01. Executive Summary
The
purpose of this report is to analyze the financial statements of Ceylon
Hospitals PLC (“Durdans”) and interpret its results for academic purposes. I
have considered past five years, starting from 2018 to 2022, as the analysis
period and used publicly available information (annual reports) in the Colombo
Stock Exchange (“CSE”).
(Detailed
calculations and interpretation are from page 06 to 25)
As
far as Durdans is concerned, it is a Rs. 3,539,699,867 (Rs. 104.5 * 33,872,726
shares) worth of company as of 31st March 2022. Book value of the Durdans
as at that date was Rs. 5,746,945,556. Book value per share on that date was
Rs. 169.66 while its market value was Rs. 104.50 per share. As at 31st
March 2022, it is an undervalued company.
Durdans
is group of companies with 3 subsidiaries in the closely related sectors.
As
far as Durdans’s performance is concerned it has drastically changed in the
recent years due to Covid-19 pandemic. Therefore, all profitability,
efficiency, solvency and market measures have improved. As a result Durdans
records a historic overall performance during last two years.
The
main reasons are for the performance,
1. High
levels of demand for Covid-19 services
2. PCR
Testing facilities
3. Facilitating
Covid-19 wards
4. Intermediate
care centers
However,
as per Chairman’s, Durdans has not operated well in terms of their regular
operations such as Cardiac center and interventional procedures. This is mainly
due to shifting demand from regular services to Covid-19 related facilities.
Future Outlook
Durdans
is looking forward to the new infrastructure development that is the first of
its kind, and slated to transform the hospital’s landscape. The Vision 2022 project is designed to
extend purpose driven healthcare to the public, and will provide improved,
facilities to patients, while offering higher levels of comfort, more
cost-effective, yet modern patient rooms with all amenities. A new state-of the-art
rehabilitation center will be set up extending up to 12,000 square feet. The
new space will develop a center of excellence in the neuroscience field providing
the full spectrum of neuroservices spanning neurology, neurosurgery and
neuro-rehabilitation.
The healthcare sector
will undoubtedly be impacted severely by the macroeconomic challenges going
forward. With reduced purchasing power, economic instability and uncertainty of
resource availability, the sector’s income may be negatively impacted through
the decline of hospital tourism and overall footfall. However, Durdans group
anticipate that, led by the short-fall of medical goods in the state sector, a shift
of elective patients to the private sector may occur.
Future Outlook (Contd.)
They believe that a public-private
partnership model may be beneficial for the collective well-being of the
nation. Medical insurance service providers will play an integral role in supporting
health and well-being through the introduction of more diverse policies accommodating
a wide range of diseases which will provide accessibility to the public and
private healthcare sectors.
02. Evidential Matters(Contd.)
2.1.
Profit or Loss
|
For the year ended 31st March, |
2022 |
2021 |
2020 |
2019 |
2018 |
|
Revenue |
5,075,574,545 |
3,518,805,279 |
3,495,296,914 |
3,449,632,770 |
3,408,056,199 |
|
Cost of Services |
(1,889,251,316) |
(1,260,971,897) |
(1,224,629,243) |
(1,319,388,028) |
(1,390,716,914) |
|
Gross Profit |
3,186,323,229 |
2,257,833,382 |
2,270,667,671 |
2,130,244,742 |
2,017,339,285 |
|
Other Operating Income |
39,984,171 |
45,555,138 |
32,786,335 |
32,544,275 |
18,463,209 |
|
Less: Expenses |
|
|
|
|
|
|
Administration Expenses |
(2,016,681,413) |
(1,610,285,893) |
(1,747,654,295) |
(1,579,467,015) |
(1,584,836,025) |
|
Other Operating Expenses |
(489,776,446) |
(367,843,598) |
(372,651,552) |
(358,914,473) |
(292,318,968) |
|
Finance Cost |
(70,785,930) |
(88,168,536) |
(128,996,372) |
(120,630,554) |
(113,510,850) |
|
Finance Income |
253,212,867 |
216,541,227 |
180,143,487 |
209,977,733 |
208,833,346 |
|
|
(2,324,030,922) |
(1,849,756,800) |
(2,069,158,732) |
(1,849,034,309) |
(1,781,832,497) |
|
Profit Before Taxation |
902,276,478 |
453,631,720 |
234,295,274 |
313,754,708 |
253,969,997 |
|
Less: Income Tax Expense |
(131,726,125) |
(7,513,385) |
(16,891,186) |
(102,114,756) |
(92,599,030) |
|
Net Profit after Taxation |
770,550,353 |
446,118,335 |
217,404,088 |
211,639,952 |
161,370,967 |
|
Earnings Per Share - Basic |
22.75 |
13.17 |
6.42 |
6.25 |
4.76 |
02. Evidential
Matters(Contd.)
2.2..
Balance Sheet (Assets)
|
As at 31st March, |
2022 |
2021 |
2020 |
2019 |
2018 |
|
ASSETS |
|
|
|
|
|
|
Non-Current Assets |
|
|
|
|
|
|
Property, Plant and Equipment |
4,452,017,627 |
4,453,928,005 |
4,982,572,131 |
4,324,720,466 |
3,947,784,527 |
|
Capital Work in Progress |
1,140,109,908 |
629,438,768 |
- |
- |
- |
|
Right-of-Use Assets |
288,954,105 |
214,543,912 |
190,533,787 |
- |
- |
|
Investments in Subsidiaries |
1,457,821,384 |
1,457,591,424 |
1,457,591,424 |
1,457,591,424 |
1,457,591,424 |
|
Share of Profit of an |
- |
229,960 |
229,960 |
229,960 |
229,960 |
|
Other Financial Assets |
71,415,787 |
66,909,787 |
61,897,550 |
57,837,505 |
33,700,971 |
|
Total Non-Current Assets |
7,410,318,811 |
6,822,641,856 |
6,692,824,852 |
5,840,379,355 |
5,439,306,881 |
|
Current Assets |
|
|
|
|
|
|
Inventories |
693,571,319 |
450,474,703 |
308,921,464 |
228,713,011 |
226,240,442 |
|
Trade and Other Receivables |
214,955,620 |
157,209,413 |
140,403,671 |
132,129,362 |
144,557,750 |
|
Advances and Prepayments |
195,052,981 |
121,193,915 |
183,676,406 |
94,235,915 |
98,169,160 |
|
Amounts due from Related Parties |
75,920,638 |
82,769,157 |
370,232,447 |
165,382,821 |
241,610,879 |
|
Other Financial Assets |
659,286,775 |
123,176,421 |
88,029,898 |
77,428,088 |
70,826,354 |
|
Tax Refund Due |
13,259,585 |
13,259,585 |
9,533,629 |
- |
13,794,764 |
|
Cash and Cash Equivalents |
129,294,626 |
225,210,725 |
96,243,072 |
62,263,772 |
58,573,161 |
|
Total Current
Assets |
1,981,341,544 |
1,173,293,919 |
1,197,040,587 |
760,152,969 |
853,772,509 |
|
Total Assets |
9,391,660,355 |
7,995,935,774 |
7,889,865,439 |
6,600,532,324 |
6,293,079,389 |
02. Evidential
Matters(Contd.)
2.3.
Balance Sheet (Liabilities)
|
As at 31st March, |
2022 |
2021 |
2020 |
2019 |
2018 |
|
EQUITY AND LIABILITIES |
|
|
|
|
|
|
Stated Capital |
916,366,104 |
916,366,104 |
916,366,104 |
916,366,104 |
916,366,104 |
|
Revaluation Reserve |
2,134,543,796 |
2,134,543,796 |
1,931,062,779 |
1,564,589,060 |
1,564,589,060 |
|
Fair Value Reserve |
600,000 |
128,000 |
- |
56,000 |
564,000 |
|
Accumulated Profit |
2,695,435,656 |
1,986,399,741 |
1,588,064,320 |
1,502,005,103 |
1,429,592,738 |
|
Total Equity |
5,746,945,556 |
5,037,437,641 |
4,435,493,203 |
3,983,016,267 |
3,911,111,901 |
|
Non-Current Liabilities |
|
|
|
|
|
|
Interest Bearing Loans and Borrowings |
1,606,246,925 |
784,444,131 |
610,850,403 |
521,002,563 |
279,893,472 |
|
Deferred Revenue |
31,470,457 |
33,260,743 |
35,051,029 |
36,841,314 |
38,631,600 |
|
Retirement Benefit Obligations |
156,789,659 |
217,078,158 |
235,102,125 |
202,506,305 |
160,235,950 |
|
Deferred Tax Liabilities |
452,599,177 |
440,808,879 |
699,797,374 |
550,280,213 |
513,601,220 |
|
Total
Non-Current Liabilities |
2,247,106,218 |
1,475,591,911 |
1,580,800,931 |
1,310,630,396 |
992,362,243 |
|
Current Liabilities |
|
|
|
|
|
|
Bank Overdraft |
94,526,628 |
72,893,970 |
466,736,394 |
693,019,494 |
397,360,201 |
|
Interest Bearing Loans and Borrowings |
248,829,947 |
793,415,967 |
325,692,847 |
201,776,300 |
388,053,250 |
|
Trade and Other Payables |
862,449,226 |
384,716,020 |
292,269,424 |
301,282,135 |
274,443,882 |
|
Taxation Payable |
73,281,567 |
55,153,671 |
- |
3,105,671 |
- |
|
Amounts Due to Related Parties |
118,521,213 |
176,726,594 |
788,872,639 |
107,702,062 |
329,747,910 |
|
Total Current
Liabilities |
1,397,608,581 |
1,482,906,222 |
1,873,571,304 |
1,306,885,662 |
1,389,605,244 |
|
Total Equity and Liabilities |
9,391,660,355 |
7,995,935,774 |
7,889,865,439 |
6,600,532,324 |
6,293,079,389 |
03. Analysis Overview
What is financial
statement Analysis?
Financial
Statement analysis is identifying a company’s profitability, solvency,
liquidity and its market position by using a set of tools available for analyzing.
There are several tools for analyzing financial statements many companies widely
use. Analysis of financial statement helps to identify company’s performance
and financial position against its own company past results or similar
companies in the industry. In addition to that analyzing financial statements
is helpful for investors to take their investing or divesting decisions.
Financial
statement analysis is done by the management for internal purposes based on
vast information whereas when an outsider is limited only to the extent of an
annual report or prospectus in the event of an IPO. As Public Limited Companies
are subject to disclose their financial statements on a consistent periodic
basis, it is expected companies to disclose enough information to take economic
decision based on them.
Tools available for
analyzing financial statements
3.1. Horizontal Analysis
This method helps an
organization to identify their financial position/condition and performance
across the time. Further this analysis may lead them to identify seasonal
changes to their product portfolio, market condition, consumer behavioral
patterns etc.
In this analysis we have
to calculate change in as an absolute figure and its percentage of increase or
decrease. The deriving figures can use for trend analysis also. Thereby, we can
use for graphical presentation as well.
Basis for Calculation as follows,
§ Value
(Rs.) Change = Analysis period amount - Base period amount
* Base period amount is the period before
the 1st period considered.
§ Percentage
Change = (Value Change/Base period amount ) * 100%
3.1.1. Horizontal
Analysis – Balance Sheet - Assets (Base year 2016/17)
|
Balance Sheet- Assets |
Value Change (Rs.) |
Percent Change (%) |
|||||||||
|
2018 |
2019 |
2020 |
2021 |
2022 |
2018 |
2019 |
2020 |
2021 |
2022 |
||
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment |
208,178,725 |
585,114,664 |
1,242,966,329 |
714,322,203 |
712,411,825 |
6% |
16% |
33% |
19% |
19% |
|
|
Capital Work in Progress |
- |
- |
- |
629,438,768 |
1,140,109,908 |
0% |
0% |
0% |
100% |
100% |
|
|
Right-of-Use Assets |
- |
- |
190,533,787 |
214,543,912 |
288,954,105 |
0% |
0% |
100% |
100% |
100% |
|
|
Investments in Subsidiaries |
- |
- |
- |
- |
229,960 |
0% |
0% |
0% |
0% |
0% |
|
|
Investment in an Associates |
- |
- |
- |
- |
(229,960) |
0% |
0% |
0% |
100% |
100% |
|
|
Other Financial Assets |
4,078,000 |
28,214,534 |
32,274,579 |
37,286,816 |
41,792,816 |
14% |
95% |
109% |
126% |
141% |
|
|
Current assets |
|
|
|
|
|
||||||
|
Inventories |
(22,993,510) |
(20,520,941) |
59,687,512 |
201,240,751 |
444,337,367 |
-9% |
-8% |
24% |
81% |
178% |
|
|
Trade and Other Receivables |
(28,795,333) |
(41,223,721) |
(32,949,412) |
(16,143,670) |
41,602,537 |
-17% |
-24% |
-19% |
-9% |
24% |
|
|
Advances and Prepayments |
(13,656,643) |
(17,589,888) |
71,850,603 |
9,368,112 |
83,227,178 |
-12% |
-16% |
64% |
8% |
74% |
|
|
Amounts due from Related Parties |
80,877,377 |
4,649,319 |
209,498,945 |
(77,964,345) |
(84,812,864) |
50% |
3% |
130% |
-49% |
-53% |
|
|
Other Financial Assets |
(10,470,701) |
(3,868,967) |
6,732,843 |
41,879,366 |
577,989,720 |
-13% |
-5% |
8% |
52% |
711% |
|
|
Tax Refund Due |
5,448,199 |
(8,346,565) |
1,187,064 |
4,913,020 |
4,913,020 |
65% |
-100% |
14% |
59% |
59% |
|
|
Cash and Cash Equivalents |
(22,684,849) |
(18,994,238) |
14,985,062 |
143,952,715 |
48,036,616 |
-28% |
-23% |
18% |
177% |
59% |
|
|
Total assets |
199,981,265 |
507,434,197 |
1,796,767,312 |
1,902,837,648 |
3,298,562,228 |
11% |
29% |
39% |
57% |
75% |
|
3.1.2. Horizontal
Analysis – Balance Sheet Liabilities (Base year 2016/17)
|
Balance Sheet (Liabilities) |
Value Change (Rs.) |
Percent Change (%) |
|||||||||
|
2018 |
2019 |
2020 |
2021 |
2022 |
2018 |
2019 |
2020 |
2021 |
2022 |
||
|
Equity & Liabilities |
|
|
|
|
|
||||||
|
Stated
Capital |
- |
- |
- |
- |
- |
0% |
0% |
0% |
0% |
0% |
|
|
Revaluation
Reserve |
(397,192,126) |
(397,192,126) |
(30,718,407) |
172,762,610 |
172,762,610 |
-20% |
-20% |
-2% |
9% |
9% |
|
|
Fair
Value Reserve |
44,000 |
(464,000) |
(520,000) |
(392,000) |
80,000 |
8% |
-89% |
-100% |
-75% |
15% |
|
|
Accumulated
Profit |
41,276,068 |
113,688,433 |
199,747,650 |
598,083,071 |
1,307,118,986 |
3% |
8% |
14% |
43% |
94% |
|
|
Non-current Liabilities |
|
|
|
|
|
||||||
|
Interest
Bearing Loans and Borrowings |
(124,355,400) |
116,753,691 |
206,601,531 |
380,195,259 |
1,201,998,053 |
-6% |
19% |
29% |
54% |
45% |
|
|
Deferred
Revenue |
(1,455,286) |
(3,245,572) |
(5,035,857) |
(6,826,143) |
(8,616,429) |
45% |
237% |
253% |
246% |
162% |
|
|
Retirement
Benefit Obligations |
12,639,874 |
54,910,229 |
87,506,049 |
69,482,082 |
9,193,583 |
-77% |
-89% |
-99% |
0% |
-19% |
|
|
Deferred
Tax Liabilities |
456,636,366 |
493,315,359 |
642,832,520 |
383,844,025 |
395,634,323 |
0% |
0% |
0% |
100% |
100% |
|
|
Current Liabilities |
|
|
|
|
|
||||||
|
Bank
Overdraft |
90,233,383 |
385,892,676 |
159,609,576 |
(234,232,848) |
(212,600,190) |
-18% |
78% |
31% |
217% |
297% |
|
|
Interest
Bearing Loans and Borrowings |
30,014,293 |
(156,262,657) |
(32,346,110) |
435,377,010 |
(109,209,010) |
-18% |
78% |
31% |
217% |
297% |
|
|
Other
Financial Liabilities |
(8,562,550) |
(8,562,550) |
(8,562,550) |
(8,562,550) |
(8,562,550) |
-18% |
78% |
31% |
217% |
297% |
|
|
Trade
and Other Payables |
(41,596,208) |
(14,757,955) |
(23,770,666) |
68,675,930 |
546,409,136 |
52% |
31% |
-9% |
-29% |
-17% |
|
|
Taxation
Payable |
- |
3,105,671 |
- |
55,153,671 |
73,281,567 |
0% |
0% |
0% |
100% |
100% |
|
|
Amounts
Due to Related Parties |
142,298,846 |
(79,747,002) |
601,423,575 |
(10,722,470) |
(68,927,851) |
65% |
44% |
163% |
18% |
3% |
|
|
Total
equity and liabilities |
199,981,260 |
507,434,197 |
1,796,767,311 |
1,902,837,647 |
3,298,562,228 |
11% |
29% |
39% |
57% |
75% |
|
3.1.3.
Trend Analysis – Profit or Loss (Base year 2016/17)
|
Profit or Loss |
Trend
Analysis |
|||||
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|
|
Revenue |
100% |
106% |
107% |
109% |
110% |
158% |
|
Cost of sales of
goods |
100% |
109% |
104% |
96% |
99% |
149% |
|
Gross profit |
100% |
104% |
110% |
117% |
116% |
164% |
Observation (i) Revenue
showing a continuous increasing trend over the past five years than the
base year. But not significantly. However, in 2022 it shows a rapid
increase in revenue due to the reason mentioned in page no. 01. (ii) Cost
of sales is not in the same increasing trend with the revenue. It has
significant variances which do not match with revenue. E.g.: 2020 and 2021 figures are a bit
unusual (iii)
Due to the variation of Cost of goods
sold, in some years gross profit has surpassed the revenue figure as
well.
3.2. Vertical Analysis/Common Size Analysis
This tool depicts how
much of a percentage represent a particular line item of the balance
sheet/statement of financial position from total assets on that balance sheet
date. Same way we can do this for the Profit or Loss too.
Most common base for a Balance
Sheet is Total Assets, whereas Revenue for a Profit or Loss.
This method is a good way to identify
year on year proportion and its fluctuations. This method will also helpful to
someone to have a quick holistic view of the total income and expenditures, as
well as assets and liabilities with their movement.
|
Vertical Analysis –
Profit or Loss |
|||||
|
Year |
2022 |
2021 |
2020 |
2019 |
2018 |
|
Revenue |
100% |
100% |
100% |
100% |
100% |
|
Cost of sales of goods |
-37% |
-36% |
-35% |
-38% |
-41% |
|
Gross profit |
63% |
64% |
65% |
62% |
59% |
|
Other Operating Income |
1% |
1% |
1% |
0% |
0% |
|
Administration
Expenses |
-40% |
-46% |
-50% |
-46% |
-47% |
|
Other Operating
Expenses |
-10% |
-10% |
-11% |
-10% |
-9% |
|
Finance Cost |
-1% |
-3% |
-4% |
-3% |
-3% |
|
Finance Income |
5% |
6% |
5% |
6% |
6% |
|
Profit before income
tax |
18% |
13% |
7% |
9% |
7% |
|
Income tax expense |
-3% |
0% |
0% |
-3% |
-3% |
|
Profit for the year |
15% |
13% |
6% |
6% |
5% |
Vertical
Analysis/Common Size Analysis (Contd.)
|
Vertical
Analysis – Balance Sheet |
|||||
|
Year |
2022 |
2021 |
2020 |
2019 |
2018 |
|
ASSETS |
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
Property, plant and equipment |
47% |
56% |
63% |
66% |
63% |
|
Work in progress |
12% |
8% |
0% |
0% |
0% |
|
Right-of-Use Assets |
3% |
3% |
2% |
0% |
0% |
|
Investments in Subsidiaries |
16% |
18% |
18% |
22% |
23% |
|
Other Financial Assets |
1% |
1% |
1% |
1% |
1% |
|
Current Assets |
|
|
|
|
|
|
Inventories |
7% |
6% |
4% |
3% |
4% |
|
Trade and Other Receivables |
2% |
2% |
2% |
2% |
2% |
|
Advances and Prepayments |
2% |
2% |
2% |
1% |
2% |
|
Amounts due from Related Parties |
1% |
1% |
5% |
3% |
4% |
|
Other Financial Assets |
7% |
2% |
1% |
1% |
1% |
|
Cash and Cash Equivalents |
1% |
3% |
1% |
1% |
1% |
|
Total assets |
100% |
100% |
100% |
100% |
100% |
|
|
|
|
|
|
|
|
EQUITY AND LIABILITIES |
|
|
|
|
|
|
Stated Capital |
10% |
11% |
12% |
14% |
15% |
|
Revaluation Reserve |
23% |
27% |
24% |
24% |
25% |
|
Accumulated Profit |
29% |
25% |
20% |
23% |
23% |
|
Non-current liabilities |
|
|
|
|
|
|
Interest Bearing Loans and Borrowings |
17% |
10% |
8% |
8% |
4% |
|
Deferred Revenue |
0% |
0% |
0% |
1% |
1% |
|
Retirement Benefit Obligations |
2% |
3% |
3% |
3% |
3% |
|
Deferred Tax Liabilities |
5% |
6% |
9% |
8% |
8% |
|
Current liabilities |
|
|
|
|
|
|
Bank Overdraft |
1% |
1% |
6% |
10% |
6% |
|
Interest Bearing Loans and Borrowings |
3% |
10% |
4% |
3% |
6% |
|
Trade and Other Payables |
9% |
5% |
4% |
5% |
4% |
|
Taxation Payable |
1% |
1% |
0% |
0% |
0% |
|
Amounts Due to Related Parties |
1% |
2% |
10% |
2% |
5% |
|
Total equity and liabilities |
100% |
100% |
100% |
100% |
100% |
3.3.
Ratio Analysis
Ratio analysis is the
mostly used tool for analyzing financial statements. It has a strong
relationship among items in the financial statements and can be identified
significant deviation from the current practice and condition of the company.
However, before do any
ratio analysis, it is the common practice to look at working capital position
of the company. Working capital represents current assets financed from long
term capital sources that do not require near term/short term repayments
Working Capital = Current Assets – Current Liabilities
Durdans’s
Working capital position for past five years as follows,
|
Working Capital |
2021/22 |
2020/21 |
2019/20 |
2018/19 |
2017/18 |
|
Current Assets |
1,981,341,544 |
1,173,293,919 |
1,197,040,587 |
760,152,969 |
853,772,509 |
|
Current Liabilities |
1,397,608,581 |
1,482,906,222 |
1,873,571,304 |
1,306,885,662 |
1,389,605,244 |
|
Working Capital
Requirement |
583,732,963 |
(309,612,303) |
(676,530,717) |
(546,732,693) |
(535,832,735) |
|
|
|
|
|
|
|
Above figures shows that Durdans
had been faced difficulty in maintaining a positive working capital position
over the past four years since 2018 to 2021. However, Durdans managed to have a
strong working capital position in 2022 due to sudden surge of the performance.
Ratio analysis has four aspects
covering Profitability, Solvency, Liquidity and Efficiency and Market. This
helps to have a holistic view of the company and can easily compare with past
years as well as with similar size companies.
3.3.1. Liquidity and Efficiency
Ratios
|
Ratio |
2021/22 |
2020/21 |
2019/20 |
2018/19 |
2017/18 |
|
Current Ratio |
1.42 |
0.79 |
0.64 |
0.58 |
0.61 |
|
Acid Test Ratio |
0.92 |
0.49 |
0.47 |
0.41 |
0.45 |
|
Account Receivable Turnover (times) |
30.94 |
27.22 |
29.37 |
28.68 |
23.64 |
|
Merchandise Turnover (times) |
3.30 |
3.32 |
4.56 |
5.80 |
5.85 |
|
Days Sales in Inventory (days) |
134.00 |
130.39 |
92.07 |
63.27 |
59.38 |
|
Days Sales Uncollected (days) |
14.19 |
13.57 |
13.34 |
11.67 |
13.95 |
|
Total Asset Turnover (times) |
0.58 |
0.44 |
0.48 |
0.54 |
0.55 |
(i)
Current Ratio
It measures as follows,
Current Liabilities
Higher ratio
shows healthy liquidity position.
(ii)
Acid-test Ratio
Current Liabilities
The numerator is known as “Quick
Assets” also. The reason for excluding prepayments and inventory is they are
considered to be relatively difficult to quickly convert into cash.
Higher
the ratio shows healthy liquidity position.
(iii)
Account Receivable Turnover
Account Receivable Turnover ratio measures how many
times a company converts its receivable into cash in each year. It measures as
follows,
Average Accounts Receivables
Higher the ratio shows good collection
position.
(iv)
Merchandise Turnover
Average Inventory
Higher the ratio shows good performance.
3.3.1. Liquidity and Efficiency
Ratios (Contd.)
(v)
Days Sales in Inventory
Cost of sales
Higher the ratio shows
good liquidity of inventory.
(vi)
Days Sales Uncollected
It measures as follows,
Net sales
Higher the ratio shows good liquidity of receivables.
(vii)
Total Asset Turnover
Average Total Assets
Higher the ratio shows good use of assets
in the production process.
3.3.2.
Profitability
Ratios
|
Ratio |
2021/22 |
2020/21 |
2019/20 |
2018/19 |
2017/18 |
|
Profit Margin |
15% |
13% |
6% |
6% |
5% |
|
Gross Margin |
63% |
64% |
65% |
62% |
59% |
|
Return on Total Assets |
9% |
6% |
3% |
3% |
3% |
|
Return on Equity |
14% |
9% |
5% |
5% |
4% |
|
Book Value Per Share |
169.66 |
148.72 |
130.95 |
117.59 |
115.46 |
|
Basic EPS |
22.75 |
13.17 |
6.42 |
6.25 |
4.76 |
(i)
Profit margin
Net Sales
Higher the ratio shows
good use of assets in the production process.
3.3.2.
Profitability(Contd.)
(ii) Gross
margin
Net Sales
Higher
the ratio shows good performance.
(iii) Return
on Total Assets
Average Total Assets
Higher
the ratio shows good performance.
(iv) Return
on Equity (RoE)
Average
Shareholder’s Equity
(v)
Book Value per Share
No. of ordinary shares outstanding
This
is the minimum guaranteed value of a company. This is mostly used in business
valuation and this is the minimum value at which a company is to be sold right
now and this value does not include an amount for growth in future.
(vi) Basic
Earnings Per Share
Weighted Average ordinary
shares outstanding
Higher
the amount shows good performance. This reflect whether management utilized
shareholders/owners funds to generate profits.
3.3.3. Solvency Ratios
Solvency ratios identifies
ability to generate future revenues and meet long term obligations. It is also
shows the long term liquidity of the company. This is one of the main ratios
that take into consideration by the equity shareholders and institutional
lenders.
Following ratios are generally
calculate a company’s long term liquidity position.
|
Ratio |
2021/22 |
2020/21 |
2019/20 |
2018/19 |
2017/18 |
|
Debt Ratio |
0.39 |
0.37 |
0.44 |
0.40 |
0.38 |
|
Equity Ratio |
0.61 |
0.63 |
0.56 |
0.60 |
0.62 |
|
Times Interest Earned (times) |
13.75 |
6.15 |
2.82 |
3.60 |
3.24 |
(i)
Debt Ratio
Total Assets
(ii)
Equity Ratio
Total Assets
This is linked with debt ratio as well.
When the debt ratio goes up, equity ratio is reducing.
(iii)
Times Interest Earned
Interest Expense
3.3.4.
Market
Ratios
|
Ratio |
2021/22 |
2020/21 |
2019/20 |
2018/19 |
2017/18 |
|
PE Ratioc(times) |
5 |
8 |
12 |
12 |
17 |
|
Dividend Yield |
22% |
24% |
34% |
58% |
76% |
|
|
|
|
|
(i)
Price Earnings Ratio (PE Ratio)
PE
ratio shows the investor confident levels. Higher PE ratios will shows a high
level of investor confident. When the demand for the shares increase, PE ratio
goes up. Therefore investor reaction will reflect in terms of the market price.
This ratio is more towards the potential investors.
EPS
(ii)
Dividend Yield
It
measures as follows,
Market
Value per Share
Dividend
Yield is one of the main indicators which investors look at.
04.
Discussion
Observations – Horizontal Analysis
·
Property, plant and equipment shows a
rapid increase compared to base year levels in 2019 & 2020. But later it
has come to a consistent level.
·
Durdans has invested in WIP. However, they
had not properly disclosed WIP balance until 2021. Therefore it shows a 100%
increase in 2021. But 472Mn had already been invested at the beginning of 2021.
Later in 2022 invested Rs. 511Mn. Therefore, actually that has been an
accumulated balance over past year which separately disclosed in 2021.
·
Due to changes in IFRS, lease
classification was changed. As a result it shows as right of use assets.
Therefore, this increase is due to classification change.
·
Other financial assets has drastically
changed. This is mainly due to deposits in financial institutions had significantly
increased in 2022.
·
Current assets has been subject to many changes
due to the changes in operations.
·
Retained earnings has reported a year on
year growth and consistently dividends had paid for last five years. Therefore,
the successful operation is evident and increased net assets position every year.
This is a good indication to potential investors who more focus on dividends
rather gains on short term trading.
·
A significant change in total borrowings
took place in 2019 to 2022.
Changes in borrowings balance as follows
(Rs),
|
Year |
2018 |
2019 |
2020 |
2021 |
2022 |
|
Bank Loans (Year-end
Balance in Rs) |
667,354,665 |
722,778,863 |
795,920,352 |
1,334,984,103 |
1,536,091,129 |
|
Loans obtained during
the year |
295,170,318 |
546,571,439 |
406,304,449 |
890,630,028 |
900,908,810 |
|
Repayments during the
year |
(388,748,252) |
(491,147,241) |
(401,962,961) |
(282,766,277) |
(699,801,784) |
|
Repayment as a % |
36.7% |
40.47% |
35.55% |
16.73% |
31.28% |
|
Interest Cost |
(113,510,850) |
(120,630,554) |
(128,996,372) |
(88,168,536) |
(70,785,930) |
·
Discussion(Contd.)
Observations – Horizontal Analysis (Contd.)
·
In 2021 & 2022 loans obtained amount
has been increased significantly. Out of that total Rs. 890Mn in 2021, Rs. 485Mn
from Commercial Bank and repaid only 19Mn in that year. That is the main reason
to have a lowest repayment % in that year. Further it is evident that the loan had
obtained at the later part of the year (15th of March). Therefore, that could also be an important
reason to have a lesser interest cost in that year. When we look at in 2022
there is no revolving loan. Therefore the interest expenses has drastically
dropped in that year also.
·
When we analyses the borrowing and
repayment pattern, it is somewhat similar to short term nature loan as Durdans
had always paid more than 30% of their total outstanding(Op. Bal. + Obtained). Term
Loan composition is very low to the Short Term loans. That is why gearing ratio
is also in a very low position (less than 40%) as shown in page no. 17. Further
they have accelerate borrowing when the AWPLR was moving down. When we look at
below chart, it shows how drastically AWPLR dropped towards 2021 where Durdans
started to borrow more.
·
Discussion(Contd.)
Observations – Vertical Analysis
(Profit or Loss)
It is clear that the business operation of
the company is in a very stable state after year 2020 when comparing gross
profits. Durdans has maintained a consecutive gross profit margin of 63% - 65%
for last three years.
There is no significant change in other
operating income throughout the past five years.
Administration cost has variations but
year 2022 reports the lowest in the history of past five years which is 40% as
against its sales. However, when analyzing changes in YoY expenses it is only
Rs. 406Mn (25%) increase in administration expenses whereas sales increase by
Rs. 1.5Bn (44%). This is a contrastingly historic moment in terms of revenue growth.
Finance cost and finance income both do
not show considerable variations. Thereby it is clear that the company has well
managed interest rate risk and maintaining a balanced borrowings and
investments which reflect from the operating results for past 5 years.
Net profit has been increasing throughout
the past five years starting from 6% in 2018 to 15% in 2022. It is a good
indication for creditors.
Observations – Vertical Analysis (Balance
sheet - Assets)
Approximately 63% - 67% of total assets were
represented by non-current assets from 2018 to 2020. However, in 2022 it was
reduced to 47%. It shows a reducing trend in investing non-current assets. That
is mainly because of depreciation. Total Depreciation charges were 190Mn and
185Mn respectively in 2021 and 2022.
When we analyze the
movements of PPE there were significant additions to the PPE.
|
Item |
Medical
Equipment |
Computer
Equipment |
||
|
2020/21 |
2021/22 |
2020/21 |
2021/22 |
|
|
Additions (Rs.) |
81,317,242 |
125,135,855 |
27,732,513 |
42,401,832 |
|
% from total additions |
57% |
67% |
19% |
23% |
Therefore, there is no
evidence to comment that investments in fixed assets has been stopped or delayed.
·
Discussion(Contd.)
Observations – Vertical Analysis (Balance
sheet - Assets) (Contd.)
Due to Covid-19 pandemic, hospitals were
fully occupied and heavy investments in medical and computer equipment can be
seen as many outside places were available to serve different type of patients (especially
covid-19 patients, PCR test, report issuing centers, additional cash collection
points etc). Therefore, it is evident how the industry driven by the pandemic.
Further, heavy investments in PPE in most recent two years reflect how
extensively machines and technology required for the operation of the company.
There is a decreasing trend of investment
in subsidiaries. That is mainly because of there was no any major investments
in subsidiaries. Therefore, when total assets are increasing it shows a
downward trend against total assets. Other than that there is no any impairment
or divestments took place during past five years.
Inventory, Trade receivable, Advances and
prepayment balances has been gradually increased since 2018. When the
operational levels are expanding, increase of working capitals is inevitable.
Therefore, in order to cope with the changing day to day operation, it must
have a strong working capital position. Otherwise liquidity of the day to day
functions could not be properly maintained.
Other financial assets also increased due
to increase in investing financial institutes as I have explained in page no.
01.
Observations – Vertical Analysis (Balance
sheet-Equity and Liabilities)
Retained earnings have been continuously increasing
due to growing profitability levels from 2018. It is good sign to the investors
as well as creditors of the Company.
Trade and other payables have drastically
increased in 2022 to a very high level than the average for the past four year.
The repayment periods would have been extended due to adverse impact to the
economy followed by the Easter Sunday Attack and also with Covid-19. Collection
from the debtors would also have been difficult due to challenging economic
situation prevailed in the country.
Deferred tax liability has been declined
followed by increase of investment in Property Plant and Equipment, where at
the initial stage tax base is higher which leads to a deferred tax assets
Contrastingly bank overdraft amount has
been decreased. The reason is in 2021, Durdans has obtained Term Loans to
absorb existing overdrafts in January 2021 as per Note. 12.3.5 in the annual
report 2020/21. (Please refer AWPLR Chart in page no. 20)
·
Discussion(Contd.)
Observations - Ratio Analysis (Liquidity
and Efficiency)
·
Durdan’s current ratio and acid ratio showing
an increasing trend. It is a good sign of achieving healthy short term
liquidity position.
·
Durdan’s AR turnover ratio has gradually
increased from 23 times to 30 times from 2018 to 2022. It is 7 times more
converts its sales in to cash than 2018. Therefore, it is clearly reflect the
efficient credit control function in the company. And also majority of the
patients are not allowed credit terms. Because of that obviously AR turnover
should increase when the sales is growing in this industry.
·
Durdan’s Merchandise turnover ratio shows
a continuous declining from 2018. Since this is a service sector, this does not
play a key role other than medicines and other consumables in the stock and it
is common to any company in this industry.
·
Durdan’s days’ sales uncollected and Days
Sales in inventory both have increased in 2022. Possibly the adverse economic
condition of the country would have led to negotiate credit terms or delays and
low collection is common to every industry during 2021 and 2022 due to various
Macroeconomics reasons. Therefore, regular business cycle was interrupted and
therefore general time to move inventories would have also been impacted.
·
Total asset turnover had been below 1
times during past 4 years, but in 2022 it showed an increase. The main reason
for that is revenue increased by Rs. 1.5Bn (44%) in 2022 while total assets
were increased only by Rs. 750Mn (9%).
Observations - Ratio Analysis (Profitability)
·
Net Profit margin has been doubled in
recent years. A 5% - 6% net profit margin which was in past years increased to
13% and 15% respectively in 2021 and 2022. Gross Profit margin has not
significantly changed despite the net profit increased. The main reasons to
increase overall profitability were due to high levels of demand for covid-19
services, PCR testing facilities, Covid-19 wards and intermediate care centers
with the existing capacity of the overheads. When analyze admin and other
operating expenses there are no drastic changes despite the revenue was
increased.
·
Following to that, entire profitability
indicators have been increased as shown in page no. 15.
·
Discussion(Contd.)
Observations - Ratio Analysis (Solvency)
·
Durdans is a low geared company. Therefore,
the default risk is minimal and the debt holders may be happy and banks may be
waiting to offer more and more loans with the strong balance sheet. There is an
inverse relationship between debt and equity ratios which mainly showing how
the business is funded.
·
Durdans has been maintaining a reasonably
good enough earnings to meet its interest expenses. Therefore, creditors are
guaranteed their debt repayment without a significant doubt. And also in 2022 it
was doubled and come to a significant interest cover position which indicates the
how the pandemic impacted to healthcare industry.
Observations - Ratio Analysis (Market)
·
Price Earnings Ratio (PE Ratio)
Even though the market
value has increased over past 5 years, PE ratio shows a declining trend. The
reason for that is drastic increase of EPS in 2021 & 2022. When the
profitability increase as discussed above, EPS also increases. But market value
depends on the trading liquidity of the share market and shareholders’ demand.
When the performance is high normally demand for the stocks will high leading
to an increase in trading prices. That is reflected in the market prices.
However the increase of EPS is greater that the increase of market prices.
·
Dividend Yield
Durdans has paid a dividend thought
out the past five years. In comparison to the earnings of the company the
dividend amount has been increased for past five years and in 2022 has declared
the highest amount the years. The major change in profitability and other
indicators were started in 2019/20 to 2020/21. With that higher EPS led to
lower dividend yield.
05. Competitor Analysis
To do the analysis, the “Singhe
Hospital PLC” is the only company had published their annual audited
performance for the year 2022. Therefore, below is the summary of its ratio
analysis.
|
Ratio |
2021/22 |
2020/21 |
2019/20 |
2018/19 |
2017/18 |
||||
|
Profitability |
|||||||||
|
GP
Ratio |
54.78% |
61.56% |
60.03% |
61.80% |
59.33% |
||||
|
NP
Ratio |
1.63% |
0.32% |
-0.85% |
-1.99% |
-10.04% |
||||
|
Return
on Assets |
1.87% |
0.25% |
-0.61% |
-1.25% |
-3.18% |
||||
|
ROE |
0.03 |
0.004 |
-0.01 |
-0.02 |
0.12 |
||||
|
BV
per share |
1.15 |
1.18 |
1.17 |
1.11 |
1.07 |
||||
|
Basic
EPS |
0.04 |
0.01 |
-0.01 |
-0.03 |
-0.12 |
||||
|
Liquidity and Efficiency |
|||||||||
|
Current
Ratio |
0.78 |
1.01 |
0.58 |
0.76 |
0.46 |
||||
|
Acid
ratio |
0.29 |
0.55 |
0.32 |
0.44 |
0.26 |
||||
|
AR
Turnover |
47 |
32.5 |
40.57 |
46.24 |
39.2 |
||||
|
Merchandise
Turnover |
5.9 |
4.6 |
6.1 |
6 |
5.55 |
||||
|
Days
sales uncollected |
7 |
12 |
11 |
8 |
9 |
||||
|
Days
sales in inventory |
68 |
92 |
66 |
63 |
65 |
||||
|
Total
Asset Turnover |
1.14 |
0.77 |
0.71 |
0.62 |
0.52 |
||||
|
Solvency |
|||||||||
|
Debt
Ratio |
0.43 |
0.46 |
0.49 |
0.50 |
0.55 |
||||
|
Equity
Ratio |
0.57 |
0.54 |
0.51 |
0.50 |
0.45 |
||||
|
Times
Interest Earned |
1.39 |
1.2 |
0.53 |
1.37 |
-0.57 |
||||
|
|
|
|
|
|
|
||||
|
Market Ratio |
|||||||||
|
PE
Ratio |
55 |
200 |
-140 |
-43.33 |
-13.33 |
||||
|
Dividend
Yield |
No
Dividends has declared |
||||||||
Observations
·
Industry GP margin on average 60%-65%. It
has no major changes between companies.
·
Other all profitability, Solvency and
efficiency measures are very different each other. Durdans is very large in
comparison to Singhe Hospitals PLC. It is clear that Singhe Hospital PLC is not
large enough to compete with Durdans.
06.
Conclusion
In order to conclude the financial
statement analysis we should have a look at the future based in the past
performance. It is a widely accepted norm that past performance do not guarantee
the future. However, without looking at the past, we are unable to predict a
company’s future reasonably.
Among many of the tools, I have
considered “Altman’s Z-score” in this regard. Below 4.1 explains further the
method of calculating z-score and deriving where the company heading to.
6.1
Z-score
The Z-score is a statistical method
of etc……..
Z-score = 3.25+a1x1+a2x2+a3x3+…………an+xn
‘a1’ -
Discriminanat Coefficient (Weights)
‘x1’ -
Discriminanat Variables (eg; Ratios)
|
Variables |
Definition |
Weighing Factor |
|
X1 |
Working Capital /
Total Assets |
6.56 |
|
X2 |
Retained Earnings /
Total Assets |
3.26 |
|
X3 |
EBIT / Total Assets |
6.72 |
|
X4 |
Market Value of
Equity / Book Value of Total Liabilities |
1.05 |
Evaluation
of Z-score results.
Following table illustrate based on
the z-score above, how a company fall into its future risk profile.
|
Z
> 2.99 |
“Safe”
Zone |
|
1.80
< Z > 2.99 |
“Gray”
Zone |
|
Z
< 1.80 |
“Stress”
Zone |
Please refer Annexure – 01 for the
Z-score calculation of Durdans.
According to the z-score of Durdans,
Durdans is in the “safe Zone’’ during the past 5 years.
Therefore, In conclusion, I think Durdans
is in a healthy situation in terms of the Efficiency, Liquidity, Performance,
Solvency and future potential.
07. Annexures
Annexure
– 01: Z-Score Calculation
|
Variable |
Definition |
2021/22 |
2020/21 |
2019/20 |
2018/19 |
2017/18 |
Weighing Factor |
|
X1 |
Working Capital |
0.06 |
(0.04) |
(0.09) |
(0.08) |
(0.09) |
6.56 |
|
|
Total Assets |
||||||
|
X2 |
Retained Earning |
0.2870 |
0.2484 |
0.2013 |
0.2276 |
0.2272 |
3.26 |
|
|
Total Assets |
||||||
|
X3 |
EBIT |
0.1036 |
0.0678 |
0.0460 |
0.0658 |
0.0584 |
6.72 |
|
|
Total Assets |
||||||
|
X4 |
MV of Equity |
0.9712 |
1.1592 |
0.7845 |
0.9356 |
1.1263 |
1.05 |
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|
BV of Total Liabilities |
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Z-Score |
6.31 |
5.48 |
4.48 |
4.87 |
5.01 |
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