1.
Introduction
This report provides a comparative
analysis of financial performances over five years of period from 2018 to 2022
of Ceylon Cold Stores PLC.
Business entities can use various
analytical techniques such as horizontal analysis, vertical analysis, trend analysis,
common size analysis and ratio analysis to understand financial strengths and
weaknesses. The financial information can be compared with past years, budgeted
or benchmarked values, industry figures and with competitor company to get a
relative understanding. This comparison enables financial users to make their
decisions.
For this assignment, Liquidity and
Efficiency ratios, Profitability ratios and Solvency ratios, Market ratios with
a relative analysis for Ceylon Cold Stores PLC over past five-year time period
have been used.
2.
background of the Company
Ceylon
Cold Stores PLC (CCS) is a leading manufacturer and distributor of Beverages
and Frozen Confectionery products and well-known as Elephant House.
CCS
was established in 1866 as the Colombo Ice Company, which in 1863 imported the
country's first ice-making machine. In 1970, the company was listed on the
Colombo Stock Exchange.
CCS
has three fully owned subsidiaries namely, Jaykay Marketing Services (Pvt) Ltd
who operates supermarket chain, LogiPark International (Pvt) Ltd which is a
mega logistic centre and The Colombo Ice Company (Pvt) Ltd who undertakes
manufacture, marketing and sales of Frozen Confectionery products. CCS ‘s
parent Company is John Keells Holdings PLC.
The
main competitors for CCS are from global market competitors such as Coca-Cola
and Pepsi and despite that competition, Elephant house soft drinks remains the
market leader in Sri Lanka.
3.
financial statement ANALYSIS
Financial
Statement Analysis is the process of identifying the financial healthiness of
an entity by properly establishing relationships between the items in the
financial statements and it is a part of a large information processing system
on which informed decisions can be based.
There
are various techniques used for Financial Statements Analysis;
·
Horizontal Analysis – Comparison of Financial
Statements across the time
·
Trend Analysis – Part of horizontal
analysis
·
Vertical Analysis – Comparison of
Financial Performance/ Position to a base amount
·
Ratio Analysis - Identification of relations among items in
the Financial Statements
The
type of financial analysis undertaken varies according to the specific interest
of the analyst. Financial Statement Analysis is vital in effective financial
management to drive a financially successful business.
3.1.
horizontal analysis
Horizontal analysis
is an approach used to analyze financial statements by comparing specific
financial information for a certain accounting period with information from
other periods.
This
technique is used to identify the change in absolute and percentage terms.
·
Rupee change = Analysis period amount-
base period amount
·
Percentage change = Rupee change/ base
period amount * 100
3.1.1.
Horizontal
Analysis of Financial Position
Table
1 – Horizontal Analysis of Financial Position (Rupee Change)
Table
2 – Horizontal Analysis of Financial Position (Percentage Change)
3.1.2.
Horizontal
Analysis of Financial Performance
Table
3 – Horizontal Analysis of Financial Performance (Rupee Change)
Table
4 – Horizontal Analysis of Financial Performance (Percentage Change)
After performing horizontal analysis, following observations
can be derived and analyzed with the Annual report information of 2021/2022;
Financial Performance
·
Revenue and cost of
sales figures were fluctuating over the study period and the company has
achieved a positive growth momentums in revenue and gross profits while net
profit growth has been negatively affected by increased income tax expense for
2021/2022.
·
As per the Annual Report 2021/2022 of CCS, the
performance of the Retail segment was upheld by higher customer penetration and
increased footfall at stores, increased efficiency in meeting online orders,
and continued expansion of its reach. In
contrast, cost pressure stemming from rising input costs and inability to fully
passing on these cost increases to customers pressured the operating
profitability of the Manufacturing Segment.
·
Further, the slight
increase in operating expenses and four times increase in finance cost compared
to previous year also have been contributed to lower net profit for the period
of 2021/2022.
·
As explained in
Annual Report of the company, both the Retail and Manufacturing segments have carried
out brand building campaigns resulting in an increase in selling and
distribution expenses. Further, administrative expenses expanded mainly due to
an increase in personnel costs and additional expenses associated with
maintaining safety protocols across our manufacturing facilities and retail outlets.
Other operating expenses increased during the year due to loss from disposals
of property, plant and equipment and exchange losses.
·
The finance cost has
been increased reflecting the gradual increase in market interest rates toward
the latter part of the year.
Financial Position
·
Total assets expanded
by 16% as at the year-end reflecting high capital expenditure and increase in
working capital investments.
·
Total expenditure on
property, plant and equipment comprise investments in outlet expansion,
acquisition of the water botting-plant and warehousing. Further, the company
made significant investments in its digital infrastructure during the year; the
Manufacturing segment enhanced its digital distributor management system while
the Retail segment upgraded its online retail platform and enhanced its
in-store customer experience through the introduction of new technology.
·
Meanwhile, working
capital investments increased sought to secure inventories given disruptions to
supply chains and restrictions on imports.
·
The Group has pursued
debt funded capacity expansions in recent years resulting in a gradual increase
in borrowings although its debt-to-equity ratio remains healthy given continued
business expansion. The company’s long-term borrowings increased as it proactively
converted its short-term debt to longer term facilities given the prevalent low
interest rate environment during the first half of the year.
·
Meanwhile, the company’s
equity increased reflecting strong profit generation and retention during the
year.
3.2.
trend analysis
Trend
analysis is a strategy used in making future predictions based on historical
data and considers a base year for comparison.
Revenue,
cost of sales and gross profit of the CCS was analyzed using trend analysis
which was used company’s financial statements of last five years from 2018 to
2022, considering 2017 as the base year for 100%.
3.2.1.
Trend
Analysis of Financial Performance
Table 5 – Trend Analysis of Financial
Performance
Graph 1 – Trend Analysis of Revenue
and Profits
3.2.2.
Trend
Analysis of Financial Position
Table 6 – Trend Analysis of Financial
Position
Graph 2 – Trend Analysis of Assets
and Liabilities
Following trends can be observed with the trend analysis
of CCS for the period from 2017-2022;
·
Despite the
volatilities in operating performance, the company presents positive trends in
revenue and gross profits.
·
Net profits are also
growing in a low phase under stressed economic environment.
·
The balance sheet of
the company has grown over the period and significant increase can be notified
in the current assets and current liabilities as witnessed by prevailed
conditions in the country.
3.3.
vertical analysis
This is a method of analyzing
financial statements that list each line item as a percentage of a base figure
within the statement.
Base amount for common size
statements are;
·
Income statement –
Total assets
·
Balance sheet –
Revenue
Vertical analysis makes it easier
to understand the correlation between single items on a balance sheet and the
bottom line, expressed in a percentage.
3.3.1.
Vertical
Analysis of Financial Performance
Table
7 – Vertical Analysis of Financial Performance
3.3.2.
Vertical
Analysis of Financial Position
Table
8 – Vertical Analysis of Financial Position
The
vertical analysis presents composition of assets and liabilities for the
Statement of Financial Position that reveals;
·
From total assets of CCS, on average 80%
was non-current assets for the period under concern.
·
However, at the end of March 2022, current
assets composition has grown to 25% of total assets reflecting increase
investment on working capital under the stressed economic conditions.
·
When analyzing liabilities, on average 78%
of financing is from shareholders’ equity and non-current liabilities stood for
around 15% on average for the period under concern.
·
Current liabilities composition also has
grown-up as end of March 2022 as the consequences of tide working capital
financing.
3.4.
ratio analysis
Ratio
analysis is the systemic use of ratios to interpret financial statements and will
facilitate to measure relationships, scandalize financial statements, identify
industry benchmarks and provide summary statics.
Ratio
analysis can be done on following key areas;
·
Liquidity and efficiency : Ability to meet
short term obligations and to efficiently generate revenue
·
Solvency : Ability to generate future
revenues and meet long term obligations
·
Profitability : Effectiveness in using
resources to generate profits
·
Market :
Ability to generate positive market expectations
3.4.1 Liquidity and Efficiency Ratios
Table 9 – Liquidity Ratios
Merchandise Turnover Ratio
The merchandise/ inventory turnover ratio is the number
of times a company's inventory has been sold and restocked in a certain period
of time and calculated by dividing the cost of items sold by the average
inventory. In general, the higher the inventory turnover, the better the
company performs because the goods sell quickly.
From 2018 to 2022, there is a gradual decline in
merchandise turnover ratio from 8.1 times to 5.5 times that implies the
business is having strained liquidity.
Accounts Receivables Turnover
The accounts receivable turnover ratio calculates how
many times a company's average accounts receivable is collected over a certain
time period. The formula is net sales divided by average accounts receivable
for the period. A greater receivables turnover ratio indicates that receivables
are converted into cash more frequently.
Over the study period, this ratio recorded a slight
decline may due to delays in debtor collection and it is detrimental to the
business.
Total Asset Turnover
This ratio assesses how efficiently a company uses its
assets to generate revenue. The asset turnover ratio is calculated by dividing
net sales by a company's total or average assets. Higher turnover ratios
indicate that the company is making better use of its assets.
The company has maintained same ratio for last three
years reflecting its continuous efficiency in asset utilization to generate
sales.
Days’ Sales in Inventory
This ratio symbolizes inventory liquidity and it is used
to determine the number of days that goods remains in stock. If a company is
doing well, it should have a low ratio, which suggests that inventory gets
cleared in a short period of time.
Inventory holding days of CCS has been increased with the
build-up of buffer stocks cater the demand despite supply chain disruptions and
import restrictions.
Days’ Sales Uncollected
This is the average number of days it takes a company to
convert credit sales into cash or collect its account receivables. This is
computed by dividing total accounts receivable by total net credit sales over a
certain time period and multiplied by the number of days in the time period.
The number of days debtors held for collection is also
increased under current economic crisis. However, the company should follow working
capital management strategies, maintain good relationships to realize sales early.
|
Liquidity Ratios |
2018 |
2019 |
2020 |
2021 |
2022 |
|
Current Ratio |
1.58 |
1.62 |
1.50 |
1.31 |
1.18 |
|
Acid Test Ratio |
1.12 |
1.05 |
0.89 |
0.84 |
0.69 |
Table 10 – Efficiency Ratios
Current Ratio
The current ratio is a liquidity ratio that assesses a
company's capacity to pay short-term or one- year obligations.
Current ratio has been weaken over the past three years.
Acid Test Ratio
This ratio measures company's capacity to satisfy short-term
obligations with its most liquid assets and is an indication of its short-term
liquidity position. It is a more conservative measure than the current ratio
since inventory, prepaid expenses, and other less liquid current assets are
removed from the calculation.
For the period from 2018 to 2022, acid ratio has been
reduced reflecting the drained real liquidity of the company.
3.4.2 Solvency Ratios
Table 11 – Solvency Ratios
Debt Ratio
This shows the degree to which a company has used debt to
finance its assets. In general, company who maintain higher debt means, higher
financial risk and also weaker solvency. Therefore, maintaining a lower debt
proportion is healthier for higher solvency.
However, debt to total assets ratio of CCs has been increased
with new long term borrowings.
Equity Ratio
This represents the owners’ contribution to total assets
and higher the value, less leverage in capital structure.
As company has financially levered during 2021/2022,
equity ratio has slightly narrowed down.
Interest Coverage Ratio
This ratio calculates how many times the interest charges
are covered by funds available to pay interest expenses.
CCS is a low geared company as debt financing is lower
compared to equity financing and thus has lesser finance cost. So, interest
cover ratio was high except for year 2021/2022 where debt financing also
increased.
3.4.3 Profitability Ratios
Table 12 – Profitability Ratios
Gross Profit (GP) Margin
Gross profit margin is calculated as gross profit divided
by revenue of the company. The gross profit margin is different from one
industry to another industry. A higher gross profit margin can make a
reasonable profit on sales, as long as it keeps overhead costs in control.
A higher GP ratio has been maintained by the company and
it has been reduced with the cost of sales increase that exceeded revenue
increase.
Net Profit (NP) Margin
Net profit margin simply mentions how much net income is
generated as a percentage of revenue. A higher net profit margin means that the
company able to effectively control its cost and the product can sell
significantly higher than its costs.
CCS’s NP margin has dropped in 2021/22 with the pressure
from increase operating costs, finance cost and taxes.
Return on Equity (ROE)
Return on Equity means how much profit a company earns
with the money shareholders have invested. ROE is calculated by net income
divided by shareholders' equity. Higher ROE is usually helped to generate cash
internally because that company less dependent on debt financing.
In relation to CCS’s ROE, the ratio shows a declining
trend over the study period with the stressed earnings with the changes in
business environment.
Return on Assets (ROA)
Return of asset ratio provides how much profit a company
able to generate from its assets. This ratio shows how efficient a company’s
management is in generating from their assets on their balance sheet. It
calculates by net income divided by company average total assets.
ROA of CCS for the period from 2018 to 2022 also declined
parallel to ROE implying negative signs for profitability of the company.
Earnings per Share (EPS)
EPS is the profit attributable to each equity share based
on the net profit for the period after taxation and preference share dividends
divided by number of equity shares in issue.
EPS ratio also shows same declining trend of profit
ratio. Number of shares of CCS for the period from 2018 to 2022 has not been
changed.
Book value per share (BVS)
Book value per share is the total common equity divided
by the number of ordinary shares.
Despite the challenges that prevailed, the BVS of CCS has
been increased with the increased assets base over the period.
3.4.4 Market
related Ratios
|
Market Performance Ratios |
2018 |
2019 |
2020 |
2021 |
2022 |
|
Dividend yield |
1.6% |
2.6% |
3.1% |
20.1% |
20.6% |
|
Price-Earnings Ratio |
37.99 |
32.40 |
32.24 |
3.63 |
2.58 |
Table 13 – Market Ratios
Price-Earnings (PE) Ratio
P/E ratio indicates that how much an investor in common
stock pays per rupee of earnings. Firms with higher P/Es are often considered
as having significant prospects for future growth as this ratio is used for
market valuation. However, if a firm has low earnings also, the P/E ratio gives
a higher value. Thus, this ratio has to be carefully interpreted and compared
with industry norms.
With a higher share price prevailed in year 2018, i.e.
Rs. 811, PE ratio was higher and with the drop of share price over the period
accompanied by recent years net profit decline, there is massive drop in PE ratio
for 2020/2021 and 2021/2022. This shows a negative prospects of company’s
earnings and growth. PE ratio decline results in lower market valuation for
CCS.
Dividend Yield
The dividend yield is the dividend per share divided by
the market price per share.
As market price drastically dropped from 2018 to 2022
(from Rs. 811 to Rs. 38.90), dividend yield has been significantly improved.
But, this ratio does not provide a positive sign of the future prospects of the
business as a market related ratio when analyzing reasons for increase.
4.
Conclusion
Based
on the analysis the following conclusion can be arrived;
·
Despite higher input
costs in the Manufacturing Sector owing to rising global commodity prices,
supply chain disruptions and the sharp depreciation of the Rupee, the company
was able to leverage scale efficiencies in the Retail sector to maintain its
Gross Profit Margin.
·
However, other
profitability ratios of NP margin, ROE, ROA and EPS were declining for the
period with the deteriorated net earnings witnessed by disruptions caused by Covid
19 pandemic and recent economic crisis.
·
Liquidity and
efficiency ratios also show negative trends with stressed operating environment
with supply chain disruptions, inflation, exchange rate depreciation, etc.
·
Solvency ratios
reflected increased gearing with new borrowings and Market ratios revealed
negative prospects with drastic share price drops in the recent past.
·
The company should
focus on working capital management strategies based on highly volatile
business environment, production efficiencies to reduce costs and increase
margins and analyze more profitable products to sustain business under
prevailing economic crisis in the country.
·
The study can be
concluded that the company should give special attention on company’s existing
credit policy and as well as market strategies to develop the profit of the
company.
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