2016-2020

 

Vertical Analysis of the income statement shows the revenue or sales number as 100% and all other line items as a percentage of sales. The graphical representation of the obtained percentage values are shown below.

 

Fig 01. Vertical analysis of the Income statement –Lanka Tiles PLC -2016

 

 

 

Fig 02. Vertical analysis of the Income statement –Lanka Tiles PLC -2017

 

 

Fig 03. Vertical analysis of the Income statement –Lanka Tiles PLC -2018

 

 

Fig 04. Vertical analysis of the Income statement –Lanka Tiles PLC -2019

               

 

Fig 05. Vertical analysis of the Income statement –Lanka Tiles PLC -2020

 

Through the vertical analysis of the Lanka tiles PLC’s income statement the following conclusions can be confirmed.

Firstly we can observe that the company’s cost of goods sold is 54%, 52% and 58% of the sales in the years 2016, 2017 and 2018 respectively. However the cost of goods sold spikes to 71% of the sales in the year 2019, driving a significant decrease in the gross profit. And later the value decreases slightly to 63% of the sales in 2020.

When focusing on the distribution costs and administrative expenses, there has been an increasing trend in distribution costs from the period of 2016-2020. And simultaneously the administrative expenses have remained more or less constant as a percentage of sales.

The finance cost also known as the interest expense has remained almost same within the range of 0-1% over the years 2016-2019. And then a rapid increase in the finance cost as a percentage of sales is seen in the year 2020.

The income tax expense has dropped each year from 2016 to 2019 in a certain pattern and later has jumped to 2.89% in 2020. The profit for the year also referred to as the net income has shown an irregular fluctuation pattern over the years. The highest net income as a percentage of sales/revenue is observable in 2017. Then the net income has decreased up to 2019 and later increased to 8.68% of sales in 2020.

4.     Ratio analysis

 

a.       Liquidity and Efficiency

 

Ratio		2020	2019	2018	2017	2016
Current Ratio	Current Assests/Current Liabilities	1.76	2.16	3.81	3.37	3.33
Acid test ratio	Quick Assests/Current Liabilities	0.47	0.86	1.91	2.12	2.45
Accounts Recievable Turnover	Sales on account/Average accounts recievable	3.82	4.23	4.53	4.76	5.87
Total assest turnover	Revenue/Average total assests	0.53	0.69	0.72	0.65	0.81
Merchandise turnover	Cost of goods sold/Average inventory	1.10	2.01	2.22	2.42	2.98
Day's sales in inventory	(Ending Inventory/Cost of sales )× 365	408.80	220.10	189.8	182.5	109.87
Day's sales uncollected	(Accounts recievable/Net sales)×365	92.82	94.90	91.25	83.95	64.97

Table 03. Liquidity and Efficiency ratio analysis for the period from 2016-2020

 

 

Fig 06.1. The fluctuation pattern of liquidity and efficiency ratios from 2016-2020

 

Fig 06.2. The fluctuation pattern of liquidity and efficiency ratios from 2016-2020

 

 

 

§  Current Ratio

This ratio measures the short term debt paying ability of the company. There is slight change in the ratios during the last five years and all of them are greater than 1 which means that the company’s assets will be able to cover its debts that are due at the end of each year.

§  Acid-test ratio

This ratio shows the relationship between the quick asset and the current liabilities and shows the company ability to pay back its current liability within its short period of time. From 2016-2018 the ratio values are greater than 1, and therefore the cash positions are better during those years. During the last two years of 2019 and 2020, the values are less than 1 which shows the company has to depend on the inventory to pay off the current liabilities.

 

§  Accounts receivable turnover

 

This measures how many times a company converts its receivables into cash in each year. A high turnover ratio is generally considered to be better than a low turnover ratio. When analyzing the last 5 years, the highest ratio can be observed in the year of 2016 in which it has been successful in efficient collection of debts owed towards the credit extended. The least ratio can be found in 2020. The period of 2017-2019 has nearly similar ratios.

§  Total asset turnover

 

This ratio measures the efficiency of assets in producing sales or the utilization of total assets. The ratios are greater than zero in each year indicating a degree of inefficiency of the company in using its assets to generate sales. A slight increase is only observable in the year of 2016.

 

 

§  Merchandise turnover

This ratio indicates the number of times the merchandise is sold and replaced during a year. If we look at the values, there is a gradual slight decrease from the year 2016 to 2020. This shows weaker sales and decreasing demand for the products when reaching the year of 2020.

 

§  Day’s sales in inventory

 

This indicates the number of days it takes for a firm to sell the inventory or the liquidity of the inventory. Therefore lower the value it is more favorable for the company. When considering the above data a gradual increase can be observed from 2016 to 2019 while a higher increase can be seen from 2019 to 2020. Accordingly, the best performance is in the year 2016.

 

 

§  Day’s sales uncollected

This represents the number of days before the company will collect the accounts receivable. Liquidity and cash flows tend to rise as the number of days sales go uncollected decreases. It also shows that receivables aren't necessarily negative debts. However, they are good in nature. A higher ratio indicates an unsuitable collection method. In 2016 the value is better than the rest of the years. Facing a gradual increase from 2016, the highest no of days is seen in 2019. In 2020, there is a slight decline.

 

 

 

b.      Solvency

 

		2020	2019	2018	2017	2016
Debt Ratio	Total liabilities/ Total Assests	0.44	0.39	0.21	0.21	0.25
Equity Ratio	Total shareholder's equity/Total Assests	0.56	0.61	0.79	0.79	0.75
Times Interest Earned	Net income before interest expense and income taxes/Interest expense	3.07	26.26	50.48	39.29	37.46

Table 04. Solvency ratio  Analysis for the period from 2016-2020

 

 

Fig 07. The fluctuation pattern of solvency ratios from 2016-2020

 

 

§  Debt ratio

 

This ratio shows that how much portion of the assets is covered by the liabilities of the organization. Lower debt ratios (0.4 or lower) are regarded better debt ratios from a risk standpoint. Borrowing money becomes more difficult with a greater debt ratio (0.6 or above) .According to the analysed data similar ratio values can be seen in 2017 and 2018. The year 2016, with the lowest debt ratio is regarded as the best year.

 

 

 

 

§  Equity ratio

 

This measures the portion of company’s assets that are contributed by owners. The greater the ratio, the more evidence there is that money is being managed correctly and that the company will be able to pay its debts on time. A high ratio value in 2017 and 2018 indicates that a corporation is financially stronger overall and has a better long-term solvency position.

And also equity ratios of all the years considered is greater than the debt ratio values. Therefore we can conclude that the company is run totally with the owner’s money.

 

 

§  Times Interest earned

 

This is the most common measure of the ability of a company’s operations to provide protection to the long term creditor. A greater times interest earned ratio is desirable since it indicates that the company poses a lower risk to investors and creditors in terms of solvency. The ratio has been increased when reaching 2018 and later decreased. A rapid decline can be observed in 2020.

 

c.     

Table 05. Profitability ratio  Analysis for the period from 2016-2020

 Profitability

		2020	2019	2018	2017	2016
Profit Margin	Net income/Net sales	8.68%	5.76%	16.39%	23.04%	21.33%
Gross Margin	(Net sales-cost of sales)/Net sales ×100	36.09%	28.62%	38.83%	44.74%	44.29%
Return on Total Assests	(Net income/Average total assests)×100	4.59%	3.96%	11.77%	14.87%	17.27%
Return on common shareholder's equity	(Net income-preferred dividends)/Average shareholder's equity	7.84%	5.77%	14.91%	19.27%	23.90%
Book value per common shares	Shareholder's equity applicable to common shares/No.of common shares outstanding	0.15	0.13	0.13	0.12	0.11
Basic earnings per share	(Net income-preferred dividends)/Weighted average common shares outstanding	0.01	0.008	0.019	0.022	0.022

 

 

Fig 08. The fluctuation pattern of Profitability ratios from 2016-2020

 

§  Profit Margin

 

This ratio interprets the net profit as a percentage of net sales. It is the company’s ability to earn a net income from sales. A high profit margin depicts that the company is producing profit above all its costs. When considering the last five years the highest profit margin is observable in 2017 and the lowest in 2019.

 

 

§  Gross Margin

 

This demonstrates a company's profitability by comparing revenue against the costs of production. Highest gross margin value in 2017 means more capital a company retains, which it can subsequently utilized to cover other expenses or pay off debt.

 

§  Return on total assets

 

Generally considered as the best overall measure of company profitability, it measures how efficiently a company uses the assets it owns to generate profits. The company is more productive in utilizing its resources during the year of 2017, with the highest Return on total assets value.

 

 

§  Return on common shareholder’s equity

 

Return on common shareholder’s equity (ROCE) is a measure of a company's ability to make profits from its investment money. A corporation that has a high return on equity is more likely to generate cash internally. Larger the ratio, the business performance is considered better. In the above years analyzed the highest ratio is found in 2016 and it declines till 2019, finally facing a slight increase in 2020.

 

 

 

§  Book value per common shares

 

In the case of liquidation, the book value per common share is the amount of assets that will be transferred to common equity. As a result, a higher book value indicates that the shares have a higher liquidation value. In strict terms, the higher the book value, the more valuable the stock is. The value shows a gradual increase over the last five years from 2016 to 2020.

 

§  Basic Earnings per share

 

The fraction of a company's earnings that is allocated to each individual share of stock is referred to as EPS. It is a term that is extremely important to stock market investors and traders. The higher a company's earnings per share, the more profitable it is. The highest earnings per share are in the year 2020 where the company is more profitable with high profits to distribute to its shareholders.

 

 

 

 

 

 

 

d.      Market ratio

		2020	2019	2018	2017	2016
Price earnings ratio	Market price per share/Earnings per share	4.58	9.20	5.27	4.54	4.51
Dividend yield	Annual dividends per share/Market price per share	No sufficient data	4.5%	10%	7.4%	7.0%

Table 06.  Market ratio  Analysis for the period from 2016-2020

 

 

Fig 09. The fluctuation pattern of Market ratios from 2016-2020

 

 

§  Price Earnings ratio

 

The price to earnings ratio (PE Ratio) is a measure of a company's share price in relation to its annual net income per share. An excessive cost Earnings Ratio frequently indicates a positive future performance. Here, the highest ratio is viewed in 2019.

 

§  Dividend yield

 

The dividend yield is a financial measure that shows how much a firm pays out in dividends each year as a percentage of its stock price. Dividend yield greater than 4% is considered strong. Therefore throughout the past five years the dividend stocks generate more income, often with a great risk.

               

5.     Working capital

 

 

Working capital = Current Assets – Current liabilities

 

 

	2020	2019	2018	2017	2016
Working capital	2820985	2683119	2871973	2708667	2454460

Table 07.  Working capital for the period from 2016-2020

 

Working capital is the difference between the current assets and current liabilities. It is a measure of an organization's short term liquidity and is significant for performing monetary analysis, demonstrating, and managing cash flow. Having an exceptionally high net working capital, a company has the monetary assets to meet its short term financial obligations as a whole. Here the working capital has faced an incremental rise till the year 2018 and then has fallen slightly. However the working capital has increased again in the year 2020. This signals that the organization is insightfully overseen and furthermore has the potential for solid development.

 

Fig 10. The fluctuation pattern of working capital from 2016-2020

 

 

 

 

 

 

 

6.     Altman’s Z-Score model analysis

 

This is a multiple discriminant analysis technique, developed as a powerful diagnostic tool measuring solvency with ability to identify bankrupt firms. Signals can be identified whether the company is in safe zone, grey zone or distress zone.

Formula for calculation- 1.2 T1 +1.4T2+3.3T3+0.6T4+0.999T5

 

 

Zones of Discrimination:

 

Z > 2.99            -“Safe” Zone

1.81 < Z < 2.99 -“Grey” Zone

Z < 1.81           -“Distress” Zone

 

 

	2020	2019	2018	2017	2016
Working capital	2820985	2683119	2871973	2708667	2454460
Total Assests	13,653,659	11,678,894	8,701,046	8,359,582	7,679,748
T1	0.207	0.230	0.330	0.324	0.320
Retained Earnings	5,606,252	5,025,691	4,778,698	4,394,551	3,584,487
Total Assests	13,653,659	11,678,894	8,701,046	8,359,582	7,679,748
T2	0.411	0.430	0.549	0.526	0.467
Earnings before interest and taxes	1,025,903	579,812	1,098,784	1,247,570	1,396,581
Total Assests	13,653,659	11,678,894	8,701,046	8,359,582	7,679,748
T3	0.075	0.050	0.126	0.149	0.182
Market value of equity	2,657,810	3,713,500	5289090	5411100	5336830
Total liabilities	5,955,773	4,561,569	1,830,714	1,765,056	1,895,286
T4	0.446	0.814	2.889	3.066	2.816
Sales	6,694,824	7,008,992	6,126,307	5,176,372	5,541,368
Total Assests	13,653,659	11,678,894	8,701,046	8,359,582	7,679,748
T5	0.490	0.600	0.704	0.619	0.722
Z	1.828	2.130	4.019	4.075	4.047

Table 08.  Z- score  Analysis for the period from 2016-2020

 

 

 

The period of 2016-2018 seems good for the company as it was in the ‘Safe zone’ with a stable financial health. In the year of 2019 the company has moved towards the ‘Grey zone’ . In the last year it shows a value of 1.828 which is very close to the threshold that means the company is moving towards the ‘Distress zone’. Therefore the company has a high risk of bankruptcy.

 

Fig 11. The fluctuation pattern of Z-Score from 2016-2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.     Conclusion

 

When analyzing the five year summary of the Lanka Tiles PLC, it was clear that from the year 2016 there had been an increase of revenue during each year in considerable amounts, but in the year 2020 there had been a significant downfall of the revenue than the previous year. This is majorly due to the fact that the country is suffering and currently recovering from the corona-virus crisis. The Z-score analysis further proves the reality that the company is moving towards the distress zone. Therefore the management should take necessary actions to increase the performance of the organization such as eliminating all non-essential expenses, creating new business plans and maximizing the revenue streams.