1.
Introduction
This report provides a comprehensive
analysis of BPPL Holdings PLC based on its financial performance and position
over the five years from 2018 to 2022. Using methods such as trend analysis,
vertical and horizontal analysis, and ratio analysis the group's published
figures were evaluated to arrive at the conclusions made on its financial
growth and status.
1.1. Company
Profile
BPPL Holdings PLC is one of
Asia’s largest brush manufacturers, a large plastic up cycler, and the only
polyester yarn producer in Sri Lanka.
First established in 1984, the
group have been in operation for almost 40 decades to date with a vision to
create a world where nothing goes to waste – starting with their operations.
Till now, the group’s upcycling efforts have prevented over 570 million plastic
bottles from ending up in landfills, as sustainability is the priority in their
operations. BPPL Holdings PLC is also a leading name in environmental, social,
and governance (ESG) impact in the Asian region. The group focuses on creating
environmentally friendly cleaning tools, monofilaments, and polyester yarn for
professional and household markets worldwide. The group’s global sales network
covers Sri Lanka, Canada, the USA, Mexico, Jamaica, Panama, Ireland, England,
Netherlands, Denmark, France, Turkey, Dubai, India, Bangladesh, Indonesia,
Australia, and New Zealand.
Under the group’s umbrella are
two subsidiaries known as Beira Brush (Pvt) Ltd and ECO Spindles (Pvt) Ltd.
Beira Brush (Pvt) Ltd
Beira Brush (Pvt) Ltd is one of
Southeast Asia’s largest brush manufacturers having over 35 years of
experience. The company produce brushes and other cleaning products for
households, commercial and professional sectors using recycled plastic and
wood.
ECO Spindles (Pvt) Ltd
The latest addition to the BBPL
family is ECO Spindles (Pvt) Ltd, which masters the art of converting PET waste
to high-grade yarn and filaments. The company operates state-of-the-art
manufacturing facilities in the main industrial zones in Sri Lanka and owns one
of only two plants in the world capable of creating yarn directly from flakes.
2. Financial
Statement Analysis
Any organization has its many
stakeholders (internal and external) that have expectations they want to fulfil
by interacting and transacting with those organizations. Depending on the financial
information related to such organizations, stakeholders make their decisions.
Hence, financial statement analysis takes prominence in decision-making and
acts as the basis. The financial statements of a company record significant
financial data on every aspect of a business. As such, evaluated based on past,
current, and projected performance. Horizontal, vertical, trend and ratio
analysis are four techniques used to analyze financial statements.
2.1 Horizontal
Analysis
Commonly known as trend analysis,
horizontal is a financial analysis is a technique used to assess changes in
financial statement variables over multiple periods. It involves comparing the
financial data of a company or organization for consecutive periods, typically
years, to identify trends, patterns, and changes in performance over time. It
is typically performed on the income statement and the balance sheet and allows
stakeholders, such as investors, analysts, and management, to gain insights
into how significant financial indicators have evolved, whether they are
improving or deteriorating, and to identify potential areas of concern or
opportunities for improvement. Horizontal analysis is applied to various
aspects of financial statements, including revenue, expenses, net income,
assets, liabilities, and equity. By comparing these values over time,
stakeholders get a better idea of a company's financial trajectory and make
more informed decisions.
The steps involved in performing
horizontal analysis include:
I.
Selecting the Base Year
One period is
chosen as the base year, and the financial data for subsequent periods are
compared to the base year. The base year is assigned a value of 100%, and the
changes in other years are expressed as a percentage of that base year value.
In this analysis the financial year 2017 is selected as the base year.
II.
Calculating Percentage Changes
The percentage change for each line item on
the financial statement arrived using the following formula:
Percentage Change = (Current Year Value - Base Year Value) / Base Year Value *
100
or
Percentage Change = (Current Year Value / Base
Year Value) - 1*
*Method used for the analysis
III.
Trend Analysis
Once calculating the percentage changes, trends in the financial data are
identified. Positive percentage changes suggest growth or improvement, while
unfavorable changes indicate a decline. These trends provide insights into a
company's financial health, operational efficiency, and overall performance.
2.1.1 Income
Statement Horizontal Analysis
BPPL Holdings PLC
(five-year financial performance)
|
Description |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|
Revenue |
100% |
108% |
113% |
108% |
142% |
200% |
|
Gross Profit |
100% |
96% |
100% |
89% |
122% |
145% |
|
Operating Profit |
100% |
85% |
87% |
106% |
126% |
151% |
|
Profit before Tax |
100% |
84% |
86% |
103% |
124% |
147% |
|
Profit for the Year |
100% |
84% |
85% |
93% |
114% |
149% |
Gross Profit
Except for the revenue dip
in the financial year 2020 due to the drop in demand followed by the covid 19
pandemic, the group's revenue has continued to grow over the years. The
exceptional growth in 2021 and 2022 are from orders recouped after the
pandemic. Since, the cost of sales as a proportion of revenue has remained at
an average of 67%, the reasons contributed to revenue movement are also
attributable to the fluctuations in the gross profit.
Operating Profit
The decrease in the operating profit identified during the financial
years 2018 and 2019 was mainly due to the increased distribution and
administration costs. The reason behind the same was the commencement of phase
01 of a new synthetic yarn plant in 2018. In the initial stage of the business
cycle, the plant's costs were higher than its revenue. In addition, the
increased freight charges throughout the years of assessment can be identified
as a reason for increased distribution expenses.
Though the group's gross margins dropped in 2020 due to the pandemic, the drop
in operating profit margin following the same got saved by the insurance income
received for the fire outbreak in one of its factories.
Profit before Tax
The group's loan portfolio has increased YoY significantly from the base
year. This increase is mainly attributable to the investment in the new yarn
project and financing working capital requirements.
Profit for the Year
Other than the financial
years 2018 and 2019, where expenses increased due to the commencement of
production in the new plant, and the financial year 2020 heavily affected by
the pandemic, the group's net profit margins in the years 2021 and 2022 have
improved due to increased gross margins followed by the growth in demand from
the US market and the European region mainly.
|
Description |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|
Non-Current Assets |
100% |
159% |
198% |
224% |
246% |
320% |
|
Current Assets |
100% |
115% |
123% |
151% |
191% |
304% |
|
Capital and Reserves |
100% |
108% |
133% |
143% |
161% |
152% |
|
Non-Current Liabilities |
100% |
443% |
374% |
380% |
683% |
1301% |
|
Current Liabilities |
100% |
159% |
279% |
334% |
313% |
652% |
Non-Current Assets
The non-current assets of the group have increased continuously compared
to the base year. The capitalization of expenses incurred on the new yarn
projects phase 01 and phase 02 commenced in the years 2018 and 2020
respectively is the reason for the increase.
Current Assets
The group's current assets are on an increasing trend. As a result of stocking
more inventory to facilitate the demand recouped after the pandemic, the stocks
have increased by 75% in 2022 compared to the base year. Further, the increase
in trade receivables is from the increased export sales following the
commencement of business operations after the Covid-19 pandemic.
Capital and Reserves
The trend line of capital and reserves show a moderate increase in the
same over the years compared to the base year. Land revaluation and adopting a
cash flow hedge to minimize the impact from foreign exchange rate movements are
the drivers of these fluctuations.
Non-Current Liabilities
and Current Liabilities
The trend lines of non-current and current liabilities depict a
significant increase in their respective balances compared to the base year.
This increase is mainly due to increased long term and short-term loan
facilities that the group has obtained to fund their yarn project and the
increased working capital requirements.
2.2 Vertical
Analysis
A financial analysis technique
also known as common-size analysis used to evaluate and compare the relative
proportions of different components within a financial statement. This method
involves expressing each line item on a financial statement as a percentage of
a common base item. The purpose of vertical analysis is to highlight the
composition of a company's financial statements and to identify trends or
changes in the relative proportions of various components over time.
Vertical analysis is particularly
useful when comparing companies of different sizes or when analyzing a single
company's financial performance over multiple periods. It allows to focus on
the structure of a company's financial statements rather than just the absolute
values. This can provide insights into a company's financial health,
operational efficiency, and potential areas of concern.
Vertical analysis identifies
trends and patterns in a company's financial statements. For instance, they
might observe that the proportion of operating expenses to revenue has been
increasing over the years, indicating potential cost control issues. Or they
might notice that a company's debt is becoming a larger portion of its total
assets, raising concerns about its financial leverage.
However, it's important to note
that vertical analysis only provides a snapshot of the proportions within the
financial statements and doesn't consider the changes in the absolute values of
those line items. Therefore, it's often used in conjunction with horizontal analysis
(comparing financial data over time) and other financial analysis methods to
obtain a more comprehensive understanding of a company's financial performance
and position.
2.2.1 Income
Statement Vertical Analysis
Each line item on the income statement is expressed as a
percentage of total revenues. This helps identify the percentage of revenue
that goes toward different expenses, such as cost of goods sold, operating
expenses, and net income.
Gross Profit
The group's gross profit margin dropped by an average of 6% during the
years. The increased cost of sales resulted from the new yarn project
commencement, increased freight cost, and increased commodity prices, coupled
with the drop in revenue due to the Covid-19 pandemic, caused the gross margin
to stay lower than the base.
Operating Profit
The operating profit decreased by an average of 3% compared to the base
due to increased distribution and administration expenses. However, it's worth
noticing how the gain from the fire in the financial year 2020 offset the
otherwise operating loss.
Profit for the Year
Overall, there are no significant variances in the margins maintained for
each line item to that of the base year. The vertical analysis indicates that
variations in almost every P&L figure are around an average of 5%.
2.2.2 Statement
of Financial Position Vertical Analysis
For the balance sheet, each asset, liability, and equity
items are expressed as a percentage of total assets. This reveals the
proportion of a company's assets funded by liabilities and equity.
Non-Current Assets
The non-current assets of the group have increased from 55% of total
assets to 62% on average. Capital expenditure incurred for the yarn project
phases 01 and 02 during 2018 and 2022 caused property plant and equipment to
increase. It contributed the most to the increase in non-current assets.
Current Assets
The group's current assets have reduced by an average of 7% compared to
the base year. It is mainly due to improved inventory and debtor turnover during
the years considered.
Total Equity and
Liabilities
Other than the variances in margins caused by the revaluation of land and
the cash flow hedge in the financial years 2020 and 2019, respectively, on
average, there are no significant margin improvements or erosion in the
shareholders' equity.
However, when considered as a proportion of the total equity and
liability value, there is an average 23% reduction. The group's long-term and
short-term liabilities increased due to new loans obtained for funding the yarn
projects and managing the working capital cycle drove it.
2.3 Ratio
Analysis
Ratio analysis is a fundamental
technique used in finance and accounting to evaluate the financial performance
and health of a company by analyzing relationships between various financial
variables. It involves the calculation and interpretation of various ratios
that provide insights into different aspects of a company's operations,
profitability, liquidity, solvency, and efficiency.
2.3.1 Liquidity
Ratios
These ratios measure a company's
ability to meet its short-term financial obligations. They include,
I.
Current ratio =
Current assets / Current liabilities
II.
Quick ratio =
(Current assets – Inventory) / Current liabilities
|
Description |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|
Current Ratio (times) |
2.7 |
1.9 |
1.2 |
1.2 |
1.6 |
1.2 |
|
Acid Test Ratio (times) |
1.5 |
1.1 |
0.6 |
0.8 |
1.2 |
0.9 |
The group’s current and quick ratios which were maintained at healthy levels
recorded its historical lowest in the year 2019 due to an almost 100% increase
YoY in its short-term interest-bearing loans and borrowings which were obtained
to facilitate the yarn project phase 01. Similarly, the short-term loan
balances continued to increase in the year 2020 the year which BPPL launched
the yarn project phase 02, and as a result the current ratio remained the same.
In 2021 a 90% increase in the trade debtors was reflected in the statement of
financial position owing to the increased sales volumes with the launch of the
yarn operations. However, the increased working capital requirement raised
along resulted getting more short-term funding and it offset the growth in
debtor balances. The groups inventory level remained between Rs. 544Mn to 953Mn
over the years and the highest inventory value of Rs. 953Mn recorded in 2022
was due to maintaining sufficient stocks to cater to the orders picked up in
2022 after the pandemic.
2.3.2 Solvency
Ratios
These ratios assess a company's
long-term financial stability and its ability to meet its long-term obligations.
Examples include,
I.
Debt Ratio =
Total debt / Total assets
II.
Equity Ratio =
Total Equity / Total Assets
III.
Debt-to-equity ratio = Total debt divided / Total equity
IV.
Interest coverage ratio = Earnings before interest and taxes / Interest expenses
|
Description |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|
Debt Ratio (%) |
24% |
40% |
44% |
43% |
44% |
63% |
|
Equity Ratio (%) |
76% |
60% |
62% |
57% |
56% |
37% |
|
Debt to Equity (%) |
18% |
50% |
55% |
55% |
57% |
130% |
|
Times Interest Earned
(times) |
25 |
20 |
19 |
13 |
10 |
10 |
The groups asset portfolio to
date is funded by a mix of owner equity and borrowings. However, from year 2017
to 2021 equity funded assets dominated the asset portfolio. With the launch of
yarn phase, the group started leveraging towards borrowed funds to meet its
increased operating requirements. As a result, at present the groups asset mix
largely funded by borrowed funds. While this enabled the group to seize new
investment opportunity it should also be noted that invested assets failing to
earn expected yields may pose financial risks to the company.
As mentioned above the group
leveraging towards borrowed funds have increased the debt-to-equity ratio every
YoY and has been on average 50% till 2021. The reason behind recording a higher
debt to equity in 2022 is the 53% increase in borrowed funds during the year.
The group started to receive higher orders for its products in the later half
of year 2021 as the pandemic started to ease. Hence, more inventories had be
stocked to ensure uninterrupted supply to the increased demand. This increased
working capital requirement was funded through new loans.
Subsequently, the interest cover times faced a continuous reduction and
gradually dropped to 10 times in 2022 from 25 times in 2017.
2.3.3 Profitability
Ratios
These ratios measure a company's
ability to generate profits relative to its revenue, assets, or equity. Common
examples include,
I.
Gross profit margin = Gross profit / Revenue
II.
Return on equity =
Net income / Shareholders' equity
III.
Return on total assets = Operating profit / Total assets
IV.
Return on equity =
Profit after tax / Total equity
V.
Dividend yield =
Dividend per share / Average share price
|
Description |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|
Net Margin (%) |
18% |
14% |
13% |
15% |
14% |
13% |
|
Gross Margin (%) |
40% |
35% |
35% |
33% |
34% |
29% |
|
Return on Total Assets
(%) |
19% |
14% |
11% |
12% |
12% |
11% |
|
Return on Equity (%) |
22% |
17% |
15% |
15% |
16% |
21% |
|
Dividend Yield (%) |
3% |
3% |
4% |
4% |
2% |
2% |
|
|
|
|
|
|
|
|
|
Book Value Per Share
(Rs.) |
7 |
7 |
9 |
9 |
11 |
10 |
|
Basic EPS (Rs.) |
1 |
1 |
1 |
1 |
2 |
2 |
|
DPS (Rs.) |
0.42 |
0.42 |
0.42 |
0.42 |
0.24 |
0.42 |
The graph indicates that there is
an average 20% gap between the net margin and the gross margin. Though revenue
grew YoY continuously, the benefit of the revenue growth was not fully enjoyed
by the group due to fluctuations in cost of sales, distribution,
administration, and finance expenses resulted from new project 01/02, increased
working capital requirement, interest rate and exchange rate fluctuations.
On the other hand, the growth in
operating profits remained below the growth in total assets. As explained above
the group’s administration and distribution expenses increased over the years
as a new plant got added to the group. Subsequently, property, plant and
equipment, inventory and trade debtors also increased. Since the plant was in
its initial stage during the years considered, the revenue generated was not
sufficient to please the investment. Similarly, the return on equity was also
affected by the added finance cost and exchange impact. While the company
maintained a Dividend per Share of Rs. 0.42 throughout, the increased market
price resulted dividend yield to drop during the last two years in
consideration.
2.3.4 Efficiency
Ratios
These ratios evaluate how
effectively a company manages its resources and assets to generate sales or
profits. Examples include,
I.
Inventory turnover ratio = Cost of goods sold / Inventory
II.
Accounts receivable turnover ratio = Credit sales / Accounts receivable
III.
Total Asset Turnover (times) = Total revenue / Total
assets
IV.
Days Sales in Inventory (days) = Inventory / Cost of goods
sold * 365
V.
Days Sales Uncollected (days) = Accounts receivable /
Credit sales *365
*For
calculation purpose total revenue treated as credit sales
|
Description |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|
Account Receivable
Turnover (times) |
4 |
4 |
4 |
4 |
3 |
3 |
|
Merchandise Turnover
(times) |
3 |
3 |
3 |
3 |
4 |
4 |
|
Total Asset Turnover
(times) |
1 |
1 |
1 |
1 |
1 |
1 |
|
Days Sales in Inventory
(days) |
136 |
125 |
136 |
132 |
97 |
84 |
|
Days Sales Uncollected
(days) |
95 |
95 |
97 |
100 |
108 |
144 |
From 2017 to 2022 the group has
maintained its trade receivable turnover, inventory turnover and asset turnover
ratios almost static. While it indicates that the group has been able to
continue its operational efficiency throughout it also indicates that the
improvement in operational efficiency has also been static.
Whilst the inventory turnover
days has reduced over the years showcasing that the demand for group’s products
has increased it is concerning how the debtor collection period has grown over
the years. Since the group now has more debt to service it is important that it
limits its debtor collection period to at least 90 days (3 months).
2.3.5 Market
Ratios
These ratios reflect how the
market values a company's stock relative to its financial performance.
I.
Price-to-earnings ratio = Stock price / Earnings per share
|
Description |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|
PE Ratio (times) |
9 |
11 |
10 |
8 |
8 |
10 |
The groups Price to earnings
ratio has been at an average of 9 times over the years. Since it’s a moderate
value it can be concluded that the market price of the group share is fairly
valued. Further, the recent increase in P/E ratio from 8 times to 10 times
indicates that shareholders expect the market price of the share to grow in
future.
2.3.6
Altman Z-Score
The Altman Z-Score is a financial
metric developed by Edward Altman in the late 1960s to predict the likelihood
of a company going bankrupt. It's used to assess the financial health and
stability of a company by combining several financial ratios into a single
score. The Z-Score is commonly used by investors, analysts, and creditors to
evaluate the risk associated with a company's financial position. It's
important to note that the Altman Z-Score was developed several decades ago and
may not be as effective for all industries or under all economic conditions.
Different industries and markets may have varying levels of financial risk, and
the Z-Score should be used in conjunction with other financial analysis tools
for a comprehensive assessment of a company's financial health.
The formula for calculating the Altman Z-Score: Z-Score =
1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Where:
A = Working Capital / Total Assets
B = Retained Earnings / Total Assets
C = Earnings Before Interest and Taxes (EBIT) / Total Assets
D = Market Value of Equity / Total Liabilities
E = Sales / Total Assets
Each of the ratios is weighted
differently and contributes to the overall Z-Score. The resulting score is then
interpreted to assess the company's financial condition and potential
bankruptcy risk:
Z-Score > 2.99: The company is considered safe;
bankruptcy is unlikely.
1.81 < Z-Score < 2.99: The company is in a gray zone; caution is advised.
Z-Score < 1.81: The company is at risk of bankruptcy; financial distress is
more likely.
|
Altman Z-Score |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|
A. Working capital /
Total assets |
0.28 |
0.18 |
0.05 |
0.06 |
0.15 |
0.09 |
|
B. Retained earnings /
Total assets |
0.63 |
0.50 |
0.48 |
0.46 |
0.47 |
0.40 |
|
C. Earnings before
interest and taxes / Total assets |
0.19 |
0.12 |
0.10 |
0.11 |
0.11 |
0.09 |
|
D. Market value of
equity / Book value of total liabilities |
6.51 |
2.74 |
1.92 |
1.56 |
1.47 |
1.27 |
|
E. Total sales / Total
assets |
0.92 |
0.71 |
0.63 |
0.52 |
0.59 |
0.59 |
|
Z |
8.54 |
4.25 |
3.18 |
2.71 |
2.80 |
2.44 |
The group has moved from the safe
zone to the gray zone eventually and the main driver could be identified as the
reduction in market value of equity / book value of total liabilities.
Therefore, according to Altman Z score the group having higher debt to equity,
especially 130% in 2022 has pushed them from the safe zone to the gray zone.
3. Conclusion
In conclusion, financial
statement analysis is an indispensable tool for assessing the financial health,
performance, and prospects of a company. Through the careful examination of a
company's balance sheet, income statement, and cash flow statement, valuable
insights can be gained that aid in making informed investment decisions,
assessing creditworthiness, and understanding a company's operational
efficiency.
By calculating and interpreting
various ratios across categories such as liquidity, solvency, profitability,
efficiency, and market performance, analysts can uncover patterns and trends
that reveal the company's strengths and weaknesses. These insights facilitate
benchmarking against industry peers, historical performance, and established
financial standards.
However, it is important to
approach financial statement analysis with a balanced perspective. Ratios and
metrics, while informative, are based on historical data and do not guarantee
future performance. External factors, industry dynamics, and macroeconomic
influences can all impact a company's financial trajectory. Furthermore, the
quality of financial reporting, accounting practices, and potential management
biases should be taken into consideration when interpreting results.
In sum, financial statement
analysis serves as a critical tool for decision-makers, investors, creditors,
and other stakeholders to assess a company's ability to generate profits,
manage its resources, fulfill obligations, and achieve sustainable growth. It
provides a comprehensive view of a company's financial story, allowing for
strategic planning, risk assessment, and well-informed choices in an
ever-changing business landscape.
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