1. Introduction to Financial Statements
Financial statement analysis is a crucial tool for evaluating the financial health of a company. In today’s dynamic and competitive business context, the ability to dissect and interpret financial information is essential for investors, creditors, debtors, management, government and other stakeholders. By examining a company’s financial statements, including the balance sheet, income statement, and cash flow statement, analysts can gain valuable insight into its strengths, weaknesses, opportunities and potential risks.
The process of financial statement analysis involves a comprehensive examination of various financial metrics, trends and ratios. These indicators provide a comprehensive view of the company’s operational efficiency, liquidity, profitability, solvency and overall financial viability. Moreover, financial statement analysis enables stakeholders to make well-informed decisions, such as formulating strategic plans, assessing investment opportunities, or evaluating creditworthiness.
In this report, we will dive into the critical components of financial statement analysis, exploring the significance of each financial statement. Through a comprehensive examination of real-world financial data and analytical techniques, this report seeks to shed light on the multifaceted nature of financial statement analysis and its pivotal role in shaping the trajectory of business decisions.
Dilmah Ceylon Tea
Company PLC stands as a prominent and distinguished player in the global tea
industry, renowned for its Unwavering commitment to producing exceptional
Ceylon tea. With a legacy rooted in tradition and an unwavering dedication to
quality, Dilma has carved a unique niche in the beverage market, catering to a
discerning clientele that values authenticity, sustainability and superior
taste.
Established in 1988, Dilmah Ceylon Tea Company PLC
was founded by Merrill J Fernando, who envisioned a tea company that would
redefine the art of tea-making and elevate the experience of tea consumption.
What sets Dilmah apart is its ethos of ‘Real Tea, Real People’, which
emphasizes a direct and ethical approach to sourcing, production and
distribution. Unlike many tea brands, Dilma remains resolutely family-owned,
enabling it to uphold its commitment to quality and integrity.
Driven by the immaculate terroirs of Sri Lanka,
known as Ceylon, Dilmah’s tea plantations cultivate some of the finest tea
leaves in the world. The company meticulously oversees every step of the tea
production process, from cultivation to packaging, ensuring that only the
freshest and most authentic Ceylon tea leaves make their way into each cup.
Dalmah’s dedication to preserving the purity of the tea experience has garnered
a loyal following among tea connoisseurs and enthusiasts alike.
Beyond its exceptional products, Dilmah Ceylon Tea
Company PLC is a trailblazer in sustainable and ethical practices. The
company's commitment to its workers, local communities and the environment
underscores its role as a responsible corporate citizen. By championing fair
trade practices, supporting education initiatives and implementing eco-friendly
methods, Dilmah exemplifies the harmony between commerce and social
responsibility.
In the following sections, we will embark on a
comprehensive analysis of Dilmah Ceylon Tea Company PLC's financial statements.
Through this financial analysis, we endeavour to shed light on the numerical
narrative behind Dilmah’s Success story.
3. Financial Statements of Dilmah Ceylon Tea
Company
3.1.
Statements of Financial Position (2017-2022)
3.2.
Statement of Profit or Loss (2017-2022)
The data used in the above grids was
extracted from the annual reports of Dilmah Ceylon Tea Company, spanning the
past five consecutive years. These financial statements, which offer valuable
insights into the company's performance, can be found in the appendices of this
report.
4. Horizontal Analysis of Financial Statements
Horizontal analysis of financial statements
is a way of evaluating and comparing a company's financial performance over
multiple periods, typically years. It entails examining line items in financial
accounts, such as income statements and balance sheets, to determine trends,
shifts, and percentage differences over time. By identifying patterns and
movements in key financial indicators, this analysis supports stakeholders in
evaluating the company's financial well-being as well as growth potential,
making it a significant tool for decision making and financial planning.
Another widely used method in horizontal
analysis is trend analysis. It entails examining historical changes with
respect to financial metrics such as revenue, gross profit, net profit, assets,
liabilities, or equity.
The primary goal of horizontal analysis is
to calculate percentage changes in financial statements. The following are the fundamental
equations used in horizontal analysis.
(2017 has been taken as the base year for
the following calculations)
4.1. Horizontal Analysis of Statement of Financial
Position
4.1.1.
Rupee Change
4.1.2.
Percent Change
Over the five years
from 2018 to 2022, Dilmah Company experienced notable fluctuations in its
non-current assets. Property, plant and equipment saw a steady increase, rising
from 30.38% to 48.72%. This indicates a commitment to capital investments,
possible indication of expansion, improvement of facilities etc. In contrast,
the figures for investment property displayed growth in the initial years
(2018-2019) but have since stabilized. Intangible assets exhibited a consistent
decline from -0.39% to -65.73%. This signals a potential damage or value
reduction in intangible assets. However, a striking transformation occurred in
total non-current assets, which grew rapidly from 27.42% to 59.49%. This shift
could be connected to the considerable growth in property, plant and equipment,
which implies a strategic focus on tangible asset investments.
The percent change
in current assets reveals dynamic trends. Inventory started with a 26.50%
increase in 2018, followed by fluctuations, but eventually rose to 97.52% in
2022. This might indicate fluctuations in demand, changes in inventory
management practices, or an increase in stockpiling. Trade and other
receivables displayed steady growth, indicating that the company was
effectively managing its credit and receivables. Cash and cash equivalents
experienced a major decline in the first two years, with figures of -60.10% and
-42.0.%. However, it bounced back with a 73.38% increase in 2022. This suggests
that the liquidity challenges early on are potentially addressed through
improved cash management. The overall growth in total current assets, from
-22.12% to 88.88%, signifies the company’s ability to strengthen its working
capital position.
The company’s total
assets experienced significant variations during the five years. Initially,
there was an 8.30% decrease in 2018% likely due to the negative performance of
non-current assets and cash and cash equivalents. However, in successive years,
the total assets showed a remarkable recovery, with an 80.68% increase in 2022.
This recovery indicates a substantial improvement in the company’s financial
health and overall asset base.
Dilmah Company’s
equity experienced considerable change during the five years. Stated capital
witnessed a remarkable rise of 221.25% in 2018, likely due to an introduction
of new capital or a revaluation of assets. However, the following four years
saw no changes in this category, possibly indicating a stabilization of capital
structure. Retained earnings displayed a positive trend, increasing by 86.63%
in 2022. Total equity showed a notable upward trajectory, rising from 2.43% to
85.33%. This indicates that the company managed to accumulate retained earnings
and increase its capital base, potentially due to improved profitability and
strategic financial decisions.
Deferred tax
liabilities fluctuated, with a substantial increase in 2018, followed by a more
stable trend. The variations may indicate changes in tax regulations.
Retirement benefit obligations showed consistent growth, reaching 73.59% in
2022. This may imply the company’s commitment to pension obligations. Total
non-current liabilities exhibited notable changes, with an outstanding increase
of 390.69% in 2019. This is likely due to retirement benefit obligations. This highlights
the importance of monitoring and managing long-term obligations.
Trade and other
payables experienced volatility, with a significant decrease of -26.88% in
2019, followed by recovery. Provisions and accrued expenses showed consistent
growth, peaking at 427.25% in 2022. This substantial increase may suggest
higher provisioning for contingencies and liabilities. Total current
liabilities initially declined by -62.31% in 2018 but subsequently increased,
reaching a 12.87% growth in 2022. This reflects the dynamic nature of
short-term liabilities.
The overall trend
in total liabilities suggests a complex financial landscape for Dilmah Company.
It experienced a notable decrease of -50.35% in 2018, followed by a similar reduction
in 2019. However, there was a significant turnaround in 2020, with a 92.23%
increase. This change could be attributed to the dynamic interaction between
non-current and current liabilities. Subsequently, the company continued to
manage its liabilities efficiently, resulting in a 62.48% increase in 2022.
Finally, when we
consider total liability and equity together, the company’s financial position
reveals a trajectory from an 8.30% decrease in 2018 to a vigorous 80.68%
increase in 2022. This transformation emphasizes the company’s ability to
manage both assets and liabilities effectively, showing substantial growth in
its financial health over five years.
In summary, the
five-year analysis of Dilmah Company’s statement of financial position shows a
journey of transformation and flexibility. The company showed significant
growth in non-current assets, effective management of current assets, and
careful handling of liabilities. Equity and retained earnings saw positive
trends, offering a sound financial performance. This transformation concluded
in a remarkable 80.68% increase in total assets. These financial changes
indicate a company adapting to market conditions, capitalizing on opportunities
and strengthening its financial performance over the five years.
Figure 2:Percentage Changes in
Total Assets Current and Non-Current Components (2018-2022)
Figure 4:Percentage Changes in
Total Assets, Liabilities and Equity
4.2. Horizontal Analysis of Statements of Profit or
Loss
4.2.1. Rupee Change
Table 5:Rupee Changes in Statement
of Profit or Loss
4.2.2. Percent Change
Table 6:Percent Changes in
Statement of Profit or Loss
The Dilmah Company
experienced a significant increase in revenue over the last five years. Revenue
increased by 25.92% in 2018 and continued to rise, reaching a peak of 58.55% in
2020. This suggests increased sales, market expansion or successful product
offerings. However, revenue growth slowed down in 2022, with a 55.73% increase,
indicating a potential market saturation or increased competition.
The cost of sales
displayed a trend similar to revenue. It increased by 27.57% in 2018, followed
by a peak of 43.04% in 2020. The rise in the cost of sales often aligns with
revenue growth, indicating that the company incurred higher costs to meet
increasing demand. The subsequent decrease in the cost of sales in 2021 may be
attributed to cost saving measures or improved operational efficiency.
Gross profit, the
difference between revenue and the cost of sales, saw significant variations.
It increased by 23.53% in 2018 and surged to 81.16% in 2020, indicating the
company’s ability to maintain profitability even with increased costs. In 2022,
the gross profit increased by 67.87%. This trend suggests that the company
managed to effectively manage its cost structures to preserve a healthy margin.
The profit before
tax showed notable growth, starting with a 31.73% increase in 2018 and steadily
climbing to an impressive 106.28% in 2020. In the following years, it continued
to see substantial growth, with an astounding 503.01% increase in 2022. This
exceptional performance may be associated with cost controls, increased
revenues, and other potential improvements that contributed to higher
profitability.
The profit for the
year, which reflects the company’s net income after taxes, followed a similar
trend. It increased by 44.15% in 2018, reaching a peak of 111.49% in 2021 and a
similar remarkable 569.71% increase in 2022. These figures emphasize the
company’s ability to translate strong revenue growth and effective cost
management into considerable profit growth.
In summary, the
figures from Dilmah Company’s statement of profit or loss indicates a
remarkable journey of revenue growth, cost management, and profitability. This
performance may result from strategic initiatives, operational efficiencies, or
adaptations to market conditions, highlighting the company’s strong financial
performance over the five years.
4.3. Trend Analysis of Statements of Financial
Position
Table 7:Trend Analysis of
Statements of Financial Position
Total non-current assets increased steadily
over the five years, reaching 125.17% of the 2018 value by 2022. This indicates
a consistent effort to invest in long-term assets, possibly in property, plant,
and equipment, and intangible assets.
Total current assets showed considerable
growth, climbing to 242.51% of the 2018 figure by 2022. This suggests effective
management of current assets, potentially an increase in inventory, trade
receivables, and cash reserves.
The company's total assets also experienced
impressive growth, reaching 197.05% of the 2018 level in 2022. This growth in
both current and non-current assets indicates overall expansion and improved
financial health.
The equity portion saw consistent growth,
amounting to 180.94% of the 2018 figure by 2022. This reflects a sound
financial performance and a positive impact on shareholder equity.
Total non-current liabilities showed steady
growth but remained relatively balanced with the company's asset growth. In
2022, they reached 382.60% of the 2018 level, suggesting that the company's
leverage and long-term obligations have increased.
Total current liabilities surged
significantly, reaching 299.48% of the 2018 value in 2022. This might indicate
an increase in short-term obligations, trade payables, or provisions. The
substantial growth may permit further analysis to ensure liquidity and
financial stability.
The total liabilities, including both
non-current and current liabilities, increased considerably but remained
manageable. In 2022, they added up to 327.26% of the 2018 figure, suggesting
that the company has assumed more obligations compared to its asset growth.
Overall, the trend analysis reveals a
dynamic financial position for the company. It has witnessed significant growth
in assets, equity, and liabilities, indicating an expansion of its operations
and financial base. The healthy growth in current assets reflects effective
working capital management, while the increase in both non-current assets and
liabilities suggests investments and financing activities. It is crucial to
further investigate the company's liquidity, solvency, and capital structure to
make informed decisions about its financial health and future expectations.
4.4.
 |
Trend Analysis of Statements of Profit or Loss
Dilmah Ceylon Tea Company's revenue
exhibited an upward trend, growing steadily over the five years. In 2022, it
reached 123.67% of the 2018 figure. This signifies consistent revenue growth,
suggesting that the company has been successful in expanding its customer base
and product offerings despite a slight dip in 2021.
The cost of sales trend shows a similar
pattern, reflecting the company's ability to effectively manage its costs while
increasing revenue. In 2022, it stood at 115.56% of the 2018 level, indicating
efficient cost control measures and procurement strategies.
Gross profit exhibited substantial growth,
reaching 135.90% of the 2018 figure in 2022. This trend showcases Dilmah Ceylon
Tea Company's capacity to maintain strong profitability even as sales expanded,
indicating efficient operations and value generation.
Both profit metrics, profit before tax and
profit for the year, experienced significant growth, with 2022 figures reaching
457.76% and 464.58% of their respective 2018 values. This remarkable profitability
growth underscores the company's ability to translate revenue growth and
cost-effective operations into substantial profits, reflecting a resilient
business model and strong financial performance.
The trend analysis for Dilmah Ceylon Tea
Company's income statement presents a positive financial picture. The company
has consistently grown its revenue, maintained efficient cost control, and
achieved substantial profitability. This financial resilience positions the
company well for future growth and potential strategic initiatives, making it
an attractive candidate for investment opportunities.
5. Vertical Analysis of Financial Statements
Vertical analysis, often referred to as
common-size analysis, is a valuable technique used to examine the internal
composition of financial statements, including the statement of financial
position and the statement of profit or loss. This method involves expressing
each line item as a percentage of a chosen base item within the statement.
Typically, in the balance sheet, either total assets or total liabilities and
equity are used as the base, while in the income statement, total revenue
serves as the base. Vertical analysis allows for the relative assessment of the
significance of assets, liabilities, revenue and expenses, aiding in the
identification of patterns, trends, and changes in a company’s financial
structure. This analytical approach is a valuable resource for financial
decision making, comparative analysis and financial reporting, providing a
standardizes way to interpret financial data.
The general equation for calculating the common
size percentage is as follows:
In this equation, the “Analysis Amount”
represents the value of the specific financial item being analysed (e.g., a
specific asset, liability, revenue, or expenses), and the “Base Amount”
represents the value of the chosen base item (e.g., total assets, total
liabilities and equity, or total revenue). Multiplying the result by 100 converts
the ratio into a percentage, making it easier to interpret and compare.
5.1.
VERTICAL ANALYSIS OF
STATEMENT OF FINANCIAL POSITION
 |
From
2018 to 2022, Dilmah Ceylon Tea Company's financial position has seen notable
changes, as observed in the vertical analysis of its statement of financial
position. One significant trend is the decline in non-current assets,
particularly property, plant, and equipment, which fell from 26.14% in 2018 to
15.13% in 2022, indicating a possible shift in the company's investment
strategy. Investment property and intangible assets also experienced a
decrease. Conversely, current assets, including a substantial increase in cash
and cash equivalents to 36.87% in 2022, suggest a strategic emphasis on
liquidity. The total non-current assets category has been on a continuous decline,
constituting 38.75% of total assets in 2018 and decreasing to 24.61% in 2022.
Regarding equity, stated capital remained
relatively stable, while retained earnings consistently dominated, fluctuating
between 66.34% and 82.76% of total equity. The total equity category, despite
some fluctuations, remained the central element in Dilmah Ceylon Tea Company's
capital structure, representing 88.99% in 2018 and 81.72% in 2022.
Non-current liabilities have increased,
possibly reflecting changes in long-term obligations, while current liabilities
have remained a relatively smaller portion of the capital structure compared to
equity. The proportion of total assets attributed to total liabilities
displayed fluctuations, reaching 18.28% in 2022.
In summary, this highlights the company's
conservative approach, prioritizing equity and liquidity. The shift toward
higher liquidity suggests a focus on flexibility and efficient cash management
as part of the company's strategic direction. The vertical analysis provides an
insightful view of the financial structure and the evolving trends that have
shaped Dilmah Ceylon Tea Company's financial position over the five years.
5.2. 
Vertical Analysis of Statement of Profit or Loss
Figure 9:Vertical Analysis of
Dilmah's Financial Composition (2018 - 2022)
Revenue, which serves as the base value,
remained stable at 100% throughout the five years. The cost of sales declined
gradually as a proportion of revenue, from 60.11% in 2018 to 56.17% in 2022.
This trend reflects the company's ability to manage its production and
operational costs efficiently, contributing to improved profitability.
Gross profit, the result of subtracting the
cost of sales from revenue, increased from 39.89% in 2018 to 43.83% in 2022.
This growth highlights the company's capacity to enhance its gross profit
margin, indicating effective cost management and possibly higher pricing or
sales strategies.
Profit before tax, as a percentage of
revenue, experienced a consistent upward trend, rising from 13.84% in 2018 to
51.22% in 2022. This notable increase suggests a substantial improvement in
operational efficiency and profitability, as well as potential changes in the
company's tax strategies.
The proportion of profit for the year,
compared to revenue, also demonstrated substantial growth, increasing from 13%
in 2018 to 48.83% in 2022. This signifies a strong performance in converting
revenue into net profit, reflecting efficient operations and possibly a favourable
tax environment.
6. RATIO
ANALYSIS
Ratio analysis is a fundamental tool in
financial analysis that enables stakeholders, including investors, creditors,
and management, to evaluate a company's financial performance and health. By
examining the relationships between various financial figures, ratios provide
valuable insights into a company's operational efficiency, profitability,
liquidity, and overall financial stability. They help in evaluating how well a
company is managing its resources, meeting its obligations, and generating
profits. Ratio analysis is a critical aspect of financial decision-making,
offering a quantitative perspective on a company's financial health and helping
in comparisons with industry peers and historical performance. It provides a
structured and systematic approach to understanding a company's financial
statements and is a key component of financial statement analysis.
6.1. LIQUIDITY
AND EFFICIENCY RATIOS
1.
Current Ratio
This ratio calculates a company's capacity
to cover its immediate financial obligations using its short-term assets. A
ratio exceeding 1 indicates good short-term liquidity.
2.
Quick Ratio (Acid-Test Ratio)
Similar to the current ratio, but it
excludes inventory from current assets, offering a more conservative measure of
liquidity.
3.
Total Asset Turnover Ratio
This ratio evaluates how effectively a
company influences its assets to generate revenue. A higher ratio suggests
better asset utilization.
4.
Merchandise Turnover Ratio
This ratio measures how quickly a company
sells and replenishes its inventory, indicating efficient inventory management.
5.
Accounts Receivable Turnover
Ratio
This ratio evaluates the speed at which a
company collects payments from customers, with a higher ratio indicating
effective accounts receivable management.
6.
Days' Sales Uncollected
This ratio represents the average number of
days it takes for a company to collect payments from customers. A lower number
of days typically indicates more efficient accounts receivable management.
7.
Days' Sales in Inventory
This ratio shows the average number of days
it takes for a company to sell its entire inventory. A lower number of days
implies efficient inventory turnover and management.
These liquidity and efficiency ratios
provide valuable insights into a company's ability to manage its short-term
obligations, optimize asset utilization, and enhance overall financial
performance. They play a critical role in evaluating operational efficiency and
financial well-being.
Table 11: Liquidity and Efficiency
Ratios
In 2019, the current ratio improved
significantly to 9.61:1, indicating strong short-term liquidity with current
assets far exceeding current liabilities. However, in 2020, the current ratio
dropped to 3.43:1, suggesting potential liquidity challenges. This decrease
could be due to a decrease in current assets or an increase in current
liabilities, which could affect the company's ability to meet short-term
obligations. The subsequent recovery in 2021 (8.32:1) and 2022 (6.77:1) is a
positive sign, but it's essential to monitor whether this improvement is
sustainable.
The acid test ratio follows a similar
pattern, providing a more conservative view of liquidity by excluding
inventory. The significant drop in 2020 (2.90:1) is concerning, but the
subsequent recovery indicates efforts to enhance short-term financial health.
The declining trend in accounts receivable
turnover from 2.66 times in 2018 to 1.39 times in 2022 implies a slowdown in
collecting payments from customers. A lower turnover may indicate that the
company is taking more time to collect outstanding invoices, which can affect
cash flow and liquidity. It's crucial to investigate the reasons behind this
trend, such as changes in credit policies or customer payment behaviour.
The consistent decline in merchandise
turnover from 2018 (5.17) to 2022 (3.76) suggests that inventory is being sold
less efficiently. A decreasing turnover ratio may result from slower sales,
overstocked inventory, or other operational inefficiencies. Efficient inventory
management is crucial to optimize working capital and profitability.
The total assets turnover ratio shows
variations over the years, with a significant drop in 2020 (0.54). A lower
ratio indicates the underutilization of assets to generate revenue. It's
essential to investigate the causes of this drop, such as changes in business
operations or asset utilization.
The increase in days' sales uncollected
from 2018 (147.81 days) to 2022 (187.80 days) suggests a longer time to collect
payments from customers. This can impact cash flow and liquidity, so strategies
to improve accounts receivable management may be necessary.
Similarly, the rise in days' sales in
inventory, from 78.78 days in 2018 to 106.45 days in 2022, implies that the
company is taking longer to sell its inventory. This can tie up capital and
impact overall efficiency. Investigating inventory management practices is
crucial to address this issue.
In summary, while there are positive signs
in liquidity ratios for specific years, the declining accounts receivable
turnover, merchandise turnover, and increasing days' sales uncollected and
days' sales in inventory indicate areas that may need attention. A
comprehensive analysis and strategy for improving efficiency, inventory
management, and accounts receivable collection are vital to enhance overall
financial health.
6.2. SOLVENCY
RATIOS
1.
Debt Ratio (Debt-to-Asset
Ratio)
This ratio measures the proportion of a
company's assets financed by debt. It indicates the company's solvency and risk
of financial distress. A lower debt ratio implies lower financial risk.
2.
Equity Ratio (Equity-to-Asset
Ratio)
This ratio shows the proportion of a
company's assets financed by shareholders' equity. It reflects the company's
financial stability and ownership structure. A higher equity ratio is generally
favourable.
3.
Times Interest Earned Ratio
(Interest Coverage Ratio)
This ratio assesses a company's ability to
cover its interest expenses with its earnings before interest and taxes. A
higher ratio suggests a stronger capacity to meet interest obligations.
These solvency ratios help evaluate a
company's long-term financial health, risk, and its ability to meet long-term
debt and interest obligations. The Debt Ratio and Equity Ratio provide insights
into the capital structure, while the Times Interest Earned Ratio assesses the
company's interest payment capacity.
Table 12:Solvency Ratios
In 2018, the debt ratio was relatively low
at 11.01%, indicating that only about 11.01% of the company's assets were
financed by debt. This is generally considered a positive sign, as it suggests
a low financial risk.
In 2019, the ratio decreased further to
9.91%, which is even better in terms of solvency.
However, in 2020, there was a significant
increase to 28.61%. This may indicate a higher proportion of assets financed by
debt, which could raise concerns about financial risk.
The ratio decreased in 2021 to 17.24% and
then slightly increased to 18.28% in 2022. While the debt ratio is lower than
in 2020, it remains higher than the earlier years.
The equity ratio in 2018 was 88.99%,
signifying that a significant portion of the company's assets was financed by
equity, which is generally a sign of financial stability.
In 2019, the equity ratio increased to
90.90%, further strengthening the company's financial position.
However, in 2020, the ratio decreased notably
to 71.39%, suggesting a lower proportion of assets financed by equity. This
might be related to changes in the capital structure or financial performance.
The ratio improved in 2021 to 82.76% and
remained relatively stable at 81.72% in 2022.
In 2018, the times interest earned ratio
was 37.90, indicating that the company had earnings 37.90 times greater than
its interest expenses. This signifies a strong ability to cover interest
obligations.
The ratio increased significantly in 2019
to 118.25, showing even more robust coverage of interest expenses.
However, in 2020, the ratio dropped to
11.93, which may raise concerns about the company's ability to cover interest
payments. This could be due to an increase in interest expenses or a decrease
in earnings.
The ratio remained relatively low in 2021
at 10.77 but increased to 35.19 in 2022, suggesting some recovery in interest
coverage.
In summary, the interpretation highlights
the figures in these solvency ratios. The debt ratio's increase in 2020 and its
subsequent fluctuations should be examined to assess the company's financial
risk. The equity ratio indicates changes in capital structure. In contrast, the
times interest earned ratio reflects the company's ability to cover interest
expenses, with 2020 being a particularly challenging year in this regard.
6.3. PROFITABILITY
RATIOS
1.
Profit Margin (Net Profit
Margin)
This ratio measures the proportion of
revenue retained as net profit after all expenses. It reflects a company's
overall profitability. A higher profit margin indicates greater profitability.
2.
Gross Margin
This ratio assesses the proportion of
revenue retained as gross profit after accounting for the cost of goods sold.
It shows the efficiency of a company's core operations.
3.
Return on Total Assets (ROA)
ROA measures a company's ability to
generate profits from its total assets. It provides insight into how
efficiently assets are utilized to generate income.
4.
Return on Common Shareholders'
Equity (ROE)
ROE assesses the return generated for
common shareholders' equity. It reflects the profitability of shareholder
investments.
5.
Basic Earnings Per Share (EPS)
EPS represents the earnings attributable to
each common share. It's an essential measure for investors to assess a
company's profitability per share.
These profitability ratios help
stakeholders evaluate how effectively a company generates profits, manages
expenses, and provides returns to shareholders. They offer insights into
different aspects of a company's financial performance and its ability to
deliver returns to investors.
Table 13:Probability Ratios
2018, the profit margin was 13.00%,
indicating that the company retained 13.00% of its revenue as profit. This
ratio improved steadily over the years and reached 48.83% in 2022. The
significant increase in profit margin suggests growing profitability, possibly
due to cost management and revenue growth.
The gross margin represents the
profitability of a company's core operations. It was 39.89% in 2018 and
improved to 46.47% in 2020 before stabilizing at 43.83% in 2022. This shows
that the company efficiently managed its production costs and maintained a
strong margin on its products.
ROA was 9.84% in 2018 and gradually increased
to 27.97% in 2022. This ratio measures how efficiently the company utilizes its
assets to generate earnings. The consistent growth suggests improved asset
utilization and profitability.
In 2018, the ROE was 11.69%, and it
increased over the years to 34.05% in 2022. ROE reflects the return generated
for common shareholders. The steady growth in ROE indicates that the company is
effectively utilizing common equity to generate returns for shareholders.
Basic EPS measures the company's
profitability on a per-share basis. It increased from 58.74 rupees in 2018 to
267.23 rupees in 2022, indicating robust earnings growth per share.
In summary, these profitability ratios
demonstrate consistent improvements in the company's financial performance. The
rising profit margin, gross margin, ROA, ROE, and EPS are indicators of
enhanced profitability and efficient use of resources. This trend is generally
positive for shareholders and suggests that the company's operations have
become more profitable over the years.
6.4. MARKET
RATIOS
1.
Price-to-Earnings (P/E) Ratio
The P/E ratio reflects the market's
valuation of a company's stock relative to its earnings. It indicates how much
investors are willing to pay for each rupee of earnings.
2.
Dividend Yield
Dividend yield measures the dividend income
an investor can expect to receive from a company's stock relative to the
current market price. It is an indicator of a company's dividend distribution
to shareholders.
These market ratios provide insights into
how investors perceive a company's stock and its attractiveness as an
investment. The P/E ratio shows the market's price expectations, while the dividend
yield is important for income-oriented investors seeking dividend income from
their investments.
Table 14:Market Ratios
The P/E ratio in 2018 indicated that
investors were willing to pay a premium of 9.45 times the company's earnings
per share (EPS) for its stock, reflecting optimism about future earnings.
Over the years, the P/E ratio steadily
decreased, reaching 3.73 in 2022. This decreasing ratio may suggest that
investors had more cautious expectations regarding the company's future
earnings. The reasons for this decline should be explored, considering factors
like shifting market opinions and the company's earnings performance.
In 2018, the dividend yield stood at 8.11%,
meaning investors received an 8.11% return on their investment through
dividends. A high dividend yield can be particularly appealing to
income-oriented investors.
The dividend yield fluctuated over
subsequent years, dropping to 3.23% in 2019, rebounding to 4.71% in 2020,
decreasing to 2.83% in 2021, and then rising to 5.51% in 2022. These variations
might be attributed to changes in dividend policies, fluctuations in earnings,
or adjustments in the company's stock price. The shifts in yield reflect
different periods of dividend attractiveness to investors.
7. ALTMAN Z - SCORE
The Altman Z-Score is a financial formula
used to predict the likelihood of a company going bankrupt within two years.
It's particularly relevant for evaluating the financial health of
publicly-traded manufacturing and non-manufacturing companies. The Z-Score
considers various financial ratios and metrics to provide a single score that
can be interpreted as follows:
Z-Score > 2.6
Typically, this indicates that the company
is in good financial health, with a low risk of bankruptcy.
1.1 < Z-Score < 2.6
This range suggests a company is in a grey
area and is not clearly in financial distress, but it's not entirely safe
either.
Z-Score < 1.1
A Z-Score below 1.1 is generally viewed as
a warning sign of financial distress or a higher risk of bankruptcy.
The Altman Z-Score takes into consideration
several financial metrics, including working capital, retained earnings, EBIT,
market value of equity, book value of total debt, and more. It's a valuable
tool for investors, creditors, and financial analysts to evaluate a company's
financial stability and bankruptcy risk.
The Z-Score Formula:
A =
Working Capital / Total Assets
B =
Retained Earnings / Total Assets
C =
Earnings Before Interest and Tax (EBIT) / Total Assets
D =
Market Value of Equity / Total Liabilities
E =
Sales / Total Assets
Table 15:Data for the Calculations
of Z - Scores
Working
Capital = Current Assets – Current Liabilities
EBIT =
Profit Before Tax + Finance Cost
Market
Value of Equity = Number of Outstanding Shares * Market Price Per Share
Outstanding
Shares = Net Income / Earnings Per Share
Table 16:Required Calculations for
the Calculation of Z - Scores
Table 17:Z-Scores
2018
(Z-score: 8.2197): In the initial year, 2018, Dilmah Company exhibited an
exceptionally high Z-score of 8.2197, firmly positioning itself within the
"Safe Zone." This remarkable Z-score was indicative of a company in
robust financial health, marked by substantial working capital, retained
earnings, profitability, and a favorable market valuation. It portrayed an
excellent overall financial position.
2019
(Z-score: 9.2223): The subsequent year, 2019, saw the Z-score climb even
higher, reaching 9.2223. This was a clear indication of continued financial
strength and stability within the "Safe Zone." Dilmah Company not
only maintained its exceptional financial health but also appeared to enhance
it.
2020
(Z-score: 3.8517): However, the year 2020 brought a noticeable shift as the
Z-score declined to 3.8517. Although the Z-score remained within the "Safe
Zone," it entered the "Grey Zone," hinting at financial
challenges. These could be attributed to changes in financial structure,
profitability, or market valuation and warrant a closer examination.
2021
(Z-score: 5.4257): The Z-score exhibited a positive rebound in 2021, rising to
5.4257 and moving back toward the "Safe Zone." This indicated an
improvement in the company's financial position, though it remained within the
"Grey Zone," suggesting some persisting financial concerns.
2022
(Z-score: 6.1534): By 2022, the Z-score continued its upward trajectory,
reaching 6.1534. While it remained within the "Grey Zone," this
upward trend signified a strengthening financial position.
In
summary, Dilmah Company started with exceptionally high Z-scores in 2018 and
2019, indicative of strong financial health. A significant dip in 2020 raised
concerns, but the subsequent years demonstrated an active effort to regain
financial stability. It's essential to explore into the specific factors behind
these fluctuations to understand the company's financial journey.
8. conclusion
Dilmah Ceylon Tea Company's financial
journey from 2018 to 2022 is an indication of its resilience and adaptability
in the face of various economic challenges and opportunities. The analysis of
the company's financial statements through horizontal analysis, vertical
analysis, trend analysis, ratio analysis, and Altman Z-scores paints a
comprehensive picture of its financial health.
The horizontal analysis reveals a
consistent upward trajectory in crucial financial metrics. Revenue, net income,
total assets, and equity all exhibited substantial growth. This signifies that
the company was not only expanding its operations but also strengthening its
financial position over the years.
The vertical analysis of the statement of the
financial position indicated that Dilmah Company was effectively balancing its
asset composition. There was a noticeable reduction in the proportion of
property, plant, and equipment relative to total assets, suggesting a shift
toward more liquid assets. Total equity remained strong and relatively stable,
which is evidence of the company's prudent capital structure.
The trend analysis highlighted the
company's consistent growth in revenue, net income, and total assets. However,
it is essential to highlight a brief dip in profitability and Altman Z-scores
in 2020. This was followed by a swift recovery in the following years,
indicating the company's flexibility in navigating financial challenges.
Liquidity and efficiency ratios, including
current and acid test ratios, depicted a consistent picture of short-term solid
liquidity. The accounts receivable turnover and merchandise turnover remained
stable. The profitability ratios told a captivating story, with increasing
profit margins and returns on assets and equity. Market ratios, although
showing fluctuations in P/E and dividend yield, reflected varying market opinions.
The Altman Z-scores initially indicated a
very low likelihood of bankruptcy in 2018 and 2019, signifying the company's robust
financial health. Nevertheless, a dip in 2020 raised some financial concerns,
which were subsequently addressed in the following years, specifying the
company's adaptability.
In a holistic view, Dilmah Ceylon Tea
Company's overall financial performance is commendable. The company
demonstrated remarkable growth and financial stability. It maintained strong
liquidity, efficient asset utilization, and solid equity throughout the period.
While there was a brief period of concern in 2020, the subsequent years marked
a recovery in financial health, emphasizes the company's resilience.
The profitability ratios and positive trend
analysis clearly indicate enhanced profitability and operational efficiency.
However, it is paramount for Dilmah Company to remain vigilant, particularly
concerning the factors that contributed to the temporary decline in 2020,
particularly in terms of profitability and the Altman Z-scores. Furthermore,
the market ratios revealed varying investor sentiment.
In summation, Dilmah Ceylon Tea Company's
overall financial performance is highly positive. The company's journey
reflects growth, adaptability, and strategic perception. To ensure a long-term
commitment to financial strength and stability, it must continue to monitor,
adapt, and evolve its financial strategies in response to the evolving business
landscape
9. RECOMMENDATIONS
§ Keep a close eye on financial performance, particularly to identify
and address factors that caused a dip in profitability and Altman Z-scores in
2020. Be proactive in addressing any issues affecting profitability.
§ Invest in research and development to remain competitive and
innovative in the tea industry. Exploring sustainable and health-conscious tea
products can open up new market opportunities.
§ Maintain a focus on cost management and operational efficiency.
Streamlining operations can result in cost savings and better profitability.
§ Maintain a focus on cost management and operational efficiency.
Streamlining operations can result in cost savings and better profitability.
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