Financial Statements Analysis of Diesel and Motor Engineering PLC

 

1.     INTRODUCTION

 

The main objective of this assignment is analysis of Financial Statement of Selected Quoted Public Company in Colombo Stock Exchange. For this purpose I have selected Financial Statements of Diesel and Motor Engineering PLC (DIMO) for the last 5 years (From 2018/19 to 2021/22). In this assignment, it has been used main Financial Statements to analyze the Financial Performance of the Company such as Profit or Loss Statement, Other Comprehensive Income Statement, Statement of Financial Statement, Statement of Changes in Equity and Cash Flow Statement.

 

In addition to the above, it has been used Investor Related Information of the Company for this analysis. Analysis of the Financial Statement of Diesel and Motor Engineering PLC has been basically conducted under three main techniques of Horizontal Analysis, Vertical Analysis and Ratio Analysis. Finally it has been made Altman’s Z –Score Model to measure the Financial Stability of the Company.

 

It is assumed that this assignment provides detailed analysis and interpretation of Financial Statements of the Diesel and Motor Engineering PLC under above three main techniques.

 

 

 

                                                            

2.  BACKGROUND OF THE COMPANY

 

Diesel & Motor Engineering PLC (DIMO) was founded in 1939 by four young entrepreneurs. Tata Motors’ relationship with DIMO began in 1961 when the very first Tata Motors truck was exported to them in 1961. DIMO became a Publicly Quoted Company in 1964, by obtaining a listing with the Colombo Brokers’ Association. In 1970, DIMO began producing radiators, brake linings, gaskets and kingpins which were very rare, due to the import restrictions in place at the time.

 

The dawn of the '90s witnessed the launch of the DIMO Automobile Training School (DATS) established in collaboration with Daimler AG, Germany, to develop a programme of international standards. The school became the first in the private sector to offer training in automotive technology as a social service.

 

In 2017, DIMO enters Myanmar to establish its first offshore subsidiary by investing in DIMO Lanka Company Limited. In 2018 DIMO expands its footprint in agriculture by acquiring equity interest in Plant Chemistry (Private) Limited and Plant Seed (Private) Limited - the first acquisitions of the Group. Presently, DIMO offers customers excellent and unmatched after-sales service, along with a variety of mobility and logistics solutions.

 

Today DIMO is a global company, one that has always reflected the enduring spirit of Sri Lanka on its over eight decades of journey to success. The company is now focused on transforming its business and processes with digitalization and is reimagining its product portfolio with a brand new strategic focus to successfully navigate through future challenges.

 

 

 

 

 

3. OVERVIEW OF FINANCIAL STATEMENTS ANALYSIS

Financial statement analysis evaluates financial information presented in financial statements to make better decisions about the business. The Profit or Loss Statement, Statement of Financial Position, Statement of Comprehensive Income, Statement of Changes in Equity, Cash Flow statement among other financial information, can be analyzed. The information obtained from financial statements analysis is benefited for decision-making for internal and external stakeholders and can give a company valuable information on overall performance and specific areas for improvement. The analysis can help them with budgeting, cost reduction decision, growth in revenues, and future capital investments opportunities. Further, it provides lending institutions with an unbiased view of a Company’s Financial Stability.

When considering the outcomes from analysis, it is important for a company to understand that data produced needs to be compared to others within industry and close competitors. The company should also consider their past experience and how it corresponds to current and future performance expectations. Three common analysis tools are used for decision-making; horizontal analysis, vertical analysis, and ratio analysis.

Horizontal analysis looks comparison of Company’s financial performance across time. A company will look at one period (usually a year) and compare it to another period. The trend analysis is also part of the Horizontal Analysis. Vertical analysis shows a comparison of a line item within a statement to another line item within that same statement. It analyses vertical effect of the line items compared with the other parts of the business. Ratio analysis uses to identify statistical relationship among Financial Statement Items and important ratio metrics.

In this assignment it has been described detailed analysis of Financial Statement of DIMO under three main tools of horizontal analysis, vertical analysis and ratio analysis.

 

 

 

 

 

 

4.  HORIZONTAL ANALYSIS

 

 

Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period with information from base period. Analysts use such an approach to analyze historical trends.

 

Horizontal Analysis – Statement of Profit or Loss

 

Base Year = 2016/17

 

	2017/18		2018/19		2019/20		2020/21		2021/22
	Value Change (Rs. Mn)	% Change	Value Change (Rs. Mn)	% Change	Value Change (Rs. Mn)	% Change	Value Change (Rs. Mn)	% Change	Value Change (Rs. Mn)	% Change
Revenue	(880.5)	-2.1	(7,170.7)	-17.7	(4,849.1)	-14.5	(3,534.1)	-12.4	5,132.5	20.6
Cost of Sales	(525.0)	-1.5	(6,806.2)	-19.9	(4,999.3)	-18.2	(3,437.7)	-15.3	2,707.6	14.2
Gross Profit	(355.5)	-5.4	(364.6)	-5.9	150.3	2.6	(96.4)	-1.6	2,425.0	41.0
Other Operating Income	(118.6)	-44.0	23.6	15.6	85.4	48.9	22.7	8.7	223.6	79.1
Selling and Distribution Expenses	(65.0)	-6.9	(271.6)	-31.0	(13.4)	-2.2	35.0	5.9	(107.5)	-17.2
Impairment Loss / (reversals)	(87.5)	100.0	272.8	-311.7	59.7	32.2	(89.7)	-36.6	(115.0)	-74.0
Administration Expenses	(101.1)	-2.3	(50.6)	-1.2	(130.7)	-3.1	170.0	4.2	1,043.5	24.6
Operating Profit	(220.4)	-14.2	(291.6)	-21.8	320.1	30.7	(189.0)	-13.9	1,827.6	155.5
Finance Income	(47.1)	-23.7	(2.0)	-1.3	52.1	34.9	(145.4)	-72.2	(12.8)	-22.8
Finance Cost	190.2	22.4	417.2	40.2	(210.6)	-14.5	(635.7)	-51.1	1,694.3	278.0
Net Finance Cost	237.4	36.5	419.3	47.2	(262.7)	-20.1	(490.3)	-47.0	1,707.1	308.4
Profit before Tax / Loss	(457.8)	-50.5	(710.9)	-158.4	582.8	222.3	301.3	94.0	120.6	19.4
Income Tax Expenses /(Reversals)	(189.6)	-60.5	(172.6)	-139.5	101.8	208.1	121.0	228.8	(14.4)	-8.3
Profit / Loss for the Year	(268.1)	-45.2	(538.2)	-165.7	481.0	225.5	180.3	67.4	134.9	30.1

 

Revenue of the DIMO significantly decreased throughout the first 4 years and there is a 20.6% growth (Rs. 5,132.5 Mn) in Financial Year 2021/22 compare to the prior year. Cost of Sales and Gross profit are also decreased during the first 4 years and for the year 2021/22, it has been significantly increased by 14.2% and 41.0% respectively.

Other Operating Income has significantly improved during the year 2021/22 and it is continuously increased except the year 2017/18. Company has able to reduce the Selling and Distribution Expense throughout the analysis period except the year 2020/21. Compared with the other Financial Years, Administration Expenses has increased significantly during 2021/22. Profit before tax and Profit after tax has declined during the first 2 years and there is a drastic improvement in last 3 years.

 

Horizontal Analysis – Statement of Financial Position

 

Base Year = 2016/17

 

	2017/18		2018/19		2019/20		2020/21		2021/22
	Value Change (Rs. Mn)	% Change	Value Change (Rs. Mn)	% Change	Value Change (Rs. Mn)	% Change	Value Change (Rs. Mn)	% Change	Value Change (Rs. Mn)	% Change
Assets
Property, Plant and Equipments	2,828.2	34.0	20.0	0.2	373.5	3.3	2,297.2	19.9	357.3	2.6
Intangible Assets and Goodwill	(6.8)	-28.4	0.4	2.1	(6.5)	-36.9	9.7	87.1	174.0	837.9
Investment in Subsidiaries	450.9	1936.2	40.4	8.5	50.2	9.8	(31.9)	-5.7	195.5	36.7
Investment in Equity Securities	55.6	712.0	(16.1)	-25.5	(14.2)	-30.1	(22.2)	-67.2	41.6	384.0
Total Non Current Assets	3,327.8	39.7	44.6	0.4	403.0	3.4	2,252.7	18.5	768.2	5.3
Inventories	341.4	4.0	(1,640.3)	-18.4	(397.2)	-5.5	(2,491.8)	-36.2	3,142.7	71.6
Trade and Other Receivables	1,244.1	37.4	401.2	8.8	656.9	13.2	673.0	12.0	1,717.5	27.3
Other Current Assets	(211.0)	-25.6	797.0	129.9	433.7	30.7	(727.7)	-39.5	32.8	2.9
Current Tax Liabilities	118.5	100.0	175.1	147.7	(57.3)	-19.5	(236.3)	-100.0	-	-
Cash and Cash Equivalents	(78.0)	-28.9	(72.4)	-37.8	451.4	379.0	278.3	48.8	1,488.8	175.4
Total Current Assets	1,415.1	10.9	(339.4)	-2.4	1,087.4	7.7	(2,504.5)	-16.5	6,381.8	50.4
Total Assets	4,742.9	22.2	(294.9)	-1.1	1,490.4	5.8	(251.7)	-0.9	7,150.0	26.4
Equity and Liabilities
Equity
Stated Capital	-	0.0	-	0.0	-	0.0	-	0.0	195.3	45.9
Reserves	1,376.1	15.6	(254.2)	-2.5	300.5	3.0	2,502.0	24.4	315.9	2.5
Total Equity	1,376.1	14.9	(254.2)	-2.4	300.5	2.9	2,502.0	23.4	511.2	3.9
	-		-		-		-		-
Long Term Liabilities	(280.0)	-47.4	180.0	58.1	(200.2)	-40.8	789.0	272.1	85.1	7.9
Lease Liabilities	-	-	-	-	395.9	-	(74.9)	(18.91)	184.8	57.58
Employee Benefits	25.3	4.3	77.7	12.7	18.5	2.7	10.5	1.5	66.1	9.2
Deferred Tax Liabilities	1,613.7	651.7	(52.0)	-2.8	(131.9)	-7.3	216.5	12.9	(476.1)	-25.1
Contract Liabilities	14.1	160.5	6.8	29.7	24.9	84.2	(1.6)	-2.9	(30.2)	-57.2
Total Non Current Liabilities	1,373.1	96.0	212.5	7.6	107.2	3.6	939.6	30.1	(170.3)	-4.2
Trade Payables	1,236.5	70.3	(1,321.9)	-44.1	540.4	32.3	2,039.5	92.1	3,040.6	71.5
Other Current Liabilities	757.1	8.5	1,068.8	11.0	542.3	5.0	(5,732.8)	-50.7	3,768.6	67.7
Total Current Liabilities	1,993.7	18.6	(253.1)	-2.0	1,082.7	8.7	(3,693.3)	-27.3	6,809.2	69.3
Total Liabilities	3,366.8	27.8	(40.6)	-0.3	1,189.9	7.7	(2,753.7)	-16.6	6,638.8	47.8
Total Equity and Liabilities	4,742.9	22.2	(294.9)	-1.1	1,490.4	5.8	(251.7)	-0.9	7,150.0	26.4

 

The Property, Plant & Equipment value has increased approximately 3.0% throughout the analysis period except financial year 2017/18. Investment in Equity Securities has suddenly improved during the Year 2021/22 and remaining Financial Years it has negative growth. Total Current Assets are fluctuated throughout the analysis period and highest growth percentage (50.4%) reflected during the year 2021/22 and lowest growth (-16.5%) reported at F/Y 2020/21. There was average growth in Total Non-Current Assets and decline has been reported in F/Y 2021/22.

Capital Infusion has been made during the year 2020/21 and there was no growth in remaining financial years. Total Assets of the Company has declined significantly and there was 26.4 % sudden growth in last financial year. Total non-current Assets also increased at initial financial years and there was a negative growth in 2021/22. Total Current Liabilities are also continuously decreased except the last Financial Year.  Total Liabilities also fluctuated throughout the analysis period and highest growth reported in F/Y 2021/22, it was 47.8% compared to the base year.

 

5. TREND ANALYSIS

 

Trend analysis of financial statements helps information users to get understand of percentage changes over the selected base period performance. Trend Analysis of the DIMO Financials during last 5 Years as follow.

 

Trend Analysis – Statement of Profit or Loss (Base Year 2017/18)

%

	2017/18	2018/19	2019/20	2020/21	2021/22
Revenue	100.0	82.3	70.3	61.6	74.3
Cost of Sales	100.0	80.1	65.6	55.5	63.4
Gross Profit	100.0	94.1	96.6	95.0	133.9
Other Operating Income	100.0	115.6	172.2	187.2	335.2
Selling and Distribution Expenses	100.0	69.0	67.5	71.5	59.2
Impairment Loss / (reversals)	100.0	(211.7)	(279.9)	(177.5)	(46.1)
Administration Expenses	100.0	98.8	95.7	99.7	124.2
Operating Profit	100.0	78.2	102.1	88.0	224.8
Finance Income	100.0	98.7	133.1	37.0	28.6
Finance Cost	100.0	140.2	119.9	58.7	221.8
Net Finance Cost	100.0	147.2	117.6	62.4	254.8
Profit before Tax / Loss	100.0	(58.4)	71.5	138.6	165.5
Income Tax Expenses /(Reversals)	100.0	(39.5)	42.7	140.5	128.9
Profit / Loss for the Year	100.0	(65.7)	82.4	137.9	179.4

 

According to the above analysis Total Revenue of the Company has been declined in a significant percentage with compared to the year 2017/18. Cost of Sales and Gross Profit (except year 2021/22) also declined with compared to the base year of 2017/18. It was recorded significant improvement in Gross Profit during the year 2021/22 compared with base year and other financial years. Further, Operating Profit and Profit before Tax also decreased during the first 3 Financial Years (2018/19, 2019/20 and 2020/21) compare to the base year. It was recorded increasing trend in PBT and PAT for the last 2 Financial Years (2020/21 and 2021/22). Graphical trend analysis of Total Revenue, Gross Profit and Net Profit of the Company can be illustrated as follow.

 

Trend Analysis – Statement of Financial Position

 

%

	2017/18	2018/19	2019/20	2020/21	2021/22
Assets
Property, Plant and Equipments	100.0	100.2	103.5	124.1	127.3
Intangible Assets and Goodwill	100.0	102.1	64.4	120.5	1,130.4
Investment in Subsidiaries	100.0	108.5	119.1	112.4	153.6
Investment in Equity Securities	100.0	74.5	52.1	17.1	82.7
Total Non Current Assets	100.0	100.4	103.8	123.1	129.6
Inventories	100.0	81.6	77.1	49.2	84.4
Trade and Other Receivables	100.0	108.8	123.2	137.9	175.5
Other Current Assets	100.0	229.9	300.6	182.0	187.3
Current Tax Liabilities	100.0	247.7	199.4	-	-
Cash and Cash Equivalents	100.0	62.2	297.9	443.2	1,220.5
Total Current Assets	100.0	97.6	105.2	87.8	132.1
Total Assets	100.0	98.9	104.6	103.6	131.0
Equity and Liabilities
Equity
Stated Capital	100.0	100.0	100.0	100.0	145.9
Reserves	100.0	97.5	100.5	125.0	128.1
Total Equity	100.0	97.6	100.4	124.0	128.8
Long Term Liabilities	100.0	158.1	93.5	347.9	375.4
Lease Liabilities	-	-	-	-	-
Employee Benefits	100.0	112.7	115.8	117.5	128.3
Deferred Tax Liabilities	100.0	97.2	90.1	101.8	76.2
Contract Liabilities	100.0	129.7	238.8	231.9	99.3
Total Non Current Liabilities	100.0	107.6	111.4	144.9	138.8
Trade Payables	100.0	55.9	73.9	142.0	243.5
Other Current Liabilities	100.0	111.0	116.6	57.5	96.4
Total Current Liabilities	100.0	98.0	106.5	77.4	131.1
Total Liabilities	100.0	99.7	107.4	89.6	132.5
Total Equity and Liabilities	100.0	98.9	104.6	103.6	131.0

 

With compared to the base year (2017/18), Total Non-Current Assets have been gradually increased during last 5 years. Total Current Assets also increased during the 2019/20 and 2021/22. But there was a significant decline in Current Assets end of the Year 2020/21. Except Financial Year 2018/19, Total Assets of the Company have continuously increased during the last 3 years.

 

There was rapid improvement in Total Equity of the Company compared with base year. Total Non-Current Liabilities also continuously increased during last 5 years. Compared to the drop in Current Assets, there was a drop in Current Liabilities during the 2 Financial Years of 2018/19 and 2020/21. Except these 2 Financial Years, all other Financial Years it was reported significant increase in Current Liabilities of the Company. Graphical Presentation of the Trend Analysis of the DIMO is as follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6. VERTICAL ANALYSIS

 

Vertical analysis is a method of analyzing each line item of the financial statements as a percentage of a base amount. The base value item always shows at 100%, with each following line item representing a percentage of the whole. Vertical Analysis of the Last 5 Years Financial Statements are as follows.

 

Vertical Analysis – Statement of Profit or Loss

 

	2017/18	2018/19	2019/20	2020/21	2021/22
Revenue	100.0%	100.0%	100.0%	100.0%	100.0%
Cost of Sales	84.6%	82.4%	78.9%	76.3%	72.3%
Gross Profit	15.4%	17.6%	21.1%	23.7%	27.7%
Other Operating Income	0.4%	0.5%	0.9%	1.1%	1.7%
Selling and Distribution Expenses	2.2%	1.8%	2.1%	2.5%	1.7%
Impairment Loss / (reversals)	-0.2%	0.6%	0.9%	0.6%	0.1%
Administration Expenses	10.5%	12.6%	14.3%	17.0%	17.6%
Operating Profit	3.3%	3.1%	4.8%	4.7%	10.0%
Finance Income	0.4%	0.4%	0.7%	0.2%	0.1%
Finance Cost	2.6%	4.4%	4.4%	2.4%	7.7%
Net Finance Cost	2.2%	3.9%	3.7%	2.2%	7.5%
Profit before Tax / Loss	1.1%	-0.8%	1.1%	2.5%	2.5%
Income Tax Expenses /(Reversals)	0.3%	-0.1%	0.2%	0.7%	0.5%
Profit / Loss for the Year	0.8%	-0.6%	0.9%	1.8%	1.9%

 

For the analysis of Statement of Profit or Loss, it has been used Total Revenue as base amount and every other items have been defined as a proportion of Total Revenue. Cost of Sales has been taken largest portion of the Revenue and there was a gradual decline in cost of sales during last 5 years. This was mainly affected to the improvement of Gross Profit of DIMO. Further there was significant percentage increase in PBT and PAT during last 2 years.

 

Vertical Analysis – Statement of Financial Position

 

Assets	2017/18	2018/19	2019/20	2020/21	2021/22
Property, Plant and Equipments	42.7%	43.3%	42.3%	51.2%	41.5%
Intangible Assets and Goodwill	0.1%	0.1%	0.0%	0.1%	0.6%
Investment in Subsidiaries	1.8%	2.0%	2.1%	2.0%	2.1%
Investment in Equity Securities	0.2%	0.2%	0.1%	0.0%	0.2%
Total Non Current Assets	44.8%	45.5%	44.5%	53.2%	44.4%
Inventories	34.1%	28.2%	25.2%	16.2%	22.0%
Trade and Other Receivables	17.5%	19.2%	20.6%	23.3%	23.4%
Other Current Assets	2.3%	5.5%	6.8%	4.1%	3.4%
Current Tax Liabilities	0.5%	1.1%	0.9%	-	-
Cash and Cash Equivalents	0.7%	0.5%	2.1%	3.1%	6.8%
Total Current Assets	55.2%	54.5%	55.5%	46.8%	55.6%
Total Assets	100.0%	100.0%	100.0%	100.0%	100.0%
Equity and Liabilities
Equity
Stated Capital	1.6%	1.6%	1.6%	1.6%	1.8%
Reserves	39.1%	38.5%	37.5%	47.1%	38.2%
Total Equity	40.7%	40.2%	39.1%	48.7%	40.0%
Long Term Liabilities	1.2%	1.9%	1.1%	4.0%	3.4%
Lease Liabilities	-	-	1.4%	1.2%	1.5%
Employee Benefits	2.3%	2.7%	2.6%	2.6%	2.3%
Deferred Tax Liabilities	7.1%	7.0%	6.1%	7.0%	4.1%
Contract Liabilities	0.1%	0.1%	0.2%	0.2%	0.1%
Total Non Current Liabilities	10.7%	11.7%	11.4%	15.0%	11.4%
Trade Payables	11.5%	6.5%	8.1%	15.7%	21.3%
Other Current Liabilities	37.1%	41.7%	41.4%	20.6%	27.3%
Total Current Liabilities	48.6%	48.2%	49.5%	36.3%	48.6%
Total Liabilities	59.3%	59.8%	60.9%	51.3%	60.0%
Total Equity and Liabilities	100.0%	100.0%	100.0%	100.0%	100.0%

 

In the Statement of Financial Position, every line item under Assets is defined as a proportion of Total Assets and every items under Equity and Liabilities is presented as a proportion of Total Equity and Liabilities.

 

Total Non-Current Assets of the Company are not exceeded 50% of total assets except the Financial Year 2020/21. Significant of Non-Current Assets (over 90%) represents Property, Plant & Equipment. Total Current Assets represents over 50% of Total Assets (except Financial Year 2020/21) throughout the last 5 years. Inventory percentage denominated below 25% for the last 2 years and Trade Receivables percentage has been improved over 20% during last 2 years.

Total Equity represents above 40% throughout the 5 years period and there was slight decrease in reserves for the year 2019/20. Total Non-Current Liabilities do not show significant movement during last 5 years but there is a sudden flop in Financial Year 2020/21. Total Current Liabilities of the Company also don’t show significant movement. But end of the Financial Year 2020/21, there was sudden decrease in Current Liabilities.

 

 

 

 

 

7. RATIO ANALYSIS

 

Ratio analysis is a main Financial Statements analysis tool that can be used to measure Liquidity, Operation Efficiency, Profitability, Solvency and proper utilization of Assets by studying Financial Statements of the Company. In this analysis, it has been used below major Ratio Categories:

i.                    Liquidity and Efficiency

ii.                  Solvency

iii.                Profitability

iv.                Market

 There are number of ratios under each category which support the stakeholders’ decision making purpose and it has used following ratios to analysis the DIMO Financial Statements during last 5 years.

i.                    Liquidity and Efficiency Ratios

 

Ratio	2017/18	2018/19	2019/20	2020/21	2021/22
Current Ratio	1.14	1.13	1.12	1.29	1.14
Acid Test Ratio	0.43	0.55	0.61	0.84	0.69
Accounts Receivable Turnover (times)	10.27	6.99	5.38	4.19	4.20
Merchandise Turnover (times)	3.92	3.39	3.18	3.38	3.65
Days' Sales Uncollected (No. of Days)	41.2	54.4	72.1	92.1	97.2
Days' Sales in Inventory (No. of Days)	94.9	96.7	111.7	84.1	126.4
Total Assets Turnover (times)	1.71	1.28	1.07	0.92	0.98

 

Current Ratio - The current ratio is used to calculate a company’s ability to meet its short-term debt and obligations and it is also known as working capital ratio. The Current Ratio of the DIMO reported greater than 1.0 and it represents a sign that company has sufficient ability to meet its short term liabilities.

Acid Test Ratio –This Ratio measures the Company’s ability to pay its current Liabilities using Quick Assets. Inventories and pre-paid expenses are not considered as Quick Assets. Acid Test Ratio of the Company takes average rate and it will be sufficient to meet short term obligation. In the Year 2020/21, DIMO has reported 0.84 Acid Test Ratio and Company’s Acid Test Ratio was decreased to 0.69 at the end of the year 2021/22.

Account Receivable Turnover – This Ratio is used to measure how many times, the Company converts its receivables into cash. The Higher value of Account Receivable Turnover Ratio represents company efficiency in debt management. DIMO’s Account Receivable Turnover has decreased throughout the past 5 years and it is not representing healthy debt management.

Merchandise Turnover – This Ratio measures the number of times inventory is sold and replaced during the year. DIMO’s Merchandise Turnover is close to 4.0 times and it is indicate ability in selling goods of the Company. Company has maintained average level of Merchandise Turnover throughout the last 5 years.

Day’s Sales Uncollected –This measures the liquidity of receivables. As per the Financial Statements of DIMO, No. of Days Sales Uncollected has continuously increased and it is close to 100 days end of the year 2021/22. This is not better for the Company’s Liquidity Position.

Day’s Sales in Inventory – This Ratio measures the liquidity of inventory and average time in days that the Company takes turn its inventory into cash.  As per the DIMO’s Financial Statement this Ratio has been continuously increased and it was 126 Days end of the year 2021/22. This is not a good sign for the Company and maintain below 100 days should be most important.

Total Assets Turnover – Efficiency of the Assets in terms of producing sales is mainly measured by using this Ratio. The Value should be greater than 1 to indicate sufficient efficiency of the Company. Assets Turnover of the DIMO is close to 1.0 throughout the past 5 years. But this ratio has gradually decrease with compare to the year 2017/18.

ii.                  Solvency Ratios

 

Ratio	2017/18	2018/19	2019/20	2020/21	2021/22
Debt Ratio	59.3%	59.8%	60.9%	51.3%	60.0%
Equity Ratio	40.7%	40.2%	39.1%	48.7%	40.0%
Times Interest Earned (times)	1.43	0.82	1.26	2.02	1.32

 

Debt Ratio - Debt ratio measures the financial stability of the company and it represents what portion of a company’s assets is contributed by creditors. The Debt Ratio of DIMO is approximately 60.0% and it means that company is mainly depended on debt financing. The higher Debt Ratio contributes to high insolvent risk and excessive debt can lead to a heavy debt repayment burden.

 

Equity Ratio – Equity Ratio measures the proportion of an owner's investment used to finance the company's assets. The Equity Ratio of DIMO is approximately 40% throughout the last 5 years. For the year 2020/21, this ratio has increased to 48.7%.

 

Times Interest Earned (times) – This ratio measures the company’s ability to pay interest based on Profit before Interest and Taxes. The large value represents the more ability of paying interest on debt. Times interest earned of the DIMO takes low value and it shows high volume of finance cost compared with Profit before Interest and Taxes.

 

iii.                Profitability Ratios

 

Ratio	2017/18	2018/19	2019/20	2020/21	2021/22
Net Profit Margin	0.8%	-0.6%	0.9%	1.8%	1.9%
Gross Profit Margin	15.4%	17.6%	21.1%	23.7%	27.7%
Return on Total Assets	1.4%	-0.8%	1.0%	1.6%	1.9%
Return on Common Shareholders' Equity	3.3%	-2.0%	2.5%	3.8%	4.3%
Book Value per Common Share (Rs.)	1,196.78	1,168.14	1,201.99	1,426.79	1,482.17
Basic Earnings per Shares (Rs.)	36.60	-24.03	30.16	48.54	63.15

 

Net Profit Margin – Net profit margin measures how much net income is generated as a percentage of total revenues received. According to the Financials of DIMO, Net profit margin has been continuously improved and it takes 1.9% for the year 2021/22. As a result of earning losses for the year 2018/19, Net Profit Margin takes negative figure.

 

Gross Profit Margin – This ratio indicates the percentage of each rupee of revenue that the company retains as gross profit. Gross Profit Margin was continuously improved throughout the last 5 years and it was increased to 27.7% for the year 2021/22. This represents healthy performance of DIMO.

 

Return on Total assets – This ratio represents how effectively company uses its assets to generate earnings in terms of Total Assets. The Company’s Returns on Assets recorded over 1.0% and this ratio improved to 1.9% for the year 2021/22.

 

Return on Common Shareholders’ Equity – This ratio measures the how success of a company in generating income for the benefit of common stockholders. This ratio is rapidly increased throughout last 5 years and for the year 2020/21, it recorded as 4.3%.

 

Book Value per Common Share – This ratio indicates a Company’s net assets value on a per share basis. This ratio also increased throughout the last 5 years and for the year 2021/22, it was recorded highest amount of Rs. 1,482.17 per share.

 

Basic Earnings per Share – This ratio indicates how much profit earned for each share of common stock outstanding. The Basic Earnings per Share of the Company is continuously improved and it is recorded highest value of Rs. 63.15 per share for the year 2021/22.

 

iv.                Market Ratios

 

Ratio	2017/18	2018/19	2019/20	2020/21	2021/22
Price - Earnings Ratio (times)	12.7	-12.7	8.6	10.9	7.7
Dividend Yield	4.3%	-	1.0%	0.5%	2.6%

 

Note: For the Financial Year 2018/19, Dividends have not been declared.

 

Price – Earnings Ratio – P/E ratio shows what the market is willing to pay per share based on earnings. The high P/E ratio indicates high share price relative to earnings. As per the information, P/E Ratio of DIMO represents highest value for the year 2017/18. But this ratio has dropped to 7.7 times for the year 2021/22. This mainly from the Market Value decreased during the year 2021/22 and as at March 31, 2022, Market value per share recorded as Rs. 488/=

 

Dividend Yield - The Dividend Yield provides an idea of how well the company distributes its profit to its Shareholders. A high dividend yield ratio indicates that the company is distributing a better share of its profit to its shareholders. As per the above data, highest dividend yield represents at the year 2017/18 and for the year 2020/21, it has dropped to 0.5%. Further, it shows some improvement in F/Y 2021/22 and it has increased to 2.6%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.  ANALYSIS OF THE COMPANY USING ALTMAN’S Z –SCORE MODEL

 

Altman’s Z-Score model is a numerical measurement that is used to predict the chances of a business going bankrupt in the next two years. The model was developed by American finance professor Edward Altman in 1968 as a measure of the financial stability of companies.Altman’s Z-score model is considered an effective method of predicting the state of financial distress of any organization by using multiple balance sheet values and corporate income.

 

The Z-score model is based on five key financial ratios, and it relies on the information contained in the 10-K report. It increases the model’s accuracy when measuring the financial health of a company and its probability of going bankrupt. The five ratios are as follow:

i.                    Working Capital/Total Assets Ratio

ii.                  Retained Earnings/ Total Assets Ratio

iii.                Earnings before Interest and Tax/ Total Assets Ratio

iv.                Market Value of Equity/ Total Liabilities Ratio

v.                  Total Sales / Total Assets Ratio

 

The Sum of these ratios is considered as Z-score under this model and interpretation based on Z-Score value can be illustrated as follow:

 

  

Usually, the lower the Z- score, the higher the odds that a company is heading for bankruptcy. A Z-score that is lower than 1.8 means that the company is in financial distress and with a high probability of going bankrupt. On the other hand, a score of 3 and above means that the company is in a safe zone and is unlikely to file for bankruptcy. A score between 1.8 and 3 means that the company is in a grey area and with a moderate chance of filing for bankruptcy.

Investors use Altman’s Z-score to make a decision on whether to buy or sell a company’s stock, depending on the assessed financial strength. If a company shows a Z-score closer to 3, investors can consider purchasing the company’s stock since there is minimal risk of the business going bankrupt in the next two years.

However, if a company shows a Z-score closer to 1.8, the investors may consider selling the company’s stock to avoid losing their investments since the score implies a high probability of going bankrupt.

Z-score calculation of DIMO using above model is as follow:

 

Financial Ratio	2017/18	2018/19	2019/20	2020/21	2021/22
Working Capital /Total Assets Ratio	0.066	0.063	0.060	0.105	0.070
Retained Earnings / Total Assets Ratio	0.407	0.402	0.391	0.487	0.400
Earnings before Interest & Tax/ Total assets Ratio	0.051	0.040	0.050	0.043	0.088
Market Value of Equity/ Total Liabilities Ratio	0.158	0.105	0.081	0.181	0.132
Total Sales/ Total Assets Ratio	1.551	1.291	1.043	0.922	0.880
Z- Score Value as the Altman’s Model	2.233	1.902	1.625	1.738	1.569
	Grey Zone	Grey Zone	Distress Zone	Distress Zone	Distress Zone

 

As per the above calculation, Diesel and Motor Engineering Company was at Gray Zone during the first financial years of 2017/18 and 2018/19. This has been converted to below 1.8 Z – Score value during last financial years and there is a possibility to business going bankrupt in the next two years. But considering the current economic and financial crisis situation in Sri Lanka, this position can be expected from every company. Therefore this situation is temporary and it will be changed after normalization of Macro Economic variables in Sri Lanka.

 

 

 

 

 

9. CONCLUSION

 

The main objective of the financial statement analysis of a company is to provide the necessary information required by the internal and external stakeholders for informative decision making, assessing the current and past performance of the company, predicting the success or failure of the business, etc. The above analysis provides detail analysis of Financial Statements of Diesel and Motor Engineering PLC for the last 5 years using main analysis tools of Horizontal, Vertical and Ratio Analysis.   

According to the horizontal analysis, Diesel and Motor Engineering PLC was able to obtain continuous growth in Profit before Tax and Profit after Tax during last 5 years. Further it can be noted that Company was able to maintain strong financial position while increasing its Total Assets. Accordingly DIMO was able to increase its profitability last 2 years despite facing challenges of the COVID -19 pandemic, current economic conditions and forex loss.

Vertical analysis shows continuous growth in current assets proportion compared to Total Assets and there is a decreasing trend in Non- Current Assets. It reflects Company’s recent trend of short term assets financing via Long Term funds. This working capital conservative approach will be threat to DIMO’s long term profitability. Further it shows sudden decrease in Shareholders’ Equity percentage end of the year 2021/22, it means that Company’s Total Liabilities are in increasing trend.  

As per the Trend Analysis, DIMO shows stable growth for the recent years and it indicates that company was able to manage consequences arising from COVID – 19 pandemic and current adverse economic conditions. But there is a significant increase in Finance Cost and Long term Liabilities in last 2 years. It indicates that Company is heavily depend on Long Term Liabilities and this will be contributed to high insolvent risk. Further, there is a sudden improvement in Intangible assets and Goodwill end of 2021/22.

According to the Ratio Analysis, maintaining a healthy current ratio and quick assets ratio reflect better management of liquidity and working capital of the Company. It shows increasing trend in No. of Days’ uncollected and Days’ Sales in Inventory during recent years, this may be as a result of current financial crisis in the country. Therefore, DIMO should pay attention for the unusual movement in working capital cycle. As previously mentioned that DIMO’s Debt Ratio shows sudden growth end of the year 2021/22 and this leads to heavy debt repayment. Further Times Interest Earned Ratio is also in decreasing trend and this is mainly due to recent increases in finance cost.

Further, Company was able to improve its Return on Assets and Return on Equity and it indicates stability of the Company. Continuous increase in Earning per Share (EPS) and Dividend per Share reflect capacity of the DIMO delivering long term value to its shareholders. Market Ratios do not show continuous growth and there are fluctuations in the market value of the DIMO. Therefore P/E ratio is fluctuating throughout the last 5 years. But there is significant improvement in Dividend Yield because of Company has declared more dividend in recent years and DIMO has able to deliver maximum shareholders return. 

Finally as per Altman’s Z-Score Model, DIMO was at Gray Zone during the first financial years of 2017/18 and 2018/19. This has been converted to below 1.8 Z – Score value during last financial years and there is a possibility to business going bankrupt in the next two years. But considering the current economic and financial crisis situation in Sri Lanka, this position can be expected from all of the companies in Sri Lanka. But as per the above financials, DIMO has a large capacity to face for current economic and financial crisis. Therefore this situation will be improved after normalization of prevailing economic and financial crisis in Sri Lanka.