Royal Ceramics Lanka Plc

 

1           Executive Summary

Royal Ceramics Lanka Plc is a public quoted company listed in the Colombo Stock Exchange. It’s a manufacturer of homogeneous porcelain tiles, ceramic tiles and sanitary ware in Sri Lanka. Their brand “Rocell” holds the market leadership position in the surface covering and bath ware industry in Sri Lanka. It operates through major segments such as manufactures and distribution of wall tiles, floor tiles and related products, sanitary ware products, cultivation, processing and sale of tea and rubber, manufacturing and distribution of packing materials. They also engage in manufacturing and distribution of extrusions and allied products and provide financial solutions. The other segments involves in supply of raw materials to the ceramic industry and provision of consumer, retail, life style, healthcare and transportation.

Financial Statement Analysis is a method of reviewing and analyzing a company’s financial statements in order to overview its past, present, or projected future performance. It involves reviewing the financial statements of an organization to gain an understanding of its financial situation. Financial statements usually include a balance sheet, income statement, statement of cash flows and supplementary notes. The main purpose of financial statement analysis is to utilize information about the past performance of the company in order to predict how it will fare in the future. Tools and techniques used in financial analysis include ratio analysis, trend analysis, horizontal analysis, vertical analysis or common sized financial statement analysis. Financial statement analysis is crucial for complying with business laws and regulations, while also meeting the needs of stakeholders and various other parties.

.This report will explain the Liquidity position, Profitability, financial position and performance of the Royal Ceramics Lanka PLC during the five years from 2018 to 2022 using company annual reports. The analysis is based on the data obtained from the published financial reports for the company from 2018 to 2022. Data were analyzed using vertical, trend, horizontal, and ratio analysis. Based on the calculations the interpretations have been made.

 

2           Analysis Overview

Royal Ceramics Lanka PLC (Rocell) is one of the leading conglomerates in the country with a presence in manufacturing, agriculture and mining sectors. It has a growing portfolio of diverse strategic businesses and widening presence along the construction sector. It has a global presence and is mainly engaged in business activities in Japan, Singapore, New Zealand, Taiwan, Pakistan, Nepal, USA, Sweden, England, Netherlands, Maldives, and Seychelles.

Royal Ceramics was incorporated in 1990 and it was listed in Colombo Stock Exchange in 1994. Royal Porcelain (Pvt) Ltd and Rocell Bath ware Ltd, being the Subsidiaries of the company, commenced their operations in 2002 and in 2009 respectively. In 2014, Rocell Pty Ltd was incorporated in Australia as a part of international expansion. In 2017 Lanka Wall tiles PLC was brought under the direct control of Royal Ceramics. From the year 2010 onwards it has acquired other businesses such as Delmege Forsyth and Lanka Ceramics PLC. With the acquisition of Lanka Ceramics PLC, Royal Ceramics became a monopoly over the tile market in Sri Lanka. Royal Ceramics was included in the annual Forbes financial magazine's list of the top 200 Asian firms with sales under a billion US dollars, during the year 2010. Today they have a market capitalization of Rs. 45 Billion. Currently, their financial capital is funded by Rs.51 billion from shareholders and Rs. 35 billion from debt. The company has 8859 employees at present and almost 40 manufacturing facilities.

Vision

To continue to be the leader in the surfacing industry locally and to enter and impact the global market.

Mission

“To offer state of the art surfacing solutions to home and commercial builders with products and services that transcend the highest quality, ensuring customer satisfaction by matching all expectations, growing the market by way of product innovation, thereby enhancing shareholder wealth, developing our human resources to excelling latitudes such that Royal Ceramics exudes a stance of excellence”

3           Evidential Matter

In this section the financial statements of Royal Ceramics Lanka PLC has been analyzed using trend analysis, horizontal analysis, vertical analysis, and finally ratio analysis. All the data for 2018-2022 period has been collected from company annual reports.

3.1         Trend Analysis

Trend analysis is used to reveal patterns in data covering successive periods. In many cases, it is important to examine changes over a specific period because this enables the evaluation of emerging trends that may influence performance in future years. It is a useful tool to evaluate the trend situations. The five-year summary of selected financial data, as found in all annual reports, is useful in this regard. Essentially, one year is selected as the base year and is set to 100%. All other years are represented as a percentage of the base year.

Base Year 2017.

	2022	2021	2020	2019	2018
ASSETS
Non-Current Assets
Property, Plant and Equipment	245%	203%	210%	170%	161%
Investments in Subsidiaries	130%	128%	128%	128%	125%
Investments in Associates	110%	100%	100%	100%	100%
Intangible Assets	62%	70%	80%	89%	92%
Deferred Tax Assets	0%	0%	0%	0%	0%
Total Non-Current Assets	165%	149%	153%	132%	128%
Current Assets
Inventories	243%	250%	386%	160%	116%
Trade and Other Receivables	123%	146%	194%	161%	124%
Other Non-financial Assets	133%	69%	91%	75%	101%
Other Financial Assets	97%	993%	169%	147%	334%
Income Tax Recoverable	0%	0%	0%	69%	105%
Cash and Cash Equivalents	2414%	624%	135%	155%	97%
Total Current Assets	471%	265%	262%	144%	117%
Total Assets	214%	167%	170%	134%	126%
EQUITY AND LIABILITIES
Capital and Reserves
Stated Capital	100%	100%	100%	100%	100%
Reserves	1291%	637%	558%	389%	389%
Retained Earnings	241%	214%	187%	112%	116%
Total Equity	245%	206%	182%	118%	120%
Non-Current Liabilities
Interest Bearing Loans and Borrowings	50%	67%	89%	89%	100%
Retirement Benefit Liability	247%	231%	207%	125%	118%
Total Non-current Liabilities	90%	96%	115%	100%	113%
Current Liabilities
Trade and Other Payables	79%	67%	79%	258%	181%
Other Current Liabilities	59%	55%	26%	22%	73%
Dividend Payable	115%	47%	77%	87%	106%
Interest Bearing Loans and Borrowings	148%	151%	463%	186%	161%
Total Current Liabilities	265%	151%	197%	202%	152%
Total Liabilities	179%	124%	157%	152%	133%
Total Equity and Liabilities	214%	167%	170%	134%	126%

Table 1 Trend Analysis- Statement of Financial Position

According to the trend analysis in statement of financial position several trend can be identified.

Total Assets have increased throughout the five year period against the base year. This shows a positive trend. The non-current assets have increased mainly due to the increase in property plant and equipment. Investment in subsidiaries and investment in associates show 0% trend percentage during the three years from 2019 to 2021 prior to the sudden increase in the year 2022. The differed tax asset show neither increase nor decrease against the base year. Intangible assets however shows a declining trend because it has declined over the years. the most significant trend percentage in current assets is the cash and cash equivalents as it shows a trend percentage of 2414%. Inventory and Trade receivables show a much volatile trend compared to other figures.

Total equity and liability has also shown a growth trend. Stated capital has shown 100% trend percentage which implies there have been no change from the base year 2017. Another important observation is that there is a higher growth in reserves. Reserves has accumulated rapidly which is the main contributor to the growth in equity compared to retained earnings. Retained earnings have an increasing trend over the period of analysis even though it has declined in the year 2019 compared to base year.

Both long term and short term interest bearing loan first show an increasing trend which has afterwards become a declining one. Total Non-current liabilities have a peak in the year 2020 and after that point it has a decreasing trend.

 

	2022	2021	2020	2019	2018
Revenue	376%	327%	169%	99%	90%
Cost of Sales	359%	327%	170%	108%	95%
Gross Profit	392%	328%	167%	91%	86%
Other Operating Income	165%	77%	56%	57%	153%
Distribution Expenses	228%	230%	170%	137%	108%
Administrative Expenses	89%	69%	75%	69%	68%
Other Operating Expenses	70%	366%	213%	31%	120%
Finance Cost	77%	154%	246%	206%	112%
Finance Income	37563%	7196%	2303%	1666%	933%
Profit Before Tax	501%	260%	52%	2%	151%
Tax Expense	824%	454%	94%	-19%	167%
Profit for the Year	470%	242%	48%	4%	149%
Basic Earnings Per Share	47%	24%	48%	4%	149%
Dividend per share	47%	16%	44%	22%	100%
Statement of Comprehensive Income
Net Profit for the Year	470%	242%	48%	4%	149%
Actuarial (Loss)/Gain on Retirement Benefit Liability	-229%	-317%	191%	-252%	196%
Other Comprehensive Income/(Loss) for the Year, net of tax	-28446%	-3694%	191%	-252%	-12255%
Total Comprehensive Income for the Year, net of tax	576%	256%	47%	5%	195%

Table 2 Trend Analysis- Statement of Profit or Loss

In the statement of profit or loss important trends can be recognized with respect to revenue, cost of sales, finance income and net profits. Both revenue and cost of sales have a growth trend. However the gross profit has also shown a growth trend regardless of the increasing trend in cost of sales which implies that the growth in revenue has outpaced the growth in cost of sales.. In the year 2021 both revenue and cost of sales show the same trend percentage compared to the base year which indicated that revenue and cost of sales have almost increased by the same magnitude. It shows that they have an approximately similar trend over the period of analysis. Administrative expenses and Distribution expenses have increased against the base year while other expenses and finance cost have a comparatively lower trend percentage than their prior years. The finance income has pulled the trend upwards by a significant amount in the year 2022. Regardless of the lower trend percentage recorded in 2019, the net profits have increased compared the base year 2017 which shows a positive trend which is a good sign for the company.

3.2         Vertical Analysis

Vertical analysis is also known as common size financial statement analysis. Vertical analysis uses percentages to compare individual components of financial statements to a key statement figure.  In the income statement all items are expressed as a percentage of sales while in the balance sheet all items are expressed as a percentage of total assets.

It helps to understand which factors are contributing to profit margins and whether profitability is improving over time. It thus becomes easier to compare the profitability of a company with its peers. This is because it shows the relative proportions of account balances.

 

ASSETS	2022	2021	2020	2019	2018
Non-Current Assets
Property, Plant and Equipment	31%	32%	33%	34%	34%
Investments in Subsidiaries	21%	26%	26%	33%	34%
Investments in Associates	11%	12%	12%	16%	17%
Intangible Assets	0%	1%	1%	1%	1%
Deferred Tax Assets	0%	0%	0%	0%	0%
Right of Use Assets	3%	3%	4%	0%	0%
Other Non-financial Assets	0%	0%	0%	0%	0%
Total Non-current Assets	65%	75%	76%	83%	85%
Current Assets
Inventories	9%	12%	18%	9%	7%
Trade and Other Receivables	2%	3%	3%	3%	3%
Amounts Due from Related Parties	0%	1%	0%	0%	0%
Other Non-Financial Assets	2%	1%	1%	1%	2%
Other Financial Assets	0%	2%	0%	0%	1%
Income Tax Recoverable	0%	0%	0%	0%	0%
Cash and Cash Equivalents	22%	7%	2%	2%	2%
Total Current Assets	35%	25%	24%	17%	15%
Total Assets	100%	100%	100%	100%	100%
EQUITY AND LIABILITIES
Capital and Reserves
Stated Capital	4%	5%	5%	7%	7%
Reserves	9%	5%	5%	4%	4%
Retained Earnings	48%	54%	47%	36%	39%
Total Equity	61%	65%	57%	47%	50%
Non-Current Liabilities
Interest Bearing Loans and Borrowings	5%	9%	11%	15%	17%
Deferred Tax Liabilities	3%	3%	3%	2%	2%
Retirement Benefit Liability	2%	2%	2%	1%	1%
Total Non-Current Liabilities	10%	13%	16%	17%	21%
Current Liabilities
Trade and Other Payables	4%	5%	6%	23%	17%
Amounts Due to Related Parties	0%	1%	0%	0%	0%
Other Current Liabilities	1%	2%	1%	1%	3%
Contract Liability	17%	7%	2%	2%	0%
Dividend Payable	0%	0%	0%	0%	0%
Income Tax Liabilities	2%	2%	0%	0%	0%
Interest Bearing Loans and Borrowings	5%	6%	19%	9%	9%
Total Current Liabilities	30%	22%	28%	36%	29%
Total Liabilities	39%	35%	43%	53%	50%
Total Equity and Liabilities	100%	100%	100%	100%	100%

Table 3 Vertical Analysis- Statement of Financial Position

The common size analysis from a balance sheet perspective provides insight into a firm’s capital structure and how it compares to its rivals. Then, we can conclude whether the debt level is too high, excess cash is being retained on the balance sheet, or inventories are growing too high.

Out of the total assets, 31% is property plant and equipment and 9% for inventory in the year 2022. It can be identified that this is the case for other years as well where property plant and equipment holds a larger percentage of total assets compared to other assets in the company. In current assets cash and cash equivalents hold a higher percentage than other items which is 22% in 2022. This percentage throughout the years can be viewed as an adequate proportion of total assets which is not too less that could put the company in liquidity problems and not too much which could indicate the company having tied its cash at the expense of investment opportunities.

According to the vertical analysis of Total equity and liabilities position it can be noticed that composition of assets, liabilities, and shareholders’ equity accounts changed from 2018 to 2022. Out of the total equity and liability values for year 2022, 61% is for equity, 10% for non – current liabilities and 30% for current liabilities. In the year 2018 both total liabilities and total equity as a percentage of total assets is 50%. This shows that during that year company’s total assets have been financed by both debt and equity sources equally. Comparatively in the year 2019 the equity percentage has decreased to 47% out of total assets which in turn gives 53% to total liabilities. This could imply that the company was relatively high geared during 2019 compared to other periods. However the total equity as a percentage of total assets have exceeded the percentage of total liabilities as a percentage of total assets in the following years. Accordingly the higher equity percentages of 61%, 65%, and 57% respectively for 2020, 2021, and 2022 could indicate good financial health for the company.

 

	2022	2021	2020	2019	2018
Revenue	100%	100%	100%	100%	100%
Cost of Sales	-47%	-49%	-50%	-54%	-52%
Gross Profit	53%	51%	50%	46%	48%
Other Operating Income	21%	11%	16%	27%	80%
Distribution Expenses	-17%	-20%	-28%	-39%	-33%
Administrative Expenses	-4%	-4%	-8%	-13%	-14%
Other Operating Expenses	-1%	-3%	-3%	-1%	-4%
Finance Cost	-2%	-5%	-15%	-21%	-13%
Finance Income	2%	0%	0%	0%	0%
Profit Before Tax from Continuing Operations	52%	31%	12%	1%	65%
Tax Expense	-7%	-5%	-2%	1%	-6%
Profit for the Year	44%	26%	10%	2%	59%
Basic Earnings Per Share	0%	0%	0%	0%	0%
Dividend per share	0%	0%	0%	0%	0%
Statement of Comprehensive Income
Net Profit for the Year	44%	26%	10%	2%	59%
Revaluation of Land and Building	10%	1%	0%	0%	18%
Actuarial (Loss)/Gain on Retirement Benefit Liability	0%	0%	0%	0%	0%
Other Comprehensive Income/(Loss) for the Year, net of tax	10%	1%	0%	0%	18%
Total Comprehensive Income for the Year, net of tax	54%	28%	10%	2%	76%

Table 4 Vertical analysis- Statement of Profit or Loss

According to the common size analysis of income statement it can be identified that in general, the expenses as a percent of net sales has decreased over time, while profit figures as a percent of net sales has increased over time. The distribution expenses and administrative expenses have decline to 17% and 4% as a percentage of sales respectively in which is lower compared to previous years. The most notable change in the common size analysis in the income statement is that the net profit and gross profit as a percentage of sales (Gross profit margin and Net profit margin) have significantly increased in the year 2022. The net operating income or earnings after interest and taxes represent 44% of the total revenues, and it shows the health of the business’s core operating areas. The net income can be compared to the previous year’s net income to see the company’s performance year-on-year. Accordingly the net income as a percentage of revenue has increased for royal ceramics PLC for the past years indicating higher performance from year to year. This could make the company attractive to investors.

3.3         Horizontal Analysis

Horizontal analysis refers to studying the behavior of individual financial statement items over several accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the base year. Horizontal analysis shows a company's growth and financial position changes in year to year.

 

 

ASSETS	2022	2021	2020	2019	2018
Non-Current Assets
Property, Plant and Equipment	145%	103%	110%	70%	61%
Investments in Subsidiaries	30%	28%	28%	28%	25%
Investments in Associates	10%	0%	0%	0%	0%
Intangible Assets	-38%	-30%	-20%	-11%	-8%
Deferred Tax Assets	-100%	-100%	-100%	-100%	-100%
Total Non-Current Assets	65%	49%	53%	32%	28%
Current Assets
Inventories	143%	150%	286%	60%	16%
Trade and Other Receivables	23%	46%	94%	61%	24%
Other Non-Financial Assets	33%	-31%	-9%	-25%	1%
Other Financial Assets	-3%	893%	69%	47%	234%
Income Tax Recoverable	-100%	-100%	-100%	-31%	5%
Cash and Cash Equivalents	2314%	524%	35%	55%	-3%
Total Current Assets	371%	165%	162%	44%	17%
Total Assets	114%	67%	70%	34%	26%
EQUITY AND LIABILITIES
Capital and Reserves
Stated Capital	0%	0%	0%	0%	0%
Reserves	1191%	537%	458%	289%	289%
Retained Earnings	141%	114%	87%	12%	16%
Total Equity	145%	106%	82%	18%	20%
Non-Current Liabilities
Interest Bearing Loans and Borrowings	-50%	-33%	-11%	-11%	0%
Retirement Benefit Liability	147%	131%	107%	25%	18%
Total Non-Current Liabilities	-10%	-4%	15%	0%	13%
Current Liabilities
Trade and Other Payables	-21%	-33%	-21%	158%	81%
Other Current Liabilities	-41%	-45%	-74%	-78%	-27%
Dividend Payable	15%	-53%	-23%	-13%	6%
Interest Bearing Loans and Borrowings	48%	51%	363%	86%	61%
Total Current Liabilities	165%	51%	97%	102%	52%
Total Liabilities	79%	24%	57%	52%	33%
Total Equity and Liabilities	114%	67%	70%	34%	26%

Table 5 Horizontal Analysis- Statement of Financial Position

Horizontal analysis typically shows the changes from the base period in dollar and percentage. According to the horizontal analysis conducted in the statement of financial position, the year to year changes in assets, equity and liabilities against the base year can be seen. In the year 2022 total assets have increased by 114%. In the same year equity has increased by 145% and total liabilities by 79%.

Total assets increased by 114% as supported by growth in cash and cash equivalents and property, plant and equipment. In non-current assets, property plant and equipment has increased by 145% and by 110% in 2022 and 2020. This is because the company has decided to invest Rs. 3.4Bn in acquisition of PPE across all sectors for which Rs. 1.1Bn was invested in acquisition of plant & machinery. In current assets inventories have increased in 2022 by 143% and a 286% increase in inventory has been recorded in 2020. This drastic year to year increase in inventory has made the company management to continuously focus on reducing inventory levels. An important observation can be made with regard to trade receivables of the company. Trade receivables have shown a gradual increase by year to year until a dramatic increase by 94% in 2020 which has further highlighted the need to accelerate collection of outstanding debts. However the trade receivables have only increased by 23% in 2022. Cash and cash equivalents have increased by 2314% in 2022. Cash balances increased as most of the business was done on cash sales. Overall the total current assets of the company has more than doubled year by year consecutively after 2019.

The long term interest bearing loans have decreased from year to year by a considerable percentage. In the year 2022 it has declined by 50% than base year. According to the Annual report of 2021/2022, this is due to the company’s decision to enhance their margins by repaying its debt and reduce finance costs. Equity has increased in the recent years of the analysis period. This is because of the company policy to strengthen its balance sheet with equity increasing by 145% with increased retained earnings and revaluation reserves.

3.4         Ratio Analysis

Ratio analysis is the comparison of line items in the financial statements of a business. Ratio analysis is used to evaluate a number of issues in an organization, such as its liquidity, efficiency of operations, and profitability.

3.4.1        Liquidity Ratios

Liquidity Ratios measure a company's ability to pay off its short-term debts as they become due, using the company's current or quick assets. Liquidity ratios include the current ratio, quick ratio, and working capital ratios.

Current Ratio

The current ratio measures a company’s short-term debt paying ability. It is a frequently used ratio to measure the company’s liquidity as it is an easy measure to understand the relationship between the current assets and current liabilities. 

 

 

 

Year	2022	2021	2020	2019	2018
Current ratio	1.18	1.16	1.2	1.23	1.31

Table 6 Current Ratio

According to the annual reports of the company from 2019, the current ratio of the company has declined because the investment in working capital of the company decreased. Nevertheless the company has been able to maintain a current ratio greater than 1 throughout the years. The improvement in current ratio from 2021 to 2022 is mainly due to the increase in customer advances for tiles reflecting the strong line of projects in hand. However according to industry standards an ideal current ratio for Royal Ceramics PLC would be 2:1. Therefore the company should further improve their current ratio.

Quick Ratio

Quick assets include Cash, Current Marketable Securities, and Accounts Receivable. 
This ratio measures a company’s ability to meet obligations without having to liquidate inventory. Sometimes current assets may contain huge amounts of inventory. This may affect the current ratio interpretations as these are not very liquid. To address this issue, we consider the most liquid assets like Cash and Cash equivalents and Receivables, then it should provide us with a better understanding of the coverage of short-term obligations.

 

Year	2022	2021	2020	2019	2018
Quick ratio	0.88	0.61	0.33	0.39	0.47

Table 7 Quick Ratio

The quick ratio of the company has also declined in the initial years and afterwards it has improved in 2021 and 2022. This is due to the improvement in cash and cash equivalents as sales orders have increased at an accelerating pace during the year. According to the industry norms a quick ratio of 1:1 would be ideal for the company. Therefore the quick ratio should also be improved.

Inventory Turnover and Accounts Receivable Turnover

Inventory Turnover ratio measures how many times a company’s inventory has been sold and replaced during the year. A lower inventory turnover ratio means that the company is taking longer to process its inventory to finished goods. This ratio helps to make decisions in a variety of areas, including pricing, manufacturing, and marketing, purchasing and warehouse management.

Accounts Receivable Turnover ratio measures how many times a company converts its receivables into cash each year.

A lower Accounts receivable ratio would mean that the company takes too long to convert their receivables in to cash. Such situations could put the company in severe liquidity positions.

Apart from these two ratios the inventory days and days to collect receivables can also be calculated to provide a better understanding on how long it takes the company to convert inventory in to sales as well as to collect cash from their receivables. Table 8 has summarized these calculations.

Year	2022	2021	2020	2019	2018
Inventory Turnover	2.29	1.62	1.86	2.15	1.37
Accounts Receivable Turnover	24.24	16.75	8.26	6.06	7.00
Inventory Turnover Days	159.51	225.81	373.80	296.34	265.50
Average Days to Collect Receivables	15.06	21.79	44.17	60.25	52.11

Table 8 Inventory Turnover and Accounts Receivable Turnover

At Royal ceramics lanka PLC their inventory turnover ratio is at a lower level compared to its industry peers. This indicates that the number of times their inventory turns to sales is relatively lower compared to others. The company’s inventories have increased in line with increased production and decision to increase stock levels to manage the volatility and uncertainty. For an example the inventory turnover ratio at the company from 2018-2021 has been around 2 which implies their inventory was converted to sales only about 2 times during a year. This is also explaining the high levels of inventory in the company. Even though it has increased up to 2 times per year in 2022 this ratio should be improved further. Moreover the days to sell inventory also indicates that inventories are kept relatively for a longer period. In 2022 it takes almost 160 days for inventory to turn into sales.

Accounts Receivable Turnover ratio for Royal Ceramics show that it has increased over time. This has been mostly due to the increase in credit sales. It has become 24 times in 2022. The average days to collect cash from receivables has decreased in 2022 because the times cash collected from debtors has increased compared to previous year.

3.4.2        Solvency Ratios

Also called financial leverage ratios, these compare a company's debt levels with its assets, equity, and earnings, to evaluate the likelihood of a company survival over the long run, by paying off its long-term debt as well as the interest on its debt.

 

Debt to Assets Ratio

This ratio measures the percentage of a company’s assets that are financed by debt. This information can reflect how financially stable a company is. The higher the ratio, the higher the degree of leverage and, consequently, the higher the risk of investing in that company.

 

 

Year	2022	2021	2020	2019	2018
Debt-Assets Ratio	0.39	0.35	0.43	0.53	0.50

Table 9 Debt to Assets Ratio

This ratio shows the degree to which, company has used debt to finance its assets. Royal ceramics Lanka PLC has been able to maintain this ratio around and below 0.5, meaning that a greater portion of a company's assets is funded by equity. In the year 2019 the debt to asset ratio has risen to 0.53. The increase has been primarily driven by the expansion in the borrowing base. In contrast it has become 0.35 in 2021 which is relatively lower among other years due to the decline in interest bearing debt. This will be a favorable condition to determine whether additional loans will be extended to the firm in future.

Debt to Equity Ratio

The Debt to Equity Ratio or leverage ratio calculates how much the company uses debt as compared to its equity. This is an important ratio as it provides the company’s ability to pay off debt using its own capital. A lower ratio is generally considered better as it shows greater asset coverage of liabilities with its own capital.

 

Year	2022	2021	2020	2019	2018
Debt-Equity Ratio	0.65	0.54	0.77	1.15	0.98

Table 10 Debt to Equity Ratio

The company’s debt to equity ratio has declined from 2019-2021. This is primarily due to an increase in shareholder’s equity as well as the decline in interest bearing debt. However the ratio has increased from 0.54 to 0.65 in 2022. Overall the company shows comparatively low gearing ratio indicating strong financial position. According to the annual report of 2021 the debt to equity ratio has mainly reduced due to the boost in retained earnings that year.

 

Interest coverage ratio

The Interest Coverage ratio signifies the ability of the company to pay interest on the debt. Higher interest coverage ratios imply a greater ability of the firm to pay off its interests. If interest coverage is less than 1, then EBIT is not sufficient to pay off interest, which implies finding other ways to arrange funds. A company’s ability to meet its interest obligations is an aspect of its solvency.

 

Year	2022	2021	2020	2019	2018
Interest Coverage Ratio	26	8	2.58	3.12	5.14

Table 11 Interest Coverage Ratio

In the case of Royal Ceramics, they have been able to maintain their interest coverage ratio at a sufficient level. In 2022 this ratio is 26 times which means that the company has been able to pay its interest 26 times out of their EBIT. However the year 2020 has shown an interest coverage ratio of 2.58 which is considerably low compared to other years. The main reason behind it was the increase in finance costs during that year. In general the company has been generating sufficient earnings to service its interest on debt.

3.4.3        Profitability ratios

These ratios convey how well a company can generate profits from its operations. 

Net Profit Margin

This measure describes the percent remaining of each sales rupee after subtracting other expenses as well as cost of goods sold. Net Margin is basically the net effect of operating as well as financing decisions taken by the company.

 

Year	2022	2021	2020	2019	2018
NP Margin	44%	26%	10%	2%	59%

Table 12 NP Margin

NP Margin in 2021 has been 26% of sales which indicates greater profitability for the company. This has been a result of company’s focus on deriving economies of scale with larger production runs and process innovation to drive efficiencies in inputs. And due to successful rationalization of product and design portfolio as well as improvement in finance income along with a decline in other operating expenses the NP Margin of year 2022 has been increased to 44% of sales. However in 2019 the NP Margin is significantly low which is a concerning issue for the company during that year. According to the annual report the main reason for this low profitability was the cost pressures of both locally and foreign sourced raw materials. Even though the NP margin suffered during that year it has gradually increased afterwards signaling the company a path for growth.

Asset Turnover Ratio

Asset Turnover Ratio is a comparison of sales to total assets. This ratio provides an indication of how efficiently the assets are being utilized to generate sales.

 

Year	2022	2021	2020	2019	2018
Assets Turnover	0.50	0.49	0.28	0.19	0.20

Table 13 Asset Turnover

The asset turnover of the company has improved over the analysis period. This is a good sign for the company as it indicates that the company is utilizing their assets efficiently. For an example the highest asset turnover ratio during the five year period is 0.5 which means that for every 1 rupee of asset, the company is generating 0.50 cents of sales. The ratio has improved from 2019 onwards. The reasons behind this improvement has been the ability of the firm to generate more sales using their assets due to the actions implemented for improving productivity levels and enhancing efficiencies through responsible consumption practices, to support profit margins. Accordingly, the company has initiated quality circles with Total Productive Maintenance programs and other quality focused initiatives.

Return on Investment

This is the ratio of wealth generated to the amount invested.

 

Year	2022	2021	2020	2019	2018
ROI	22%	13%	3%	0%	12%

Table 14 Return on Investment

ROI should be analyzed over a period of time in order to get a better understanding of the growth of the company. The most noticeable figure is the 0% ROI in the year 2019. This low ROI has been a result of many inefficiencies existing in the company during that year. For an example the cost of sales have increased compared to 2018, which has been due to the drastic increase in the price of raw materials which were impacted by the increase in  freight charges and the devaluation of the Rupee. However the company has overcome these difficulties from 2020 by enhancing the manufacturing capabilities during the year through investments in printing machinery and infrastructure.

Return on Equity

Return on equity provides us with the Rate of return earned on the Common Shareholder’s Equity. ROE can be basically considered as a profitability ratio from a shareholder’s point of view. This provides how much returns on generated from shareholder’s investments.

 

 

Year	2022/21	2021/20	2020/19	2019/18	2018/17
ROE	35%	21%	5%	1%	23%

Table 15 Return on Equity

Return on equity has increased from 2020. In 2021 ROE is 21% and it shows strong performance of the company. Despite the increase in equity base in 2022 the company has still been able to maintain a ROE of 35% implying that the sole reason for the increase in performance has been due to increase in profits. The underlying reasons behind this is the company’s decision on consistent investment in expansion combined with productivity and sustainability initiatives which has enabled lean cost profiles. They have continuously improved operating margins which contributed to profitability as Distribution and Other Operating expenses declined. Finance costs have also declined due to the reduced levels of borrowings and renegotiated interest rates.

 

 

 

 

 

 

 

The figure 1shows the behavior of NP margin ROE and ROI which are the main performance measures for a company in terms of profitability. With this graphical representation it can be clearly identified that a significant decline in performance has occurred in 2019. This setback has been caused by lower revenue yields from price competition and increased depreciation charges due to higher capital expenditure for growth expectations. Contraction of the construction sector due to   COVID-19 pandemic outbreak and Easter Sunday attacks in April 2019 has driven the demand for the products of the company to decline as the demand is mainly derived from the construction sector. Increasing raw material prices due to supply disruptions, inflation and devaluation of the rupee, high energy cost and labor cost has also affected performance of 2019. However the company has been able to rebuild their profitability in the following years.

3.4.4        Stock market ratios

Stock market ratios analyze the earnings and dividends of a company. They include dividend yield, P/E ratio and earnings per share (EPS). Investors use these metrics to predict earnings and future performance.

Earnings per share

Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares of its common stock. EPS indicates how much money a company makes for each share of its stock and is a widely used metric for estimating corporate value.

A higher EPS indicates greater value because investors will pay more for a company's shares if they think the company has higher profits relative to its share price.

 

Year	2022	2021	2020	2019	2018
EPS	5.77	2.97	0.58	0.05	1.83

Table 16 Earning Per Share

Earnings per share at Royal Ceramics have increased from 2019 onwards. It has become 5.77 which implies that for each share of the stock the company generates 5.77 of earning. Due to the increased performance in both 2021 and 2022 the company has recorded higher EPS. There has been a decline in EPS to 0.05 in 2019.

 

Book value per share

Book value per share (BVPS) is the ratio of equity available to common shareholders divided by the number of outstanding shares. Book value of equity per share effectively indicates a firm's net asset value (total assets - total liabilities) on a per-share basis. If a stock is undervalued, it will have a higher book value per share in relation to its current stock price in the market. BVPS is used mainly by stock investors to evaluate a company's stock price. It measures the amount that would be distributed to holders of each share of common stock if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off.

Year	2022	2021	2020	2019	2018
Book Value per share	17.7	14.9	13.2	8.5	8.7

Table 17 Book Value per Share

During the years from 2019-2022 the book value per share of Royal Ceramics have increased. It has been 17 and 14 in 2022 and 2021 respectively. The company has used a portion of its earnings to buy assets that would increase common equity along with BVPS. Furthermore they have used earnings to reduce liabilities. Due to the increase in asset balances and decrease in liabilities in 2021 and 2022 the company has been able to increase its book value per share.

Price Earnings Ratio

Price Earnings Ratio measures the price of a stock relative to its earnings per share (EPS). A higher value generally indicates a greater cost for a lower return, and a lower value generally indicates a greater return for a lower cost. A simple way to think about the P/E ratio is how much is paid for one rupee of earnings per year.

 

 

Year	2022	2021	2020	2019	2018
Price Earnings Ratio	7.06	8.67	9.64	113	5.76

Table 18 Price Earnings ratio

The PE ratio has declined from 2019. Initially it has been 113 times and then become 7.06 in 2022. The PE ratio of 2019 is significantly high due to the low earning per share during that year. In 2020 the market price of Royal Ceramic PLC share has decreased than 2019. Decrease in Market price per share and increase in earnings per share in 2020 has a combined effect on the low PE ratio recorded in 2020. Investors will compare these PE ratios with that of industry peers and determine whether the share is overvalued or undervalued.

Dividend Yield

The dividend yield is the amount of money a company pays shareholders for owning a share of its stock divided by its current stock price. If a company’s dividend yield has been steadily increasing, this could be because they are increasing their dividend, because their share price is declining, or both.

 

Year	2022	2021	2020	2019	2018
Dividend Yield	10%	1%	1%	0%	1%

Table 19 Dividend Yield

In the case of Royal Ceramics, their dividend yield has increased in 2022. 10% means that the company is paying 10% as dividend out of its market price. This has been a result of increase in payout ratio which has increased the dividend per share. However the company has maintained a low dividend yield for the company reflecting the company’s decision to be more focused on growth opportunities and higher levels of investments.

 

4           Conclusion

The content of this report has been based on the financial statement analysis carried out on Royal Ceramics Lanka PLC from 2018 to 2022. The analysis has used published annual reports for the five year period and has used four main techniques in financial statement analysis. The purpose of this analysis is to identify the key areas in company performance with respect to its liquidity, solvency profitability and earnings.

Trend analysis and horizontal analysis identified major growth trend and patterns of how the income statement and balance sheet items have changed during the years. The vertical analysis has recognized the relative proportions of these items and their importance in the financial statements. Ratio analysis has identified the relationship among different variables. According to the entire analysis important factors on company performance can be pointed out.

In terms of liquidity position of the company the ratio analysis has shown that the company should further improve their inventory management as well as debtor exposure. It has emphasized the need for the company to aim for the ideal industry standards and norms when it comes to the liquidity ratios. The Management should take certain operational measures such as the temporary cessation of new recruitments, increments, high risk new capital projects, refurbishments and curtail advertisements, to manage the working capital. Effective inventory control should also be considered to improve liquidity position.

Solvency of the company has proven to be somewhat satisfactory as the calculations provide evidential support that the company has easy access to funds at competitive interest rates. Comfortable leverage ratios are favorable for securing further funding. The financial position remains strong for Royal Ceramics as they have good solvency and less financial distress.

The stock market ratios have also shown that the company has strengthen their earning ability and the stock market conditions have remained favorable for the company. The company has been profitable throughout the analysis period. ROI, ROE and NP margin calculations suggest that the company can remain attractive to investors.