Financial Statement Analysis Royal Ceramics Lanka PLC (2018 – 2022)

 

1.      Company Overview

Commencing the business in 1991 with a vision to build a brand synonymous with contemporary lifestyles, innovation, design, and quality, Royal Ceramics Lanka PLC (Rocell) has now grown into a conglomerate that is primarily focused on manufacturing items supporting the housing and construction industry. In 2013, the Group acquired the Lanka Walltiles PLC Group, their main competitor, enhancing the market leadership by adding ‘Lanka Tiles’ also to the portfolio. Today the Group is diversified across 6 key sectors which include its core competency Tiles, Aluminium, Sanitaryware, Plantations, Packaging and Mining through acquisitions and strategic investments. The group also represents in Finance and services sectors through their associate undertaking of LB Finance PLC and Delmege Ltd.

The group consists of 12 nos of subsidiaries and 02 nos of associate companies. The Rocell Group continues to invest a significant portion of its monetized capital in enhancing the manufacturing capabilities to maintain the competitive edge. Superior product quality and innovative designs have gained a strong brand presence not only in Sri Lanka but also across the export destinations. Designed by prominent architects in Italy, the company’s flagship brand ‘Rocell’ have won the customers across the world. The combination of aesthetically appealing designs and functionality of Rocell Bathware with its superior quality has enabled them to become market leader in the domestic market. Rocell together with Lankatiles dominate the local wall tile and floor tile market by having more than 71% of the market share while Rocell Bathware meets 39% of the domestic requirement.

 

 

 

 

 

 

 

 

 

2.      Analysis

 

01          

02          

2.1         Horizontal analysis

 Horizontal analysis is the comparison of financial information of a company with historical financial information of the same company over a number of reporting periods. The main purpose is to see if the numbers are high or low in comparison to past records, which may be used to investigate any causes for concern. In this method of analysis, the earliest period is usually used as the base period and the items on the statements for all later periods are compared with items on the statements of the base period. The changes are generally shown both in rupees and percentage.

 

2.1.1          Statement of Comprehensive Income of Royal Ceramics Lanka PLC - Year on Year

Description	2018	2019	2020	2021	2022
Revenue	-9.74%	9.91%	69.86%	94.31%	14.77%
Cost of sales	-5.31%	14.26%	56.74%	92.89%	9.69%
Gross profit	-14.04%	5.28%	85.04%	95.71%	19.69%
Other income - net	52.55%	-62.32%	-2.19%	34.86%	117.78%
Administrative expenses	-31.62%	1.32%	8.04%	-10.07%	31.91%
Distribution expenses	7.54%	27.12%	24.20%	35.55%	-0.90%
Other Expenses	19.79%	-73.72%	576.20%	71.73%	-80.93%
Operating profit	42.48%	-69.47%	108.81%	159.28%	69.14%
Finance costs	10.21%	24.64%	76.11%	-42.36%	-98.72%
Profit before tax	50.85%	-87.30%	169.58%	404.01%	92.43%
Income tax expense	67.24%	-78.98%	167.67%	382.97%	81.41%
Profit for the year	49.27%	-88.19%	169.94%	408.02%	94.43%

 

2.1.2          Statement of Financial Position of Royal Ceramics Lanka PLC - Year on Year

Description	2018	2019	2020	2021	2022
ASSETS
Non-current assets
Property, plant and equipment	61.41%	5.03%	23.98%	-3.44%	20.68%
Investment in Subsidiaries	25.17%	2.35%	0.25%	0.00%	0.86%
Investments in Associates	0.00%	0.00%	0.00%	0.00%	10.28%
Differed Tax Assets	-100.00%	0.00%	0.00%	0.00%	0.00%
Other Non-financial assets	0.00%	0.00%	0.00%	-56.38%	-100.00%
Right of use assets	0.00%	0.00%	0.00%	-11.47%	3.12%
Intangible Assets	-8.45%	-2.97%	-10.39%	-12.55%	-10.57%
Total Non- Current Assets	28.07%	2.91%	15.80%	-2.29%	10.94%
Current assets
Inventories	16.30%	37.19%	141.83%	-35.29%	-2.77%
Trade and other receivables	23.82%	29.73%	20.51%	-5.72%	-22.62%
Other non-financial assets	0.52%	-25.74%	22.41%	-24.99%	94.45%
other financial assets	234.07%	-55.93%	14.64%	-	-
Tax receivable	5.31%	-34.24%	100.00%	-	-
Cash and cash equivalents	-2.89%	59.68%	-13.10%	362.98%	286.94%
Total Current Assets	16.61%	23.49%	81.80%	1.05%	77.90%
Total Assets	26.25%	5.92%	27.06%	-1.48%	27.70%
EQUITY AND LIABILITIES
Capital and reserves
Stated capital	0.00%	0.00%	0.00%	0.00%	0.00%
Reserves	288.79%	0.00%	43.62%	14.03%	102.79%
Accumulated Profit/ (Loss)	15.86%	0.50%	60.22%	14.64%	12.71%
Total Capital and reserves	20.42%	0.39%	50.31%	13.22%	19.07%
Non-current liabilities
Employee benefit obligations	17.80%	6.36%	65.28%	11.63%	6.76%
Deferred tax liability	0.00%	2.79%	65.51%	1.34%	45.32%
Loans and borrowings	0.22%	-10.71%	-0.94%	-24.31%	-25.52%
Total Non-current liabilities	12.61%	-8.29%	11.34%	-16.16%	-6.55%
Current liabilities
Trade and other payables	80.62%	32.20%	-66.77%	-0.25%	1.25%
Other current liabilities	-27.17%	-69.75%	20.14%	106.02%	8.87%
Loans & borrowings	61.19%	15.50%	148.74%	-67.45%	-2.12%
Dividends payable	5.99%	-18.06%	-11.31%	-38.85%	143.53%
Contract liability	0.00%	0.00%	17.79%	188.70%	228.46%
Tax payable	0.00%	0.00%	0.00%	264.88%	58.52%
Total Current liabilities	52.40%	25.79%	2.82%	-23.16%	74.77%
Total Liabilities	32.81%	11.57%	5.74%	-20.63%	43.74%
Total Equity and Liabilities	26.25%	5.92%	27.06%	-1.48%	27.70%

 

2.1.3          Statement of Comprehensive Income of Royal Ceramics Lanka PLC – Base year 2017

 

Description	Base Year 2017 Amounts	2018	2019	2020	2021	2022
Revenue	3,824,904	-9.74%	-0.79%	68.51%	227.44%	275.81%
Cost of sales	-1,881,390	-5.31%	8.20%	69.59%	227.11%	258.80%
Gross profit	1,943,514	-14.04%	-9.49%	67.47%	227.76%	292.28%
Other income - net	1,808,744	52.55%	-42.52%	-43.78%	-24.18%	65.12%
Administrative expenses	-698,556	-31.62%	-30.72%	-25.15%	-32.69%	-11.21%
Distribution expenses	-1,072,067	7.54%	36.70%	69.78%	130.14%	128.06%
Other Expenses	-105,658	19.79%	-68.51%	112.91%	265.63%	-30.28%
Operating profit	1,875,977	42.48%	-56.51%	-9.18%	135.48%	298.29%
Finance costs	-386,159	10.21%	37.36%	141.90%	39.44%	-98.21%
Profit before tax	1,489,818	50.85%	-80.84%	-48.34%	160.38%	401.06%
Income tax expense	-130,701	67.24%	-64.85%	-5.92%	354.38%	724.28%
Profit for the year	1,359,117	49.27%	-82.37%	-52.42%	141.72%	369.98%

 

2.1.4          Statement of Financial Position of Royal Ceramics Lanka PLC - Base year 2017

 

Description	Base Year 2017 Amounts	2018	2019	2020	2021	2022
ASSETS
Non-current assets
Property, plant and equipment	4,064,061	61.41%	69.52%	110.17%	102.95%	144.92%
Investment in Subsidiaries	5,157,343	25.17%	28.11%	28.43%	28.43%	29.53%
Investments in Associates	3,162,937	0.00%	0.00%	0.00%	0.00%	10.28%
Deferred Tax Assets	194,858	-100.00%	-100.00%	-100.00%	-100.00%	-100.00%
Other Non-financial assets	-	0.00%	0.00%	100.00%	100.00%	0.00%
Right of use assets	-	0.00%	0.00%	100.00%	100.00%	100.00%
Intangible Assets	186,756	-8.45%	-11.17%	-20.40%	-30.39%	-37.75%
Total Non- Current Assets	12,765,955	28.07%	31.80%	52.63%	49.13%	65.44%
Current assets
Inventories	1,198,259	16.30%	59.55%	285.83%	149.65%	142.74%
Trade and other receivables	440,409	23.82%	60.62%	93.57%	82.50%	41.22%
Other non-financial assets	367,189	0.52%	-25.35%	-8.63%	-31.46%	33.27%
other financial assets	43,981	234.07%	47.24%	68.80%	893.46%	-2.90%
Tax receivable	52,483	5.31%	-30.75%	-100.00%	-100.00%	-100.00%
Cash and cash equivalents	300,095	-2.89%	55.07%	34.75%	523.88%	2314.04%
Total Current Assets	2,402,416	16.61%	44.01%	161.81%	164.57%	370.66%
Total Assets	15,168,371	26.25%	33.73%	69.92%	67.41%	113.78%
EQUITY AND LIABILITIES
Capital and reserves
Stated capital	1,368,673	0.00%	0.00%	0.00%	0.00%	0.00%
Reserves	213,634	288.79%	288.79%	458.40%	536.73%	1191.21%
Accumulated Profit/ (Loss)	6,444,556	15.86%	16.44%	86.56%	113.88%	141.05%
Total Capital and reserves	8,026,863	20.42%	20.89%	81.70%	105.72%	144.95%
Non-current liabilities
Employee benefit obligations	208,701	17.80%	25.29%	107.09%	131.18%	146.81%
Deferred tax liability	-	100.00%	100.00%	100.00%	100.00%	100.00%
Loans and borrowings	3,307,021	0.22%	-10.52%	-11.35%	-32.90%	-50.02%
Total Non-current liabilities	3,515,722	12.61%	3.27%	14.98%	-3.59%	-9.91%
Current liabilities
Trade and other payables	1,815,045	80.62%	138.78%	-20.66%	-20.86%	-19.88%
Other current liabilities	731,380	-27.17%	-77.97%	-73.53%	-45.47%	-40.63%
Loans & borrowings	1,033,981	61.19%	86.18%	363.10%	50.74%	47.55%
Dividends payable	45,380	5.99%	-13.15%	-22.97%	-52.90%	14.71%
Contract liability	-	0.00%	100.00%	100.00%	100.00%	100.00%
Tax payable	-	0.00%	0.00%	100.00%	100.00%	100.00%
Total Current liabilities	3,625,786	52.40%	91.71%	97.11%	51.46%	164.71%
Total Liabilities	7,141,508	32.81%	48.17%	56.68%	24.36%	78.75%
Total Equity and Liabilities	15,168,371	26.25%	33.73%	69.92%	67.41%	113.78%

 

 

2.1.5          Horizontal Analysis - Discussion points

Horizontal analysis has been done in both ways by considering year on year change and the change by taking 2017 as the base year.  When considering the year-on-year comparison, the percentage change of the horizontal analysis of total assets shows the growth rate of the company, Royal Ceramics. The years 2018, 2019, 2020, 2021 and 2022 show growth rates of 26.25%, 5.92%, 27.06%, (-1.48%) and 27.7% respectively. It reflects that the growth rate of the company has gradually increased when considering the recent years except for the year 2021. The negative growth of year 2021 is mainly due to the drop of inventories significantly by 35% by the year end. Revenue and profitability also show positive values in the year-on-year comparison in recent past.

When considering base year comparison, it can be noted that the net profit has significantly increased in the years 2021 and 2022 although it shows a decrease during past period, i.e.2019 and 2020. However, revenue also has increased during the period 2020 to 2022 despite the decline in 2018 and 2019.

In the assets side, total assets have increased over the period as a result of increase in both non-current assets and current assets. Current assets show a significant increase in years 2020, 2021 and 2022 mainly due to the increase in inventory levels and cash balances.

When considering the Equity and liabilities side of the company, the equity value has been increasing over the period while total non-current liabilities have been decreased over the period compared to the base year 2017. This is mainly due to the decrease in loans and borrowings giving a positive indication of the company’s solvency. Further trade payables also show a decrease during the period from 2020 to 2022. Other current liabilities show a significant decrease after 2019 due to the effect that the company has recognized the advance payments received on behalf of timber flooring and sanitaryware and tiles orders from customers separately under contract liabilities separately. Accordingly, the contract liability has increased by 100% compared to the base year.

 

2.2          Trend Analysis

Trend analysis is the process of comparing business data over time to identify any consistent results or trends. Trend analysis helps to understand how the business has performed and predict where current business operations and practices. It will give ideas about how might change things to move the business in the right direction.

 

2.2.1          Statement of Comprehensive Income of Royal Ceramics Lanka PLC

Description	Base Year 2017 Amounts	2018	2019	2020	2021	2022
Revenue	100	90.26	99.21	168.51	327.44	375.81
Cost of sales	100	94.69	108.20	169.59	327.11	358.80
Gross profit	100	85.96	90.51	167.47	327.76	392.28
Other income - net	100	152.55	57.48	56.22	75.82	165.12
Administrative expenses	100	68.38	69.28	74.85	67.31	88.79
Distribution expenses	100	107.54	136.70	169.78	230.14	228.06
Other Expenses	100	119.79	31.49	212.91	365.63	69.72
Operating profit	100	142.48	43.49	90.82	235.48	398.29
Finance costs	100	110.21	137.36	241.90	139.44	1.79
Profit before tax	100	150.85	19.16	51.66	260.38	501.06
Income tax expense	100	167.24	35.15	94.08	454.38	824.28
Profit for the year	100	149.27	17.63	47.58	241.72	469.98

 

 

According to the above trend analysis on profit or loss statement, revenue has been decreased in the year 2018 and 2019 and then showing an increasing trend from 2020 to 2022 period. Same trend shows for gross profit as well while net profit shows an increase in 2018 but has been declined significantly in the year 2019 and 2020. However, the company has been able to overcome such drawback and to mark a significant growth in 2021 and 2022. When considering the profitability level throughout the period, year 2022 is the highest performing year for the company in terms of revenue, gross profit and net profit growth compared with the base year 2017.

2.2.2          Statement of Financial Position of Royal Ceramics Lanka PLC

 

Description	Base Year 2017 Amounts	2018	2019	2020	2021	2022
Total Non- Current Assets	100	128.07	131.80	152.63	149.13	165.44
Total Current Assets	100	116.61	144.01	261.81	264.57	470.66
Total Assets	100	126.25	133.73	169.92	167.41	213.78
Total Equity	100	120.42	120.89	181.70	205.72	244.95
Total Non-current liabilities	100	112.61	103.27	114.98	96.41	90.09
Total Current liabilities	100	152.40	191.71	197.11	151.46	264.71
Total Liabilities	100	132.81	148.17	156.68	124.36	178.75

 

According to the above trend analysis on the statement of financial position, it can be seen that almost all the line items in assets, equity and liabilities shows an increasing trend compared with the base year 2017 except for non-current liabilities which have been decreased in the years 2021 and 2022. This decrease is mainly due to the drop in the long-term loans and borrowings of the company. In addition, the current assets show a significant growth in the year 2022 as a result of high inventory levels and cash and bank balance maintained by the company at the year-end 2022.

 

2.3         Vertical Analysis

Vertical analysis of financial statements is a technique in which the relationship between items in the same financial statement is identified by expressing all amounts as a percentage of a total amount. This method compares different items to a single item in the same accounting period. When applying this method on the balance sheet, all of the three major categories of accounts (i.e., assets, liabilities, and equity) are compared to the total assets. All of the balance sheet items are presented as a proportion of the total assets. When applying this technique to the income statement, each of the expenses is compared to the total sales revenue.

The main advantages of vertical analysis are that the balance sheets of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes within one business. The financial statements prepared by using this technique are known as common size financial statements.

 

 

2.3.1          Statement of Comprehensive Income of Royal Ceramics Lanka PLC

 

Description	2018	2019	2020	2021	2022
Revenue	100.00%	100.00%	100.00%	100.00%	100.00%
Cost of sales	51.60%	53.64%	49.50%	49.14%	46.96%
Gross profit	48.40%	46.36%	50.50%	50.86%	53.04%
Other income - net	79.93%	27.40%	15.78%	10.95%	20.78%
Administrative expenses	-13.84%	-12.75%	-8.11%	-3.75%	-4.32%
Distribution expenses	-33.39%	-38.62%	-28.24%	-19.70%	-17.01%
Other Expenses	-3.67%	-0.88%	-3.49%	-3.08%	-0.51%
Operating profit	77.43%	21.50%	26.43%	35.27%	51.98%
Finance costs	12.33%	13.98%	14.49%	4.30%	0.05%
Profit before tax	65.10%	7.52%	11.94%	30.97%	51.93%
Income tax expense	6.33%	1.21%	1.91%	-4.74%	7.49%
Profit for the year	58.77%	6.31%	10.03%	26.23%	44.44%

 

In considering the above vertical analysis of the profit or loss statement, the cost of sales represents more than 45% of the sales revenue over the period. Gross profit shows 48% and 46% in year 2018 and 2019 respectively but has gradually increased to 53% by year 2022. Other income shows an exceptional increase compared with the sales revenue of 79.9% in the year 2018 due to recognition of Rs.1.3Bn investment disposal profit to the other income. Generally, it has stood around 20% of sales. Operational profit also significantly high comparing with sales in 2018 due to increase in other income. Other than that, operating profit has increased significantly in year 2022 due to reduction in operational costs relative to the increased sales revenue in that year. This has marked more than 50% of operational profit in the year 2022 and a 44% net profit compared to the sales revenue. However, highest net profit represents in the year 2018 over the period.

2.3.2          Statement of Financial Position of Royal Ceramics Lanka PLC

 

Description	2018	2019	2020	2021	2022
ASSETS
Non-current assets
Property, plant and equipment	34.25%	33.96%	33.14%	32.48%	30.70%
Investment in Subsidiaries	33.71%	32.57%	25.70%	26.08%	20.60%
Investments in Associates	16.52%	15.59%	12.27%	12.46%	10.76%
Other Non-financial assets	0.00%	0.00%	0.16%	0.07%	0.00%
Right of use assets	0.00%	0.00%	3.75%	3.37%	2.72%
Intangible Assets	0.89%	0.82%	0.58%	0.51%	0.36%
Total Non- Current Assets	85.37%	82.94%	75.60%	74.97%	65.13%
Current assets
Inventories	7.28%	9.42%	17.94%	11.78%	8.97%
Trade and other receivables	2.85%	3.49%	3.31%	3.17%	1.92%
Other non-financial assets	1.93%	1.35%	1.30%	0.99%	1.51%
other financial assets	0.77%	0.32%	0.29%	1.72%	0.13%
Tax receivable	0.29%	0.18%	0.00%	0.00%	0.00%
Cash and cash equivalents	1.52%	2.29%	1.57%	7.37%	22.34%
Total Current Assets	14.63%	17.06%	24.40%	25.03%	34.87%
Total Assets	100.00%	100.00%	100.00%	100.00%	100.00%
EQUITY AND LIABILITIES
Capital and reserves
Stated capital	7.15%	6.75%	5.31%	5.39%	4.22%
Reserves	4.34%	4.09%	4.63%	5.36%	8.51%
Accumulated Profit/ (Loss)	38.99%	36.99%	46.65%	54.28%	47.91%
Total Capital and reserves	50.47%	47.84%	56.59%	65.03%	60.63%
Non-current liabilities
Employee benefit obligations	1.28%	1.29%	1.68%	1.90%	1.59%
Differed tax liability	2.08%	2.02%	2.63%	2.71%	3.08%
Loans and borrowings	17.31%	14.59%	11.37%	8.74%	5.10%
Total Non-current liabilities	20.67%	17.90%	15.68%	13.35%	9.77%
Current liabilities
Trade and other payables	17.12%	21.36%	5.59%	5.66%	4.48%
Other current liabilities	2.78%	0.79%	0.75%	1.57%	1.34%
Loans & borrowings	8.70%	9.49%	18.58%	6.14%	4.70%
Dividends payable	0.25%	0.19%	0.14%	0.08%	0.16%
Contract liability	0.00%	2.42%	2.25%	6.58%	16.93%
Tax payable	0.00%	0.00%	0.43%	1.60%	1.98%
Total Current liabilities	28.85%	34.27%	27.73%	21.63%	29.60%
Total Liabilities	49.53%	52.16%	43.41%	34.97%	39.37%
Total Equity and Liabilities	100.00%	100.00%	100.00%	100.00%	100.00%

 

In considering the vertical analysis of the company. Property, plant and equipment represents a value between 30% to 35% compared with total assets over the period. Investment in subsidiaries and investment in associates show a gradual decline throughout the period with the increase in total asset base. However, the total non-current assets stood at 85% in 2018 and gradually declined to 75% by 2021 and significantly dropped to 65% in 2022. This is mainly due to the increase in current assets significantly in 2021 and 2022 with the increase in inventories and cash balance in 2021 and 2022. Accordingly, the current assets have increased from 14% to 35% over the period from 2018 to 2022.

Total equity represents 50% in 2018 and has gradually increased to 65% in 2021 and slightly decreased to 60% in 2022. Long term loans and borrowings has decreased considerably over the period resulting a decrease in non-current liabilities from 2018 to 2022.

Current liabilities stood around 30% of total assets over the period. However, trade payables show an increase in 2019 but significantly decreased by year 2022.Further, contract liability shows a considerable increase to 16% of total assets due to the company has shifted more on order-based production process with the prevailing situation. Total liabilities increased to 52% in 2019 and then decreased to 39% in 2022.total equity and total liabilities position of 50:50 in 2018 has changed to 60:40 in 2022 showing the positive trend in the company’s solvency position.

2.4         Ratio Analysis

Ratio analysis is a foundation for evaluating and pricing credit risk and for doing fundamental company valuation. A financial ratio, or accounting ratio, is derived from a company’s financial statements and is a calculation showing the relative magnitude of selected numerical values taken from those financial statements.

Financial ratios are grouped into the following categories:

1.      Solvency ratios

2.      Profitability ratios

3.      Market value ratios

4.      Liquidity and Efficiency ratios

Financial ratios may be used internally by managers within a firm, by current and potential shareholders and creditors of a firm, and other audiences interested in understanding the strengths and weaknesses of a company, especially compared to the company over time or compared to other companies.  

2.4.1          Solvency Ratios

 

2.4.1.1         Debt Ratio

This ratio measures what portion of a company’s assets is contributed by creditors. The debt ratio is defined as the ratio of total debt to total assets, expressed in percentage, and can be interpreted as the proportion of a company’s assets that are financed by debt.

In considering the Royal Ceramics Lanka PLC the debt ratio for the years are as follows;

2018	2019	2020	2021	2022
49.53%	52.16%	43.41%	34.97%	39.37%

The above results show that the debt ratio has increased in 2019 and shows a lower percentage in recent years. If this ratio is high, the more leveraged the company and the greater its financial risk. 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.

2.4.1.2         Equity Ratio

The equity ratio is a financial ratio indicating the relative proportion of equity used to finance a company's assets. Equity Ratio is a good indicator of the level of leverage used by a company.

 

2018	2019	2020	2021	2022
50.47%	47.84%	56.59%	65.03%	60.63%

In considering the study period equity ratio is high in the Royal Ceramics Lanka PLC. Higher equity ratios are typically favorable for companies. Because higher investment levels by shareholders show potential shareholders that the company is worth investing in since so many investors are willing to finance the company. A higher ratio also shows potential creditors that the company is more sustainable and less risky to lend future loans. However, considering the low ratio investors are not willing to invest in the company.

2.4.1.3         Debt to Equity Ratio

 

This ratio measures the extent to which a company can cover its debt which is calculated as follows;

 

 

2018	2019	2020	2021	2022
98.13%	109.05%	76.72%	53.78%	64.92%

 

In considering the Royal Ceramics Lanka PLC, the debt-to-equity ratio for the years as above shows high percentage in the years 2018 and 2019 and then has decreased by year 2022 showing a less leverage position of the company in recent years.

 

 

 

 

2.4.1.4         Interest Coverage Ratio

 

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. 

 

 

2018	2019	2020	2021	2022
6.18	1.50	1.79	7.43	25.60

 

In considering the Royal Ceramics Lanka PLC, the interest coverage ratio shows a decrease in year 2019 and 2020, but significantly increased to 25 times in 2022. Therefore, it reflects that the company is strong enough to pay the loan and the interest thereon throughout the period.

 

2.4.2          Profitability Ratios

 

2.4.2.1         Profit Margin

 

Profit margin ratios are calculated in order to determine the overall profitability of an organization after reducing both cash and non-cash expenditures. This ratio describes a company’s ability to earn a net income from sales.

 

In considering the Royal Ceramics Lanka PLC the Profit margin ratio for the years are as follows;

2018	2019	2020	2021	2022
58.77%	6.31%	10.03%	26.23%	44.44%

Profit margin is exceptionally high in year 2018 and 2022. This is due to recognition of Rs.1.3Bn investment disposal profit during 2018 and Rs.2.5Bn dividend income in 2022 as other operating income by the company. The lowest net profit margin has recorded in the year 2019. A higher net profit margin means that a company is more efficient at converting sales into actual profit.

2.4.2.2         Gross Margin

Gross margin is a profitability measure that is calculated as the ratio of Gross Profit (GP) to Net Sales and therefore shows how much profit the company generates after deducting its cost of revenues.

The gross profit ratio's main value is being an accurate indicator of how efficiently a company is selling its goods and services. This will give the organization's management and potential investors a view of how well the company manages to optimize its processes, keep the costs to a minimum and produce the highest possible profit.

 

In considering the Royal Ceramics Lanka PLC the Gross margin ratio for the years are as follows;

2018	2019	2020	2021	2022
48.40%	46.36%	50.50%	50.86%	53.04%

 

Gross margin has gradually increased over the period under concern. The highest gross margin has been recorded in 2022 which is 53%.  A high gross profit ratio will make a company very attractive for potential investors, as it can be interpreted as a clear sign that the investment will pay off in a relatively short time. 

 

2.4.2.3         Return on Equity (ROE)

 

The amount of net income returned as a percentage of shareholders' equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

 

In considering the Royal Ceramics Lanka PLC the Return on equity for the years are as follows;

2018	2019	2020	2021	2022
22.93%	2.47%	5.33%	21.13%	35.32%

In considering the above ROE ratio of the company over the period, it can be seen that it is relatively low in year 2019 and 2020 but shows an increasing trend in recent years. The highest ROE shows in the year 2022 which is at 35%. The ROE allows an investor to determine the change in profitability over the period.

2.4.2.4         Return on Assets (ROA)

 

ROA measures the ability to turn assets into profit. This is a very useful measure of comparison within an industry. A low ratio compared to the industry may mean that your competitors have found a way to operate more efficiently. After-tax interest expense can be added back to the numerator since ROA measures profitability on all assets whether or not they are financed by equity or debt.

 

In considering the Royal Ceramics Lanka PLC the Return on assets for the years are as follows;

2018	2019	2020	2021	2022
11.82%	1.21%	2.81%	12.84%	22.09%

 

In considering the above ROA ratio of the company over the period, it can be seen that it is relatively low in year 2019 and 2020 but shows an increasing trend in recent years. The highest ROA shows in the year 2022 which is at 22%.

 

2.4.3          Investors’/ Market Ratios

 

2.4.3.1         Book Value per Common Share

 

This ratio represents the liquidation at reported amounts. If the company is bankrupted the amount receives for one shareholder is reflected through this ratio values. 

 

2018	2019	2020	2021	2022
87.24	87.58	131.64	149.04	17.75

This ratio shows a gradual increase from 2018 to 2021 and the highest book value per share shows in the year 2021 which is Rs.149.04. Book value per share shows a significantly low value in year 2022 due to the sub-division of Ordinary Shares on the basis of a sub-division of every one (01) Ordinary Shares into ten (10) Ordinary Shares, thus increasing the existing 110,789,384 issued Ordinary Shares of the Company to 1,107,893,840 Ordinary Shares during the year under concern.

 

2.4.3.2         Basic Earnings per Share

 

Earnings per share (EPS) represents the net income earned for each share of outstanding common stock. In a simple capital structure, it is calculated by dividing net income by the number of weighted average common shares outstanding. This ratio is very important in stock exchange in stock market when buying and selling stock market shares.

 

2018	2019	2020	2021	2022
18.31	2.16	5.84	29.65	10.48

 

When considering EPS of Royal Ceramics Lanka PLC, it shows a relatively lower values for year 2019 and 2020. The highest value has been recorded in 2021 and again it has dropped in 2022. Since it gives a positive EPS of the company it is worth buying shares by the investors.

 

2.4.3.3         Price- Earnings Ratio (P/E 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. 

 

 

2018	2019	2020	2021	2022
5755.71	27285.18	9576.64	8666.77	3882.59

 

Price earnings ratio of the company is at a good position during the period under concern. However, P/E ratio of 2019 is exceptionally high and the lowest P/E ratio is reported in 2022.

 

2.4.3.4         Dividend Yield

 

The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the price per share. It is also a company's total annual dividend payments divided by its market capitalization, assuming the number of shares is constant. It is often expressed as a percentage.

 

 

2018	2019	2020	2021	2022
0.01%	0.00%	0.01%	0.01%	0.02%

 

2.4.4          Liquidity and Efficiency Ratios

 

2.4.4.1         Current Ratio

The current ratio is also called the working capital ratio, as working capital is the difference between current assets and current liabilities. This ratio measures the ability of a company to pay its current obligations using current assets. The current ratio is calculated by dividing current assets by current liabilities.

 

 

2018	2019	2020	2021	2022
0.51	0.50	0.88	1.16	1.18

 

A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities. Therefore, in considering the above current ratio for the period from 2018 to 2020 shows the lower liquidity position of the company which is below the norm. However, the current ratio has gradually increased showing the improved liquidity position of the company in 2021 and 2022.

 

2.4.4.2         Quick Ratio

 

A more stringent liquidity test indicates if a firm has enough short-term assets (without selling inventory) to cover its immediate liabilities. This is often referred to as the “acid test” because it only looks at the company’s most liquid assets only (excludes inventory) that can be quickly converted to cash).

 

2018	2019	2020	2021	2022
0.25	0.22	0.23	0.61	0.88

 

Considering the analysis period, it shows a low quick ratio than the norm. However, the ratio is gradually improving towards the norm of 1:1. A low quick ratio can be concerning. It means your business has fewer liquid assets than liabilities. A low ratio might mean your business has slow sales, numerous bills, and poor collections for your accounts receivable.

 

2.4.4.3         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. 

 

In considering the Royal Ceramics Lanka PLC the accounts receivables turnover for the years are as follows;

2018	2019	2020	2021	2022
7.00	6.06	8.26	15.12	20.16

Even though the company has recorded lower receivables turnover during the period 2018 to 2020, this ratio has increased significantly in 2021 and 2022. It reflects that the company has increased its collection efficiency of debtors in recent years than the past.

 

 

2.4.4.4         Merchandise/ Inventory 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.

 

 

In considering the Royal Ceramics Lanka PLC the merchandise turnover for the years are as follows;

2018	2019	2020	2021	2022
1.37	1.23	0.98	1.62	2.29

The merchandise turnover ratio values of the company are not much higher according to the results. It shows that high amount of inventory is left and not sold much.

2.4.4.5         Days of Sales Uncollected

 

This ratio indicates the number of days a company requires to collect its money from debtors back.

 

In considering the Royal Ceramics Lanka PLC the days sales uncollected for the years are as follows;

2018	2019	2020	2021	2022
52.11	60.25	44.17	24.13	18.10

The results of the calculation reveals that the company has recorded a higher debtors collection period in 2019, but thereon gradually reduces such period over the recent years. The lowest value has reported in 2022, i.e. 18 days. It shows that the company has managed to decrease the collection period year to year and it is an indication of efficiently 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.

2.4.4.6         Days of Sales in inventory

 

This ratio indicates the number of days a company requires to collect its money from debtors back. 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.

 

In considering the Royal Ceramics Lanka PLC the days sales in inventory for the years are as follows;

2018	2019	2020	2021	2022
265.50	296.34	373.80	225.81	159.51

According to above analysis, the inventory holding period of the company is considerably high. The highest holding period shows in 2020 and the lowest value has recorded in 2022. The higher values 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.

2.4.4.7         Total Assets Turnover Ratio

This ratio measures the efficiency of the assets in producing sales. If the value of this ratio is greater than one, it is good for the company and the company is more efficient. The ratio value become very much higher is also not good for the company.

In considering the Royal Ceramics Lanka PLC the total assets turnover ratio for the years are as follows;

2018	2019	2020	2021	2022
0.20	0.19	0.28	0.49	0.50

The calculation reflects the revenue of the company is not much higher compared to average total assets. However, the highest assets turnover ratio has recorded in year 2022.

3.      conclusion

 

The ceramic tiles and sanitaryware industry in Sri Lanka has a long history in manufacturing and distribution of tiles and sanitaryware all over the country as well as exporting to many foreign countries in the world. The analysis of the annual reports of the company under concern and other peers in the industry shows that the profitability has been increased significantly over the period under concern.

Royal Ceramics Lanka PLC is a public quoted company, which is listed on the Colombo stock exchange. Royal Ceramics Lanka PLC, the pioneer floor tile and bath ware producer in Sri Lanka was incorporated in 1990 with the manufacture of Ceramic Glazed Floor Tiles and sanitaryware as its core business. Today they have a market capitalization of Rs.27,918 Million. Currently, their financial capital is funded by Rs.19.7 billion from shareholders and Rs. 12.8 billion from debt. Lanka tiles PLC has 8859 employees at present.

In considering the improvement EPS, it reported 29.65 in 2021 which is the highest value in the analysis period. It is a considerable improvement. The total revenue and net interest income is a considerable increase in the study period. Total revenue increases 3.8Bn of 2017 to 14.4 million in 2021.

The calculations and analysis represent that the profitability and the solvency of the company are in a good position whereas liquidity and efficiency ratios are not much positive during the period under concern. Therefore, company mush concern highly on the weak areas of the company and implement remedies to overcome the hard situation of the company in such areas. 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.