Agalawatte Plantations PLC

 

01. Introduction

Financial statement analysis is the process of examining a company’s financial statements for decision-making purposes. The published financial statements of an organization will provide financial information on the company’s performance, financial position and financial health.

Financial statement analysis involves applying various techniques and tools to analyze the data in the financial statements. Some of the common techniques are:

·         Horizontal analysis: This involves comparing the changes in the financial statement items over time. For example, comparing the revenue growth rate from one year to another.

·         Vertical analysis: This involves comparing the proportions of the financial statement items within a single period. For example, comparing the gross profit margin to the revenue each year.

·         Trend Analysis: This involves understanding the trend (upwards or downward) of financial indicators of a firm by comparing them to base year.

·         Ratio analysis: This involves calculating and interpreting various ratios that measure different aspects of a company’s performance. For example, calculating the return on equity to measure how well a company uses its shareholders’ funds.

02. Background of the Company

Agalawatte Plantations PLC is a reputed company based in Sri Lanka that is involved in the cultivation, production, processing and sale of tea, rubber and oil palm. The company was founded in 1992 and has subsidiaries that produce and sell plywood products and develop leisure sector projects. Agalawatte Plantations operates in three segments: rubber, tea and oil palm. The company’s revenue in 2022 was 1.85 billion LKR and its net income was 245 million LKR. The company’s chairman is Mr. Anil Amarasuriya, and its chief executive officer is MR. G. P. N. A. G. Gunathilake. The firm has a vision “To be the benchmark among plantation Companies” and the mission “To Contribute towards the growth of the company through optimum utilization of available resources and opportunities with the use of best management practices, whilst enhancing shareholder wealth and improving the quality of life of all stakeholders, thereby being a partner in National Development”.

03. Financial Statement Analysis

This report will focus on conducting a detailed financial analysis for Agalawatte Plantations PLC. For the purpose of this report key focus will be on the audited Income Statement and Statement of Financial Position. The time period considered for the analysis is 2018- 2022 (5 years). This financial statement analysis will consist of Horizontal Analysis, Vertical Analysis, Trend Analysis, Ratio Analysis (Liquidity and Efficiency, Solvency, Profitability and Market ratios).

 

3.1 Horizontal Analysis

The horizontal analysis is calculated by considering the published numerical values over the period considered for the analysis. This will be used to understand the firm’s performance compared to its base year. The results can be presented either in terms of the change in rupee value or as a percentage change. The base year considered for this analysis is the financial year 2017.

01.  Rupee Change

   Amount posted during specific financial year – Amount posted during base financial year.

02.  Percentage Change

(Rupee Change/ Amount posted during base financial year) *100.

3.1.1 Horizontal Analysis of Income Statement

Table 1: Horizontal Analysis- Income Statement (Rupee Change)

3.1.1.1 Rupee Change

 

 

 

 

 

3.1.1.2 Percentage Change

Table 2: Horizontal Analysis- Income Statement (Percentage Change)

 

Overall, there has been an improvement in the firm’s income statement with the significant increase in revenue potential. The increase in cost of sales can be justified by the increase in revenue. There have been fluctuations in the firm’s operating activities over the 5 year period. There has been an increase in the firm’s financial costs which can be due to funding along the firms expansionary projects.

 

 

 

 

3.1.2 Horizontal Analysis of Statement of Financial Position

3.1.2.1 Rupee Change

Table 3: Horizontal Analysis- SOFP (Rupee Change)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.1.2.2 Percentage Change

Table 4: Horizontal Analysis- SOFP (Percentage Change)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At a broader level the firm’s total assets base and the total equity and liabilities base have significantly improved compared to the base year. The firm has expanded its capital structure and is more balanced in the most recent financial year. This can be justified by the growth in stated capital and the reduction in total noncurrent liabilities of the firm.

When looking at the current assets, it can be argued that Agalawatte Plantations PLC is having strict receivables days policy with the lowest recorded in 2022 (-9% compared to 2017) and higher cash balance in 2022 compared to 2017 (grown by 135%). From non-current assets base the firm has significantly improved its right to use assets (which has grown by 209% compared to base year).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.2 Vertical Analysis

3.2.1 Vertical Analysis of Income Statement

Table 5: Vertical Analysis- Income Statement

 

 

3.2.2 Vertical Analysis of Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 6: Vertical Analysis- SOFP

The total assets base of the firm mainly consists of Non-Current Assets which is more than 80% each financial year over the 5-year period. The current assets range from 20%-10%, the lowest recorded in 2019 and 2020. The investments made by the firm in subsidiaries, joint ventures and other investments are very minute whereas bearer biological assets take up a major portion of the firm’s assets base. In the current assets segment of the firm, inventories take up major portion which indicates firm needs to assess the requirement to maintain high levels of inventory and apply relevant inventory management techniques.

During the most recent financial years out of the 5-year period considered for the analysis, there has been a shift in the firm’s capital structure. The total equity of the firm is increasing whereas the non-current liabilities are declining. However, it seems that Agalawatte Plantations is taking short term borrowings. The current liabilities and current assets of the firm seem to be taking up similar proportions from total assets, equity and liabilities. 

 

 

 

 

 

 

 

3.3 Trend Analysis

Table 7: Trend Analysis - Income Statement

3.3.1 Trend Analysis of the Income Statement – Agalawatte Plantations PLC

Overall Agalawatte Plantations PLC has experienced a sudden boost in its profit over the 5 year period, especially after 2019 financial year.

3.3.2 Trend Analysis of the Statement of Financial Position – Agalawatte Plantations PLC

Table 8: Trend Analysis- SOFP

 

 

Over the 5 years considered for the analysis the total assets and total equity has undergone a gradual increase whereas total liabilities are experiencing a gradual decline.

3.4 Ratio Analysis

The ratio analysis is conducted as a mechanism of analyzing and interpreting numerical data published on the Financial Statements of Agalawatte Plantations PLC. Ratio analysis enable the interested parties of the firm in understanding the financial performance, financial health and its position within the market. For this report four main ratio categories are considered.

01.  Liquidity and Efficiency ratios- A measure of short-term financial viability of the firm using its current assets and how the firm is utilizing its resources in generating revenue and managing business operations.

02.  Solvency Ratios- A measure of long-term financial viability of the firm along with its ability to service long term debt obligations.

03.  Profitability Ratios- A measure of the firm’s potential in generating revenue from its operations and assets base.

04.  Market Ratios- An indicator of the market’s perception towards a company’s earnings and shares.

Table 9: Liquidity and Efficiency Ratios

3.4.1 Liquidity and Efficiency Ratios

3.4.1.1 Working Capital

As per the data, it is visible that working capital has experienced a decline in the periods from 2018-2019 and has a gradual improvement in the most recent years (i.e. 2020-2022). When looking at the cash balance of Agalawatte Plantations PLC, 2018 and 2019 has recorded the lowest cash balances (Rs 16 million and Rs 9 million respectively) along with highest record of Bank overdrafts which was Rs 156 million in 2018 and Rs 210 million in 2019. This indicates the firm had poor working capital management policies during 2018-2019, relying on short term loans to manage the financing requirements. In the year 2022, the firm has a positive net working capital. However, during this year the firm has recorded the highest level of closing inventory. However, in 2022 Agalawatte PLC has been able to reduce its dues to significant parties and short-term borrowings.

3.4.1.2 Current Ratio

The ratio measures the ability of Agalawatte Plantations PLC to cover its short term liabilities using its current assets. The firm’s current ratio has improved over the five-year period indicating better short-term liquidity of the firm. All the current ratios over the five-year period are positive values with an upward trend. However, it is important to consider the closing inventory of the firm to understand the liquidity of the firm using readily liquid assets.

3.4.1.3 Acid Test Ratio

This is an advanced version of the current ratio which excludes the closing inventory of the firm. When analyzing the acid test ratio it is evident in 2022 the healthy working capital position in mainly backed by the higher closing stocks maintained by the firm. However, Agalawatte Plantations PLC has been able to obtain a higher quick ratio in 2022 as the firm has recorded lowest ratios in 2018 and 2019 which was at 0.04. Based on this analysis it is visible the firm’s short term liquidity position is not strong and requires immediate actions.

3.4.1.4 Account Receivable Turnover Times

This ratio shows how often a company collects cash from its customers who owe it money or how well it manages its credit and debt collection. Based on the financial data of Agalawatte Plantations, there has been a significant improvement in the firm’s account receivable turnover. The firm has recorded the lowest turnover in 2019 which was 17.81 times and the highest in 2022 which was 48.67 times. Agalawatte Plantations has recorded highest level of sales revenue and lowest average receivables balance in 2022. There has been a significant improvement in the firm’s debtor cash collection which might have led to strong working capital in 2022.

3.4.1.5 Merchandise Turnover Ratio

This ratio indicates how frequently a company sells and replenishes its goods during the year. This is also known as inventory turnover and stock turnover. Over the 5-year period considered for the analysis, there has been a gradual drop in the firm’s merchandise turnover ratio. Looking at the figures it is evident this is mainly stemming from higher inventory record of Agalawatte plantations in 2022. When previous year inventory was around the range of Rs 250 million- Rs 400 million, in 2022 the inventory is at Rs 730 million.

3.4.1.6 Total Asset Turnover

The total assets turnover measures the efficiency rate at which Agalawatte plantations is using its assets base to generate revenue. There have been minute variations in the periods from 2018- 2020 and a significant improvement from 2020 to 2021. The firm has recorded the highest turnover in 2022, which is at 0.95 times. While both total asset base and revenue of the firm have increased, in 2022 the revenue growth has surpassed that of assets growth (when assets have increased by 19% revenue has increased by 33% from 2021 to 2022). However, the turnover does not meet the industry norm of 1. This suggests the firm needs to employ mechanisms to reduce inefficiencies in generating its revenue.

3.4.1.7 Days sales uncollected (days)

This shows how the rate a company collects cash from its sales or the average number of days between selling and receiving payment. With the growth of the revenue backed by a decline in receivables base the firm has experienced a growth in days sales uncollected. The ratio which was at 23 days in 2018 has improved to just 6 days in 2022.

3.4.1.8 Days sales in inventory 

This will indicate the period taken by the firm in converting its goods (both finished and working progress) to sales. With the increase in Agalawatte plantations closing inventory, there has been an increase in days sales in inventory with the highest record in 2022 which is 75 days.

Table 10: Solvency Ratios

3.4.2 Solvency Ratios

3.4.2.1 Debt Ratio

The debt ratio is one of the main indicators of the long-term financial stability of Agalawatte Plantations PLC. In other words, the portion of the firm’s assets which as contributed to the debt finance providers of the firm. The higher the portion, the weaker the firm’s solvency position. In the years from 2018-2019 the majority of the firm’s asset base has been contributed towards firm’s lenders which has significantly improved by 2022 as less than 50% (closer to 50%) is contributed towards debt finance providers.

3.4.2.2 Equity Ratio

Equity ratio will suggest the portion of company’s assets allocated towards firm’s owners. Currently around 87% of the firm’s assets are contributed to the owners which indicated ap positive and improved solvency.

3.4.2.3 Time Interest Earned ratio

This is a measure which considers the ability of the firm to cover its interest costs using its net profit before interest and tax expenses. A higher ratio would indicate a strong solvency of the firm. There has been a boost in the firm’s interest cover from 2019 to 2021 which is resulting from addition of finance income from 2021 and improved net profit before interest and taxes. In the most recent years of 2022 and 2021 the interest cover has been stable with minute variations. The interest cost has increased in 2022 mainly due to economic situations (increase in interest rates resulted from Economic crisis) yet, the firm has been able to maintain a strong position due to its high net profit before interest and tax.

Table 11: Profitability Ratios

3.4.3 Profitability Ratios

3.4.3.1 Net Profit Margin

The net profit margin will indicate the portion of net income earned from its total revenue, where a higher ratio will indicate the positive financial health of the firm. There has been a significant boost in the firm’s revenue which has resulted in a growth in its net profit margin. This growth in revenue is mainly due to the positive impact the plantation industry as a whole had with the import restrictions imposed during COVID-19 (due to health concerns) and the post Economic crisis of 2022. With the import restrictions, manufacturers started sourcing raw materials from local producers such as Agalawatte Plantations for rubber, tea and palm oil. This improved demand for the firm’s products resulting in fast-paced growth in its financial health.

3.4.3.2 Gross Profit Margin

This is similar to the NP margin. The ratio is one of the key profitability indicators of a firm which considers the gross profit earned during the period. As the NP margin of the firm, the gross profit has improved significantly over the five-year period.

3.4.3.3 Return on Total Assets

This ratio shows how well a company earns income from its assets or the fraction of average total assets that turns into net income. The significant improvement in net profits after tax along the increase in assets has resulted in overall growth in ROA of Agalawatte Plantations PLC.

3.4.3.4 Return on Common Shareholder's Equity

In simple, this will suggest the return obtained by owners of the firm per Rs 1.00 they invested in Agalawatte Plantations PLC. Over the past five years there has been an inclined growth but in 2022 with the increase in total average equity there has been a reduction from 2021 to 2022. However, at an overall level the firm’s ROE is in a healthy position.

3.4.3.5 Book Value per Common Share

The share capital has been stagnant from 2018-2019 with a significant growth in 2020. The increase in the number of shares issues can be justified as a mechanism taken by the firm to improve its solvency position. (Equity ratio which was at -313% boosted in 2020 to 1219% and there after firm experienced a better solvency position) While the firm’s number of shares are fixed at 156 million from 2020-2022 there has been a considerable improvement in firm’s book value. This can be justified by positive market perception about Agalawatte which can be due to the overall growth within plantation industry during the period.

3.4.3.6 Earnings per Share

As the name suggests, this indicates the earnings contributed towards shareholders for one share of Agalawatte Plantations PLC owned by them. With the improved net profits of the firm, earnings per share has increased over the 5 year period.

3.4.4 Market Ratios

Table 12: Market Ratio

3.4.4.1 Price Earnings Ratio

The Price Earnings (P/E) ratio is one of the most significant ratios considered by a shareholder or a potential investor. This is a clear depiction of the level of confidence placed by the market towards firms shares. There has been an inclined confidence in 2020 which has gradually decreased by 2022. The increase in 2020 can be justified as the popularity of local products with the import restrictions and the decline can be due to the threat posed on plantations industry with the import restrictions for pesticides and other manure which is crucial for the growth of plantations industry.

 

 

 

 

 

 

 

 

 

 

 

 

04. Conclusion

The financial statement analysis was done with the objective of understanding the financial performance and financial health of Agalawatte Plantations PLC for the period 2018-2022. This information can be used by decision makers to understand the current position of the firm and thereby use as a metrics to forecast the future potential of Agalawatte Plantations. For the purpose of this report the audited published financial statements of the firm were analyzed based on horizontal, vertical, trend and ratio analysis.

At a broader outlook, Agalawatte Plantations has undergone massive improvements in terms of its revenue and profit figures backed up expansions in firms operations which can be justified looking at the firm’s capital structure.

While the firm’s capital structure is in a more balanced position in 2022, through scrutinized analysis it was identified that Agalawatte Plantations is relying on short term debt sources. This has resulted in an alarming situation regarding short-term liquidity while the long-term solvency is at a strong position. This suggests the firm needs to address its working capital management policies, especially with regards to current liabilities.

In terms of the organization’s assets base, it seems that the firm has a large portion stored as inventory. It is important to analyze the reason for the boost in closing stock in 2022 compared to 2021. This can indicate poor inventory management policies which can have cascading implications for firm’s holding and ordering costs and overall efficiency of Agalawatte Plantations.

The firm has gained a considerable level of shareholder confidence over the years which is justified by increased levels of earnings per share, price earnings ratios and market price of shares. It is important the firm reinvests and find sustainable solutions to withstand economic and political factors which affect the Sri Lankan plantations industry.

In conclusion, the analysis suggests Agalawatte Plantations required immediate actions relating to working capital management and strive for sustaining its shareholder confidence by improving operational efficiency. 

However, it should be taken with caution when making a decision based on above mentioned financial analysis. Horizontal and Vertical analysis tends to be subjective as the selection of the base year is not fixed. There can be non-recurring events which can cause a favorable or a unfavorable scenario. For example, in 2022 as the firm had more inventory this created a positive impact on profitability ratios such as GP and NP margin (higher the closing inventory, lower the cost of sales) but a negative impact on liquidity ratios.

The ratio analysis can provide a clear summary of the firm’s performance in different aspects; however, the same ratio can be calculated in different methods. In addition to that, the results are only fixed for the selected period, which cannot provide the true picture of the firm. Therefore, will not be ideal when forecasting prospects for the firm.

While a detailed financial analysis can provide a decision maker a starting point in understanding firm’s performance it is critical to incorporate other qualitative factors such as environmental conditions i.e., economic, and political circumstances, loyalty of the customer base, competition in the market, brand and goodwill, sustainability.