Financial Statements Analysis of Tokyo Cement Company Lanka PLC

 

1.                 Introduction

Financial statements can be identified as a structured report prepared by an entity to summarize its financial performance and position over a specific period of time. Financial statements mainly consist of Income Statement, Statement of Financial Position, Statement of changes of Equity, Cash Flow Statements and Notes. The primary purpose of preparing financial statement is to have a better understanding of the entity’s financial performance, position and financial health.

Financial statements serve as a crucial tool utilized by both internal (i.e. management, board of directors, employees, internal auditors, etc.) and external (i.e. investors, creditors, suppliers, customers, government, competitors, media, etc.) stakeholders for the purpose of making financial decisions (such as investment, financing, dividend, and strategic planning decisions). However, mere examination of financial statements is not sufficient for internal & external stakeholders to make informed financial decisions. In this regard, Financial Statement Analysis helps stakeholders gain valuable insights into the financial activities of the entity and to have a comprehensive understanding of the entity’s financial health, performance, and relevant financial risks.

Financial statement analysis involves the examination and evaluation of an entity’s financial statements. Horizontal analysis, vertical analysis, and ratio analysis are the primary financial statement analysis tools. These tools guide its users to study past and present data in order to make effective and efficient future decisions. In light of all the foregoing, this study carries out a comprehensive financial statement analysis of Tokyo Cement Company Lanka PLC (TCCL) using horizontal analysis, vertical analysis, and ratio analysis.

 

 

2.                 Background of the Company

Tokyo Cement Company Lanka PLC is a well-known and influential player in Sri Lanka's construction and manufacturing sector. It was established in 1982 and has become a top producer and supplier of high-quality cement and construction-related items.

TCCL’s headquarters is located in Colombo. Tokyo Cement has gained a strong reputation for its dedication to innovation, sustainability, and doing things with high quality. The company values responsible business practices, taking care of the environment, and meeting the changing needs of the construction industry. TCCL offers a wide range of products, including different types of cement, ready-mix concrete, and added-value items made to suit various construction needs. Over time, the company has built a strong system to distribute its products across Sri Lanka. This ensures that its products reach different construction projects on time and efficiently.

The unique feature that makes Tokyo Cement stand out is its ongoing investment in research and development. This has led to the creation of modern construction solutions. The company is also a leader in promoting environment-friendly products, which helps reduce the negative effects of construction activities. TCCL has also been involved in CSR activities to help local communities. These activities cover education, healthcare, and social well-being, which make life better for the people in those communities. This holistic approach matches the company's vision of fostering sustainable growth and contributing positively to society.  TCCL was listed on the Colombo Stock Exchange in 1984 by becoming the first-ever privately owned cement manufacturer and after almost four decades it has made a significant impact on transforming Sri Lanka’s construction industry.

3.                 Financial Statement Analysis

Financial statement analysis is a systematic process that examines an entity’s financial statements for the purpose of having an in-depth understanding of its financial performance, financial position, and overall health. This provides insights into the entity’s profitability, liquidity, solvency, and operational efficiency by interpreting the financial statements.

In this study, the author uses horizontal analysis, trend analysis, vertical analysis, and ratio analysis as financial statement analysis tools to have an in-depth understanding of the TCCL’s financial performance, financial position, and overall health over the selected period of time.

●       Horizontal analysis - method of comparing financial data over a consecutive period to identify trends and changes

●       Trend analysis - examination of financial data over multiple years to identify patterns and changes

●       Vertical analysis - expressing items in a financial statement as a percentage of a common base to understand their relative significance

●       Ratio analysis - evaluation of a company’s financial health by calculating and analyzing relationships between various financial figures

4.                 Horizontal Analysis

Horizontal analysis is a method of comparing financial data over consecutive periods.  This helps to identify trends, changes, and patterns in a company’s financial statements.

Under this method, it can assess how various line items have changed in absolute terms (Rupee Change) and as a percentage of a base year (Percent Change). The following formulae are used to compute the Rupee Change and the Percent Change of line items.

 

Rupee Change = Analysis Period Amount - Base Period Amount

 

Percent Change =         Rupee Change     *     100%                 Base Period Amount

Base Period - 2017/18

Time Period - 2018/19 to 2022/23 (5 accounting periods)

4.1 Horizontal Analysis of Financial Position

4.1.1 Rupee Change

4.1.2 Percent Change

Property, plant, and equipment (PPE) has increased in 2019/20 by Rupee change of 3,023 & Percent change of 33% compared to the base year and then gradually increased over the next three years’ period of time. Capital work-in-progress has gone minus as it was fully capitalized in 2020/21. Intangible assets have drastically increased in 2018/19 by a percent value of 537%. Investments in subsidiaries and Right of use assets have remained almost unchanged during the last 5 years however it shows a drastic increment compared to the base year. Operating lease prepayment has become -100% in 2018/19 and remains constant till 2022/23.  Inventory value has significantly elevated in 2021/22 by the percent value of 208%. Trade and other receivables fluctuated around 20%-30% percent value over the 5-year period of time. Cash & Cash equivalent also has substantially increased in 2021/22 up to the percent value of 646% but dramatically dropped in the next year, i.e. 2022/23, to the percent value of 127%.

The stated capital of TCCL has remained unchanged over the past five years while retained earnings show slight fluctuation over the 5 years’ time compared to the base year. Lease Creditors have increased drastically in 2019/20 by the Rupee change of 251. An exception arises for the base year when computing the percent change in Lease Creditors. This is because the lease creditors were at 0 in the base year, preventing the calculation of a percent value due to mathematical constraints. Compared to the new base year, lease creditors have dramatically increased in 2019/20. Base year exception has been done again for trade payables and lease creditors and the new base years are, respectively, 2021/22 and 2018/19. Furthermore, Current Liabilities experienced a substantial increase of 198% in 2021/22, followed by a subsequent decrease to 154% in 2022/23.

4.2 Horizontal Analysis of Income Statement

4.2.1 Rupee Change

4.2.2 Percent Change

The revenue of TCCL has been slightly fluctuated from 2018/19 to 2020/21 but in 2021/22 revenue has significantly elevated up to 56% and further it has been raised up to 73% in 2022/23. Similarly, the cost of sales of the company has also followed the parallel pattern of fluctuations with the revenue until 2021/22 but it experienced a moderate decline in 2022/23. Furthermore, gross profit (GP) of TCCL has exponentially grown up to 257% in 2022/23. Other operating income has slightly fluctuated over the 5-year period.

Selling expenses and distribution expenses have markedly increased up to a Rupee value of 2,544 and Percent value of 140%. Interest cost has also significantly increased up to Percent value of 477% in 2021/22 and shows a gradual increase of 526% in 2022/23. Finally, the net profit of the company has recorded the highest percent value in the last 5 years, recording a growth of 41% compared to the net profit of the base year.

5.                 Trend Analysis

5.1 Trend Analysis of Financial Position

Non-current assets of TCCL have gradually increased over the past five accounting periods. Current assets of TCCL have drastically increased in 2021/22 up to 208% and then declined to 168% in 2022/23. Moreover, the total assets of TCCL have gradually increased over the past five accounting periods regardless of the fluctuations in current assets.

The stated capital of TCCL has remained unchanged during the 5 accounting periods. However, the retained earnings have fluctuated over 5-year time and marked at 122% in 2022/23. Non-current liabilities have significantly increased in 2019/20 up to 127% but then gradually decreased up to 80% in 2022/23. Current liabilities of TCCL have exponentially grown up to 298% in 2021/22 but slightly dropped up to 254% in 2022/23.

5.2 Trend Analysis of Income Statement

Revenue of the TCCL has fluctuated over the past 5 accounting periods and recorded a 173% increment in 2022/23. The cost of sales of TCCL has also followed the parallel trend of fluctuations with the revenue until 2021/22 but it experienced a moderate decline in 2022/23. Other operating income has fluctuated over time while showing significant elevations in 2019/20, 2020/21, and 2022/23. Selling and distribution expenses have dramatically surged up to 240% in 2022/23 while administration expenses have experienced moderate fluctuations over the time. Finance cost has also substantially increased over time and recorded 626% in 2022/23. However, the net profit of TCCL has shown a declining trend over the past 5 years and recorded 40% in the 2022/23 accounting period.

6.                 Vertical Analysis

Vertical analysis, a fundamental technique in financial analysis, involves assessing the relative proportion of individual items within a financial statement. This method helps to understand the significance of each item in relation to the whole. By expressing each item as a percentage of a common base, usually total revenue for income statements and total assets for balance sheets, users gain insights into the composition and structure of a company's financial data. This analysis aids in identifying trends, highlighting areas of strength or concern, and comparing the relative importance of various components. Vertical analysis serves as a valuable tool for both investors and management, providing a clearer understanding of a company's financial health and the allocation of resources.

Common-size percentage  =        Analysis Amount     *     100%                                Base Period Amount

6.1 Vertical Analysis of Financial Position

The non-current assets of the TCCL have always been valued between 69%-82% of the total assets and depicted that TCCL has a strong asset base that could bring numerous advantages to the company like long term stability, enhanced borrowing capacity, competitive advantage, expansion opportunities, etc. Property, plant, and equipment constitute a significant portion of the non-current assets, which lie between 35%-41%. The current assets of the company have always lied between the range of 18%- 31% of total assets during the past five years.

The total equity of TCCL has lied between 39%-50% of total assets during the past 5 years depicting a significant level of financial risk, ownership control, and strong ability to withstand economic challenges. Non-current liabilities represent 14% of total assets in the recent accounting period (i.e. 2022/23) and it depicts the financial flexibility of TCCL. The current liabilities of the company represent between the range of 42%-25% during the past five years. However, during the accounting periods of 2021/22 & 2022/23, the equity, non-current liabilities, and current liabilities structure have slightly declined compared to the past 3 years.

The total liabilities of TCCL have stayed within a consistent range of 50% to 61% over the last five accounting periods. This shows that TCCL has been managing its debts and obligations steadily. Keeping liabilities in this range indicates careful financial planning, helping TCCL handle changes in the economy well. This approach ensures the company can meet its commitments while maintaining stability. The vertical analysis of its financial position demonstrates TCCL's responsible strategy in balancing its financial structure for long-term growth and security.

6.2 Vertical Analysis of Income Statement

With the exception of the year 2022/23, the past four accounting periods have consistently shown a cost of sales totaling 75% to 85% of the revenue. However, in 2022/23, by showing a positive trend, the cost of sales was recorded as 68% of the revenue. Other operating income has fluctuated during the last 5 years of time and in 2022/23 it was valued at 2% of the revenue.

Selling and distribution expenses have gradually increased over the past five years and were recorded as 12% of revenue in the recent accounting period, i.e. 2022/23. The administrative expenses also followed the parallel pattern of selling and distribution expenses.

In 2022/23, TCCL's EBIT notably rose by 21%, marking a significant increase. Over the past four years, there was a steady rise, ranging from 0% to 9% of the revenue. TCCL's net profit has shown fluctuations over the last five years. The highest, at 6.92% of revenue, was in 2020/21, while the lowest, at -1.91% of revenue, occurred in 2021/22.

7.                 Ratio Analysis

Ratio analysis is a powerful tool in financial analysis that provides insights into a company's financial performance, health, and prospects. By evaluating various financial ratios, stakeholders can gain a deeper understanding of a company's operational efficiency, profitability, liquidity, solvency, and overall effectiveness in utilizing resources. These ratios offer a quantitative basis for making informed decisions, whether it's for investment, lending, or strategic planning. Components of Ratio Analysis:

 

1. Liquidity Ratios - assess a company's ability to meet its short-term obligations.
2. Efficiency Ratios - measure how well a company utilizes its assets to generate revenue and manage costs.
3. Profitability Ratio - evaluate a company's ability to generate profits relative to its revenue and resources.
4. Solvency Ratios - gauge a company's long-term financial stability and its ability to meet long-term obligations.
5. Market Ratios - assess a company's performance from an investor's perspective.

7.1 Liquidity Ratios

 

	2022/23	2021/22	2020/21	2019/20	2018/19
Current Ratio	0.58:1	0.62:1	0.52:1	0.79:1	0.60:1
Quick Ratio	0.34:1	0.41:1	0.32:1	0.52:1	0.40:1
Cash Ratio	0.08:1	0.21:1	0.02:1	0.03:1	0.01:1

 

The current ratio of TCCL for the past five years has lied between the range of 0.58:1 to 0.8:1 and these figures cannot be considered as healthy. A ratio around 1.5 to 2 is generally considered healthy and it indicates that the company has sufficient current assets to meet its short-term obligations. TCCL’s current ratio indicates a potential liquidity concern. This ratio suggests that the company's current assets are only 58% of its current liabilities in 2022/23, which may indicate a challenge in meeting short-term obligations. A low current ratio might imply that the company is relying heavily on short-term borrowings or struggling to convert its current assets into cash quickly.

The quick ratio of TCCL was 0.34:1 in 2022/23 which is a slight drop compared to the last year. A ratio of around 1 or slightly above is usually considered good. A company with a quick ratio of 0.34:1 indicates that its immediate liquidity position may be relatively low. This ratio suggests that for every rupee of immediate liabilities, the company has LKR 0.34 in highly liquid assets (cash, marketable securities, and accounts receivable) to cover those obligations.

The cash ratio is the most conservative measure of liquidity, evaluating a company’s ability to meet its short-term liabilities using only cash and cash equivalents. The cash ratio of TCCL was 0.08:1 in 2022/23 A company with a cash ratio of 0.08:1 has a relatively low level of liquidity in terms of its ability to cover short-term liabilities with its immediate cash and cash equivalents. This indicates that for every unit of current liabilities, the company holds 0.08 units of cash and cash equivalents. While a cash ratio of 0.08:1 suggests that the company has some cash on hand, it also implies that the company might be relying on other liquid assets, like marketable securities or accounts receivable, to meet its short-term obligations. This could potentially pose a higher level of risk, as it might face challenges if it needs to cover liabilities quickly.

7.2 Efficiency Ratios

 

	2022/23	2021/22	2020/21	2019/20	2018/19
Inventory Turnover	6.27 times	9.31 times	8.07 times	7.20 times	11.01 times
Debtor Turnover	10.50 times	11 times	7.93 times	6.93 times	7.70 times
Debtor Collection	35 days	33 days	46 days	53 days	47 days
Creditors Turnover	2.98 times	3.51 times	5.96 times	6.18 times	7.12 times
Credit Period	123 days	104 days	61 days	59 days	51 days

 

Inventory turnover ratio measures how efficiently a company sells its inventory during a specific period. During the 5-year period of time, TCCL’s inventory turnover ratio has varied between 6 to 11 times which is often considered favorable. This range reflects efficient inventory management. A turnover of 6 suggests a company is selling and restocking its inventory approximately every two months, while a turnover of 11 indicates a faster cycle of around 1.5 months.

The debtor turnover ratio assesses how quickly a company collects its accounts receivables from customers. A higher ratio implies efficient collection. TCCL’s debtor collection ratio has varied between 7-11 times during the past 5 years. This ratio signifies that the company is managing its accounts receivable effectively, with customers settling their dues relatively quickly. A higher turnover suggests streamlined credit and collection processes, contributing to improved cash flow and liquidity.

The debtor collection period measures the average number of days it takes for a company to collect payments from customers. TCCL’s debtor collection period for the past 5 years varied between 33-53 days. A collection period of 33 days suggests prompt receivables management, while 53 days might indicate a slightly extended process. Striking a balance between shorter collection periods and customer satisfaction is crucial for maintaining healthy cash flow and sustaining positive customer relationships.

The credit turnover ratio evaluates how quickly a company pays its accounts payable to suppliers. TCCL’s credit turnover ratio for the past 5 years varied between 2.98 to 7.12 times. The lower end of the range of 2.98 times implies the company takes longer to settle its payables, while the higher end of 7.12 times indicates quicker payment. The company's position within this range can reflect its payment strategy and relationships with suppliers.

The credit period measures the average number of days it takes a company to pay its creditors.  During the 5-year period of time, TCCL’s credit period has varied between 51 to 123 days. A credit period in this range suggests a balance between preserving cash flow and maintaining favorable relationships with suppliers.

 

 

 

 

 

7.3 Profitability Ratios

 

	2022/23	2021/22	2020/21	2019/20	2018/19
GP Ratio	32%	15%	19%	25%	14%
NP Ratio	6%	-2%	7%	4%	-5%
ROE	12%	-4%	9%	5%	-8%
ROA	5%	-2%	5%	3%	-3%

 

Gross profit ratio measures the proportion of gross profit to total revenue, including how effectively a company manages its direct production costs. TCCL’s GP ratio has varied between 14% to 35% during the past 5 years. Around 25% to 35% can be considered favorable irrespective of industry norms.

The net profit ratio evaluates the percentage of net profit to total revenue, reflecting a company’s overall profitability after deducting all expenses, taxes, and interests. A higher NP ratio indicates stronger profitability. TCCL’s net profit ratio for the period between 2018/19 to 2022/23 is -5% to 7%. This fluctuation suggests that TCCL experienced both challenging periods with losses and periods of profitability. It's important to analyze the underlying reasons behind these fluctuations and implement strategies to improve overall profitability and stabilize the NP ratio within a positive range.

Return on Equity measures the percentage of net profit relative to shareholders' equity, indicating how efficiently a company generates profit from shareholders' investments. ROE of TCCL has varied between -8% to 12% during the last five years. A negative ROE implies that the company is not generating sufficient returns on the equity invested, which could be due to operational inefficiencies or financial challenges. An ROE of 12% signifies a more favorable scenario where the company is earning a reasonable return on shareholders' equity.

Return on Assets assesses the percentage of net profit relative to total assets, revealing how effectively a company uses its assets to generate profit. TCCL has a ROA range between -3% to 5% for the past five years. A ROA below 0% indicates that the company's net losses outweigh its asset utilization, which could be a concern for financial sustainability. A ROA of 5% indicates that the company is generating a modest profit in relation to its total assets.

7.4 Solvency Ratios

 

	2022/23	2021/22	2020/21	2019/20	2018/19
Debt Ratio	0.56	0.61	0.50	0.52	0.55
Debt-Equity Ratio	0.32	0.31	0.29	0.56	0.40
Interest Cover	1.78	0.84	2.26	1.56	-0.14

 

The debt ratio assesses the proportion of a company’s total assets financed by debt. The debt ratio of TCCL in 2022/23 was 0.56. While assessing the range of debt ratio of 0.5 to 0.61 over the past five years, it can be said that TCCL has a reasonable level of external funding. This level of debt suggests a balance between leveraging opportunities and managing financial risk.

The debt-to-equity ratio evaluates the balance between a company's external financing (debt) and internal financing (equity). The debt-equity ratio of TCCL for the past five years lay between 0.29 to 0.56. A ratio of 0.29 suggests that for every unit of debt, there are about 3 units of equity. This signifies a relatively lower reliance on debt financing, which can contribute to reduced financial risk. As the ratio increases to 0.56, the company's use of debt becomes more prominent, allowing for potential leveraging to finance operations or expansion.

The interest coverage ratio depicts TCCL’s ability to pay off its interest expenses with EBIT. TCCL has experienced -0.14 to 2.26 times interest cover over the past five-year period of time. A negative value, such as -0.14, implies that the company's EBIT is insufficient to cover its interest obligations. And a value of 2.26 suggests that the company is able to cover its interest expenses with a relatively slim margin.

7.5 Market Ratios

 

	2022/23	2021/22	2020/21	2019/20	2018/19
PE Ratio	3.84	-50.80	3.52	8.26	-38.82
Dividend Yield	3%	0	4%	3%	1%

 

The Price Earning (PE) ratio measures the valuation of a company's stock relative to its earnings. The PE ratio of TCCL in 2022/23 is 3.84 and it indicates that the investors are willing to pay 3.84 times the TCCL’s EPS for each share of the TCCL’s stock. A relatively low PE ratio suggests that the stock may be considered undervalued by the market. Investors are valuing the company's earnings at a lower multiple compared to companies with higher P/E ratios.

Dividend yield calculates the return on investment from dividends paid by a company relative to its stock price. It indicates the income generated from owning the stock. The dividend yield of TCCL in 2022/23 is 3%. This ratio suggests that every rupee invested would return 3 cents for the investors as annual dividends. This relatively low yield might indicate that the company's focus is on reinvesting its earnings back into the business for growth rather than distributing a significant portion as dividends.

8.                 Conclusion

Tokyo Cement Company Lanka PLC is a well-established and reputed company in Sri Lanka that manufactures and supplies cement and cement-related products to its customers. This report has carried out financial statement analysis of TCCL using horizontal & vertical analysis, trend analysis, and ratio analysis.

Horizontal, vertical, and trend analysis identified that the TCCL’s income statement and balance sheet figures have fluctuated over the selected 5-year period of time, i.e. 2018/19 to 2022/23. Revenue and the net profit of the company have fluctuated over time and indicated dramatic increments in the recent year of 2022/23. TCCL has built a strong asset base over time while maintaining minimal fluctuations in equity items.

Based on the findings of the ratio analysis for 2022/23, it can be said that the TCCL's financial metrics present a mixed picture. While the current and quick ratios indicate liquidity challenges, the inventory turnover and debtor turnover ratios signify efficient operations. The creditor turnover suggests reasonable payment management. With a decent GP ratio of 32% and NP ratio of 6%, profitability seems promising. A ROA of 5% reflects effective asset utilization. The debt-equity ratio of 0.32 indicates a balanced capital structure. A low PE ratio of 3.84 suggests undervaluation. The 3% dividend yield appeals to income-seeking investors. Overall, while there are liquidity concerns, the company demonstrates the potential for profitability and efficient resource management, warranting further analysis before investment.