Financial Statement Analysis of Royal Ceramics Lanka PLC

 

1. Introduction

 

Financial statement analysis is a process of evaluating and interpreting company financial statements to gain insights into its financial performance and position. It involves examining the financial statements including balance sheet, income statement and cash flow statement to assess the company’s profitability, liquidity, solvency and overall financial health. Financial statement analysis is a valuable tool for investors, creditors, analysts and management to make informed decisions about a company’s financial performance.

 

Importance of Financial Statement Analysis

Financial Statement analysis helps to identify the risks and opportunities associated with investing or conducting business with a particular company. So that below are few reasons;

·         Investment Decisions: Investor analyze financial statements to evaluate the financial health and performance of company before making investment decisions. By analyzing the company profitability, liquidity and overall financial stability, investors can assess potential risks and rewards of investing in particular company’s stocks and bonds.

·         Credit Decisions: Creditors including banks and lending institutions analyze financial statements to determine creditworthiness of borrowers. Creditors male informed decisions after assessing company’s ability to generate cash flow and meet its financial obligations to extend loans or credit to the company.

·         Strategic Planning: Company management rely on financial statement analysis to make strategic decisions. After analyzing financial ratios and trends, management can identify areas to improve, allocate resources more efficiently and effectively and set goals for growth and expansion.

·         Performance Evaluation: Companies can evaluate their own performance over time by comparing current financial results to previous periods and industry benchmarks. Companies can identify strengths and weaknesses in their operations and take corrective actions.

·         Regulatory Compliances: Companies are required to prepare accurate and transparent financial statements in accordance with accounting standards and regulations. Regulators and auditors can analyze financial statements and ensure compliance and detect any potential irregularities and misstatements.

Financial statement analysis provides insights into a company’s long term financial sustainability. By assessing factors like debt levels, capital structure and cash flow, companies can plan for long term growth and stability. So that, financial statement analysis serves as a critical tool for assessing the financial health, performance and prospects of the company. The following report uses horizontal analysis, vertical analysis and ratio analysis to interpret data and discuss the financial performance of Royal Ceramics Lanka PLC.

 

 

 

 

 

 

 

 

 

 

 

 

 

2. Background of the Company

 

Royal Ceramics Lanka PLC branded as Rocell was founded on 1990 and in 1994, it was listed on Colombo Stock Exchange. The company is engaged in manufacturing ceramic tiles and bath ware and also one of the constituents of the S&P Sri Lanka 20 Index. Rocell is in the business of enhancing the quality of life by adding colour, style and elegance to life. It creates sense of aspiration, expectation, fashion and style always stirring aspirations around good living, creating sensorial pleasures of an aesthetically living ambiance.

Subsidiaries of the company Royal Porcelain (Pvt) Ltd and Rocell Bathware Ltd commenced operations in 2002 and 2009 respectively. Also from 2010, the company was acquiring stakes in other companies which resulted in Royal Ceramics taking control of a stake of 20% in Delmege Forsyth in 2010, 2525.85% in LB Finance in 2012, and 76.54% in Lanka Ceramics PLC in 2013. After the acquisition of Lanka Ceramics PLC for LKR 2.9 billion from CT Holdings, Royal Ceramics could obtain monopoly over the tile market in Sri Lanka.

Currently the company serve the high end market. Due to the economic crisis in Sri Lanka, import restrictions were imposed and the overall market share of the company has increased to 75% in floor tiles and 82% in wall tiles.

Vision of the company

“To Continue to be the leader in the surfacing industry locally and to enter and impact the global market.”

Mission of the company

“To offer state of the art surfacing solutions to both the home and commercial builders with products and services that transcend the highest quality, ensuring customer satisfaction by matching all expectations, growing the market by way of product innovation, thereby enhancing shareholder wealth, developing our human resources to excelling latitudes such that Royal Ceramics exudes a stance of excellence.”

3.Financial Statement Analysis

 

Financial statement analysis provides insights over financial statements and highlights over the financial performance of a company. So basically there are three techniques used to analyze financial statements. Horizontal analysis compares data of the company over several years. So that past data will be compared with the current situation. Trend analysis is also part of horizontal analysis which will analyze the trend of few years. Vertical analysis compare company’s financial performance in relative to a base year. It analyses the vertical effect of the line items of financial statements on other parts of the business and its proportion. Ratio analysis interprete key relations among financial statement items and calculate statistical relationships for better decision making of stakeholders of a business.

So these financial statements can be compared with the past data of the company over several years, with competitors and within the industry guidelines.

 

3.1 Horizontal Analysis

 

Horizontal analysis is conducted by analyzing the values of financial statements over times. This is useful to identify the changes in values of each year compared to the base year. So that data has been analyzed from 2019 to 2023 by considering 2018 as the base year.

This can be calculated as follows.

Dollar change = Analysis period amount - Based Period Amount Percentage change = Dollar change / Based period amount *100

 

 

 

 

Base year – 2018

Time period – 2019 - 2023

3.1.1-Horizontal Analysis of Financial Position

 

Rupee Change

ASSETS	2019	2020	2021	2022	2023
Non Current Assets
Property, Plant & Equipment	329,777,395.00	1,981,924,285.00	1,688,109,812.00	3,393,937,503.00	5,025,790,417.00
Consumable Biological Assets	-	-	-	-	-
Leasehold Rights Over Mining Lands	-	-	-	-	-
Investment Property	-	-	-	-	-
Investments in Subsidiaries	151,628,107.00	168,402,419.00	168,402,429.00	225,069,089.00	283,345,635.00
Investments in Associates	-	-	-	325,226,108.00	325,226,108.00
Intangible Assets	(5,070,730.00)	(22,311,955.00)	(40,969,346.00)	(54,716,535.00)	(42,591,030.00)
Right of Use Assets	-	965,786,742.00	855,048,508.00	881,696,491.00	946,300,551.00
Deferred Tax Assets	-	41,304,331.00	18,017,371.00	-	-
	476,334,772.00	3,135,105,822.00	2,688,608,774.00	4,771,212,656.00	6,538,071,681.00
Current Assets	-	-	-	-	-
Inventories	518,233,634.00	3,229,655,099.00	1,597,904,575.00	1,515,139,837.00	4,622,621,983.00
Trade and Other Receivables	162,091,535.00	307,208,826.00	258,446,575.00	(2,268,096.00)	204,885,812.00
Amounts Due from Related Parties	-	-	-	78,917,708.00	1,911,783,271.00
Other Non Financial Assets	(94,992,758.00)	(33,573,530.00)	(117,420,978.00)	120,280,770.00	291,993,303.00
Contract Assets	-	-	-	-	-
Other Financial Assets	(82,169,229.00)	(72,687,401.00)	290,004,969.00	(104,221,461.00)	(83,512,046.00)
Income Tax Recoverable	(18,926,011.00)	(55,269,110.00)	(55,269,110.00)	(55,269,110.00)	(55,269,110.00)
Cash and Cash Equivalents	173,929,762.00	112,972,308.00	1,580,818,876.00	6,952,987,865.00	510,915,056.00
	658,166,933.00	3,488,306,192.00	3,554,484,907.00	8,505,567,513.00	7,403,418,269.00
Assets held for sale	-	-	-	-	-
	658,166,933.00	3,488,306,192.00	3,554,484,907.00	8,505,567,513.00	7,403,418,269.00
Total Assets	1,134,501,705.00	6,623,412,014.00	6,243,093,681.00	13,276,780,169.00	13,941,489,950.00
	-	-	-	-	-
EQUITY AND LIABILITIES	-	-	-	-	-
	-	-	-	-	-
Capital and Reserves	-	-	-	-	-
Stated Capital	-	-	-	-	-
Reserves	-	362,344,363.00	529,688,624.00	1,927,882,666.00	1,527,416,460.00
Retained Earnings	37,545,543.00	4,556,499,046.00	6,317,100,355.00	8,068,373,434.00	8,950,404,650.00
Equity Attributable to Equity Holders of the Parent	37,545,543.00	4,918,843,409.00	6,846,788,979.00	9,996,256,100.00	10,477,821,110.00
Non Controlling Interest	-	-	-	-	-
Total Equity	37,545,543.00	4,918,843,409.00	6,846,788,979.00	9,996,256,100.00	10,477,821,110.00
	-	-	-	-	-
Non Current Liabilities	-	-	-	-	-
Interest Bearing Loans & Borrowings	(354,892,325.00)	(382,567,821.00)	(1,095,110,480.00)	(1,661,376,466.00)	(1,542,780,027.00)
Deferred Tax Liabilities	11,124,894.00	279,761,716.00	288,871,333.00	600,636,969.00	1,285,208,307.00
Retirement Benefit Liabilities	15,633,820.00	186,336,913.00	236,615,962.00	269,233,926.00	368,441,224.00
Other Non Current Liabilities	-	-	-	-	-
	(328,133,611.00)	83,530,808.00	(569,623,185.00)	(791,505,571.00)	110,869,504.00
Current Liabilities	-	-	-	-	-
Trade and Other Payables	1,055,495,518.00	(1,838,422,279.00)	(1,842,054,704.00)	(1,847,564,185.00)	(1,852,863,926.00)
Amounts Due to Related Parties	-	193,591,695.00	398,836,826.00	23,462,162.00	50,352,315.00
Other Current Liabilities	(371,496,415.00)	46,188,555.00	1,138,429,832.00	5,390,416,233.00	2,159,742,906.00
Contract Liability	491,392,636.00	-	-	-	-
Dividend Payable	(8,686,717.00)	(13,142,376.00)	(26,723,634.00)	3,955,388.00	212,864,456.00
Income Tax Liabilities	-	111,120,589.00	405,458,291.00	642,746,561.00	666,584,311.00
Interest Bearing Loans & Borrowings	258,384,751.00	3,121,701,613.00	(108,018,724.00)	(140,986,519.00)	2,116,119,274.00
	1,425,089,773.00	1,621,037,797.00	(34,072,113.00)	4,072,029,640.00	3,352,799,336.00
Liabilities directly associated with the assets held for sale	-	-	-	-	-
	1,425,089,773.00	1,621,037,797.00	(34,072,113.00)	4,072,029,640.00	3,352,799,336.00
Total Equity and Liabilities	1,134,501,705.00	6,623,412,014.00	6,243,093,681.00	13,276,780,169.00	13,941,489,950.00

 

Percentage Change

ASSETS	2023	2022	2021	2020	2019
Non Current Assets
Property, Plant & Equipment	5.03%	30.21%	25.73%	51.74%	76.62%
Consumable Biological Assets
Leasehold Rights Over Mining Lands
Investment Property
Investments in Subsidiaries	2.35%	2.61%	2.61%	3.49%	4.39%
Investments in Associates	0.00%	0.00%	0.00%	10.28%	10.28%
Intangible Assets	-2.97%	-13.05%	-23.96%	-32.00%	-24.91%
Right of Use Assets
Deferred Tax Assets
	2.91%	19.18%	16.45%	29.18%	39.99%
Current Assets
Inventories	37.19%	231.76%	114.66%	108.72%	331.71%
Trade and Other Receivables	29.73%	56.34%	47.40%	-0.42%	37.57%
Amounts Due from Related Parties
Other Non Financial Assets	-25.74%	-9.10%	-31.81%	32.59%	79.11%
Contract Assets
Other Financial Assets	-55.92%	-49.47%	197.38%	-70.93%	-56.84%
Income Tax Recoverable	-34.24%	-100.00%	-100.00%	-100.00%	-100.00%
Cash and Cash Equivalents	59.69%	38.77%	542.47%	2385.96%	175.32%
	23.49%	124.51%	126.88%	303.60%	264.26%
Assets held for sale
	23.49%	124.51%	126.88%	303.60%	264.26%
Total Assets	5.92%	34.59%	32.60%	69.33%	72.80%
EQUITY AND LIABILITIES
Capital and Reserves
Stated Capital	0.00%	0.00%	0.00%	0.00%	0.00%
Reserves	0.00%	43.62%	63.77%	232.11%	183.90%
Retained Earnings	0.50%	61.03%	84.61%	108.06%	119.87%
Equity Attributable to Equity Holders of the Parent	0.39%	50.89%	70.84%	103.42%	108.40%
Non Controlling Interest
Total Equity	0.39%	50.89%	70.84%	103.42%	108.40%
Non Current Liabilities
Interest Bearing Loans & Borrowings	-10.71%	-11.54%	-33.04%	-50.13%	-46.55%
Deferred Tax Liabilities	2.79%	70.12%	72.40%	150.54%	322.13%
Retirement Benefit Liabilities	6.36%	75.79%	96.24%	109.51%	149.86%
Other Non Current Liabilities
	-8.29%	2.11%	-14.39%	-19.99%	2.80%
Current Liabilities
Trade and Other Payables	32.20%	-56.08%	-56.19%	-56.36%	-56.52%
Amounts Due to Related Parties
Other Current Liabilities	-69.75%	8.67%	213.74%	1012.03%	405.48%
Contract Liability
Dividend Payable	-18.06%	-27.32%	-55.56%	8.22%	442.55%
Income Tax Liabilities
Interest Bearing Loans & Borrowings	15.50%	187.31%	-6.48%	-8.46%	126.97%
	25.79%	29.34%	-0.62%	73.69%	60.68%
Liabilities directly associated with the assets held for sale
	25.79%	29.34%	-0.62%	73.69%	60.68%
Total Equity and Liabilities	5.92%	34.59%	32.60%	69.33%	72.80%

 

The property plant and equipment has increased significantly over the last 5 years. So this has increased from 5% in 2019 to 76% in 2023.Ingangible assets have decreased during 2019-2023 as well. Differed tax assets also have increased from 2.9% to 39% in 2023. So that overall noncurrent assets have increased during the last 5 years.

When considering current assets, inventory has increased in comparison to the base year which is 331% from 2018. Trade and other receivables have increased while the lowest change in in 2022 which is 0.42% decline and 56.34% increase in 2020 which is the highest difference. Other non-financial assets have decreased up to 2021 but increased slightly afterwards. Other financial assets have decreased during last few years but there is a drastically increase in 2021.Cash and cash equivalents have also increased where it has largely improved in 2022 but this also indicates extra funds within the business. So that current assets as well as total assets have increased during 2019 to 2023 compared with the base year 2018.

Stated capital has remained constant during the last 5 years. However, retained earnings and reserves have improved between 2019 to 2023. Equity is belonging to shareholders and no non-controlling interest recorded.

When considering noncurrent liabilities, interest bearing loans have decreased in comparison to 2018. Deffered tax liability and retirement benefit liabilities have drastically increased as well. So the total noncurrent liabilities have fluctuated during 2019-2023. When considering current liabilities, trade and other liabilities have declined which is a good indication of liquidity. Other current liabilities also have increased and dividend payable in 2023 is very high. Overall current liabilities have improved during last 5 years.

 

3.1.2-Horizontal Analysis of Income Statement

 

Rupee Change

	2019	2020	2021	2022	2023
Revenue from Contract with Customers	342,289,027.00	2,993,101,920.00	9,071,939,894.00	10,922,156,607.00	13,456,277,797.00
Cost of Sales	(254,029,874.00)	(1,409,033,618.00)	(4,372,676,485.00)	(4,968,905,408.00)	(7,468,230,449.00)
Gross Profit	88,259,153.00	1,584,068,302.00	4,699,263,409.00	5,953,251,199.00	5,988,047,348.00
Other Operating Income	(1,719,584,367.00)	(1,742,344,287.00)	(1,387,856,295.00)	227,395,833.00	(372,756,480.00)
Distribution Expenses	(312,670,547.00)	(667,290,821.00)	(1,314,403,161.00)	(1,292,090,706.00)	(2,125,399,436.00)
Administrative Expenses	(6,320,814.00)	(45,217,306.00)	7,417,983.00	(214,447,131.00)	(425,017,120.00)
Other Operating Expenses	93,301,978.00	(98,387,446.00)	(259,752,002.00)	124,743,794.00	147,279,640.00
Finance Cost	(110,558,117.00)	(519,195,436.00)	(161,537,555.00)	134,084,423.00	9,618,187.00
Finance Income	5,694,136.00	10,641,966.00	48,661,396.00	284,570,130.00	582,998,231.00
Share of Associate Companies Profit	-	-	-	-	-
Profit Before Tax Continuing Operations	(1,961,878,578.00)	(1,477,725,028.00)	1,631,793,775.00	5,217,507,542.00	3,804,770,370.00
Tax (Expense)/Reversal	172,639,525.00	95,612,378.00	(375,306,385.00)	(858,761,057.00)	(1,086,223,383.00)
Net Profit After Tax from Continuing Operations	(1,789,239,053.00)	(1,382,112,650.00)	1,256,487,390.00	4,358,746,485.00	2,718,546,987.00
Discontinued Operations	-	-	-	-	-
Profit after tax from discontinued operations	-	-	-	-	-
Profit for the Year	(1,789,239,053.00)	(1,382,112,650.00)	1,256,487,390.00	4,358,746,485.00	2,718,546,987.00
	-	-	-	-	-
Attributable to:	-	-	-	-	-
Equity Holders of the Parent	(1,789,239,053.00)	(1,382,112,650.00)	1,256,487,390.00	4,358,746,485.00	2,718,546,987.00
Non Controlling Interest	-	-	-	-	-
	(1,789,239,053.00)	(1,382,112,650.00)	1,256,487,390.00	4,358,746,485.00	2,718,546,987.00

 

Percentage Change

	2019	2020	2021	2022	2023
Revenue from Contract with Customers	9.91%	86.70%	262.78%	316.37%	389.78%
Cost of Sales	14.26%	79.09%	245.44%	278.91%	419.20%
Gross Profit	5.28%	94.81%	281.27%	356.32%	358.41%
Other Operating Income	-62.32%	-63.14%	-50.30%	8.24%	-13.51%
Distribution Expenses	27.12%	57.88%	114.01%	112.08%	184.36%
Administrative Expenses	1.32%	9.47%	-1.55%	44.90%	88.98%
Other Operating Expenses	-73.72%	77.73%	205.22%	-98.56%	-116.36%
Finance Cost	25.54%	119.96%	37.32%	-30.98%	-2.22%
Finance Income	78.59%	146.88%	671.62%	3927.60%	8046.48%
Share of Associate Companies Profit
Profit Before Tax Continuing Operations	-87.30%	-65.75%	72.61%	232.16%	169.30%
Tax (Expense)/Reversal	-78.98%	-43.74%	171.70%	392.88%	496.95%
Net Profit After Tax from Continuing Operations	-88.19%	-68.12%	61.93%	214.84%	134.00%
Discontinued Operations
Profit after tax from discontinued operations
Profit for the Year	-88.19%	-68.12%	61.93%	214.84%	134.00%
Attributable to:
Equity Holders of the Parent	-88.19%	-68.12%	61.93%	214.84%	134.00%
Non Controlling Interest
	-88.19%	-68.12%	61.93%	214.84%	134.00%

 

Total revenue has increased from 2019 to 2023 in comparison to 2018. It has rapidly icraesed I 2022 and 2023. Cost of sales also has increased proportionate to revenue but it is very high in 2023. Similarly, gross profit also has increased during last 5 years and highest is recorded in 2023.Profit before tax in highest recorded in 2022 and lowest in 2019. Total comprehensive income also has increased during last few years and the highest value in 2022.

3.2-Trend Analysis

3.2.1-Trend Analysis of Financial Position

	2018	2019	2020	2021	2022	2023
Non Current Assets	100%	103%	119%	116%	129%	140%
Current Assets	100%	123%	225%	227%	404%	364%
Total Assets	100%	106%	135%	133%	169%	173%
Total Equity	100%	100%	151%	171%	203%	208%
Non Current Liabilities	100%	92%	102%	86%	80%	103%
Current Liabilities	100%	126%	129%	99%	174%	161%
Total Equity and Liabilities	100%	106%	135%	133%	169%	173%

 

Total assets and equity have increased over the last five years. Non-current liabilities have slightly decreased up to 2022 but increased in 2023. Current liabilities have also increased during the last few years except 2021.This can be represented in following graph.

 

3.2.2-Trend Analysis of Income Statement

	2018	2019	2020	2021	2022	2023
Revenue from Contract with Customers	100%	110%	187%	363%	416%	490%
Cost of Sales	100%	114%	179%	345%	379%	519%
Gross Profit	100%	105%	195%	381%	456%	458%
Other Operating Income	100%	38%	37%	50%	108%	86%
Distribution Expenses	100%	127%	158%	214%	212%	284%
Administrative Expenses	100%	101%	109%	98%	145%	189%
Other Operating Expenses	100%	26%	178%	305%	1%	-16%
Finance Cost	100%	126%	220%	137%	69%	98%
Finance Income	100%	179%	247%	772%	4028%	8146%
Share of Associate Companies Profit
Profit Before Tax Continuing Operations	100%	13%	34%	173%	332%	269%
Tax (Expense)/Reversal	100%	21%	56%	272%	493%	597%
Net Profit After Tax from Continuing Operations	100%	12%	32%	162%	315%	234%
Discontinued Operations
Profit after tax from discontinued operations
Profit for the Year	100%	12%	32%	162%	315%	234%
Attributable to:
Equity Holders of the Parent	100%	12%	32%	162%	315%	234%
Non Controlling Interest
	100%	12%	32%	162%	315%	234%

 

There is a drastically increase of revenue during the last few years and also the gross profit has increased proportionate to revenue. But the net profit has dropped in 2019 which is the lowest and has gradually improved during the last few years. This can be represented in following graph.

 

3.3-Vertical Analysis

 

In vertical analysis, every item of the financial statement is represented as a proportion of total account and it is calculated within a given year. In the statement of financial position, every item under assets is calculated as a proportion of total assets and items under equity and liability is represented as a percentage of total equity and liabilities. Also every item under Income statement is expressed as a proportion of total revenue.

Common – size percentage = Analysis Amount/Base Amount *100%

 

 

3.3.1-Vertical Analysis of Financial Position

ASSETS	2019	2020	2021	2022	2023
Non Current Assets
Property, Plant & Equipment	34%	33%	32%	31%	35%
Consumable Biological Assets	0%	0%	0%	0%	0%
Leasehold Rights Over Mining Lands	0%	0%	0%	0%	0%
Investment Property	0%	0%	0%	0%	0%
Investments in Subsidiaries	33%	26%	26%	21%	20%
Investments in Associates	16%	12%	12%	11%	11%
Intangible Assets	1%	1%	1%	0%	0%
Right of Use Assets	0%	4%	3%	3%	3%
Deferred Tax Assets	0%	0%	0%	0%	0%
	83%	76%	75%	65%	69%
Current Assets
Inventories	9%	18%	12%	9%	18%
Trade and Other Receivables	3%	3%	3%	2%	2%
Amounts Due from Related Parties	0%	0%	0%	0%	6%
Other Non Financial Assets	1%	1%	1%	2%	2%
Contract Assets	0%	0%	0%	0%	0%
Other Financial Assets	0%	0%	2%	0%	0%
Income Tax Recoverable	0%	0%	0%	0%	0%
Cash and Cash Equivalents	2%	2%	7%	22%	2%
	17%	24%	25%	35%	31%
Assets held for sale	0%	0%	0%	0%	0%
	17%	24%	25%	35%	31%
Total Assets	100%	100%	100%	100%	100%
EQUITY AND LIABILITIES
Capital and Reserves
Stated Capital	7%	5%	5%	4%	4%
Reserves	4%	5%	5%	9%	7%
Retained Earnings	37%	47%	54%	48%	50%
Equity Attributable to Equity Holders of the Parent	48%	57%	65%	61%	61%
Non Controlling Interest	0%	0%	0%	0%	0%
Total Equity	48%	57%	65%	61%	61%
Non Current Liabilities
Interest Bearing Loans & Borrowings	15%	11%	9%	5%	5%
Deferred Tax Liabilities	2%	3%	3%	3%	5%
Retirement Benefit Liabilities	1%	2%	2%	2%	2%
Other Non Current Liabilities	0%	0%	0%	0%	0%
	18%	16%	13%	10%	12%
Current Liabilities
Trade and Other Payables	21%	6%	6%	4%	4%
Amounts Due to Related Parties	0%	1%	2%	0%	0%
Other Current Liabilities	1%	2%	7%	18%	8%
Contract Liability	2%	0%	0%	0%	0%
Dividend Payable	0%	0%	0%	0%	1%
Income Tax Liabilities	0%	0%	2%	2%	2%
Interest Bearing Loans & Borrowings	9%	19%	6%	5%	11%
	34%	28%	22%	30%	27%
Liabilities directly associated with the assets held for sale	0%	0%	0%	0%	0%
	34%	28%	22%	30%	27%
Total Equity and Liabilities	100%	100%	100%	100%	100%

 

Total non-current assets have decreased from 83% to 69% during the last few years. Since thus is a manufacturing company, maintaining non-current assets more than 70% is good which is more than 2/3 of total assets. However, the current assets have increased from 17% to 31% and the highest amount of 35% is in 2022. This also due to changes in inventory and cash and cash equivalents.

Total equity has increased from 48% to 61% in 2023. Also total liabilities have decreased during the last few years. Also there is a high portion of current liabilities within the company which is not much good for liquidity position of the company. However, still there is a high gearing position within the company.

3.3.2-Vertical Analysis of Income Statement

	2019	2020	2021	2022	2023
Revenue from Contract with Customers	100%	100%	100%	100%	100%
Cost of Sales	-54%	-50%	-49%	-47%	-55%
Gross Profit	46%	50%	51%	53%	45%
Other Operating Income	27%	16%	11%	21%	14%
Distribution Expenses	-39%	-28%	-20%	-17%	-19%
Administrative Expenses	-13%	-8%	-4%	-5%	-5%
Other Operating Expenses	-1%	-3%	-3%	0%	0%
Finance Cost	-14%	-15%	-5%	-2%	-3%
Finance Income	0%	0%	0%	2%	3%
Share of Associate Companies Profit	0%	0%	0%	0%	0%
Profit Before Tax Continuing Operations	8%	12%	31%	52%	36%
Tax (Expense)/Reversal	-1%	-2%	-5%	-7%	-8%
Net Profit After Tax from Continuing Operations	6%	10%	26%	44%	28%
Discontinued Operations	0%	0%	0%	0%	0%
Profit after tax from discontinued operations	0%	0%	0%	0%	0%
Profit for the Year	6%	10%	26%	44%	28%
Attributable to:
Equity Holders of the Parent	6%	10%	26%	44%	28%
Non Controlling Interest	0%	0%	0%	0%	0%
	6%	10%	26%	44%	28%

 

Out of sales revenue, cost of sales have been between 47% to 55% during the last 5 years. So nearly 50% of revenue generated has been over cost of sales.  Also the distribution cost has reduced from 39% to 19% in 2023. The profit also has increased in comparison to sales revenue from 6% to 28% and the highest revenue is recorded in 2022 which is 44%.

3.4-Ratio Analysis

They have been impacted by contractions in economic sector and country’s moderate economic growth has impacted on the business.

3.4.1 Liquidity and Efficiency

 

Liquidity ratios are financial ratios that measure a company’s ability to meet short term financial obligations with readily available assets. Liquidity ratios are important indicators of a company’s short term financial health and ability to handle financial challenges.

Ratio		2019	2020	2021	2022	2023
Working Capital
Current Ratio	Current Ratio = Current Assets / Current Liabilities	0.498	0.880	1.157	1.178	1.149
Acid Test Ratio	Quick ratio = Quick assets/Current liabilities	0.223	0.233	0.613	0.867	0.256
Accounts Receivable Turnover	Net Annual Credit Sales/ Average Accounts Receivables	6.058	8.264	15.124	21.346	26.150
Accounts Receivable Turnover (Days)	Accounts Receivables Turnover Ratio/ 365	0.017	0.023	0.041	0.058	0.072
Inventory Turnover Ratio	Cost of goods sold /Average Inventory	1.232	0.976	1.616	2.288	2.073
Inventory Turnover Ratio (Days)	Inventory turnover ratio/365	0.003	0.003	0.004	0.006	0.006
Accounts Payable Turnover Ratio	Net Sales/Average Accounts Payable	0.997	2.233	8.709	10.027	11.839
Accounts Payable Turnover Ratio (Days)	Accounts Payable Turnover Ratio/ 365	0.003	0.006	0.024	0.027	0.032
Total Assets Turnover Ratio	Net Sales /Average Total Assets	0.192	0.280	0.490	0.497	0.516

 

Working capital represents company’s operational liquidity and short-term financial health. Or else working capital indicates how much capital or funds a company possess to cover its day-to-day operational expenses and short term obligations. Working capital is an important metric for assessing a company's ability to manage its short-term financial obligations, maintain its operations, and invest in growth opportunities. However, like the current ratio, the ideal level of working capital can vary by industry and company circumstances.  But it doesn’t capture the entire financial health of the company. In Royal Ceramic Lanka PLC, working capital has improved during the last few years.

The current ratio measures a company's ability to pay off its short-term liabilities using its short-term assets. A ratio higher than 1 indicates that the company has more current assets than current liabilities, suggesting a healthier liquidity position. So that, company will have excess assets that could be efficiently used elsewhere. This ratio should not be too high which might indicate excess cash within the business. In 2019 and 2020, the current ratio is less than 1. So the current assets exceed its current liabilities, which indicate potential liquidity issues and difficulties in meeting short term obligations. But this ratio has improved after 2021 and indicates a good position. The highest is recorded in 2022 and lowest in 2019. However, this ratio can vary across industry.

Acid test ratio excludes current assets such as inventories and prepayments that can’t be easily converted into cash. So this ratio has slightly improved up to 2022 but reduced in 2023. The highest ratio is reported in 2022 and lowest in 2019. Typically, a good acid-test ratio value is considered to be around 1 or higher, as this suggests that the company's liquid assets are sufficient to cover its current liabilities. But this ratio has been lower than 1 during the last few years. However, just like with the current ratio, the ideal acid-test ratio can vary by industry and company circumstances. It's important to analyze the acid-test ratio in conjunction with other financial metrics and industry benchmarks to gain a comprehensive understanding of a company's financial health and liquidity. However, it is more than zero every year and indicates good position.

Accounts receivable turnover is a financial metric that measures how efficiently company manages its credit and collect payments from its customers. This ratio indicates the number of times on average, a company’s debtors are collected and converted into cash within a year. A higher accounts receivable turnover ratio is generally considered better because it implies that the company is collecting payments from its customers more quickly, which can improve its cash flow and liquidity. A lower turnover ratio might suggest that the company is facing difficulties in collecting payments or has lenient credit policies. So this ratio has improved over the last few years and company.

Also this can be calculated in terms of days. This measures liquidity of receivables or the number of days between the day of sales and the day receivables are collected.  A shorter average collection period is preferred as it indicates that the company is collecting payments more quickly. But this ratio has increased during the last few years. But this is less than 30 which is the optimal level.

Inventory turnover ratio indicates how efficiently a company manage its inventory. So this shows how many times a company’s inventory is sold over a specific period. This ratio assists in effectively managing company’s inventory levels to meet demand and avoid overstocking. Higher ratio indicates company is selling its inventory more quickly, which can lead to better cash flow, reduced carrying costs, and potentially less risk of obsolete inventory. Also a lower inventory turnover ratio could indicate slower sales, overstocking, or inefficiencies in managing inventory. So this ratio has reduced in 2020 but improved afterwards. The highest ratio has been reported in 2022 and the lowest in 2020.

This ratio also can be calculated in terms of days, which measures the liquidity of inventory or the average time in days’ company will turn its inventory into sales. This ratio is very low during last 5 years and it is better.

Accounts payable turnover ratio measures how efficiently a company manages its creditors. It indicates the number of times, that a company pay off its creditors within a specific period. A higher ratio indicates a company is paying off its creditors more quickly and suggest effective management of supplier relationships and favorable credit terms. So during 2019 to 2023, this ratio has improved in Royal Ceramic Lanka PLC. As well as the number of days have increased as well.

This ratio can be compared in terms of number of days. It is also very lower value during the last few years. So that, company is settling its creditors and efficiently managing supplier realtionships.

Assets turnover ratio measures whether company is efficiently generating sales revenue from its total assets. This ratio is useful to analyse company’s operational efficiency and asset utilization. The value should be greater than 1 to indicate high efficiency rate. So that this ratio has been less than 1 during last five years which implies that the average total assets are more than revenue. So that the company is less efficient in generating revenue.

3.4.2 Solvency

Solvency measures company’s ability to meet its long term financial obligations. It is crucial to evaluate a company’s overall financial health and its capacity to remain viable over the long term.

Ratio		2019	2020	2021	2022	2023
Debt Ratio	Total Liabilities/ Total assets	0.522	0.434	0.350	0.394	0.391
Equity Ratio	Total Equity/ Total Assets	0.478	0.566	0.650	0.606	0.609
Times Interest Earned	EBIT/ Interest Expense	1.502	1.790	7.433	25.012	13.906

 

These gearing ratios can be represented as follows.

 

 

 

 

 

 

 

 

So the gearing position has improved during the last few years.

Debt ratio measures the portion of company’s assets contributed by creditors. The highest debt ratio has been recorded in 2019 and it has declined up to 2023. This ratio has been between 39% to 52% which indicates a high gearing position in Royal Ceramics Lanka PLC.

Equity ratio measures the portion of company assets contributed by owners. So this has been 47% in 2019 and this has improved up to 60% in 2023 which is a good sign.

Times interest earned measures the ability of firm’s operations to protect long term creditors or how strong company is paying the interest. So this has been 1.5 in 2019 and improved up to 13.9 times in 2023. The higher the value, the higher ability to pay interest out of the earnings generated.

 

3.4.3 Profitability

 

Profitability ratios are financial metrics that assess company’s ability to generate profits in terms of revenue, assets, equity or financial factors. These ratios provide insights regarding financial performance and its efficiency in generating profits.

Ratio		2019	2020	2021	2022	2023
Gross Profit Margin	Gross Profit/ Net Sales *100	46.36%	50.50%	50.86%	53.04%	45.30%
Profit Margin	Net Income/Net Sales *100	6.31%	10.03%	26.23%	44.44%	28.08%
Return on Total Assets	Net Income/Total Assets	0.187	0.250	0.493	0.443	0.511
Return on Common Shareholder's Equity	Net Income/ Shareholder's Equity	0.025	0.044	0.199	0.325	0.236
Book Value per Common Share	(Share holders Equity- Preference shares)/ Average Number of Shares	8.758	13.164	14.904	17.747	18.182
Basic EPS	(Net Income- Preference Dividends) Average Number of Shares	0.050	0.580	2.970	5.770	4.290

 

Gross profit margin measures the percentage of revenue remains after deducting cost of sales. It indicates how well a company generates profits from core production or sales activities. Highest ratio is recorded in 2022 and the lowest in 2023.It indicates how well a company is generating profits from its core production or sales activities.

Net profit margin is the percentage of revenue that remains as net profit after all expenses including taxes, interest and non-operating items are deducted. The lowest ratio has been reported in 2019 and highest in 2022.

Return on assets ratio measures how efficiently a company uses its assets to generate profits. A high ROA indicates that company is more efficiently generating profits from its assets. So during the last few years, this ratio has been 18% in 2019 and has improved up to 51% in 2023.

Also, total assets have been increased by 15% to Rs.61.2 bn as the company invested in capital expenditure and working capital to position themselves for growth. Due to Rs.4bn investment in capital expenditure, company was able to increase their production capacity from 35,000sqm to 41,000 sqm in 2018/19. So that this has led to their company’s growth.

Return on common shareholder’s equity indicates whether the company is more efficient in generating profits for its shareholders in relative to the amount of equity invested. So that, this ratio provides insights to shareholders how effectively company is utilizing shareholder funds to generate returns. So the highest ratio is in 2022 which is 32% and the lowest in 2019 which is 2.5%. This indicates that, in 2022, 0.32 income has been generated per Rupees 1 being invested.

Book value per common share measures liquidation at reported amounts or the amount a shareholder gets at the situation of the company closing due to bankruptcy. The value has increased within the last 5 years which is a good indication.

Basic earnings per share indicates how much income was earned for each share of common stock outstanding. When buying and selling shares this factor need to be considered. It is favorable to buy shares when this value is high. So that, this value has increased up to 2022 but decreased in 2023. So that the company is profitable and it’s good to invest in the company.

3.4.4 Market

 

Ratio		2019	2020	2021	2022	2023
PE Ratio	Share price/EPS	118.00	9.64	8.67	7.06	6.44
Dividend yeild	DPS/Share price	0.00	0.01	0.01	0.10	0.11
Dividend payout ratio	DPS/EPS	92.00	69.00	47.00	73.00	74.00

 

Price earnings ratio is often used by investors to measure stock values. Higher the ratio, more potential for growth. This ratio compares the company’s market price to earnings per share. The highest value has been recorded in 2019 and declined upto 2023. So that, the shares may be undervalued. Investors can buy the shares at discounted price or else lack of growth potential.

Dividend yield identifies the return, in terms of cash dividends, on the current market price of the stock. The dividend yield in 2023 and lowest in 2019. So this is often used by investors to assess the income potential of stock or income generating investment. So this ratio has improved during the last few years.

Dividend payout ratio measures the proportion of company’s earnings that are distributed to shareholders in forms of dividends. So this ratio has been very high during the last few years. The highest ratio is in 2019 and the lowest in 2021.

 

 

 

 

 

 

 

4.Conclusion

 

Financial statement analysis assists to gain insights and make more informed decisions about a company’s financial performance and position. Both internal and external stakeholders can use these results for decision making. This report analyses the financial statements of Royal Ceramics Lanka PLC. Data have been gathered from 2019 to 2023 and horizontal analysis, trend analysis, vertical analysis and ratio analysis has been performed.Through the analysis, it is reflected that Royal Ceramics Lanka PLC has good performance and potential for revenue growth. But following issues also have been identified through the analysis.

According to trend analysis, profits are very low in 2019 and 2020. But it has drastically increased after 2021 and 315% in 2022. But it has slightly decreased in 2023. Also total liabilities have declined and equity has improved but the stated capital have not increased during last 5 years. So this is due to repayment of long-term loans and reserves and retained earnings of the company. The vertical analysis also indicates that property plant and equipment has increased and it is good as this is a manufacturing company. Also, total assets have been increased by 15% to Rs.61.2 bn as the company invested in capital expenditure and working capital to position themselves for growth. Due to Rs.4bn investment in capital expenditure, company was able to increase their production capacity from 35,000sqm to 41,000 sqm in 2018/19. So that this has led to their company’s growth. Even though the net revenue is increasing yearly, the gross profit and profit for the year are comparatively meagre due to the massive cost of goods sold. The company should focus more on to reduce COGS by reducing idle time, unnecessary expenses and operations, wastage of resources, etc. The company's total equity to total liability ratio is 3:2 in 2023 which means the company is financed by fewer debts, which indicates a more stable and profitable company.

According to ratio analysis, the company’s liquidity position is in healthy state otherwise too much or too less liquidity may lead to issues within the company. Royal Ceramics Lanka PLC has maintained their liquidity at a stable position. But the quick ratio is bit lower and they may not much have highly liquid assets which can be easily converted into cash. From the efficiency ration, it can be concluded that company is operating efficiently. But company should try to increase more efficiency for long term sustainability. Solvency ratios measures company’s ability to meet its long term financial obligations. It is crucial to evaluate a company’s overall financial health and its capacity to remain viable over the long term. So that currently company is having 2:3 gearing position which is a bit high gearing postion. Market ratios do not show stable growth or decline. The P-E ratio has declined  and dividend yield  has slightly increased throughout the years. Therefore, there is a risk in investing in the company because investors cannot decipher a clear idea on whether the company is growing or not.

Also the impact from Easter attack, Covid 19 situation and economic situation of Sri Lanka has largely impacted over the Sri Lankan economy as well as adverse effect over the construction industry. So Royal Ceramics Lanka PLC also have been impacted through these situations which have a direct impact over their revenue as well. But they have gained some favorable benefits through import restrictions imposed within Sri Lanka. So that, Royal Ceramics Lanka PLC should evaluate growth options through forecasting and try to increase the revenue and reduce the cost while maintaining the quality standards of their products as well. Company should make strategic decisions and policies to stabilize company performance.