FINANCIAL STATEMENT ANALYSIS OF CHEVRON LUBRICANTS LANKA PLC
FROM YEAR 2018-2022
1.
Introduction
A company's financial statements are
compared and evaluated annually to understand its performance and growth. The
financial statements represent a summary of important financial data of all
business activities throughout the year. Public limited companies include four
main statements in their annual reports: the income statement, the balance
sheet, the cash flow statement, and the statement of equity.
Financial statement analysis can be
evaluated for the current, past, or future performance. It can compare the same
type of data yearly or important relationship between two kinds of data in the
same year in the same company or compare data in different companies
(competitors). Financial statement analysis includes horizontal analysis, vertical
analysis and ratio analysis are the most used techniques in financial statement
analysis. It helps to internal parties namely owners, management, internal
auditors and employees as well as to the external parties such as potential
investors, customers, creditors, and government to understand about the company
performance.
It is vital to analyse the financial
statements of companies to make the informed decisions for the users or the
stakeholders. In addition to this they can forecast about the company future
perspectives for the society concern as a corporate citizen.
The following report will use these
three approaches to interpret data and analyse the financial performance of Chevron Lubricants Lanka PLC.
2.
Company
Profile
Chevron
Lubricants Lanka PLC was incorporated in 1992 and is based in Colombo, Sri
Lanka. The Company engages in blending, manufacturing, importing, distributing,
and marketing lubricants oils, greases, brake fluids, and specialty products in
Sri Lanka. The Company offers its products for industrial, commercial, and
consumer applications. Chevron Lubricants Lanka PLC markets its products under
Chevron, Caltex, and Texaco brands.
For
almost three-quarters of a century, Chevron has been manufacturing and
marketing quality lubricants around the world. In today’s highly complex and
competitive market, Chevron’s high performance brands and value-added services
are a result of the combination of resources and technology of the entire
Chevron Lubricants organization. Well-known brands such as Havoline, Delo and Caltex
have established both a local and international reputation for reliability and
unsurpassed quality and performance.
3.
Financial Statement Analysis
Financial
statement analysis is the process of examining a company’s performance in the
context of its industry and economic environment in order to arrive at a
decision or recommendation. It provides
a foundation that enables the analyst to better understand other information
gathered from research beyond the financial reports. Often, the
decisions and recommendations addressed by financial analysts pertain to
providing capital to companies, specifically, whether to invest in the
company’s debt or equity securities and at what price.
Overall,
a central focus of financial analysis is evaluating the company’s ability to
earn a return on its capital that is at least equal to the cost of that
capital, to profitably grow its operations, and to generate enough cash to meet
obligations and pursue opportunities.
Generally, there are three approaches used to analyze
financial statements namely horizontal analysis, vertical analysis and ratio
analysis. Horizontal analysis uses to
comparing a company’s financial condition and performance across time and it
includes the trend analysis too. Vertical analysis is comparing a
company’s financial performance to a base amount. It analyses the vertical
effect the line items have on other parts of the business and its proportions.
Ratio analysis uses key relations among financial statement items and uses important
ration metrics to calculate statistical relationships.
Here, we have selected Chevron Lubricants Lanka PLC to
analyze the financial statement for the five (05) years period from 2018 to
2022.
3.1
Summary of Statement of Financial Position and Statement of
Comprehensive Income
Statement
of Financial Position
|
As at 31 December (all amounts in Sri Lanka Rupees,
in Millions) |
|||||
|
|
2022 |
2021 |
2020 |
2019 |
2018 |
|
Assets |
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
Property, plant and equipment
|
1,589 |
1,661 |
1,758 |
1,883 |
1,963 |
|
Right-of-use assets
|
342 |
302 |
343 |
389 |
Nil |
|
Trade and other receivables |
70 |
64 |
79 |
74 |
76 |
|
|
2,001 |
2,028 |
2,180 |
2,347 |
2,040 |
|
Current assets |
|||||
|
Inventories |
5,178 |
3,760 |
2,691 |
1,939 |
2,756 |
|
Trade and other receivables |
1,978 |
1,181 |
1,082 |
1,080 |
1,014 |
|
Cash and cash equivalents |
3,876 |
4,025 |
1,899 |
870 |
259 |
|
|
11,033 |
8,966 |
5,671 |
3,889 |
4,028 |
|
Total assets |
13,034 |
10,993 |
7,852 |
6,236 |
6,068 |
|
|
|||||
|
Equity and liabilities |
|||||
|
Capital and reserves |
|||||
|
Stated capital |
600 |
600 |
600 |
600 |
600 |
|
Retained earnings |
5,559 |
4,399 |
3,580 |
3,536 |
3,314 |
|
|
6,159 |
4,999 |
4,180 |
4,136 |
3,914 |
|
Non-current liabilities |
|||||
|
Employee benefit obligations |
283 |
205 |
192 |
147 |
140 |
|
Deferred tax liabilities |
234 |
157 |
247 |
266 |
258 |
|
Lease liabilities |
358 |
310 |
332 |
359 |
Nil |
|
|
875 |
672 |
771 |
772 |
397 |
|
|
|||||
|
Current liabilities |
|||||
|
Trade and other payables |
4,739 |
2,167 |
789 |
1,423 |
5,040 |
|
Current income tax liabilities |
925 |
552 |
699 |
502 |
333 |
|
Lease liabilities |
35 |
31 |
34 |
36 |
Nil |
|
|
5,999 |
5,322 |
2,900 |
1,327 |
1,756 |
|
Total liabilities |
6,875 |
5,995 |
3,671 |
2,099 |
2,153 |
|
Total equity and liabilities |
13,034 |
10,993 |
7,852 |
6,236 |
6,068 |
Statement
of Comprehensive Income
|
(all amounts in Sri Lanka Rupees) in Millions |
|||||
|
|
2022 |
2021 |
2020 |
2019 |
2018 |
|
Sales
|
24,575 |
16,866 |
11,637 |
11,856 |
10,861 |
|
Cost of sales
|
(14,288) |
(10,688) |
(7,020) |
(7,421) |
(6,769) |
|
Gross profit |
10,287 |
6,178 |
4,617 |
4,435 |
4,092 |
|
Other income
|
2 |
8 |
4 |
2 |
8 |
|
Distribution expenses
|
(1,310) |
(945) |
(778) |
(791) |
(638) |
|
Administrative expenses
|
(1,484) |
(878) |
(808) |
(730) |
(720) |
|
Operating profit |
7,496 |
4,363 |
3,036 |
2,917 |
2,743 |
|
|
|
|
|
|
|
|
Finance income
|
576 |
86 |
105 |
71 |
22 |
|
Finance costs
|
(3,072) |
(117) |
(42) |
(45) |
(5) |
|
Finance income - net
|
(2,496) |
(31) |
63 |
26 |
17 |
|
|
|
|
|
|
|
|
Profit before tax |
5,000 |
4,333 |
3,099 |
2,943 |
2,760 |
|
Income tax expenses
|
(1,334) |
(407) |
(874) |
(844) |
(768) |
|
Profit for the year |
3,666 |
3,926 |
2,226 |
2,099 |
1,992 |
3.2 Horizontal
Analysis
Horizontal
Analysis of Statement of Financial Position
#
Base year - 2017.
|
As at 31 December |
|||||
|
|
2022 |
2021 |
2020 |
2019 |
2018 |
|
Assets |
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
Property, plant, and equipment
|
-23% |
-20% |
-15% |
-9% |
-5% |
|
Right-of-use assets
|
342% |
291% |
343% |
404% |
-100% |
|
Trade and other receivables |
-8% |
-16% |
4% |
-2% |
0% |
|
|
-7% |
-5% |
2% |
9% |
-5% |
|
Current assets |
|||||
|
Inventories |
153% |
84% |
32% |
-5% |
35% |
|
Trade and other receivables |
56% |
-7% |
-15% |
-15% |
-20% |
|
Cash and cash equivalents |
2674% |
2781% |
1259% |
522% |
85% |
|
|
220% |
160% |
64% |
13% |
17% |
|
Total assets |
133% |
96% |
40% |
11% |
8% |
|
|
|||||
|
Equity and liabilities |
|||||
|
Capital and reserves |
|||||
|
Stated Capital |
0% |
0% |
0% |
0% |
0% |
|
Retained earnings |
63% |
29% |
5% |
4% |
-3% |
|
|
54% |
25% |
4% |
3% |
-2% |
|
Non-current liabilities |
|||||
|
Employee benefit obligations |
74% |
26% |
18% |
-9% |
-14% |
|
Deferred tax liabilities |
-5% |
-36% |
0% |
8% |
5% |
|
Lease liabilities |
0% |
-14% |
-7% |
100% |
0% |
|
|
115% |
65% |
89% |
89% |
-3% |
|
|
|||||
|
Current liabilities |
|||||
|
Trade and other payables |
617% |
228% |
19% |
115% |
662% |
|
Current income tax liabilities |
128% |
36% |
73% |
24% |
-18% |
|
Lease liabilities |
-70% |
-73% |
-70% |
-69% |
-100% |
|
|
408% |
351% |
146% |
12% |
49% |
|
Total liabilities |
333% |
277% |
131% |
32% |
36% |
|
Total equity and liabilities |
133% |
96% |
40% |
11% |
8% |
The
company’s total assets growth rate is high to 133% in 2022 compared to 8%
growth in 2018. And it identified that assets have grown more than 100% during
the 2022. In the asset category, Right-of-use assets under the non-current assets and inventory
and cash and cash equivalents under the current assets have shown considerable
growth over the time from 2018 to 2022. In contrast, the property, plant, and
equipment has declined by 23% in 2022 from 2017 base period amount.
The company’s equity capital has grown by 54% in 2022 from
negative growth of 2% in 2018. These changes derived merely from the changes in
retained earnings in 2022 since stated capital remained unchanged during the
past five years. Further, the total liabilities has grown by 408% in 2022 from
12% growth in 2019. This growth is caused by considerable addition in employee
benefit obligations in non-current liabilities and current income tax
liabilities under the current liabilities. Notably, the tax liability has grown
by 128% in 2022 from the 2017 base year.
Horizontal Analysis
of Statement of Comprehensive Income
|
|
2022 |
2021 |
2020 |
2019 |
2018 |
|
Sales
|
122% |
53% |
5% |
7% |
-2% |
|
Cost
of sales
|
126% |
69% |
11% |
18% |
7% |
|
Gross
profit |
117% |
30% |
-3% |
-6% |
-14% |
|
|
|
|
|
|
|
|
Other
income
|
-61% |
41% |
-18% |
-68% |
49% |
|
|
|
|
|
|
|
|
Distribution
expenses
|
99% |
43% |
18% |
20% |
-3% |
|
|
|
|
|
|
|
|
Administrative
expenses
|
118% |
29% |
19% |
7% |
6% |
|
|
|
|
|
|
|
|
Operating
profit |
120% |
28% |
-11% |
-14% |
-19% |
|
|
|
|
|
|
|
|
Finance
income
|
506% |
-9% |
11% |
-25% |
-77% |
|
Finance
costs
|
59518% |
2164% |
715% |
782% |
0% |
|
Finance
income - net
|
-2877% |
-134% |
-29% |
-71% |
-81% |
|
|
|
|
|
|
|
|
Profit
before tax |
43% |
24% |
-11% |
-16% |
-21% |
|
|
|
|
|
|
|
|
Income
tax expenses
|
43% |
-56% |
-6% |
-9% |
-17% |
|
Profit
for the year |
43% |
53% |
-13% |
-18% |
-22% |
The net profit has
highest growth rate of 53% in 2021 and thereafter decline to 43% growth rate in
2022. These two years show a positive growth rate compared to negative growth
from 2018 to 2020. Further, profit before tax and income tax growth rate also
same percentage of 43% in 2022, and the operating profit fluctuated over the
period.
This more net profit
caused by more growth (122%) in sales revenue in 2022 compared to other years.
However, the cost of sales also grows in line with sales. Hence, the gross profit
has shown 117% in 2022. Further, the finance income has grown by a maximum of
506% in 2022. However, the finance costs has grown by 59,518% in 2022.
3.2
Trend Analysis
Trend Analysis of Statement
of Comprehensive Income
|
|
2022 |
2021 |
2020 |
2019 |
2018 |
|
Sales
|
222% |
153% |
105% |
107% |
98% |
|
Cost of sales
|
226% |
169% |
111% |
118% |
107% |
|
Gross profit |
217% |
130% |
97% |
94% |
86% |
|
|
|
|
|
|
|
|
Other income
|
39% |
141% |
82% |
32% |
149% |
|
|
|
|
|
|
|
|
Distribution expenses
|
199% |
143% |
118% |
120% |
97% |
|
Administrative expenses
|
218% |
129% |
119% |
107% |
106% |
|
Operating profit |
220% |
128% |
89% |
86% |
81% |
|
|
|
|
|
|
|
|
Finance income
|
606% |
91% |
111% |
75% |
23% |
|
Finance costs
|
59618% |
2264% |
815% |
882% |
100% |
|
Finance income - net
|
-2777% |
-34% |
71% |
29% |
19% |
|
|
|
|
|
|
|
|
Profit before tax |
143% |
124% |
89% |
84% |
79% |
|
|
|
|
|
|
|
|
Income tax expenses
|
143% |
44% |
94% |
91% |
83% |
|
Profit for the year |
143% |
153% |
87% |
82% |
78% |
The
net profit has suddenly increased in 2021 and 2022 compared to 2018-2020. This
has been supported by a considerable increase in 2021 and 2022. Moreover, the
sale revenue grown at a peak level in 2022 which shows two times growth
compared with the 2018-2020 sales amount. However, the finance cost and income
tax expenditure have drastically increased in 2022 and 2021 due to government’s
finance and tax reformations.
Trend
Analysis of Statement of Financial Position
|
|
2022 |
2021 |
2020 |
2019 |
2018 |
|
Assets |
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
Property, plant, and equipment
|
77% |
80% |
85% |
91% |
95% |
|
Right-of-use assets
|
442% |
391% |
443% |
504% |
-100% |
|
Trade and other receivables |
|||||
|
|
93% |
95% |
102% |
109% |
95% |
|
Current assets |
|||||
|
Inventories |
253% |
184% |
132% |
95% |
135% |
|
Trade and other receivables |
156% |
93% |
85% |
85% |
80% |
|
Cash and cash equivalents |
2774% |
2881% |
1359% |
622% |
185% |
|
|
320% |
260% |
164% |
113% |
117% |
|
Total assets |
233% |
196% |
140% |
111% |
108% |
|
|
|||||
|
Equity and liabilities |
|||||
|
Capital and reserves |
|||||
|
Stated capital |
100% |
100% |
100% |
100% |
100% |
|
Retained earnings |
163% |
129% |
105% |
104% |
97% |
|
|
154% |
125% |
104% |
103% |
98% |
|
Non-current liabilities |
|||||
|
Employee benefit obligations |
174% |
126% |
118% |
91% |
86% |
|
Deferred tax liabilities |
95% |
64% |
100% |
108% |
105% |
|
Lease liabilities |
100% |
86% |
93% |
100% |
0% |
|
|
215% |
165% |
189% |
189% |
97% |
|
|
|||||
|
Current liabilities |
|||||
|
Trade and other payables |
762% |
717% |
328% |
119% |
215% |
|
Current income tax liabilities |
228% |
136% |
173% |
124% |
82% |
|
Lease liabilities |
30% |
27% |
30% |
31% |
-100% |
|
|
508% |
451% |
246% |
112% |
149% |
|
Total liabilities |
433% |
377% |
231% |
132% |
136% |
|
Total equity and liabilities |
233% |
196% |
140% |
111% |
108% |
The
company’s total assets and total liabilities have increased drastically during
2022 as well as in 2021. Here, the long-term liabilities growth (04 times) is
more than the short-term liabilities growth rate (02 times). Further equity
capital increased due to the considerable growth in retained earnings in 2022
and 2021.
3.4 Vertical
Analysis
Vertical
Analysis of Statement of Comprehensive Income
|
|
2022 |
2021 |
2020 |
2019 |
2018 |
|
Sales
|
100% |
100% |
100% |
100% |
100% |
|
Cost of sales
|
-58.14% |
-63.37% |
-60.33% |
-62.60% |
-62.33% |
|
Gross profit |
41.86% |
36.63% |
39.67% |
37.40% |
37.67% |
|
|
|||||
|
Other income
|
0.01% |
0.05% |
0.04% |
0.01% |
0.08% |
|
|
|||||
|
Distribution expenses
|
-5.33% |
-5.60% |
-6.68% |
-6.67% |
-5.88% |
|
Administrative expenses |
-6.04% |
-5.21% |
-6.94% |
-6.16% |
-6.63% |
|
Operating profit |
30.50% |
25.87% |
26.09% |
24.61% |
25.26% |
|
|
|||||
|
Finance income
|
2.34% |
0.51% |
0.91% |
0.60% |
0.20% |
|
Finance costs
|
-12.50% |
-0.69% |
-0.36% |
-0.38% |
-0.05% |
|
Finance income - net
|
-10.16% |
-0.18% |
0.55% |
0.22% |
0.16% |
|
|
|||||
|
Profit before tax |
20.34% |
25.69% |
26.63% |
24.82% |
25.41% |
|
|
|||||
|
Income tax expenses
|
-5.43% |
-2.41% |
-7.51% |
-7.12% |
-7.07% |
|
Profit for the year |
14.92% |
23.28% |
19.13% |
17.71% |
18.34% |
The cost
of goods sold has remained almost 60% of sales amount every year, which means
the gross profit is 40% of total revenue. Profit after tax percentage has
fluctuated over the years with the highest value recorded in 2021 and lowest value
in 2022. Profit before tax percentage been has nearly stable over the years except
the 2022 which has a minimum profit before tax.
On the
cost behaviour side, the distribution expenses and administrative expenses have shown nearly a 6%
portion of sales amount and these two expenditure components have similar size
of cost in terms of percentage over the time.
Therefore, the operating profit slightly grow to 30% in 2022 from 24% in
2019. However, the finance cost fluctuated more in 2022 (12.5%) compared to 0.05% in 2018.
Therefore, the finance cost became the main expenditure items in 2022 compared
to other expenditures in the same year since finance costs nearly equal to the sum
of distribution
expenses and administrative expenses
in 2022.
3.5 Ratio Analysis
Ratio
analysis is conducted by comparing various items in financial statements to
interpret different aspects of the business. It determines to address four main
components and to give a clear idea of the company’s performance in each
component.
v Liquidity and efficiency - Ability
to meet short-term obligations and to efficiently generate revenues
v Solvency - Ability to
generate future revenues and meet long-term obligations
v Profitability - Ability
to provide financial rewards sufficient to attract and retain financing
v Market - Ability to
generate positive market expectations
3.5.1
Profitability Analysis
|
Profitability Ratios |
2022 |
2021 |
2020 |
2019 |
2018 |
|
Net Profit Margin |
15% |
23% |
19% |
18% |
18% |
|
Gross Profit Margin |
42% |
37% |
40% |
37% |
38% |
|
Return on Total Assets (ROA) |
31% |
42% |
32% |
34% |
34% |
|
Return on Common Share Holders’
Equity |
66% |
86% |
54% |
52% |
50% |
|
Basic Earnings Per Share (EPS) –
Rs. |
15.28 |
16.36 |
9.27 |
8.75 |
8.00 |
This ratio describes a company's ability to earn a net
income from sales or how much proportion is the net profit from the revenue.
The higher the value, the more profitable the company is. Here, the profit
margin has declined to 15% in 2022 compared to 23% in 2021. Therefore net
profit has declined by 8% during 2022. It is the lower net profit margin
recorded during the past five years of data. Moreover, except the 2022, all
other years’ profits have shown a steadily increasing pattern.
Gross Profit Margin
This ratio measures the amount remaining from the sales
after considering the sales cost. It measures the ability to cover operating
and other expenses. The value should be high for a company to survive. Here the
gross profit margin increased to
42% in 2022 from 37% in 2021. Hence, 42% is the
higher net profit margin recorded during the past five years of data. The
margin is less than 50% in the company but has been increasing except the 2021
and 2019. Therefore, the company maintains a satisfactory gross profit level to
face the other expenses.
Return on Total Assets
This ratio indicates how effectively a company uses
its assets to generate earnings or the proportion of net income from average
total assets. This is the best overall measure of a company’s profitability and
how much revenue is generated from its overall assets’ usage.
Here, the ROA has declined to 31% in 2022 compared to 42%
in 2021. Therefore net profit has declined by 12% during 2022. It is the lower
net profit margin recorded during the past five years of data. Notably, ROA
recorded a maximum level of 42% in 2021. However, the company has reached a
stable line in 2022 even though there were some significant fluctuations in
return generated from the assets during the past five years.
Return on
Common Shareholder's Equity
It measures the return on shareholder’s funds. This
indicates how well the company employed the owners' investments to earn income
or the proportion of income earned by invested capital.
Here the ROE decreased to
66% in 2022 compared to 86% in 2021. It has declined by 20% in 2022. However
the company’s ROE has shown a steady upward trend over the period except the
peak level of ROE of 86% in 2021. Therefore, it is good enough for the company
to attract future prospective investors.
Basic Earnings per Share
This measure
indicates how much income was earned for each share of common stock
outstanding. This is an essential factor to consider when buying/selling
shares. If the value is high, it is favourable to buy shares and if the value
is low it is unfavourable to buy shares.
The value has
fluctuated over the years from 2018 to 2022. Here the EPS has increased considerably during the
2022 (Rs.15.28) and 2021 (Rs.16.36) when comparing 2018-2020 period which
recorded the EPS as single digit number which is below Rs.10 (between Rs.8.00
to Rs.10.00).
Therefore,
it is a good move for company in terms of earnings for the company's common
shareholders. It will be a positive sign for future sources of capital.
3.5.2 Liquidity and Efficiency Ratios
|
|
2022 |
2021 |
2020 |
2019 |
2018 |
|
Current |
1.84 |
1.68 |
1.96 |
2.93 |
2.29 |
|
Acid ratio |
0.98 |
0.98 |
1.03 |
1.47 |
0.72 |
|
Total Asset Turnover |
2.05 |
1.79 |
1.65 |
1.93 |
1.86 |
|
Accounts Receivable Turnover |
15.56 |
14.91 |
10.77 |
11.33 |
9.53 |
|
Merchandise Turnover |
3.20 |
3.31 |
3.03 |
3.16 |
2.82 |
|
Days’ Sales Uncollected |
23.46 |
24.49 |
33.90 |
32.22 |
38.31 |
|
Days’ Sales in Inventory |
114.17 |
110.14 |
120.36 |
115.46 |
129.45 |
Current Ratio
This ratio measures the short-term
debt-paying ability of the company. This ratio should not be too high because
too much liquidity is not suitable for the company and generally the
recommended ratio between current assets and current liability is 2:1. Here the
company’s short-term debt-paying ability is at a satisfactory level since all
the values are positive and nearly 2:1 except the 2019. Therefore, the company manages
its net operating capital well without overtrading or under-trading.
Acid Test Ratio
This ratio only considers the
company's ability to pay its debt by using assets that can be rapidly converted
into cash. This ratio excludes current assets such as inventories and prepaid
expenses that may be difficult to convert into cash quickly. The recommended
ratio value is 1:1. Hence, the company's overall acid test ratio is at a stable
level in all years except the maximum value of 1.47 in 2019. However, it is
more than zero in all years. Therefore, it depicts that the company can manage
well its’ short-term debt by handling its liquid-able current assets.
Total Assets Turnover
This ratio measures the efficiency of assets in producing sales. The
value should be greater than one to indicate a higher efficiency rate. All five
years' values are more than one (nearly equal to two (02) which implies the total
revenue exceeds its average total assets. This shows an efficient utilization
of its assets.
Accounts Receivable Turnover:
This ratio measures how many times a
company converts its receivables into cash each year or how effective it is to
extend credit and collect debt. The bigger the value, the better the company’s
efficiency. The company has reached its highest in 2022 and it also shows a
steady increasing trend in the ratio except the little fluctuation in 2020.
This indicates a healthy performance in sales versus trade debtors.
Day's Sales Uncollected
This measures receivables' liquidity or the number of days between the
day of sales and the day the receivables are collected. Fewer days, less than
30 days are optimal and better for the liquidity of the company. The company
has reached a minimum day of collection period (23.46 days) in 2022 compared
with 38.31 days in 2018. Further, the company has brought the collection period
below 30 days during 2022 and 2021 except all the past three years which has
more than 30 days. This figure shows a steady declining pattern over time.
Merchandise Turnover
Turnover ratio measures the number of times inventory is sold
and replaced during the year. A lower turnover means poor sales and poor
performance of the organization. Here, the company’s Merchandise Turnover is
always greater than 1 (more than 2 for all years) and it’s in the positive
figure which means net sales exceed its inventory. It indicates that the company
perform by strong sales through its inventory.
Day's Sales in Inventory
Days' sales inventory measures the liquidation of inventory for
particular period of time. And another way to call it an inventory holding
period. This ratio should be in lower rate. However, the company has higher
number of days in all the past five years (more than 100 days). It is due to
the company processing the lubricating oil by holding more inventory in their
oil plant. However, it’s advisable to the company to consider this issue and take
innovative solution in a possible manner to reduce this situation in future.
3.5.3
Solvency Ratio
Solvency
ratio explains the long term debt paying ability to the company. This Ratio reflect
the respective creditors or and shareholders against the assets.
|
|
2022 |
2021 |
2020 |
2019 |
2018 |
|
Debt Ratio |
0.53 |
0.55 |
0.47 |
0.34 |
0.35 |
|
Equity Ratio |
0.47 |
0.45 |
0.53 |
0.66 |
0.65 |
|
Debt To Equity ratio |
1.12 |
1.20 |
0.88 |
0.51 |
0.55 |
|
Interest coverage Ratio |
2.63 |
38.14 |
74.82 |
65.76 |
535.16 |
Debt ratio
Debt ratio is for measures the relationship between
borrowings and total assets, and to measure the financial solvency of the
company. This ratio measures what portion of a company's assets are
contributed by creditors.
The company’s debt ratio has
dramatic increased over the time from lowest value of 0.34 in 2019 to highest
value of 0.55 in 2021. Further, debt ratio has shown in last two years, 0.53 in
2022 and 0.55 in 2021 recorded high value compared to 0.35 in 2018. Hence, high
debt ratio (more than 50% during the last two years) indicates that, more
proportion of overall debt included in their assets.
Equity ratio
This
ratio measures what portion of a company's assets are contributed by owners’ equity. The company’s debt ratio has dramatic decreased over the time from
highest value of 0.66 in 2019 to minimum value of 0.45 in 2021. Further, debt
ratio has shown in last two years, 0.47 in 2022 and 0.45 in 2021 recorded
lowest value compared to 0.66 in 2019. Hence, lower the debt ratio (less than
50% during the last two years) indicates that, less proportion of equity
included in their assets.
Debt to Equity ratio
Debt to equity ratio measure the leverage of capital
structure. The company debt to equity ratio has shown an increasing trend from
lowest value of 0.51 in 2019 to highest value of 1.20 in 2021. Further the
value has more than 1 in 2022 and in 2021 which depicts that company’s external
debt exceeds the internal equity fund.
Times Interest Earned
This ratio measures the ability of a firm's operations
to protect the long-term creditor or how strong the company is in paying the
interest. The higher the value, the higher the ability to bear the interest
payments or finance cost of the company. This value has declined drastically to
lowest value of 2.63 times in 2022 compared to highest value of 535.16 times in
2018. Therefore, it indicates that company has the lower level of interest bearing
capacity on long term debt.
3.5.4
Market Analysis
|
|
2022 |
2021 |
2020 |
2019 |
2018 |
|
Price
–Earnings Ratio (P/E) Times |
6.32 |
6.91 |
11.65 |
8.56 |
8.77 |
|
Dividend
Yield Ratio |
0.07 |
0.12 |
0.08 |
0.10 |
0.12 |
|
Market
Price per Share |
96.50 |
113.00 |
108.00 |
74.90 |
72.80 |
Price-Earnings (P/E) Ratio
Investors often use this measure as a general guideline in evaluating
stock values. Generally, the higher the price-earnings ratio, the more
opportunity a company has for growth. This ratio compares the company’s market
price to earnings per share. The company’s P/E ratio value has declined over
the time with considerable fluctuations. The lowest value is recorded for 6.32
times in 2022 and the highest value has taken for 11.65 times in 2020. Hence,
the company’s P/E ratio declined over the time except 2020. This indicates that
there is a possibility that the company stocks are undervalued. Investors can
buy the stock at a discounted price, or it can mean a genuine lack of growth
potential.
Dividend Yield
This ratio measures the return, in
terms of cash dividends, on the current market price of the stock. The highest
dividend yield is recorded in 2018 and the lowest in 2017. The values have
fluctuated throughout the years. The company’s Dividend yield value has
declined over the time with considerable fluctuations. The lowest value is
recorded for 7% in 2022 and the highest value has taken for 12% in 2020 and in
2018. Hence, the company’s P/E ratio has declined over the time except 2020.
Market Price per Share
The market value of share has shown
upward trend from Rs.72.80 in 2018 to Rs.113.00 in 2021. However, there is
considerable decline of share to Rs.96.50 in 2022 compared to Rs, 113.00 in
2021.
3.6 Altman Z-Score
The
Altmen Z-score is the credit-strength test that measures an openly traded
manufacturing company's probability of bankruptcy and measures the credit
worthiness for a company.
The Altman Z score formula for
Chevron Lubricants Lanka PLC for 2022 as
follows,
Z = 0.3862Q1 + 0. 4265Q2
+0.6193Q3+3.3689Q4+
1.8855Q5
|
# |
2022 |
2021 |
2020 |
2019 |
2018 |
|
Q1 |
0.3862 |
0.3314 |
0.3529 |
0.4107 |
0.3744 |
|
Q2 |
0.4265 |
0.4001 |
0.4560 |
0.5671 |
0.5462 |
|
Q3 |
0.6193 |
0.4047 |
0.4001 |
0.4793 |
0.4557 |
|
Q4 |
3.3689 |
4.5241 |
7.0599 |
8.5632 |
8.1138 |
|
Q5 |
1.8855 |
1.5343 |
1.4822 |
1.9014 |
1.7899 |
|
Altman Z-Score |
6.6864 |
7.1946 |
9.7510 |
11.9218 |
11.2801 |
Q1 = Working capital
/ Total assets
Q2 = Retained
earnings / Total assets
Q3 = Earnings before
interest and taxes / Total assets
Q4 = Market value of
equity / Book value of total liabilities
Q5 = Total sales /
Total assets
Zones of
Discrimination:
Z > 2.99
-
Safe zone
1.8 < Z <
2.99
- Grey zone
Z<1.80 - Distress
zone
Therefore,
according to the above calculations, we can identify that the company in “Safe
Zone” over the time from 2018 to 2022. Hence, it’s a good sign for company
credit worthiness and has satisfactory credit strength since Z score more than
3 which indicates that company has very less level of probability for
bankruptcy.
4.
Conclusion
Financial
statement analysis is used to understand and diagnose the firm's profitability
and financial soundness and make forecasts about the firm's future
prospects based on informed decision making by users.
According
to the past five years’ financial statements analysis, we can concluded that
the Chevron Lubricants Lanka PLC has shown good performance based on net profit
after tax and revenue growth in lines with better asset growth and utilization.
However,
the following issues were identified through the analysis,
According
to trend analysis, Profit after tax percentage has fluctuated over the years
with the highest value recorded in 2021 and lowest value in 2022. Profit before
tax percentage has nearly stable over the years except the 2022 which has
minimum profit before tax. Further, finance cost and income
tax expenditure has drastically increased in 2022 and 2021 due to government’s
finance and tax reformations. The finance cost became the main component in expenditure items
in 2022 compared to other expenditures in the same year.
In
addition to this, the company’s total assets growth rate is high in 2022 due to
more addition to right-of-use
assets under the non-current assets and inventory and cash and cash equivalents
under the current assets has shown considerable growth over the time from 2018
to 2022. The excess inventory is due to the inflationary effect in the economic
environment of country. Therefore, the days’
Sales in Inventory has shown more than 100 days. However, these effects are
general circumstances during the 2021 and 2022 period as an industry
perspectives.
Then as per the ratio
analysis, company performance is good in terms of profitability ratios. The
company earns satisfied return on its assets and on its share. Company's
liquidity position is at a healthy state since current ratio and acid test
ratio shown efficient in the day to day operation cycle. However, the days’
sales in inventory is at poor level which is over 100 days. Hence, it’s
advisable to management consider this issue and take better remedies in future.
Further,
company shows the optimum capacity to repay the overall liabilities by effective
management of its assets. However, the interest coverage ratio has dropped down
to lower level to two times in 2022 compared to previous years. This also a
common issue in industry perspective during 2022. However, management has to
think about alternative and economically low-cost financing channels in future.
In addition to this, the
company's company market status is moderately attractive in terms of P/E ratio.
However, it shows a lower divide the yield ratio since the company allocates
earnings of its in retained earning more in 2022 as well as market price of
share has drop down to nearly Rs.100.00. Therefore, there is needed to make
strategic and innovative development plans to maintain existing market share
and to attract the future prospective investors.
Finally, the credit
worthiness or strength of the company is at capable level based the Altman Z
score which is at safe zone region.
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