Financial Statement Analysis for Royal Ceramics Lanka PLC

 

1.0   Introduction

 

Financial analysis is an essential tool for evaluating the health and performance of a business or organization. In an era marked by rapid economic changes and evolving market dynamics, the ability to assess financial data critically is crucial for making informed decisions and strategic planning. This report aims to provide a comprehensive analysis of Royal Ceramics Lanka PLC's financial position and performance over the past five years.

Investors, managers, creditors, and regulators must all have a thorough grasp of an entity's financial strengths, weaknesses, and trends in order to act as good financial stewards. A properly done financial analysis provides insightful information about the profitability, solvency, liquidity, and overall sustainability of a company.

Throughout this report, we will delve into Royal Ceramics Lanka PLC's financial statements, scrutinize key financial ratios, and examine market and industry benchmarks. By dissecting the financial components, we aim to provide an in-depth understanding of the company's financial standing and offer actionable recommendations for decision-makers.

In conclusion, this report is an invaluable resource for anyone wanting to learn more about Royal Ceramics Lanka PLC's financial performance and its capacity to overcome obstacles in the fast-paced business environment of today.

 

 

 

 

 

 

 

 

 

 

2.0 Introduction of the Company

 

Established in 1991, the journey of Royal Ceramics Lanka PLC (Rocell) began with the aspiration to be the market leader in tile manufacturing. Royal Porcelain (Pvt) Limited was founded in 2002 and later amalgamated with Rocell. In 2009 Company ventured into manufacturing of sanitaryware with the establishment of Rocell Bathware Ltd. In 2013, company’s market position was enhanced with the acquisition of the Lanka Walltiles PLC Group. The Rocell brand, together with Lanka Tiles and Lanka Walltiles have become the undisputed market leader in local tile manufacturing industry. Today, Rocell has evolved into a conglomerate that is primarily engaged in producing items supporting the housing and construction industry with a significant presence in five sectors, namely, tiles, bath ware, aluminium, packaging and mining. Further, they are present in the finance and service sectors through their Associates LB Finance PLC and Delmege Ltd.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.0 Financial Statement Analysis of Royal Ceramics Lanka PLC

 

3.1 Horizontal Analysis

A company's financial information is compared with its historical financial data from previous reporting periods in a horizontal analysis. The basic goal is to compare the figures to historical data in order to determine whether they are high or low, which can be utilized to look into potential causes for concern. The oldest period is typically regarded as the base period in this technique of analysis, and the items on the statements for all subsequent periods are contrasted with the items on the statements of the base period. Typically, the changes are displayed in both rupees and percentage.

3.1.1 Statement of Profit or Loss of Royal Ceramics Lanka PLC – Base year 2018

Analysis period = 2019 – 2023

Base period = 2018

Rupee change = Analysis period amount – Base period amount

Percentage change = (Rupee change / Base period amount) * 100

Table 01 – Percentage change for statement of profit or loss

Description	Base year amount (2018) Rs (000)	2019 Rs. (000)	2020 Rs. (000)	2021 Rs. (000)	2022 Rs. (000)	2023 Rs. (000)
Revenue	3,452,289	9.92%	86.70%	262.78%	316.34%	389.78%
Cost of sales	(1,781,547)	14.26%	79.09%	245.44%	278.91%	419.20%
Gross profit	1,670,741	5.28%	94.81%	281.27%	356.32%	358.41%
Other income-net	2,759,287	-62.32%	-63.14%	-50.30%	8.24%	-13.51%
Administrative expenses	(477,647)	1.32%	9.47%	-1.55%	29.86%	88.98%
Distribution expenses	(1,152,859)	27.12%	57.88%	114.01%	112.08%	184.36%
Other expenses	(126,570)	-73.71%	77.73%	205.22%	-41.80%	-83.64%
Finance cost	(432,815)	25.54%	119.96%	37.32%	-30.98%	-2.22%
Profit before tax	2,247,381	-87.30%	-65.75%	72.61%	232.16%	169.30%
Income tax expense	(218,578)	-78.98%	-43.74%	171.70%	392.89%	496.95%
Profit for the year	2,028,802	-88.19%	-68.12%	61.93%	214.84%	134.0%

 

 

3.1.2   Statement of Financial Position of Royal Ceramics Lanka PLC - Base year 2018

 

Table 02 – Percentage change for statement of financial position

Description			Base year amount (2018) Rs (000)			2019 Rs. (000)		2020 Rs. (000)		2021 Rs. (000)		2022 Rs. (000)	2023 Rs. (000)
ASSETS Non-current assets
Property, plant and equipment			6,559,706			5.03%		30.21%		25.73%		51.74%	76.62%
Investment in Subsidiaries			6,455,371			2.35%		2.61%		2.61%		3.49%	4.39%
Investments in Associates			3,162,937			0.00%		0.00%		0.00%		10.28%	10.28%
Other Non-financial assets			-			0.00%		100%		100%		0.00%	0.00%
Intangible Assets			170,970			-2.97%		-13.05%		-23.96%		-32.00%	-24.91%
Total Non- Current Assets			16,348,985			2.93%		19.20%		16.47%		29.21%	40.02%
Current assets
Inventories			1,393,557			37.19%		231.76%		114.66%		108.72%	331.71%
Trade and other receivables			545,300			29.73%		56.34%		47.40%		-0.42%	37.57%
Other non-financial assets			369,085			-25.73%		-9.10%		-31.81%		32.59%	79.11%
Other financial assets			146,927			-55.93%		-49.47%		197.38%		-70.93%	-56.84%
Tax receivable			55,269			-34.24%		-		-		-	-
Cash and cash equivalents			291,412			59.69%		38.77%		542.47%		2385.96%	175.32%
Total current assets			2,801,553			23.49%		124.51%		126.88%		303.60%	262.26%
Total assets			19,150,539			5.92%		34.59%		32.60%		69.32%	72.80%
EQUITY AND LIABILITIES Capital and reserves
Stated capital		1,368,673			0.00%		0.00%		0.00%		0.00%		0.00%
Reserves		830,590			0.00%		43.63%		63.77%		232.11%		183.90%
Retained earnings		7,466,545			0.50%		61.03%		84.61%		108.06%		119.87%
Total equity		9,665,809			0.37%		50.80%		70.84%		103.42%		10840%
Non-current liabilities
Employee benefit obligations		245,857			6.36%		75.79%		96.24%		109.51%		149.86%
Deferred tax liabilities		398,975			2.79%		70.12%		72.40%		150.55%		322.13%
Loans and borrowings		3,314,132			-10.80%		-11.54%		-33.04%		-50.13%		-46.55%
Total Non-current liabilities		3,958,965			-8.29%		2.11%		-14.39%		-20.00%		2.80%
Current liabilities
Trade and other payables	3,278,392			32.20%			-56.08%		-56.19%		-56.36%		-56.36%
Other current liabilities	532,632			-69.75%			-63.65%		-25.12%		-18.48%		405.49%
Loans & borrowings	1,666,640			15.50%			187.31%		-6.48%		-8.46%		126.97%
Dividends payable	48,099			-18.06%			-27.32%		-55.56%		8.22%		442.55%
Total Current liabilities	5,525,764			25.79%			29.34%		-0.62%		73.69%		60.68%
Total Equity and Liabilities	19,150,539			5.92%			34.59%		32.60%		69.33%		72.80%

 

3.1.3 Horizontal Analysis – Discussion Points

Horizontal analysis has been done by considering the change by taking 2018 as the base year. When considering base year comparison, it can be noted that the net profit has significantly increased in the years 2022 and 2023 although it shows a decrease during past period, i.e.,2019 and 2020. Revenue also has increased during the period 2021 to 2023.

When considering the assets, total assets have increased over the period as a result of increase in both non-current assets and current assets. Current assets show a significant increase in years 2020 and 2022 mainly due to the increase in inventory levels and cash balances.

 

When considering the Equity and liabilities of the company, the equity value has been increasing over the period while total non-current liabilities have been maintained at a lower level over the period. This is mainly due to the decrease in loans and borrowings giving a positive indication of the company’s solvency. Trade payables also show a decrease during the period from 2020 to 2023. Other current liabilities show a decrease from 2019 to 2022 due to the effect that the company has recognized the advance payments received on behalf of timber flooring and sanitaryware and tiles orders from customers separately under contract liabilities separately. But it has been significantly increased in 2023.

 

3.2 Trend Analysis

Trend analysis in business organizations involves the examination of historical data to identify patterns and make informed decisions about the future. By analyzing trends, organizations can anticipate changes, adapt strategies, and remain competitive.

Trend percentage = (Analysis period amount/Base period amount) *100

3.2.1 Statement of Profit or Loss of Royal Ceramics Lanka PLC – Base year 2018

Table 03 – Trend analysis for statement of profit or loss

Description	2019 (%)	2020 (%)	2021 (%)	2022 (%)	2023 (%)
Revenue	109.91	186.70	362.78	416.37	489.78
Cost of sales	114.26	179.09	345.44	378.91	519.20
Gross profit	105.28	194.81	381.27	456.32	458.41
Other income-net	37.68	36.86	49.70	108.24	86.49
Administrative expenses	101.32	109.47	98.45	129.86	188.98
Distribution expenses	127.12	157.88	214.01	212.08	284.36
Other Expenses	26.28	177.73	305.22	58.20	16.36
Operating profit	11.81	31.88	161.93	314.84	233.99
Finance costs	123.54	219.96	137.32	69.02	97.78
Profit before tax	12.73	34.25	172.61	332.16	269.30
Income tax expense	21.02	56.27	271.70	492.89	596.95
Profit for the year	11.81	31.88	161.93	314.84	233.99

 

According to the above trend analysis on profit or loss statement, revenue is higher in 2021to 2023 than 2019 and 2020. Same trend shows for gross profit as well while net profit shows an increase in 2022 but has been declined significantly in the year 2019 and 2020. When considering the profitability level throughout the period, year 2023 is the highest performing year for the company in terms of revenue and gross profit and 2022 has the highest profit for the year compared with the base year 2018.

3.2.2 Statement of Financial Position of Royal Ceramics Lanka PLC – Base Year 2018

Table 04 – Trend analysis for statement of financial position

Description	2019 (%)	2020 (%)	2021 (%)	2022 (%)	2023 (%)
Total non-current assets	102.91	119.18	116.45	129.18	139.99
Total current assets	123.49	224.51	226.88	403.60	364.26
Total assets	105.92	134.59	132.60	169.33	172.80
Total equity	100.39	150.89	170.84	203.42	208.40
Total non-current liabilities	91.71	102.11	85.61	80.01	102.80
Total current liabilities	125.79	129.34	99.39	173.69	160.68
Total equity and liabilities	105.92	134.59	132.60	169.34	172.80

 

With the exception of non-current liabilities, which have decreased in the years 2021 and 2022, almost all of the line items in assets, equity, and liabilities show an increasing trend when compared to the base year 2018, according to the trend analysis on the statement of financial position discussed above. The company's long-term debts and borrowings have decreased, which is the main cause of this decline. In addition, the current assets indicate a considerable increase in 2022 as a result of the company's high inventory levels and year-end 2022 cash and bank balance.

 

3.3 Vertical Analysis

Vertical analysis, also known as common-size analysis, is a financial analysis technique that helps a business organization assess the relative proportions of various items in its financial statements, such as the income statement and the balance sheet. The primary goal of vertical analysis is to express each item as a percentage of a common base, typically total revenue for the income statement and total assets for the balance sheet. This makes it easier to compare the financial performance and structure of a business over time or with competitors.

Common size percent = (Analysis amount/Base amount) *100

This analysis is done for year 2022 and 2023.

3.3.1 Statement of Profit or Loss of Royal Ceramics Lanka PLC

Table 05 – Vertical analysis for statement of profit or loss

Description	2022(%)	2023(%)
Revenue	100.00	100.00
Cost of sales	46.96	54.70
Gross profit	53.04	45.30
Other income-net	20.78	14.11
Administrative expenses	4.32	5.34
Distribution expenses	17.01	19.39
Other expenses	0.51	0.12
Finance cost	2.08	2.50
Profit before tax	51.93	35.79
Income tax expense	7.49	7.72
Profit for the year	44.44	28.08

 

When considering the above vertical analysis of the profit or loss statement, the cost of sales represents more than 45% of the sales revenue in both years. Gross profit has been decreased when comes to year 2023. Other income is also greater in 2022 than2023. Generally, it has stood around 20% of sales in year 2022. Profit before tax and profit for the year both have higher values in 2022 than year 2023. So, we can say that, year 2022 is a more successful year than year 2023 for this company according to its statement of profit or loss.

3.3.2 Statement of Financial Position of Royal Ceramics Lanka PLC

Table 06 – vertical analysis for financial position

Description	2022(%)	2023(%)
ASSETS Non-current assets
Property, plant and equipment	30.70	35.01
Investment in subsidiaries	20.60	20.36
Investment in associates	10.76	10.54
Right of use assets	2.72	2.86
Intangible assets	0.36	0.39
Total non-current assets	65.13	69.16
Current assets
Inventories	8.97	18.18
Trade and other receivables	1.92	2.27
Other non-financial assets	1.51	2.00
Other financial assets	0.13	0.19
Tax receivable	0.00	0.00
Cash and equivalents	22.34	2.42
Total current assets	34.87	30.84
Total assets	100.00	100.00

 

 

EQUITY AND LIABILITIES Capital and reserves
Stated capital	4.22	4.14
Reserves	8.51	7.13
Accumulated profit/loss	47.91	49.61
Total capital and reserves	60.63	60.87
Non-current liabilities
Employee benefit obligations	1.59	1.86
Differed tax liability	3.08	5.09
Loans and borrowings	5.10	5.35
Total non-current liabilities	9.77	12.30
Current liabilities
Trade and other payables	4.48	4.31
Other current liabilities	1.34	8.14
Loans & borrowings	4.70	11.43
Dividends payable	0.16	0.79
Tax payable	1.98	2.01
Total Current liabilities	29.60	26.83
Total Liabilities	39.37	39.13
Total Equity and Liabilities	100.00	100.00

 

When considering the vertical analysis according to the financial position of the company, Property, plant and equipment represents a value between 30% to 35% compared with total assets over the period. Investment in subsidiaries and investment in associates show only slight changes. Total non-current assets have been increased in 2023 by 4%. However, the total current assets have decreased in year 2023 than in 2022.

Total equity is almost same in both years. Total Current liabilities are greater in year 2022 than in year 2023. Loans and borrowings have been increased in 2023. Total liabilities are also almost the same amount in both years. According to this analysis also, we can say that company shows more successfulness in year 2022 than in 2023.

3.4 Ratio Analysis

Ratio analysis is a fundamental tool for evaluating the financial health and performance of a business organization. It involves the calculation of various financial ratios using data from the organization's financial statements, including the income statement, balance sheet, and cash flow statement. These ratios provide valuable insights into different aspects of the company's financial performance and help stakeholders make informed decisions.

Financial ratios are grouped into the following categories:

1.      Liquidity and Efficiency ratios

2.      Solvency ratios

3.      Profitability ratios

4.      Market value ratios

It's important to note that ratio analysis is most effective when comparing the ratios to industry benchmarks, historical performance, and competitors. Moreover, the interpretation of ratios may vary based on the industry, company size, and specific circumstances, so a comprehensive understanding of the business and its financial statements is crucial for meaningful analysis.

3.4.1 Liquidity and efficiency Ratios

3.4.1.1 Current ratio

Current ratio = Current assets/Current liabilities

2022	2023
1.18	1.15

 

A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities. Current ratio is higher in year 2022 than 2023. So, liquidity position of the company is good in year in 2022.

3.4.1.2 Acid – test ratio

Acid-test ratio = Quick assets/Current liabilities

2022	2023
0.88	0.47

 

It shows a low quick ratio than the norm in both years. Year 2022 is somewhat better than 2023. If a company has a quick ratio of less than one, it means that the business has fewer liquid assets than liabilities.

3.4.1.3 Accounts Receivables Turnover

Accounts receivable turnover = Sales on account/Average account receivable

2022	2023
22.23	26.15

 

Accounts receivable turnover is higher in 2023. So, company can convert its receivables into cash more times in 2023 than 2022.

3.4.1.4 Merchandise turnover

Merchandise turnover = Cost of goods sold/Average inventory

2022	2023
1.51	2.07

 

Merchandise turnover is higher in year 2023. So, in 2023 company more quickly convert goods to sales.

3.4.1.5 Days’ sales uncollected

Days’ sales uncollected = (Accounts receivable/Net sales) *365

2022	2023
13.79	16.19

 

In year 2023, it takes 16.19 days to collect money back and 2022 takes only 13.79 days. If this ratio declines, it means that the business can quickly collect its money. The business might use a variety of incentives and gimmicks, such buy one get one free, to entice customers to make a payment.

 

 

3.4.1.6 Days’ sales in inventory

Days’ sales inventory = (Ending inventory/Cost of sales) *365

2022	2023
157.27	237.40

 

The company's inventory holding duration is notably long, following the analysis above. Year 2023 takes more days than 2022. The higher values indicate a slowdown in commerce, an increase in inventory levels, or an excessive investment in inventories.

3.4.1.7 Total asset turnover

Total asset turnover = Revenues/Average total assets

2022	2023
0.44	0.52

 

The estimate shows that the company's revenue is just marginally larger than the average total assets. Assets turnover ratio is higher in 2023 than in 2022.

3.4.2 Solvency Ratios

3.4.2.1 Debt ratio

Debt ratio = (Total liabilities/Total assets) *100

2022	2023
39.37%	39.13%

 

Debt ratio is almost same in both years. This ratio shows the what portion of assets are from creditors.

3.4.2.2 Equity ratio

Equity ratio = (Total shareholders’ equity/total assets) *100

2022	2023
60.63%	60.87%

There is only a very small increase in equity ratio in 2023. Higher equity ratios are generally advantageous for businesses. Since more investors are prepared to finance the company, higher investment levels by shareholders demonstrate to future shareholders that the company is worthwhile investing in.

3.4.2.3 Times interest earned

Times interest earned = Net income before interest expense and income tax/Interest expense

2022	2023
25.99	15.30

 

This value is higher in year 2022 than in 2023. Times interest earned shows the ability of the firm’s operations to provide protection to long-term creditor.

3.4.3 Profitability Ratios

3.4.3.1 Profit margin

Profit margin = (Net income/Net sales) *100

2022	2023
44.44%	28.08%

 

This ratio shows ability to earn a net income from sales. Profit margin has been decreased when it comes to 2023.

3.4.3.2 Gross margin

Gross margin = (Net sales – cost of sales)/Net sales *100

2022	2023
53.04%	45.30%

 

This shows amount that is left to cover operating expenses. A company with a high gross profit ratio will be particularly appealing to potential investors since it might be perceived as evidence that the investment will pay off quickly. Gross margin is higher in 2022 than 2023.

 

3.4.3.3 Return on total assets

Return on total assets = (Net income/Average total assets) *100

2022	2023
19.50%	14.49%

 

This is the best overall measure of a company’s profitability. So, year 2022 is more profitable than 2023.

3.4.3.4 Return on common shareholders’ equity

Return on common shareholders’ equity = (Net income – preferred dividends)/Average shareholders’ equity *100

2022	2023
32.09%	23.85%

 

 Return on common shareholders’ equity shows how well company employed owners’ investments to earn money. Year 2022 is better than 2023 when considering this ratio.

3.4.3.5 Book value per common share

Book value per common share = Shareholders’ equity applicable to common shares/No. of common shares outstanding

2022	2023
17.75	18.18

 

Book value per common share is higher in 2023 than in 2022. During the year 2022, the number of issued ordinary shares of the Company increased from 110,789,384 to 1,107,893,840 as a result of the division of ordinary shares on the basis of dividing each one (01) ordinary share into ten (10) ordinary shares.

3.4.3.6 Basic earnings per share

Basic earnings per share = Net profit for the year/No.of shares issued

 

2022	2023
5.77	4.29

 

Basic earnings per share shows how much income earned for each of common share outstanding. This value is greater in 2022 than in 2023.

3.4.4 Market Value Ratios

3.4.4.1 Price-earnings ratio

Price-earnings ratio = Market price per share/Earnings per share

2022	2023
14.47	10.47

 

This value is higher in 2022 than in 2023.

3.4.4.2 Dividend yield

Dividend yield = (Annual dividends per share/Market price per share) *100

2022	2023
5.03%	7.02%

 

Dividend yield is higher in 2023 than 2022.

 

3.5 Altman Z-score

A financial indicator called the Z-score is employed in financial statement analysis to evaluate a company's creditworthiness and financial stability. It was created in the 1960s by Dr. Edward Altman and is especially helpful for assessing the danger of bankruptcy. The Z-score algorithm rates a company according to its financial health by taking into account a number of financial ratios.

Z = 1.2X₁ + 1.4X₂ + 3.3X₃ + 0.6X₄ + 0.999X₅

 

X₁ = Working capital/Total assets

X₂ = Retained earnings/Total assets

X₃ = Earnings before interest and taxes/Total assets

X₄ = Market value of equity/Total liabilities

X₅ = Sales/Total assets

 

3.5.1 Z-score for year 2022

Z = 1.2 *0.053 + 1.4*0.479 + 3.3*0.230 + 0.6*1.540 + 0.999*0.444 = 2.861

 

3.5.2 Z-score for year 2023

Z = 1.2*0.040 + 1.4*0.496 + 3.3*0.183 + 0.6*1.556 + 0.999*0.511 = 2.790

According to the above values, we can see that the company in a gray area where further analysis is needed. This z-scores suggest that the company is safe but may face some financial issues.

 

 

 

 

 

 

 

 

 

 

 

4.0 Conclusion

In analyzing the financial statements of Royal Ceramics Lanka PLC for the years 2022 and 2023, several key observations and trends have emerged, providing a comprehensive picture of the company's financial performance and its potential future outlook.

The company’s revenue has increased in year 2023 and this growth can be attributed to increased sales. When considering the profitability for years 2022 and 2023, year 2022 is more successful than year 2023. This improvement may be attributed to reasons such as cost control or operational efficiencies. According to the above liquidity analysis, liquidity position of the company is good in year in 2022 than in year 2023. Royal Ceramics Lanka PLC effectively managed its debt levels, as indicated by a stable debt-to-equity ratio over the two years. This indicates a balanced approach to financing.

The company's market ratios, including the Price-to-Earnings (P/E) ratio is higher in year 2022 and this indicates that investors have confidence in the company's future prospects and are willing to pay a premium for its shares.

According to calculations and analysis, the company is profitable and solvent, although its liquidity and efficiency ratios are not particularly good within the relevant time period. Therefore, the company must pay close attention to its areas of weakness and develop solutions to get out of those areas' difficult situations.

 

 

 

 

 

 

 

 

 

 

References

·         https://www.blogger.com/profile/18361654206049948515. (n.d.). Colombo Stock Market Financial Research. https://finacialsrilanka.blogspot.com/

·         Rocell, Sri Lanka’s leading tile and bathware manufacturer. (n.d.). Rocell. https://rocell.com/en

·         Kenton, W. (2022). Financial Statement Analysis: How it’s done, by statement type. Investopedia.https://www.investopedia.com/terms/f/financial-statement-analysis.asp#:~:text=Financial%20statement%20analysis%20is%20the,financial%20performance%20and%20business%20value.