Union Chemicals Lanka PLC

 

Executive Summary

 

The key objective of this task is to analyze United Chemicals Lanka PLC’s financial statements during the period from 2017/18 to 2021/22. Financial data were collected from the annual reports published on the Colombo Stock Exchange by the aforesaid company. For the analysis, different methods have been used throughout the report such as horizontal analysis, vertical analysis, trend analysis, ratio analysis and Altman’s Z - Score model. For comparison purpose another listed company in Colombo Stock Exchange; Industrial Asphalts (Ceylon) PLC has been considered in ratio analysis.

1.      Background of the company

 

Union Chemicals Lanka PLC is a manufacturing trading organization for chemicals & allied products specialized in waterborne polymer dispersions. It is a leading supplier of chemical products such as paints, inks, packaging, detergents, cosmetics, rubber, latex, textile, food and pharmaceutical industries.

 

Union Chemicals Lanka PLC has begun chemical manufacturing in 1984 under Union Carbide Ceylon LTD. It remained as an affiliate of Union Carbide Corporation (UCC) until year 2000 after which Dow Chemicals acquired UCC and the company was renamed as Union Chemicals Lanka Ltd. In November 2003, Dow Chemicals divested itself from Union Chemicals Lanka Ltd.

Union Chemicals Lanka PLC is the pioneering organization for manufacture of waterborne polymer dispersions in Sri Lanka. The company ventured into consumer market through manufacturing a range of waterborne coatings for wood and leather. Union Chemicals Lanka PLC represents Dow Chemicals (USA), Eastman (USA), Macropolymers PTE Ltd (India), Dominian Color Corporation (Netherlands), and Sunflag Chemicals (India) for a range of chemical products.

 

2.      Horizontal analysis

 

Horizontal analysis is a comparative analysis of a company’s financials across the years by comparing year by year values with figures of a base year. In here basically rupee change and percentage change are compared.

 

Rupee change = Analysis period amount – Base period amount

Percentage change = (Rupee change/Base period amount)*100%

Base year = 2016/17

Time period = from 2017/18 to 2021/22

2.1  Horizontal analysis on financial position

 

Rupee change (‘000)

	2017/18	2018/19	2019/20	2020/21	2021/22
Assets
Property, plant & equipment	6,350	53,108	99,336	125,014	165,494
Intangible assets	(6)	(7)	(7)	(7)	(7)
Retirement benefit assets	638	1,339	2,239	2,283	215
Other financial assets	277	114	50	387	220
Non-current assets	7,259	54,554	101,618	127,677	165,922
Inventories	18,552	45,655	80,452	44,843	188,813
Trade & other receivables	(6,745)	38,216	5,905	32,682	173,554
Cash & cash equivalents	(8,522)	(69,114)	(61,961)	(13,161)	5,590
Current assets	3,285	14,757	24,396	64,364	367,957
Total assets	10,544	69,311	126,014	192,041	533,879
Equity
Stated capital	-	-	-	-	-
Retained earnings	23,781	56,677	108,573	174,980	300,960
Equity attributed to the owners of the company	23,781	56,677	108,573	174,980	300,960
Liabilities
Retiring benefit obligation	1,003	3,344	7,167	11,608	5,978
Differed tax liabilities	1673	(2,776)	(5,543)	(4,474)	(2,222)
Loans & borrowings	-	36,312	39,965	7,043	2,690
Non-current liabilities	2,676	36,880	41,589	14,177	6,446
Loans and borrowings	19,927	26,802	(2,060)	9,759	58,557
Trade & other payables	(25,306)	(41,232)	(28,271)	(16,837)	149,227
Current tax liability	(11,346)	(8,085)	3,474	7,944	12,392
Dividend payable	2541	(2)	(351)	2,415	(1,673)
Bank overdraft	-	(1,729)	3060	(397)	7970
Current liabilities	(15,913)	(24,246)	(24,148)	2,884	22,6473
Total liabilities	(13,237)	12,634	17,441	17,061	23,2919
Total equity & liabilities	10,544	69,311	126,014	192,041	53,3879

 

 

 

 

 

 

 

 

 

Percentage change

	2017/18	2018/19	2019/20	2020/21	2021/22
Assets
Property, plant & equipment	3.60%	30.15%	56.39%	70.96%	93.94%
Intangible assets	-85.71%	-100.00%	-100.00%	-100.00%	-100.00%
Retirement benefit assets	10.88%	22.83%	38.18%	38.93%	3.67%
Other financial assets	374.32%	154.05%	67.57%	522.97%	297.30%
Non-current assets	3.99%	29.96%	55.80%	70.11%	91.11%
Inventories	11.84%	29.15%	51.36%	28.63%	120.54%
Trade & other receivables	-3.24%	18.33%	2.83%	15.68%	83.26%
Cash & cash equivalents	-12.00%	-97.30%	-87.23%	-18.53%	7.87%
Current assets	0.75%	3.38%	5.59%	14.76%	84.37%
Total assets	1.71%	11.21%	20.38%	31.06%	86.35%
Equity
Stated capital	0.00%	0.00%	0.00%	0.00%	0.00%
Retained earnings	5.07%	12.09%	23.15%	37.31%	64.18%
Equity attributed to the owners of the company	4.91%	11.71%	22.44%	36.16%	62.19%
Liabilities
Retiring benefit obligation	9.81%	32.70%	70.08%	113.50%	58.45%
Differed tax liabilities	21.77%	-36.12%	-72.13%	-58.22%	-28.91%
Loans & borrowings	0.00%	0.00%	10.06%	-82.38%	-61.81%
Non-current liabilities	14.94%	205.90%	232.19%	79.15%	35.99%
Loans and borrowings	102.03%	137.23%	-10.55%	49.97%	299.82%
Trade & other payables	-35.74%	-58.23%	-39.92%	-23.78%	210.73%
Current tax liability	-69.69%	-49.66%	21.34%	48.79%	76.11%
Dividend payable	31.58%	-0.02%	-4.36%	30.02%	-20.80%
Bank overdraft	0.00%	-100.00%	176.98%	-22.96%	460.96%
Current liabilities	-13.67%	-20.83%	-20.75%	2.48%	194.57%
Total liabilities	-9.86%	9.41%	12.99%	12.70%	173.42%
Total equity & liabilities	1.71%	11.21%	20.38%	31.06%	86.35%

 

The property, plant and equipment has increased drastically from 2018/19 to 2021/22 as the highest for the period with a steep increase in 2021/22 compared to the base year. Inventory has increased drastically in 2018/19 and in 2019/20 and a gradual decrease in 2020/21 followed by another drastic increase in 2021/22 as the highest amount recorded for the considered period. Trade and other receivables have a drop in 2017/18 compared to the base year followed by an increase in 2019/20 and then a continuous increase till 2021/22 which is the highest. Intangible assets decreased over the years, other financial assets recorded highest increase in 2020/21. Cash and cash equivalents decreased over the considered period except in 2021/22 which records the highest amount for the period. Loans and borrowings has increased in 2017/18 and 2018/19 followed by a decrease in 2020/21 and an increase in 2021/22 as the highest. Bank overdraft has decreased in 2018/19 and 2020/21 with an increase in 2019/20 and 2021/22. Trade and other payables decreased till 2020/21 followed by an increase in 2021/22. Stated capital has remained constant over the years. However total assets has increased constantly during the years with highest increase in 2021/22.

2.2  Horizontal analysis on financial performance

Rupee change (‘000)

	2017/18	2018/19	2019/20	2020/21	2021/22
Revenue	(60,846)	113,150	194,587	264,923	835,517
Cost of sales	(4,859)	(174,584)	(209,098)	(226,750)	(732,201)
Gross profit	(65,705)	(61,434)	(14,511)	38,173	103,316
Other income	(5,458)	1,172	2,466	(1,228)	(232)
Selling and distribution expenses	(2,145)	(873)	(8,008)	(7,673)	(3,216)
Administrative expenses	5,006	786	(4,755)	(10,477)	(20,397)
Result from operating activities	(68,302)	(60,349)	(24,808)	18,795	79,471
Finance income	4,422	(407)	(2,387)	(1,756)	(1,618)
Finance cost	299	(9,081)	(4,142)	(970)	(10,165)
Net finance cost	4,721	(9,488)	(6,529)	(2,726)	(11,783)
Profit before tax	(63,581)	(69,837)	(31,337)	16,069	67,688
Income tax expense	17,446	21,778	9,604	(4,694)	7,274
Profit for the year	(46,135)	(48,059)	(21,733)	11,375	74,962

 

Percentage change

	2017/18	2018/19	2019/20	2020/21	2021/22
Revenue	-7.99%	14.86%	25.56%	34.80%	109.76%
Cost of sales	0.87%	31.19%	37.35%	40.50%	130.79%
Gross profit	-32.62%	-30.50%	-7.20%	18.95%	51.30%
Other income	-70.34%	15.10%	31.78%	-15.82%	-2.99%
Selling and distribution expenses	14.73%	5.99%	54.98%	52.68%	22.08%
Administrative expenses	-8.39%	-1.32%	7.97%	17.55%	34.17%
Result from operating activities	-50.62%	-44.73%	-18.39%	13.93%	58.90%
Finance income	0.00%	0.00%	0.00%	0.00%	0.00%
Finance cost	-10.49%	318.52%	145.28%	34.02%	356.54%
Net finance cost	973.40%	-1956.29%	-1346.19%	-562.06%	-2429.48%
Profit before tax	-46.96%	-51.58%	-23.14%	11.87%	49.99%
Income tax expense	-45.13%	-56.33%	-24.84%	12.14%	-18.81%
Profit for the year	-47.69%	-49.68%	-22.46%	11.76%	77.49%

 

There is a significant increase in revenue from 2018/19 to 2021/22 despite the decrease in 2017/18. The cost of sales also has increased accordingly from 2018/19 to 2021/22. Due to the high increase of cost of sales than revenue gross profit has decreased in 2017/18, 2018/19 and 2019/20 compared to base year and increased in 2020/21 and 2021/22 with highest recorded in 2021/22. Net profit also behaved as gross profit with decrease in 2017/18, 2018/19 and 2019/20 and increased in 2020/21 and 2021/22 respectively.

3.      Trend analysis

 

3.1  Trend analysis on financial position

	2017/18	2018/19	2019/20	2020/21	2021/22
Assets
Property, plant & equipment	103.60%	125.62%	120.16%	109.32%	113.44%
Intangible assets	14.29%	0.00%	0.00%	0.00%	0.00%
Retirement benefit assets	110.88%	110.78%	112.49%	100.54%	74.62%
Other financial assets	474.32%	53.56%	65.96%	371.77%	63.77%
Non-current assets	103.99%	124.97%	119.89%	109.18%	112.35%
Inventories	111.84%	115.47%	117.20%	84.98%	171.46%
Trade & other receivables	96.76%	122.29%	86.90%	112.49%	158.42%
Cash & cash equivalents	88.00%	3.07%	472.75%	637.92%	132.40%
Current assets	100.75%	102.61%	102.14%	108.68%	160.66%
Total assets	101.71%	109.35%	108.25%	108.87%	142.19%
Equity
Stated capital	100.00%	100.00%	100.00%	100.00%	100.00%
Retained earnings	105.07%	106.68%	109.87%	111.50%	119.56%
Equity attributed to the owners of the company	104.91%	106.48%	109.60%	111.21%	119.12%
Liabilities
Retiring benefit obligation	109.81%	120.85%	128.17%	125.53%	74.22%
Differed tax liabilities	121.77%	52.46%	43.63%	149.91%	170.13%
Loans & borrowings	0.00%	0.00%	110.06%	17.62%	38.19%
Non-current liabilities	114.94%	266.14%	108.59%	53.93%	75.91%
Loans and borrowings	202.03%	117.42%	37.71%	167.65%	266.60%
Trade & other payables	64.26%	65.00%	143.82%	126.88%	407.66%
Current tax liability	30.31%	166.08%	241.03%	122.63%	118.36%
Dividend payable	131.58%	75.98%	95.66%	135.95%	60.92%
Bank overdraft	0.00%	0.00%	0.00%	27.81%	728.15%
Current liabilities	86.33%	91.71%	100.11%	129.30%	287.44%
Total liabilities	90.14%	121.37%	103.27%	99.75%	242.60%
Total equity & liabilities	101.71%	109.35%	108.25%	108.87%	142.19%

 

Total assets, total equity and total liability have increased during the years and has the highest amount recorded in 2021/22 for all these categories.

 

 

3.2  Trend analysis on financial performance

	2017/18	2018/19	2019/20	2020/21	2021/22
Revenue	92.01%	124.84%	109.31%	107.36%	155.60%
Cost of sales	100.87%	130.06%	104.70%	102.30%	164.26%
Gross profit	67.38%	103.15%	133.52%	128.19%	127.19%
Other income	29.66%	388.01%	114.49%	63.88%	115.25%
Selling and distribution expenses	114.73%	92.39%	146.22%	98.52%	79.96%
Administrative expenses	91.61%	107.72%	109.41%	108.88%	114.14%
Result from operating activities	49.38%	111.94%	147.66%	139.60%	139.47%
Finance income	0.00%	37.75%	32.40%	166.49%	108.73%
Finance cost	89.51%	467.55%	58.61%	54.64%	340.64%
Net finance cost	1073.40%	-172.94%	67.13%	37.08%	504.15%
Profit before tax	53.04%	91.29%	158.72%	145.55%	134.08%
Income tax expense	54.87%	79.58%	172.11%	149.21%	72.40%
Profit for the year	52.31%	96.20%	154.08%	144.14%	158.81%

 

There is a drastic increase in profit for the year in 2019/20 followed by a decrease in 2020/21 and then a gradual increase with highest in 2021/22 for the considered five years period.

 

 

 

 

 

 

 

 

 

4.      Vertical analysis

 

Vertical analysis use to analyze a line item of the financial statement as a total of the category which the particular line item belongs. As an example any line item comes under assets are compared with total asset figure.

Common size percentage = (Analysis amount/Base amount)*100%

 

4.1  Vertical analysis on financial position

	2017/18	2018/19	2019/20	2020/21	2021/22
Assets
Property, plant & equipment	29.03%	33.35%	37.02%	37.17%	29.66%
Intangible assets	0.00%	0.00%	0.00%	0.00%	0.00%
Retirement benefit assets	1.03%	1.05%	1.09%	1.01%	0.53%
Other financial assets	0.06%	0.03%	0.02%	0.06%	0.03%
Non-current assets	30.12%	34.42%	38.12%	38.23%	30.21%
Inventories	27.86%	29.42%	31.86%	24.87%	29.98%
Trade & other receivables	32.08%	35.88%	28.80%	29.76%	33.16%
Cash & cash equivalents	9.94%	0.28%	1.22%	7.14%	6.65%
Current assets	69.88%	65.58%	61.88%	61.77%	69.79%
Total assets	100.00%	100.00%	100.00%	100.00%	100.00%
Equity
Stated capital	2.39%	2.18%	2.02%	1.85%	1.30%
Retained earnings	78.36%	76.45%	77.59%	79.47%	66.82%
Equity attributed to the owners of the company	80.74%	78.63%	79.61%	81.32%	68.13%
Liabilities
Retiring benefit obligation	1.79%	1.97%	2.34%	2.69%	1.41%
Differed tax liabilities	1.49%	0.71%	0.29%	0.40%	0.47%
Loans & borrowings	0.00%	5.28%	5.37%	0.87%	0.23%
Non-current liabilities	3.27%	7.97%	7.99%	3.96%	2.11%
Loans and borrowings	6.28%	6.74%	2.35%	3.61%	6.78%
Trade & other payables	7.24%	4.30%	5.72%	6.66%	19.10%
Current tax liability	0.78%	1.19%	2.65%	2.99%	2.49%
Dividend payable	1.68%	1.17%	1.03%	1.29%	0.55%
Bank overdraft	0.00%	0.00%	0.64%	0.16%	0.84%
Current liabilities	15.98%	13.40%	12.40%	14.72%	29.76%
Total liabilities	19.26%	21.37%	20.39%	18.68%	31.87%
Total equity & liabilities	100.00%	100.00%	100.00%	100.00%	100.00%

 

 

 

Trade and other receivables comprise the majority of total assets in 2017/18, 2018/19 and 2021/22. As well as property, plant and equipment comprises the majority of total assets in 2019/20 and 2020/21. Inventory’s portion out of total assets increased till 2019/20 and then declined in 2020/21 followed by an increase in 2021/22. Cash amount out of total assets steeply decreased in over the years after 2017/18 followed by a gradual increase in 2020/21 and a decrease in 2021/22. Intangible assets, retirement benefit obligations and other financial assets represented less than 2% out of total assets over the years.

 

4.2  Vertical analysis on financial performance

	2017/18	2018/19	2019/20	2020/21	2021/22
Revenue	100.00%	100.00%	100.00%	100.00%	100.00%
Cost of sales	-80.62%	-83.99%	-80.45%	-76.65%	-80.92%
Gross profit	19.38%	16.01%	19.55%	23.35%	19.08%
Other income	0.33%	1.02%	1.07%	0.64%	0.47%
Selling and distribution expenses	-2.39%	-1.77%	-2.36%	-2.17%	-1.11%
Administrative expenses	-7.81%	-6.74%	-6.74%	-6.84%	-5.02%
Result from operating activities	9.51%	8.53%	11.52%	14.98%	13.43%
Finance income	1.11%	0.33%	0.10%	0.15%	0.11%
Finance cost	-0.36%	-1.36%	-0.73%	-0.37%	-0.82%
Net finance cost	0.74%	-1.03%	-0.63%	-0.22%	-0.71%
Profit before tax	10.25%	7.50%	10.89%	14.76%	12.72%
Income tax expense	-3.03%	-1.93%	-3.04%	-4.22%	-1.97%
Profit for the year	7.23%	5.57%	7.85%	10.54%	10.75%

 

2020/21 has the highest gross profit margin, result from operating activities margin and profit before tax margin respectively for the period. 2021/22 has the highest profit for the year margin during the considered period.

5.      Ratio Analysis

 

Ratio analysis is used for comparing different line items of the financial statements to come up with a clear picture of company’s performance in different aspects including the company’s;

·         Liquidity and efficiency

·         Solvency

·         Profitability

·         Market

For comparison purpose we have selected a similar manufacturing company - Industrial Asphalts (Ceylon) PLC (ACL), which also manufactures chemical products such as paints, adhesives and coatings, etc. UCL figures have been compared with same ratios which were also calculated for ACL.

5.1  Liquidity and efficiency

	2017/18	2018/19	2019/20	2020/21	2021/22
Current ratio	4.37	4.89	4.99	4.20	2.35
Acid test ratio	2.63	2.70	2.42	2.51	1.34
Account receivable turnover	3.42	3.90	4.15	4.51	5.12
Merchandise turnover	3.40	3.89	3.50	3.59	4.72
Day’s sales uncollected	105	103	82	86	87
Day’s sales inventory	113	101	113	93	98
Total asset turnover	1.12	1.33	1.34	1.32	1.63

(UCL)

	2017/18	2018/19	2019/20	2020/21	2021/22
Current ratio	0.84	0.42	0.48	0.79	3.77
Acid test ratio	0.38	0.14	0.39	0.76	1.25
Account receivable turnover	0.62	1.88	4.07	2.42	0.70
Merchandise turnover	0.39	1.14	7.74	42.57	9.01
Day’s sales uncollected	419	125	143	247	119
Day’s sales inventory	968	212	32	7	38
Total asset turnover	0.18	0.11	0.22	0.45	0.10

(ACL)

 

Current ratio: This ratio uses to measure the short-term debt repaying ability of the company. This ratio shouldn’t be too much high or too much low. If the ratio is too much low the company won’t be able to pay its short term loans which indicates a working capital problem. On the other hand if the ratio is too high it indicates that unutilized assets which need to be used for investments. UCL’s current ratio has increased from 2017/18 till 2019/20 which is the highest recorded followed by a decrease in 2020/21 to the lowest in 2021/22. Overall company has maintained a good working capital position all during the period compared to ACL except in 2021/22.

 

Acid test ratio: This ratio uses current assets after excluding less liquid assets like inventory to measure the company’s ability to pay short term debt (ability to pay short term debts using more liquid assets). UCL’s acid test ratio has increased till 2018/19 as the highest recorded amount and a slight decrease in 2019/20 followed by a slight increase in 2020/21 and lowest in 2021/22. Which shows a good working capital position of the company compared to ACL.

 

Account receivables turnover: This ratio calculates the frequency which the company turns its accounts receivables into cash during a year. If this ratio is high it indicates a good level in company’s efficiency. UCL’s accounts receivable turnover has increased continuously over the years from 2017/18 with highest recorded in 2021/22. Accounts receivables turnover is at a beneficial level for UCL compared to ACL.

 

 

 

Merchandise turnover: Merchandise turnover ratio calculates how many times a company is turning its inventory in to sales during a year (times inventory being replaced during a year). If the merchandise ratio is high it indicates a high level in efficiency of the company. UCL’s merchandise turnover has increased till 2018/19 which is the highest followed by decrease thereafter. Overall UCL has kept a good level in merchandise turnover ratio during the period. ACL’s merchandise turnover ratio has increased drastically in 2020/21 due to increase in cost of sales and lower inventory levels in 2019/20 and 2020/21 compared to previous years.

 

Day’s sales uncollected: This ratio measures the average days taken to collect cash after a credit sales. If the ratio is low it indicates a good level in efficiency of the company. UCL’s day’s sales uncollected increased in 2017/18 which is the highest recorded followed by a constant decrease till 2019/20 which is the lowest and a slight increase in 2020/21 and 2021/22. UCL keeps a healthy position compared to ACL on day’s sales uncollected.

 

Day’s sales inventory: Day’s sales inventory measures the average dates taken to replace the inventory. Lower the ratio better the performance. UCL’s day’s sales inventory has increased in 2017/18 to 2019/20 which are the highest and lowest recorded in 2020/21. Overall company has maintained a good level of day’s sales inventory. ACL was able to lower its day’s sales inventory in 2019/20, 2020/21 and 2021/22 than UCL due to lower level of inventory and high amount of cost of sales.

 

Total assets turnover: Total assets turnover is used to measure how efficiently assets being used to generate revenue. If the ratio is high it indicates high level of efficiency. UCL’s total assets turnover has decreased from 2019/20 to 2020/21 followed by an increase in 2021/22 which is the highest in five years. Since the ratio is more than 1 in all five years UCL is efficient in utilizing their assets on generating revenue than ACL.

 

5.2  Solvency

	2017/18	2018/19	2019/20	2020/21	2021/22
Debt ratio	19%	21%	20%	19%	32%
Equity ratio	81%	79%	80%	81%	68%
Times interest earned	-	8.28	18.22	68.59	18.98

(UCL)

	2017/18	2018/19	2019/20	2020/21	2021/22
Debt ratio	59%	18%	22%	33%	4%
Equity ratio	41%	81%	78%	67%	96%
Times interest earned	1.57	0.64	1.38	12.89	13.89

(ACL)

 

Debt ratio: Debt ratio is used to measure the proportionate of total debt out of total assets. UCL’s debt ratio has fluctuated over the five years with highest value in 2021/22 and lowest in 2017/18 and 2020/21. By analyzing the debt ratio of UCL it shows that a lower level of debt used to finance the total assets than ACL does.

Equity ratio: Equity ratio is used to measure the proportionate of total equity out of total assets. UCL’s equity ratio fluctuated over the five years with highest in 2017/18 and 2020/21 with lowest in 2021/22. By analyzing the equity ratio of UCL it shows that high level of equity used to finance the total assets than ACL does.

 

Times interest earned: This ratio measures company’s ability to pay its interest expense out of operating profit. UCL has zero times interest earned in 2017/18 due to net interest earn is positive. However UCL was able increase the ratio in 2018/19, 2019/20 and 2020/21 respectively displaying its ability to pay interest expense. ACL has a slight increase in 2019/20 and a large increase in both 2020/21 and 2021/22 of this ratio due to a surplus on revaluation of investment property.

 

5.3  Profitability

	2017/18	2018/19	2019/20	2020/21	2021/22
Profit margin	7.23%	5.57%	7.85%	10.54%	10.75%
Gross margin	19.38%	16.01%	19.55%	23.35%	19.08%
Return on total assets	8.12%	7.40%	10.48%	13.91%	17.50%
Return on common shareholder’s equity	10.21%	9.29%	13.24%	17.28%	23.79%
Book value per common share	0.34	0.36	0.40	0.44	0.52
Basic earnings per share	0.03	0.03	0.05	0.07	0.11

(UCL)

	2017/18	2018/19	2019/20	2020/21	2021/22
Profit margin	-88%	-44%	10%	44%	108%
Gross margin	49%	28%	29%	13%	45%
Return on total assets	-16%	-5%	2%	20%	11%
Return on common shareholder’s equity	-37%	-7%	3%	28%	14%
Book value per common share	91.23	801.87	821.07	1,082.63	1,482.83
Basic earnings per share	-36.45	-29.28	23.67	266.33	175.82

(ACL)

 

Profit margin: Profit margin is used to measure the proportionate of total profit earned out of total revenue. If the ratio is high, more profitable the company is. UCL’s highest profit margin is in 2021/22 and lowest in 2018/19followed by a gradual increase after that till 2021/22. UCL has kept a healthy profit margin over the years. ACL has recorded a high profit margin in 2020/21 due to a surplus on revaluation of investment property.

 

Gross margin: Gross margin is used to measure gross profit as a proportionate of the total revenue. Higher the gross profit higher the ability to pay operating expenses of a company. In contrast to the way profit margin has behaved UCL’s gross margin has the highest in 2020/21 and in 2018/19 the lowest followed by a gradual increase after that till 2020/21. Overall ACL has a good gross margin compared to UCL.

Return on total assets: This ratio measures profit as a proportionate of average total assets. Return on total assets is an indication of company’s overall profitability. Higher the ratio is better the performance of the company. UCL’s return on total assets has the highest ratio recorded in 2021/22 and in 2018/19 lowest for the period. ACL recorded a drastic increase in return on total assets in 2020/21 and slight decrease in 2021/22.

 

Return on common shareholder’s equity: Return on common shareholder’s equity ratio is used to measure how well a company has utilized shareholder’s money. Simply this ratio calculate percentage earned per 1 unit of money the investor has invested. UCL’s return on common shareholder’s equity increased from its lowest for the period in 2018/19 to 2021/22 which is the highest for the period. ACL recorded a drastic increase in return on common shareholder’s equity in 2020/21 and slight decrease in 2021/22.

 

Book value per common share: This ratio uses to measure the amount per share that a shareholder will get in an event of liquidation. UCL’s book value per common share has increased over the period with highest recorded in 2021/22 which indicates a good performance of the company. ACL have high amounts in this ratio basically due to low number of shares compared to UCL.

 

Basic earnings per share: Basic earnings per share uses to calculate net income attributable per share. Higher the ratio indicates better performance of the company. UCL’s basic earnings per share has increased from 2017/18 to 2021/22 which is the highest. ACL recorded a drastic increase in basic earnings per share in 2020/21 and slight decrease in 2021/22 thereafter.

 

5.4  Market

	2017/18	2018/19	2019/20	2020/21	2021/22
Price earnings ratio	11,859	12,324	7,999	11,099	7,207
Dividend yield	3.25%	3.25%	5.25%	3.63%	1.70%

(UCL)

	2017/18	2018/19	2019/20	2020/21	2021/22
Price earnings ratio	-8.38	-11.77	15.67	1.10	1.66
Dividend yield	0.00%	0.00%	0.40%	1.54%	1.54%

(ACL)

 

Price earnings ratio: This ratio is used by investors for selecting preferred stocks to invest. Higher the ratio indicates that the ability to future growth of the company. UCL has increased its price earnings ratio from 2017/18 to 2018/19 which is the highest followed by decrease in 2019/20, increase in 2020 and a decline in 2021/22 which is the lowest. Overall UCL keeping a good position on this ratio compared to ACL.

Dividend yield: This ratio uses to calculate dividend per share as a percentage of the market value of the share. UCL’s dividend yield has fluctuated in the period and has the highest in 2019/20. Overall UCL has kept a good position on this ratio compared to ACL.

6.      Graphical illustration on trends of the ratios for both companies.

 

7.      Analysis based on Zones on Discrimination: Original Z – Score Model

 

By using the Altman’s Z score model a company can be categorized into three zones; if the Z score is greater than 2.99 it is considered as “Safe”, whereas if the Z score is in between of 1.80 and 2.99 it is considered as “Grey” and finally if the Z score is lower than 1.80 it is considered as “Distress”. So the Z score is calculated based on the following equation developed to analyze public limited companies. Weightages were taken from Altman’s Z-Score Models of Predicting Corporate Distress Evidence from the Emerging Sri Lankan Stock Market (Samarakoon, 2009)

 

Z = 1.2X_{1 +} 1.4X₂ + 3.3X₃ + 0.6X₄ + 1.0X₅

where,

X₁ = working capital/total assets

X₂ = retained earnings/total assets

X₃ = earnings before interest and tax/total assets

X₄ = book value equity/book value of total liabilities

X₅ = sales/total assets

 

Variable	2017/18	2018/19	2019/20	2020/21	2021/22	Weightage
X1	0.54	0.52	0.49	0.47	0.40	1.20
X2	0.78	0.76	0.78	0.79	0.67	1.40
X3	0.11	0.11	0.15	0.19	0.19	3.30
X4	4.19	3.68	3.90	4.35	2.14	0.60
X5	1.11	1.27	1.28	1.27	1.39	1.00
Z Score	5.72	5.53	5.80	6.18	4.70

 

As shown in the above table UCL was able to remain in the “Safe” zone during the considered five years period as all the yearly Z scores are more than 2.99.

8.      Forecasted Financial Statements

 

For forecasting of statement of financial position, average growth rate of total assets during past five years (14%) used and for forecasting of statement of financial performance, average growth rate of sales during past five years (18%) used.

 

Forecasted financial position	2022/23
Assets
Property, plant & equipment	389,743
Intangible assets	-
Retirement benefit assets	6,934
Other financial assets	335
Non-current assets	397,013
Inventories	394,059
Trade & other receivables	435,762
Cash & cash equivalents	87,405
Current assets	917,226
Total assets	1,314,238
Equity
Stated capital	17,111
Retained earnings	878,223
Equity attributed to the owners of the company	895,333
Liabilities
Retiring benefit obligation	18,485
Differed tax liabilities	6,232
Loans & borrowings	3,069
Non-current liabilities	27,786
Loans and borrowings	89,076
Trade & other payables	251,003
Current tax liability	32,708
Dividend payable	7,269
Bank overdraft	11,064
Current liabilities	391,120
Total liabilities	418,905
Total equity & liabilities	1,314,238

 

Forecasted financial performance	2022/23
Revenue	1,881,385
Cost of sales	(1,522,340)
Gross profit	359,045
Other income	8,870
Selling and distribution expenses	(20,951)
Administrative expenses	(94,359)
Result from operating activities	252,606
Finance income	2,024
Finance cost	(15,336)
Net finance cost	(13,312)
Profit before tax	239,294
Income tax expense	(36,982)
Profit for the year	202,312

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9.      Conclusion

 

Financial analysis is used by investors and other stakeholders of a company to analyze and predict its financials on various aspects such as profitability, performance and efficiency, etc. to facilitate their investment and other financial decisions. This report is a study on Union Chemicals Lanka PLC (UCL)’s financials published for five years ranging from 2017/18 to 2021/22. Those financials were analyzed using different methods such as trend analysis, vertical analysis, horizontal analysis and ratio analysis. For comparison purpose in ratio analysis section another similar company; Industrial Asphalts (Ceylon) PLC (ACL) is used.

Overall United Chemicals Lanka PLC was keeping healthy levels in financial performance and financial position. UCL had an average growth rate of 14% in total assets during the period from 2017/18 to 2021/22. Also revenue has an average growth rate of 18% during the same period.

UCL’s trend is positive for the period from 2017/18 to 2021/22 for assets and revenue which also shows ability on further growth in the future. Property, plant and equipment, inventories and trade receivables are at a stable stage as a percentage of total assets without any major fluctuations during the period. Retained earnings also at a steady level above 65% out of total equity and liabilities, without any losses recorded during the considered period. Trade and other payables have reduced over the years as a percentage of total equity and liabilities and an increase in 2021/22. UCL was able to keep loans and borrowings percentage out of total equity and liabilities at a very low level from 2017/18 to 2021/22. As a percentage of revenue, both gross profit and profit for the year figures also positive during the considered period. The average growth rate for revenue and cost of sales are inline. There are some slight increases in selling and distribution expenses and administrative expenses over the period.

Current ratio and acid test ratio are at a healthy level which indicates a good working capital position of UCL compared to the competitor ACL which is used for comparative analysis. Accounts receivable turnover and merchandise turnover could be increased if UCL able to introduce techniques to reduce inventory levels and debtors such as increase cash sales, factoring debtors, update production process to a more efficient one, introducing new costing methods, etc. By analyzing debt and equity ratios we can identify that UCL is keener on financing their assets from equity rather than on liabilities which will be beneficial with current economic situation in the country. UCL’ ability to pay interest expense also high. UCL’s return on total assets and return on common shareholder’s equity also at a good level without major variations compared to ACL during the same five years period. High price earnings ratio of UCL will create confidence among investors on future growth and will attract more of them in the future to the company. By Z score analysis also we can identify that UCL is at a better position during all five years.

As a manufacturing company United Chemicals Lanka (PLC) has shown positive results on its financial performance throughout the period starting from 2017/18 to 2021/22 which is considered for the analysis. It is important to keep the current management practices with new improvements to keep overall performance level of the company at a healthy level in the future.