Royal Ceramics Lanka PLC

 

Chapter 1)     Introduction

The ceramic tile industry has significantly grown during the past few years. The ceramic tile industry consists of wall tiles, floor tiles, vitrified tiles and glazed porcelain tiles. The ceramic tile industry started in Sri Lanka about four decades ago. One of the reasons for the thriving tile industry in Sri Lanka is the availability of kaolin, ball clay, feldspar, silica and quartz-like raw materials for a reasonable cost and purity. And the availability of highly skilled labour, talented designers, chemists, and engineers is another reason.

1.1) Royal Ceramics Lanka PLC – Company overview

 

Royal Ceramics Lanka PLC is one of the leading tile manufacturers in Sri Lanka. "Rocell" and "Lanka Tiles" are brands of the Royal Ceramics Lanka PLC, and they hold a market share of 29% and 37% in the floor tile market and 18% and 74% in the wall tile market in Sri Lanka. Royal Ceramics Lanka PLC commenced its operations in 1991. In 1994, it was listed on the Colombo stock exchange. Royal Porcelain (PVT) Ltd started its operations in 2002, and in 2009, Rocell bathware Ltd began its operations. In 2013, the company acquired a 76.54% stake in Lanka Ceramics PLC, which gave them a market monopoly. And in 2014, they extended their operations to Australia, commencing Rocell Pty Ltd. Currently, major shareholders of the Royal Ceramics Lanka PLC are Vallible One PLC (55.96%) and Employee Provident Fund (13.79%).

Figure 1. 1 – Group overview  

 

 

 

1.2) Income statement of Royal Ceramics Lanka PLC

 

For the year ended in 31st March	2017 Rs	2018 RS	2019 Rs	2020 Rs	2021 Rs
Revenue	3,824,904,597	3,452,289,344	3,794,578,371	6,445,391,264	12,524,229,238
Cost of Sales	(1,881,390,488)	(1,781,547,930)	(2,035,577,804)	(3,190,581,548)	(6,154,224,415)
Gross Profit	1,943,514,109	1,670,741,414	1,759,000,567	3,254,809,716	6,370,004,823
Other Operating Income	1,808,744,248	2,759,287,807	1,039,703,440	1,016,943,520	1,371,431,512
Distribution Expenses	(1,072,067,663)	(1,152,859,721)	(1,465,530,268)	(1,820,150,542)	(2,467,262,882)
Administrative Expenses	(698,556,252)	(477,647,992)	(483,968,806)	(522,865,298)	(470,230,009)
Other Operating Expenses	(105,658,373)	(126,570,224)	(33,268,246)	(224,957,670)	(386,322,226)
Finance Cost	(386,935,417)	(432,815,559)	(543,373,676)	(952,010,995)	(594,353,114)
Finance Income	776,863	7,245,386	12,939,522	17,887,352	55,906,782
Profit Before Tax	1,489,817,515	2,247,381,111	285,502,533	769,656,083	3,879,174,886
Tax (Expense)/Reversal	(130,700,624)	(218,578,316)	(45,938,791)	(122,965,938)	(593,884,701)
Net Profit After Tax from Continuing Operations	1,359,116,891	2,028,802,795	239,563,742	646,690,145	3,285,290,185
Net Profit for the Year	1,359,116,891	2,028,802,795	239,563,742	646,690,145	3,285,290,185

Table 1. 1 – Income statement summary for five years – Royal Ceramics Lanka PLC

 

 

 

 

 

 

 

1.3) The balance sheet of Royal Ceramics Lanka PLC

For the year ended in 31st March	2017 Rs	2018 Rs	2019 Rs	2020 Rs	2021 Rs
ASSETS
Non-Current Assets
Property, Plant & Equipment	4,064,061,352	6,559,706,522	6,889,483,917	8,541,630,807	8,247,816,334
Investments in Subsidiaries	5,157,342,505	6,455,371,724	6,606,999,831	6,623,774,143	6,623,774,153
Investments in Associates	3,162,937,490	3,162,937,490	3,162,937,490	3,162,937,490	3,162,937,490
Intangible Assets	186,756,235	170,970,148	165,899,418	148,658,193	130,000,802
Right of use assets	-	-	-	965,786,742	855,048,508
Other Non-Financial Assets	-	-	-	41,304,331	18,017,371
Deferred Tax Assets	194,858,475	-	-	-	-
	12,765,956,057	16,348,985,884	16,825,320,656	19,484,091,706	19,037,594,658
Current Assets
Inventories	1,198,259,456	1,393,557,918	1,911,791,552	4,623,213,017	2,991,462,493
Trade and Other Receivables	440,408,888	545,300,662	707,392,197	852,509,488	803,747,237
Other Non-Financial Assets	367,189,792	369,085,823	274,093,065	335,512,293	251,664,845
Other Financial Assets	43,981,389	146,927,681	64,758,452	74,240,280	436,932,650
Income Tax Recoverable	52,482,967	55,269,110	36,343,099	-	-
Cash and Cash Equivalents	300,093,303	291,412,641	465,342,403	404,384,949	1,872,231,517
	2,402,415,795	2,801,553,835	3,459,720,768	6,289,860,027	6,356,038,742
Total Assets	15,168,371,852	19,150,539,719	20,285,041,424	25,773,951,733	25,393,633,400
EQUITY AND LIABILITIES
Capital and Reserves
Stated Capital	1,368,673,373	1,368,673,373	1,368,673,373	1,368,673,373	1,368,673,373
Reserves	213,634,264	830,590,905	830,590,905	1,192,935,268	1,360,279,529
Retained Earnings	6,444,556,583	7,466,545,263	7,504,090,806	12,023,044,309	13,783,645,618
Total Equity	8,026,864,220	9,665,809,541	9,703,355,084	14,584,652,950	16,512,598,520
Non-Current Liabilities
Interest Bearing Loans & Borrowings	3,307,021,497	3,314,132,186	2,959,239,861	2,931,564,365	2,219,021,706
Deferred Tax Liabilities	-	398,975,493	410,100,387	678,737,209	687,846,826
Retirement Benefit Liability	208,701,087	245,857,725	261,491,545	432,194,638	482,473,687
	3,515,722,584	3,958,965,404	3,630,831,793	4,042,496,212	3,389,342,219
Current Liabilities
Trade and Other Payables	1,815,044,965	3,278,392,435	4,333,887,953	1,439,970,156	1,436,337,731
Other Current Liabilities	731,378,095	532,632,925	161,136,510	193,591,695	398,836,826
Contract liabilities	-	-	491,392,636	578,821,480	1,671,062,757
Dividend Payable	45,380,246	48,099,339	39,412,622	34,956,963	21,375,705
Income Tax Liabilities	-	-	-	111,120,589	405,458,291
Interest Bearing Loans & Borrowings	1,033,981,742	1,666,640,075	1,925,024,826	4,788,341,688	1,558,621,351
	3,625,785,048	5,525,764,774	6,950,854,547	7,146,802,571	5,491,692,661
Total Equity and Liabilities	15,168,371,852	19,150,539,719	20,285,041,424	25,773,951,733	25,393,633,400

Table 1. 2 – Balance sheet summary for five years – Royal Ceramics Lanka PLC

 

 

Chapter 2)     Analysis of Royal Ceramics Lanka PLC

 

2.1) Purpose of financial statement analysis

The purpose of the financial statements is to provide information about the results of the operations, financial position and cash flows of an organisation. The income statement gives information about the ability of the organisation to generate profit. It consists of the amounts of sales, the nature of various expenses. The balance sheet provides information about the current status of the business. Data from the balance sheet can be used to estimate an organisation's liquidity, funding, and debt position. Lenders use this information to make credit decisions, whether extending or restricting the credit to a business. Investors use this information to decide whether to invest or not. Government entities use this information to make taxation decisions.

2.2) Financial statement analysis techniques

To analyse financial statements, several techniques are used. The main analysis techniques are horizontal analysis, vertical analysis and ratio analysis. The horizontal analysis provides a year to year comparison of a company's performance, the vertical analysis provides a way to compare different companies, and ratio analysis is used to measure the company's performance against other companies in the same industry and identify trends within the company.

 

2.3) Income statement analysis of Royal Ceramics Lanka PLC

 

Base year 2017	2018 % change	2019 % change	2020 % change	2021% change
Revenue	-10%	-1%	69%	227%
Cost of Sales	-5%	8%	70%	227%
Gross Profit	-14%	-9%	67%	228%
Other Operating Income	53%	-43%	-44%	-24%
Distribution Expenses	8%	37%	70%	130%
Administrative Expenses	-32%	-31%	-25%	-33%
Other Operating Expenses	20%	-69%	113%	266%
Finance Cost	12%	40%	146%	54%
Finance Income	833%	1566%	2203%	7096%
Profit Before Tax	51%	-81%	-48%	160%
Tax (Expense)/Reversal	67%	-65%	-6%	354%
Net Profit After Tax from Continuing Operations	49%	-82%	-52%	142%
Net Profit for the Year	49%	-82%	-52%	142%

Table 2. 1 - Horizontal analysis of the income statements of the Royal Ceramics Lanka PLC.

 

for the year ended in 31st March	2017	2018	2019	2020	2021
Revenue	100.00%	100.00%	100.00%	100.00%	100.00%
Cost of Sales	49.19%	51.60%	53.64%	49.50%	49.14%
Gross Profit	50.81%	48.40%	46.36%	50.50%	50.86%
Other Operating Income	47.29%	79.93%	27.40%	15.78%	10.95%
Distribution Expenses	28.03%	33.39%	38.62%	28.24%	19.70%
Administrative Expenses	18.26%	13.84%	12.75%	8.11%	3.75%
Other Operating Expenses	2.76%	3.67%	0.88%	3.49%	3.08%
Finance Cost	10.12%	12.54%	14.32%	14.77%	4.75%
	0.02%	0.21%	0.34%	0.28%	0.45%
Profit Before Tax	38.95%	65.10%	7.52%	11.94%	30.97%
Tax (Expense)/Reversal	3.42%	6.33%	1.21%	1.91%	4.74%
Net Profit After Tax from Continuing Operations	35.53%	58.77%	6.31%	10.03%	26.23%
Net Profit for the Year	35.53%	58.77%	6.31%	10.03%	26.23%

Table 2. 2 - Vertical analysis of the income statements of Royal Ceramics Lanka PLC

 

 

When considering the horizontal analysis for Royal Ceramics Lanka PLC, revenue has declined slightly in 2018 & 2019, compared to the base year 2017. But in 2018, gross profit was reduced by 14%. This is due to the increase in distribution expenses (8%). Although finance cost (40%) and other operating expenses (20%) increased compared to the base year, their contribution to the revenue is around 12%-13%, which can be seen in the vertical analysis. But the net profit of the company was increased by 49%. This is due to an increase in other operating income (53%), which is about 0.9 billion rupees. Although finance income is also increased by 833%, the amount is equal to 7.2 million. 

 In 2019, revenue had been increased, which was almost the same as in 2017, with only a 1% difference. Gross profit was also increased compared to the previous year, but still less than the base year. A considerable margin decreased the net profit of the company, 82%, compared to the base year 2017. This is due to the increase of cost of sales (8%), distribution expenses (37%) and decrease of other operating income (-43%), which have a significant impact on the revenue 53.64%,38.62% & 27.40%, respectively, which can be seen from the vertical analysis.

 In 2020, revenue was increased by 69% compared to the base year. But the net profit has decreased by 52% compared to the base year. This is due to the increase in the cost of sales (70%) and distribution expenses (70%), which are significantly larger compared to the revenue. But the net profit is higher than in the previous year.

And in 2021, revenue has increased by 227% compared to the base year, and net profit also increased by 142%, which indicate that the company has recovered from the drawbacks of the previous years, even in the middle of the Covid 19 pandemic.

 

 

 

 

 

 

 

2.4) Balance sheet analysis of Royal Ceramics Lanka PLC

 

2.4..i)      Horizontal analysis of balance sheets of Royal Ceramics Lanka PLC

Base year 2017	2018	2019	2020	2021
ASSETS	26%	34%	70%	67%
Non-Current Assets	28%	32%	53%	49%
Property, Plant & Equipment	61%	70%	110%	103%
Investments in Subsidiaries	25%	28%	28%	28%
Investments in Associates	0%	0%	0%	0%
Intangible Assets	-8%	-11%	-20%	-30%
Deferred Tax Assets	-100%	-100%	-100%	-100%
Current Assets	17%	44%	162%	165%
Inventories	16%	60%	286%	150%
Trade and Other Receivables	24%	61%	94%	83%
Other Non Financial Assets	1%	-25%	-9%	-31%
Other Financial Assets	234%	47%	69%	893%
Income Tax Recoverable	5%	-31%	-100%	-100%
Cash and Cash Equivalents	-3%	55%	35%	524%
Equity and liabilities
Total Equity	20%	21%	82%	106%
Reserves	289%	289%	458%	537%
Retained Earnings	16%	16%	87%	114%
Non-Current Liabilities	13%	3%	15%	-4%
Interest Bearing Loans & Borrowings	0%	-11%	-11%	-33%
Retirement Benefit Liability	18%	25%	107%	131%
Current Liabilities	52%	92%	97%	51%
Trade and Other Payables	81%	139%	-21%	-21%
Other Current Liabilities	-27%	-78%	-74%	-45%
Dividend Payable	6%	-13%	-23%	-53%
Interest Bearing Loans & Borrowings	61%	86%	363%	51%
Total Equity and Liabilities	26%	34%	70%	67%

Table 2. 3 – Horizontal analysis of balance sheets of Royal Ceramics Lanka PLC

Compared to the base year 2017, total assets have been increased. Property, plant and equipment have been raised by over 100%, which indicates that they have expanded their operations, and 227% revenue growth in 2021 is a result of that expansion. Investments in subsidiaries also increased slightly, while investments in associates have not changed over the course of 5 years.

Inventories have been increased in 2020 & 2021 significantly. This is due to the increase in raw materials and finished goods. Finished goods were increased due to the Covid 19 pandemic. A high amount of raw materials was obtained due to the uncertainty of the supply chain during the Covid 19 pandemic. Cash and cash equivalents also increased significantly.

Total equity also increased by over 100%. Non-current liabilities were reduced by 4%, while current liabilities increased by 51% in 2021, compared to the base year.

 

2.4..ii)   Vertical analysis of balance sheets of Royal Ceramics Lanka PLC

 

for the year ended in 31st March	2017 %	2018 %	2019	2020	2021
ASSETS	100.0%	100.0%	100.0%	100.0%	100.0%
Non-Current Assets	84.2%	85.4%	82.9%	75.6%	75.0%
Property, Plant & Equipment	26.8%	34.3%	34.0%	33.1%	32.5%
Investments in Subsidiaries	34.0%	33.7%	32.6%	25.7%	26.1%
Investments in Associates	20.9%	16.5%	15.6%	12.3%	12.5%
Intangible Assets	1.2%	0.9%	0.8%	0.6%	0.5%
Right of use assets				3.7%	3.4%
Other Non-Financial Assets				0.2%	0.1%
Long Term Receivables				0.0%	0.0%
Deferred Tax Assets	1.3%	0.0%	0.0%	0.0%	0.0%
Current Assets	15.8%	14.6%	17.1%	24.4%	25.0%
Inventories	7.9%	7.3%	9.4%	17.9%	11.8%
Trade and Other Receivables	2.9%	2.8%	3.5%	3.3%	3.2%
Other Non-Financial Assets	2.4%	1.9%	1.4%	1.3%	1.0%
Other Financial Assets	0.3%	0.8%	0.3%	0.3%	1.7%
Income Tax Recoverable	0.3%	0.3%	0.2%	0.0%	0.0%
Cash and Cash Equivalents	2.0%	1.5%	2.3%	1.6%	7.4%
EQUITY AND LIABILITIES
Total Equity	52.9%	50.5%	47.8%	56.6%	65.0%
Capital and Reserves	0.0%	0.0%	0.0%	0.0%	0.0%
Stated Capital	9.0%	7.1%	6.7%	5.3%	5.4%
Reserves	1.4%	4.3%	4.1%	4.6%	5.4%
Retained Earnings	42.5%	39.0%	37.0%	46.6%	54.3%
Non-Current Liabilities	23.2%	20.7%	17.9%	15.7%	13.3%
Interest Bearing Loans & Borrowings	21.8%	17.3%	14.6%	11.4%	8.7%
Deferred Tax Liabilities	0.0%	2.1%	2.0%	2.6%	2.7%
Retirement Benefit Liability	1.4%	1.3%	1.3%	1.7%	1.9%
Current Liabilities	23.9%	28.9%	34.3%	27.7%	21.6%
Trade and Other Payables	12.0%	17.1%	21.4%	5.6%	5.7%
Other Current Liabilities	4.8%	2.8%	0.8%	0.8%	1.6%
contract liabilities	0.0%	0.0%	2.4%	2.2%	6.6%
Dividend Payable	0.3%	0.3%	0.2%	0.1%	0.1%
Income Tax Liabilities	0.0%	0.0%	0.0%	0.4%	1.6%
Interest Bearing Loans & Borrowings	6.8%	8.7%	9.5%	18.6%	6.1%
Total liabilities	47.1%	49.5%	52.2%	43.4%	35.0%
Total Equity and Liabilities	100.0%	100.0%	100.0%	100.0%	100.0%

Table 2. 4 – Vertical analysis of balance sheets of Royal Ceramics Lanka PLC

At first glance, it seems like a capital-intensive company; around 75% - 85% of the total assets are consist of non-current assets. But plant, property and equipment only consist of about 30%. Approximately 50% consists of investments. Equity has increased during the last five years while total liabilities were reduced. High equity indicates more stable finances and more flexibility.

 

 

 

 

 

 

2.5) Ratio analysis

Financial ratios are mathematical comparisons created using values taken from financial statements to understand an organisation.

2.5..i)     Liquidity ratios

These ratios are used to determine the ability of an organisation to pay off its short-term obligations.

2.5.i.(a) Current ratio

For the year ended in 31st March	2017 Rs	2018 Rs	2019 Rs	2020 Rs	2021 Rs
Current assets (Rs)	2,402,415,795	2,801,553,835	3,459,720,768	6,289,860,027	6,356,038,742
Current liabilities (Rs)	3,625,785,048	5,525,764,774	6,950,854,547	7,146,802,571	5,491,692,661
Current ratio	0.66:1	0.51:1	0.50:1	0.88:1	1.2:1

Table 2. 5 – Current ratios of Royal Ceramics Lanka PLC

The current ratio measures a company's ability to pay its current liabilities with its existing assets. According to the above table, the current ratio has been increased during the last five years. Generally, a current ratio between 1.5-3 is considered healthy. But it depends on the industry. A current ratio of less than 1 indicates that the business has liquidity problems. According to the table, the company has been improved, and one can assume that they will reach the acceptable current ratio during the next couple of years.

 

 

 

 

 

 

2.5.i.(b) Acid test ratio

For the year ended in 31st March	2017 Rs	2018 Rs	2019 Rs	2020 Rs	2021 Rs
Current assets (Rs)	2,402,415,795	2,801,553,835	3,459,720,768	6,289,860,027	6,356,038,742
Inventories (Rs)	1,198,259,456	1,393,557,918	1,911,791,552	4,623,213,017	2,991,462,493
Current liabilities (Rs)	3,625,785,048	5,525,764,774	6,950,854,547	7,146,802,571	5,491,692,661
Quick assets (Rs)	1,204,156,339	1,407,995,917	1,547,929,216	1,666,647,010	3,364,576,249
Acid test ratio	0.33:1	0.25:1	0.22:1	0.23:1	0.61:1

Table 2. 6 – Acid test ratios of Royal Ceramics Lanka PLC

The acid test ratio or the quick ratio indicates whether a company can pay their current liabilities if it comes due immediately. This ratio reflects the company's ability to pay its current liabilities using more liquid assets like cash, cash equivalents and short term investments. The company's acid-test ratio was declined at the beginning of the five years of period, but they have improved it to 0.61, which is almost twice the beginning of the period.

2.5..ii)   Solvency ratios

Solvency ratios measure the company's ability to pay long-term debts.

2.5.ii.(a) Debt to asset ratio

For the year ended in 31st March	2017 Rs	2018 Rs	2019 Rs	2020 Rs	2021 Rs
Total liabilities (Rs)	7,141,507,632	9,484,730,178	10,581,686,340	11,189,298,783	8,881,034,880
Total Assets (Rs)	15,168,371,852	19,150,539,719	20,285,041,424	25,773,951,733	25,393,633,400
Debt to asset ratio	47.08%	49.53%	52.16%	43.41%	34.97%

Table 2. 7 – Debt to asset ratios of Royal Ceramics Lanka PLC

The debt to asset ratio shows the number of assets that have been financed with debt. Generally, 30% - 60% debt ratio is acceptable. debt ratios less than 40% is considered better. At the beginning of the five-year period, about 50% of the assets were financed by debts. It was increased until 2019 and then reduced to 34.97% in the last year, which is good. According to the table, they have decreased their financial risk during the last two years.

2.5.ii.(b) Debt to equity ratio

For the year ended in 31st March	2017 Rs	2018 Rs	2019 Rs	2020 Rs	2021 Rs
Total liabilities (Rs)	7,141,507,632	9,484,730,178	10,581,686,340	11,189,298,783	8,881,034,880
Total Equity (Rs)	8,026,864,220	9,665,809,541	9,703,355,084	14,584,652,950	16,512,598,520
Debt to equity ratio	0.89	0.98	1.09	0.77	0.54

Table 2. 8 – Debt to equity ratios of Royal Ceramics Lanka PLC

This ratio shows the proportion of total liabilities relative to total equity. If the debt to equity ratio is greater than 1, the company is financing more assets with debt. If the ratio is less than 1, the company is funding more assets with equity. Here the debt to equity ratio increased until 2019 when the debt to equity ratio was 1; then, from 2020, the company has reduced the debt to equity ratio to 0.53.

2.5.ii.(c) Times interest earned

For the year ended in 31st March	2017 Rs	2018 Rs	2019 Rs	2020 Rs	2021 Rs
EBIT* (Rs)	1,875,976,000	2,672,951,000	815,937,000	1,703,780,000	4,473,528,000
Finance Cost (Rs)	-386,935,417	-432,815,559	-543,373,676	-952,010,995	-594,353,114
Times interest earned	3.85	5.18	0.50	0.79	6.53

Table 2. 9 – Times interest earned ratios of Royal Ceramics Lanka PLC

*EBIT – Earnings before interests and taxes

The times interest earned ratio evaluates a company's ability to pay interest expenses. That means the company's ability to pay its debt obligations based on its current income. It shows how many times a company could cover its interest charges with its pre-tax earnings and has enough cash to continue to invest in the business. At the beginning of the five years, the company was in a good position, but in 2019, their times interest earned ratio declined less than one. Then the company recovered within two years, and now it has 6.52 times interest earned ratio.

 

2.5..iii)  Efficiency ratios

Efficiency ratios are used to analyse a company's ability to use its resources to produce income effectively. The more efficiently a company operates, it is more likely to generate maximum profitability for its shareholders.

2.5.iii.(a) Account receivable turnover ratio

For the year ended in 31st March	2017	2018	2019	2020	2021
Net sales (Rs)	3,824,904,597	3,452,289,344	3,794,578,371	6,445,391,264	12,524,229,238
Avg account receivable (Rs)	492,196,426	492,854,775	626,346,429.5	779,950,842.5	828,128,362.5
Acc receivable turnover(times)	7.77	7.00	6.0	8.26	15.12

Table 2. 10 - Account receivable turnover ratios of Royal Ceramics Lanka PLC

This ratio measures the number of times the company collects the average receivable balance in a year. Higher the ratio, the faster the cash collection. But a more increased value also indicates that credit sales are low, which ultimately causes to loss of good customers. Also, a high account receivable turnover value means that most customers quickly pay their debts and are financially stable. Since 2017, the company has almost doubled their account receivable turnover.

2.5.iii.(b) Inventory turnover ratio

For the year ended in 31st March	2017	2018	2019	2020	2021
Cost of sales (Rs)	(1,881,390,488)	(1,781,547,930)	(2,035,577,804)	(3,190,581,548)	(6,154,224,415)
Avg inventory (Rs)	1,227,143,787	1,295,908,687	1,652,674,735	3,267,502,285	3,807,337,755
Inventory turnover (times)	1.53	1.37	1.23	0.98	1.62

Table 2. 11 – Inventory turnover ratios of Royal Ceramics Lanka PLC

The inventory turnover ratio indicates how many times a company has sold and replaced inventory during a given period. A slow turnover ratio implies low sales, maybe excess inventory, and a faster ratio implies higher sales or insufficient inventory. The speed of sales is critical for a business. The longer the items are held, the higher the holding cost will be. According to the above table, inventory turnover was gradually declined until 2020 and then boosted to 1.62. This is probably due to the import ban imposed by the government on tiles and sanitaryware.

2.5.iii.(c) Days sales uncollected ratio

For the year ended in 31st March	2017	2018	2019	2020	2021
Acc receivables (Rs)	440,408,888	545,300,662	707,392,197	852,509,488	803,747,237
Net sales (Rs)	3,824,904,597	3,452,289,344	3,794,578,371	6,445,391,264	12,524,229,238
Days sales uncollected (days)	42.02699441	57.65297222	68.04396343	48.27728068	23.42401564

Table 2. 12 – Days sales uncollected figures of Royal Ceramics Lanka PLC

This ratio measures how long it will take for the customers to pay their credit balance. A high ratio implies that the company is selling their products to customers on credit and waiting for a long time to collect the money. This could lead to a cash flow problem, where the company do not have enough money to continue their operations. From 2017, days sales uncollected increased, and it peaked in 2019. In that year, the company recorded their lowest net profit. Then the company reduced their days' sales uncollected ratio to 23.42 days, which is almost half the time required in 2017.

2.5.iii.(d) Days sales in inventory

For the year ended in 31st March	2017	2018	2019	2020	2021
Ending Inventory (Rs)	1,198,259,456	1,393,557,918	1,911,791,552	4,623,213,017	2,991,462,493
Cost of sales (Rs)	(1,881,390,488)	(1,781,547,930)	(2,035,577,804)	(3,190,581,548)	(6,154,224,415)
Days sales in inventory (days)	232.4688597	285.5093773	342.8038541	528.8919044	177.4202136

Table 2. 13 – Days sales in inventory figures of Royal Ceramics Lanka PLC

This ratio measures the average number of days inventory is held by the company. A lower ratio is preferred because it indicates the duration of time a company's cash is tied up to its inventory. According to the above table, in 2017, days sales in inventory were around 233 days, almost eight months. It was peaked in 2020, 529 days, probably due to the Covid 19 pandemic. Then in 2021, with the import restrictions and the decline of Covid 19 pandemic, it reaches 177 days, which was the lowest in the five years.

2.5.iii.(e) Total asset turnover

for the year ended in 31st March	2017	2018	2019	2020	2021
Revenue (Rs)	3,824,904,597	3,452,289,344	3,794,578,371	6,445,391,264	12,524,229,238
Avg total assets (Rs)	14,700,154,019	17,159,455,786	19,717,790,572	23,029,496,579	25,583,792,567
Total asset turnover (times)	0.26	0.20	0.19	0.28	0.49

Table 2. 14 – Total asset turnover ratios of Royal Ceramics Lanka PLC

Asset turnover ratio indicates the net sales generated for each average rupee of total assets. This ratio indicates the efficiency of the company. The higher the ratio, the more efficient the company generates revenue from its assets. According to the above graph, in 2017, the asset turnover ratio was 0.26 times. And it declines until 2019, and then again increases. In 2021, the asset turnover ratio was 0.49 times. The company almost doubled their asset turnover ratio.

2.5..iv)  Profitability ratios

Profitability ratios are used to assess a business's ability to generate profits compared to its revenue, operating costs, balance sheet assets or shareholders' equity. Higher ratios are generally more favourable.

2.5.iv.(a) Profit margin

For the year ended in 31st March	2017	2018	2019	2020	2021
Net profit (Rs)	1,359,116,891	2,028,802,795	239,563,742	646,690,145	3,285,290,185
Revenue (Rs)	3,824,904,597	3,452,289,344	3,794,578,371	6,445,391,264	12,524,229,238
Profit margin	35.5%	58.8%	6.3%	10.0%	26.2%

Table 2. 15 – Profit margin ratios of Royal Ceramics Lanka PLC

The profitability margin shows how much a company earns per rupee. Higher the profit margin, more sales end up as profits. According to the above information, the profit margin peaked in 2018. Then it decreased by a considerable margin, and since then it slowly increased. In 2021, it reached 26.2%.

2.5.iv.(b) Gross margin

For the year ended in 31st March	2017	2018	2019	2020	2021
Gross Profit (Rs)	1,943,514,109	1,670,741,414	1,759,000,567	3,254,809,716	6,370,004,823
Revenue (Rs)	3,824,904,597	3,452,289,344	3,794,578,371	6,445,391,264	12,524,229,238
Gross margin	50.8%	48.4%	46.4%	50.5%	50.9%

Table 2. 16 – Gross margin ratios of Royal Ceramics Lanka PLC

The gross margin ratio measures how profitable a company sells its inventory. Unlike in the profit margin ratio, here, only the cost of goods sold is considered. Higher the ratio, the more profitable the company. Generally, a gross profit margin ratio of 50 % 70% is deemed to be healthy. According to the above table, the gross margin has not changed much during the last five years.

2.5.iv.(c) Return on total assets (ROA)

For the year ended in 31st March	2017	2018	2019	2020	2021
Net profit (Rs)	1,359,116,891	2,028,802,795	239,563,742	646,690,145	3,285,290,185
Avg. Total assets (Rs)	14700154019	17159455786	19717790572	23029496579	25583792567
ROA	9.2%	11.8%	1.2%	2.8%	12.8%

Table 2. 17 – Return on total assets ratios of Royal Ceramics Lanka PLC

Return on total assets measures the company's net profit relative to its total assets. It shows how effectively a company is using their assets to generate revenue. The greater a company's return on total assets, the more effectively that company is using its assets. According to the above table, return on total assets was declined after 2018 and then again recovered in the following years, increasing up to 12.8%. Generally, a return on total assets over 5% is considered good.

 

2.5.iv.(d) Return on common shareholders equity (ROE)

For the year ended in 31st March	2017	2018	2019	2020	2021
Net profit (Rs)	1,359,116,891	2,028,802,795	239,563,742	646,690,145	3,285,290,185
Avg equity (Rs)	7,842,739,228	8,846,336,881	9,684,582,313	12,144,004,017	15,548,625,735
ROE	17.3%	22.9%	2.5%	5.3%	21.1%

Table 2. 18 – Return on common shareholders equity ratios of Royal Ceramics Lanka PLC

This ratio shows the relationship between net income available to common shareholders and their average common equity invested in the company. It shows how much income is generated for each rupee invested by the common shareholders. Although the ROE ratio reduced in 2019, it has recovered during the next two years.

2.5.iv.(e) Book value per common share

For the year ended in 31st March	2017	2018	2019	2020	2021
Equity (Rs)	8,026,864,220	9,665,809,541	9,703,355,084	14,584,652,950	16,512,598,520
No. Of shares	110,789,384	110,789,384	110,789,384	110,789,384	1,107,893,840
Book value per common share (Rs)	72.45	87.24	87.58	131.64	14.90
Adjusted value (Rs)	7.25	8.72	8.76	13.16	14.90

Table 2. 19 – Book value per common share values of Royal Ceramics Lanka PLC

Book value per common share represents the minimum value of a company's equity and measures the book value of a firm per share. Investors use this ratio to measure whether a company's share price is overvalued or undervalued. If the book value is higher than the share price, the share is undervalued. If the book value is less than the share price, it is overvalued. In 2021, the company split their share in a 1:10 ratio, increasing the number of shares by ten times. Therefore, book value has been readjusted according to the new number of shares. According to the adjusted book values, it has been gradually increased every year.

 

2.5.iv.(f) Earnings per share (EPS)

For the year ended in 31st March	2017	2018	2019	2020	2021
Net profit (Rs)	1,359,116,891	2,028,802,795	239,563,742	646,690,145	3,285,290,185
No. Of shares	110,789,384	110,789,384	110,789,384	110,789,384	1,107,893,840
EPS (Rs)	12.26	18.3	2.16	5.8	2.96
Adjusted EPS (Rs)	1.23	1.83	0.22	0.58	2.96

Table 2. 20 – Earnings per share values of Royal Ceramics Lanka PLC

Earnings per share shows the net profit or loss for each share. The higher a company's EPS, the more profitable the company is. Here the EPS is adjusted for the 1:10 share split, and after 2018, it has decreased, and in the following years, it increased again, surpassing the previous higher EPS value of 1.83.

2.5..v)     Market ratios

Market ratios are used to evaluate the current share price of a listed company's stock. These ratios are used by investors to determine whether a company's shares are overvalued or undervalued.

2.5.v.(a) Price-earnings ratio (P/E ratio)

For the year ended in 31st March	2017	2018	2019	2020	2021
Market price per share	119	105.4	59	55.9	25.7
EPS	12.26757	18.31225	2.162335	5.837113	2.965347
P/E ratio	9.70037	5.75571	27.28532	9.576652	8.666775

Table 2. 21 – Price to earnings ratios of Royal Ceramics Lanka PLC

The price to earnings ratio measures its current share price relative to its earnings per share. A high ratio indicates that the share is overvalued, or investors expect a high growth rate in the future. It suggests the rupee amount an investor can expect to invest in a company to receive one rupee. Here P/E ratio hit the maximum of 27.28 in 2019, and then it started to decline. It shows that the investors have lost their interest in the Royal Ceramics Lanka PLC stocks.

 

 

2.5.v.(b) Dividend yield ratio

For the year ended in 31st March	2017	2018	2019	2020	2021
Annual Dividend per share	9	7	4	0	1.4
Market price per share	119	105.4	59	55.9	25.7
Dividend yield ratio	7.6%	6.6%	6.8%	0.0%	5.4%

Table 2. 22 – Dividend yield ratios of Royal Ceramics Lanka PLC

The dividend yield ratio shows how much a company pays a dividend each year relative to its share price. According to the above table, the dividend yield has decreased, and in 2020, no dividend is paid, probably due to the Covid 19 pandemic. However, in 2021, it increased up to 5.4%.

2.6) Financial ratio summary

Ratio	2017	2018	2019	2020	2021
Liquidity ratios
Current ratio	0.66:1	0.51:1	0.50:1	0.88:1	1.2:1
Acid test	0.33:1	0.25:1	0.22:1	0.23:1	0.61:1
Solvency ratios
Debt to asset ratio	0.47	0.50	0.52	0.43	0.35
Debt to equity ratio	0.89	0.98	1.09	0.77	0.54
Times interest earned	3.85	5.18	0.50	0.79	6.53
Plant assets to long term liabilities	1.2:1	1.7:1	1.9:1	2.1:1	2.4:1
Efficiency ratios
Account receivable turnover ratio	7.77	7.00	6.06	8.26	15.12
Inventory turnover ratio	2	1	1	1	2
Days sales uncollected ratio	42.02	57.65	68.04	48.28	23.42
Days sales in inventory	232.47	285.51	342.80	528.89	177.42
Total asset turnover	0.26	0.20	0.19	0.28	0.49
Profitability ratios
Profit margin	35.50%	58.80%	6.30%	10.00%	26.20%
Gross margin	50.80%	48.40%	46.40%	50.50%	50.90%
Return on total assets	9.20%	11.80%	1.20%	2.80%	12.80%
Return on common shareholders equity	17.30%	22.90%	2.50%	5.30%	21.10%
Book value per share	72.45	87.24	87.58	131.64	14.90
Earnings per share	12.27	18.31	2.16	5.84	2.97
Market ratios
Price-earnings ratios	9.70	5.76	27.29	9.58	8.67
Dividend yield ratio	7.60%	6.60%	6.80%	0.00%	5.40%

Table 2. 23 – Financial ratios summary of Royal Ceramics Lanka PLC

2.7) Altman’s Z score model

Altman's Z score model is a measurement that is used to predict the chances of a business going bankrupt in the next two years. It is considered an effective method of predicting the financial distress of any organisation using a few balance sheet values and income. The lower the z score, the higher the chances of heading for bankruptcy. A z score lower than 1.8 indicates a higher probability of going bankrupt. A score above 3 means it is highly unlike to go bankrupt. Between 1.8 – 3 suggests a moderate chance of going bankrupt. Here the company was in the distress zone from 2018 to 2020. And in 2021, the company reaches the safe zone, indicating that the company is now in a much stronger financial position.

Altman’s Z-score model formula

	2017	2018	2019	2020	2021
T1	-0.096783169	-0.170702924	-0.206524623	-0.039898075	0.040845486
T2	0.594815271	0.545841711	0.517905136	0.653072614	0.759918975
T3	0.408133507	0.460599985	0.132737816	0.218145594	0.581352112
T4	1.107659954	0.738694777	0.370635083	0.33209194	1.923618502
T5	0.251910998	0.180090854	0.186875822	0.249823773	0.492710311
z	2.265736561	1.754524403	1.001629234	1.413235846	3.798445386

Table 2. 24 – Altman's Z score table of Royal Ceramics Lanka PLC

Figure 2. 1 – Altman's Z score values graph

Chapter 3)     Summary

 

When looking at the five-year summary of Royal Ceramics Lanka PLC, it is visible that the company is thriving. In the last two years, they almost doubled their revenue, which is remarkable. When considering the year 2019, revenue is almost the same as the base year, but the cost of sales was increased by 8%, and distribution expenses were increased by 37%. And other operating income was reduced by 43%. These massive changes reduced the net profit by 82%. But then they gradually recovered, and in the last year, they increased their net profit by 142%. And around 50% of the total assets are investments in subsidiaries and associates. By doing this, they could save on their taxes. The parent company can file a consolidated tax return and use losses from a failing subsidiary to offset income from other subsidiaries. And keeping each company separate allows the parent company to sell their unprofitable subsidiaries without taking a hit on their financial position. And all the financial ratios were also improved in the last year, which indicates the company's strong financial position. When Altman's Z-score model was considered, the company was in distress zone until 2020. In 2021, the company reached the safe zone above 3.0. This also indicates that the Royal Ceramics Lanka PLC is now much stronger.