Watawala Plantation PLC

Introduction

Financial Analysis is the process of examining financial data to make business and financial decisions. This analysis examines the company’s financial health, operational proficiency of management, and earning capacity. Predominantly, the financial analysis assesses the company’s results, performance, and trends using financial statements which include a statement of financial position, statement of profit and loss, and statement of cash flow. The financial analysis could be used to compare firms, firms within firms, and industries through time. Thus, the examined results will use to make significant decisions such as investment, financing, and planning.

Watawala Plantation PLC

Watawala Plantation PLC (WATA) is a well-known agricultural public listed company incorporated in June 1992. This public listed company is a joint venture with the legendary TATA Group which owns Britain’s No. 1 tea brand, “Tetley”. WATA is a pioneer in palm oil plantation and recognized as the largest palm oil cultivator in Sri Lanka, meeting the country's demand for edible oil while directly and indirectly providing thousands of jobs and economic possibilities to the communities we serve in the southern province.

Product Portfolio

Figure 01: Source: Company Data

Watawala Plantation has a diverse range of product portfolios including palm oil, tea, rubber, cinnamon, coconut, and dairy. The company’s main crop is oil palm, which covers most of the company's territory. Minor crops help to keep the plantation business diverse. Watawala Dairy Ltd, a subsidiary of the Company, produces fresh milk on a state-of-the-art farm. The dairy farm generates a considerable amount of cattle slurry, which the company uses to make compost.

 

 

 

Ownership Structure

WATA was held by one significant shareholder and the public as of March 31, 2022 (Figure 02). Group Strategic Partner, Sunshine Wilmar Pvt Ltd is the company’s primary shareholder which owns 74% of the total shares, while the public holds only 26%.

Data Analysis

Figure 02: Source: Company Data

To perform the financial statement analysis of WATA PLC period of consecutive 5 years starting from the financial period 2017/18 to the financial period 2021/22. The financial statements including Statement of Profit and Loss, Statement of Financial Position, and Statement of Cash Flow have been used for the financial analysis.

Figure 03: Source: Company Annual Report

Statement of Profit or Loss

 

 

 

 

 

 

Statement of Financial Position

Figure 04: Source: Company Annual Report

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Statement Analysis

Financial statement analysis is the examination of a company’s financial statements. The process involves evaluating the company’s historical and present financial performance in its financial statements to identify financial trends and patterns over time. To make important decisions such as liquidity, efficiency, solvency, profitability, and market the managers assess financial performance and the position of the company. Furthermore, the most significant advantage of financial statement analysis is that it gives guidance to investors to decide on whether to invest in a particular business. Above all the businesses could evaluate how the company has performed within the company itself and the industry during a specific period. Even if there are many other methods used in financial statement analysis, the most common methods are.

ü  Horizontal Analysis

ü  Vertical Analysis

ü  Trend Analysis and

ü  Ratio Analysis

6.1 Horizontal Analysis

Horizontal Analysis is used to compare the company’s financial condition and performance across time. The main benefit of horizontal analysis is that the reader could clearly understand whether the income statement or the balance sheet line items have increased or decreased compared to the preceding reporting period.

Watawala Plantation PLC – Horizontal Analysis on Statement of Income

Figure 05: Source: Author Calculation

Figure 06: Source: Company Data

As per figure 05, over the past 4 years, starting from the year 2018 the revenue growth has seen a continuous reduction. However, for the financial year 2021/2022, it was noticed that the revenue was substantially up by 76% comparative to the year 2021. The author has noted that the major reasons would be the expansion of palm oil mills and treatment plants which increased the production capacity and efficiency, increase palm oil prices, and the government decision to decrease the palm oil import taxes boosted palm oil purchases in 2022. However, with the ban on the importation of fertilizer the crop yields were lower compared to the last year. Nevertheless, the management had sufficient chemical fertilizer to support the yield for the next 12 months and the management has stated that the impact of the fertilizer banned would be long-term. Hence this impact was not captured in the last financial year figures however the decision was revised at the end of the financial year. Moving to the cost of sales there is a 60% up in the 2021/2022 financial period compared to 2020/2021. The major reason for the above rise in the cost of goods sold might be the introduction of combining both organic and inorganic fertilizer techniques to overcome import restrictions. Similarly, the inflationary situation in the country followed by a high cost of goods in the domestic market and high labor costs has increased the cost of production of goods in WATA. Parallel to the top line growth, the bottom line of WATA has experienced a substantial growth of 107% in the year 2022. The major reasons for the mentioned outgrowth would be the gain on changes in fair value of biological assets by 93%, increase in administration expenses by 28% and finance income by 75% over the last financial year compares to the previous year. The main reason for the increase in finance income would be, the increase in interest income on short term bank deposits. That was predominantly due to the new investment yield of 12.80%. The Administrative expenses have been increased due to expansion and performance related expense during the year 2021/2022.

 

Watawala Plantation PLC – Horizontal Analysis on Statement of Financial Position 

 

 

 

 

 

 

 

 

 

 

 

Figure 07: Source: Author Calculation

 

 

 

 

 

 

 

 

 

 

 

 

When observing the most recent figures (FY 2021/2022) the author has noticed that the Property Plant & Equipment (PPE) and Intangible Assets have been increased by 34% and 64% respectively. The reasons are that the WATA has done numerous mills additions and purchased of an enterprise resource planning system to the company. Moving to the current assets there is a substantial increase in short term investments (133%) in the recent past year as over the last couple of 5 years, there wasn’t any addition to the short-term investments. However, in 2021/2022, WATA has made a new short-term investment on Capital Alliances Investments Limited (CAL) for an average yield of 12.80. Another reason for the current assets to exhibits an increase by 87% is that the up in inventories. According to the restrictions imposed on palm oil operations by the government, WATA has discouraged in their production. That led to an increase in

Figure 08: Source: Company Data

inventories (171%). With the repayment of interest-bearing borrowings, there was considerable reduction in non-current liabilities. Correspondingly, under the current liabilities there is 27% increase in lease liability as it is mainly due to the re-measurement and re-recognition of lease assets. Accordingly, if the reader looks into the overall increase in current liabilities and non-current liabilities the working capital has been increased by 284% (figure 8) in comparison to the last year.  

6.2 Vertical Analysis

As one of the techniques for analyzing the financial statements, vertical analysis evaluates the size of each line item on the income statement and balance sheet in proportion to the total revenue and total asset and total liability base of the business. The main benefit of using vertical analysis is that it allows for the comparison of income statements and balance sheets of businesses in various sizes, because drawing conclusions about the financial performance and position of such businesses from comparing their absolute amounts would not provide useful information. Hence vertical analysis is thought to be the optimum technique for use in these circumstances across several years, which could be used to track changes in line items over time.

According to the figure 09 all the line items have been compared against the base of total revenue.

Figure 09: Source: Author Calculation

Watawala Plantation PLC – Vertical Analysis on Statement of Income

 

As of that, the author has noticed a significant portion of total revenue has been explained by the cost of sales; 40% approximately in the year 2022. Ever since the company is engaged in palm oil and dairy milk operations, cost of sales is made up on oil palm, oil kernel, dairy and cinnamon which are considered as raw materials of the production. Even though there was a fluctuation of cost of sales against the revenue over the past 5 years, the company was able to maintain the WATA’s cost of sales within the range of 40% to 70% which is still the highest proportion of the total revenue. Consequently, all the other expenses and income especially other income, administration income, finance income and finance cost have represented only a very small amount against the total revenue which is within the range of 1% to 5%.  Also, there wasn’t any growth or decline to notice in terms of other costs and income throughout the last 5 years as well.

According to the vertical analysis of the statement of financial position (figure 10), it could be notice that the WATA is a highly equity funded company. Because when it compares the total equity and liabilities, equity takes the proportion of 84% and the liabilities has only taken the remaining 16%.  Out of the total capital and reserves retained earnings represents 78% while the stated capital symbolizes only 6%. Further moving to the total assets, 72% indicates by the total non-current liabilities which is a greater portion than the current liabilities. But then again as it very specific to the plantation industry, biological assets denote the highest share than the property plant and equipment in company WATA. The second highest would be the investment in subsidiary; a percentage of 25%.     

Watawala Plantation PLC – Vertical Analysis on Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

 

Figure 10: Source: Author Calculation

 

 

 

 

 

 

 

 

 

 

6.3 Trend Analysis

Trend analysis is another measurement that can be used to analyses the financial data of a company over time.  Even though the extrapolation of historical time series data will not essentially predict the future but the movement over the period could be used to determine the future behavior.   

The figure 11 shows the trend analysis of WATA’s statement of Income. As of that, the author has taken 2018 as the base year to see the trend or the behavior over 5 years.

Figure 11: Source: Author Calculation

Watawala Plantation PLC – Trend Analysis of the Statement of Income

 

 

 

 

 

 

 

 

 

 

 

Figure 12: Source: Company Data

Moving to the revenue, which can be clearly noticed that the revenue has grasped an upward trend in the year 2022 (see the figure 12) it was stood at 121.36%. The major reasons would be the rise in palm oil prices and the continuous expansion of the infrastructure. As of that with no wonder the cost of sales also has gone up and can be seen an upward trend. Accordingly, this is mainly due to the fact of rise in raw materials (inflationary situation), import restrictions, and the consequences of Covid-19 pandemic taking place in the country over the years. Looking at the bottom line of the company profit also displayed an upward trend since the base year of 2018. Even though, the vertical and horizontal analysis concludes that there were fluctuations over the years, this trend analysis demonstrated that in most of the income and expenses such as gain on changes in fair value of biological assets, finance income, administrative expense and finance cost has an upward trend. The reasons could be the growing interest and inflation rates, devaluation of the foreign currency and rise in labor cost etc.  

 

Watawala Plantation PLC – Trend Analysis of the Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

 

Figure 13: Source: Author Calculation

 

 

 

 

 

 

 

 

 

 

 

 

As per the trend analysis of statement of financial position, that can be observed that the total non-current assets, total current assets, total equity and total current liabilities has showed a upward trend whereas total non-current liabilities has displayed a downward trend. The reason for the downward trend was, WATA has repaid the interest-bearing borrowings continuously throughout the years. The upward trend in non-current assets was happened mainly due to the rise in investment in ERP systems which is the purchases of intangible assets and investments in property plant and equipment and subsidiaries. The rising trend in equity taken place as the WATA incurred a profit in a row. Moreover, coming to the current liabilities again there is a downward trend in current interest bearing and borrowings and lease liabilities, however the trend was happened due to the upward trend in trade and other payables.   

6.4 Ratio Analysis

The ratio analysis is the final technique in the financial statement analysis. The ratio analysis in generally used to assess the range of concerns such as company profitability, operational effectiveness, liquidity, and solvency. These calculated ratios can be used by the managers, current and potential shareholders, debtors, and creditors of the company and by the other interested audiences in understanding the strengths and weaknesses of a company, particularly when compared to the company over time or to other companies. Hence, ratios are generally known as whistle-blowers as they give warnings and signals to the managements regarding the red flags of the company. The business can be used five types of ratios to evaluate the company performances including.

ü  Profitability Ratios

ü  Efficiency Ratios

ü  Liquidity Ratios

ü  Solvency Ratios and

ü  Market Performance Ratios

 

6.4.1 Profitability Ratios

The profitability ratios indicate how effectively the company could provide sufficient financial rewards and the ability to attract and retain financing. Higher the growth of the profitability ratios, happier the investors and other stakeholders are.

Ø  Return on Equity

Return in equity points out the amount of net income that has been made by the company using the shareholders equity.

Figure 14: Source: Author Calculation

Figure 15: Source: Author Calculation

According to the horizontal analysis it was noted that both the net profit for the year and the shareholders equity has become increased in the year 2022 compared to the last year. Therefore it demonstrated that the company was able to utilize the company return effectively to the shareholders. On the other hand, when compares to the average ROE of WATA that demonstrated as 29% and this figure should be compared with the ROE figure of the other plantation companies in Sri Lanka. However, the author was unable to identify any competitor plantation company who does the same basis of operations as the Watawala Plantation PLC is the largest company who involves in Palm oil operations.

Ø  Return on Assets

Return on Assets indicates effectively and efficiently that the company is generating its earnings with the use of their total assets.

 Same as the return on equity, the calculated return on assets has also demonstrated nearly a 40% growth within the last financial periods which illustrates a positive outlook to the existing and potential investors. There was a slight decrease in 2019 and 2020 due to the revisions in the import duties of Palm Oil and volatility in global markets especially in Malaysian market impacted demand. According to the graph above it illustrated that both the ROA and ROE moved together but ROE stood higher than the ROA.

 

Ø  Profit Margins

Figure 16: Source: Author Calculation

Generally, there are their profit margins in the form of gross profit margin, operating profit margin and net profit margin. All the margins were calculated based on the gross profit operating profit and net profit that the company has earned during the period over its revenue.  According to the figure 16, it could be noticed that all the three profit margins has moved more or less same over the last 5 years. The same behavior can be illustrated by looking into the figure 14. Even though the WATA’s gross operating and net profit margins went up continuously, during the financial period of 2019/2020 it demonstrated a downturn. The author has identified many reasons for the above outlier as in reduction in global palm oil prices, India, China and EU government import restriction on palm oil to domestic production, wake up of covid-19 and uncertainty over US –China Trade war.  

 

6.4.2 Efficiency Ratios

Efficiency ratios are generally calculated to measure the how efficiently that the company’s assets have been supported in order to generate revenue. Traditionally greater activity is better.

 

Figure 17: Source: Author Calculation

 

 

 

Ø  Asset Turnover Ratio

Asset turnover ratio measures the company’s ability to generate revenue from its assets by comparing net sales with average total assets.

Figure 18: Source: Author Calculation

Starting from the year 2018 to year 2020 there was decline in the asset turnover ratio due to the significant decrease in the revenue. However, the same was began to increase during past two financial periods. Anyhow the WATA was able to maintain the average of 0.58 times at the end of the year 2022. With the substantial revenue growth ratio went high up to the 0.68 times which illustrates that the company has effectively utilized its expanded capacities to generate revenue to the company.

Ø  Inventory Turnover Ratio

Inventory turnover ratios measures the occurrence that the company has sold and replaced inventory during the period. Generally, if the ratio is high that displays the inventory is converting into sales more efficiently. In the horizontal analysis, it was noted that the inventory has been increased by 171% in year 2022 than the last year. Even though it was expected to have a lower inventory turnover in the same year, however, the ratio went high as the increase in inventory set off by increase in the cost of sales. But still WATA is below the company average, so it would be better to take necessary strategies in order to increase the frequency of converting inventory into sales.

Ø  Debtors Turnover Ratio  

Debtor’s turnover ratio is another efficiency ratio which measures the effectiveness of collecting receivables owed by the customers to the company. Higher the turnover ratio better the performances.

According to the figure 17 WATA’s debtors’ turnover ratio has been increased 13.45 times to 25.18 times which is greater than the company’s average. Company’s average stood up at 15.09 times. This high effectiveness in collecting receivables from customers demonstrated that the WATA has a better credit policy and credit terms in such a crisis situation too.  Also apart from the above three turnover ratios, the author has calculated the day’s sales uncollected. In the last financial period the, it has seen a substantial decrease, which represent that the rapidity of collecting dues from customers have been increased. (Lower the ratio higher the effectiveness of collecting debts from the customers).  Moreover, it stands even less than the company average which gives the signal of better credit policy and terms.

 

6.4.3 Liquidity Ratios  

Liquidity ratios illustrates the company’s ability to meet the short term obligations.  

 

Figure 19: Source: Author Calculation

 

Ø  Current Ratio

Figure 19: Source: Author Calculation

The current ratio measures the company’s ability to pay the short-term obligations with in a one year. The ratio will be calculated on the current assets over current liabilities. During the financial period of 2019 and 2020 the ratio has been declined due to the 36% increase in trade payables. However, there was a massive increase in the 2021/2022 financial year which stood the ratio as 4.1. That was way higher than the company average too. That was solely due to the higher increase in cash and cash equivalents and inventories. However, the trade payables also have been decreased by 21%.

Ø  Quick Ratio/Acid Test Ratio

Quick ratios measure the same company’s ability to pay its short-term liabilities but using the most liquid assets which means excluding the inventory and prepayments. Even though the author has excluded the inventory values to see how the company’s most liquid asset’s ability to pay the short-term liabilities, again it proves that the WATA has a higher ability as the quick ratio is way higher than the company’s average and yet the ratio has increase when compares to the last year. As an overall view, the WATA has the ability to pay its short-term debts as well as the company has the capacity to move go for the short-term debts as well.

6.4.4 Gearing Ratios/Solvency Ratios

The solvency ratios or the gearing ratios demonstrated that the company’s ability to pay its long-term obligations and it illustrates how a company has finance its overall operations by using different funds.

Figure 19: Source: Author Calculation

 

 

Ø  Debt to Equity Ratio

The debt-to-equity ratio could be calculated by using the company’s total liabilities over its total assets. The financial leverage of the firm can be evaluated by using the same ratio. This measures the degree to which a company is financing its operations through debt or equity.

As per the calculated debt to equity ratio of the WATA, it clearly indicates that the company is more funded by equity than debts. The same can be further evidenced using the debt ratio and the equity ratio. In 2022 the equity stood at 84% while the debt was at 16%. In general investors are preferred low debt to equity ratio. Hence WATA keeping a lower ratio will attract more potential investors.

Ø  Interest Coverage Ratio 

Interest coverage ratio determines how many times that the interest on outstanding debts could be paid using its operating profit. The ratio has exhibited a drop in year 2020 due to decrease of operating profit. However, the times of paying interest has been gradually increased over the years due to the higher operating profit and due to the lower interest cost. Last year the ratio was held at 74.24 times, and it was more than the company average too.  Thus, it can be concluded that the WATA has an ability to pay its long-term debts and it indicates that the company has a higher capacity in moving for long term debt financing.    

6.4.4 Investor’s Market Performance Ratios

The Market performances ratios are used to examine the current share price traded in the Colombo Stock Exchange.

Figure 20: Source: Author Calculation

 

 

 

Ø  Earnings Per Share (EPS)

Earnings per share indicates the net income per share. By using the ratio, the investors can decide on whether the company is profitable for the investors or not. In general investors are looking at higher EPS company’s as they could get a higher earning. However, according to the WATA, the EPS has been gradually strengthened over the years, and stood at 16.87 in the year 2022. This was a greater achievement and it signal the potential investors a positive outlook.

Ø  Dividend Per Share  

Dividend per share demonstrated the proportion of the company’s earnings which is paid out to its exiting shareholders. As per the WATA, the DPS has been evolved over the last five years and distributed a divided of Rs. 9 per share in 2022. Even though paying dividends maximizes the shareholders wealth, it restricts the company’s growth. 

Ø  Price to Earnings Ratio

Price to earnings ratio or the P/E ratio is used to value a company. Correspondingly the ratio can be used to measure the current share price relative to its earnings. Even though the PE ratio has been increased in the year 2021, there was major decreased in 2022. The reason was mainly due to the decrease of current share price in the market. For the last couple of quarters, the stock market was not performed well due to the ongoing covid 19 and economic crisis. Therefore, this implies a negative outlook for the investors even though the company is performing well.

6.5 Altman Z Score

The Altman Z Score is used to forecast the probability that a business will go bankrupt within the next two years.

Figure 21: Source: Author Calculation

 

According to the Altman’s Z score model which has been calculated, the Z score for the past 5 Years stood greater than the 2.99 from the year 2018 to 2022. This indicator shows that the WATA was in the “Safe Zone”. Also, it has been displayed that the score is gradually increasing. Thus, for the coming years the company is in safer zone.