1.Introduction
This report is prepared with the intension of providing a
comparative analysis of financial performance over 2 years of period from 2022
to 2023 of Kotmale Holings PLC.
By referring Statement of Profit or Loss and Other
Comprehensive Income, Statement of Financial Position, Statement of Changes in
equity, Statements of Cash Flows; financial performance is analyzed under
several criteria as analytical techniques. Those techniques are, horizontal
analysis, vertical analysis, trend analysis, common size analysis and ratio
analysis.
Horizontal analysis helps in identifying trends or changes in
financial performance over time. Such as determining the financial growth or
decline and year to year comparison are the main criteria which can be
determined via horizontal analysis.
Vertical analysis involves expressing each line item on a
financial statement as a percentage of a base item, often total revenue or
total assets. This analysis helps in identifying Composition and comparing
competitors.
Trend analysis focuses on identifying long-term patterns,
tendencies, and shifts in financial data. Through this long-term performance
and predicting future performance are done.
Common Size Analysis is another term for vertical analysis.
It standardizes financial statements to percentages. That makes easier to do a
comparison within statements.
Ratio analysis is done under several financial ratios such as
liquidity, profitability, efficiency, solvency and market ratio. Under
liquidity, ratios like the current ratio and quick ratio helps to determine a
company's ability to meet its short-term obligations. Ratios like net profit
margin, return on assets, and return on equity under profitability, assess a
company's ability to generate profits. Ratios like inventory turnover and
accounts receivable turnover measure how efficiently a company manages its
assets. These ratios belong to efficiency ratios. Under solvency there are
several ratio as debt ratio and equity ratio. Via those, evaluating a company's
ability to meet long-term obligations is done. There are two ratio as price
earnings ratio and dividend ratio under market ratio. That reflect how investors
perceive the company's stock.
All above techniques help to evaluate the company’s financial
health, performance and overall strength. This report provides the financial
performance analysis of Kotmale Holdings PLC with the use of above methods.
2.Introduction to the Organization
Kotmale Holdings PLC is a prominent player in the Sri Lankan
dairy sector. With a strong focus on these industries, the company has
established itself as a key contributor to the dairy value chain within the
country. The company was founded on January 6, 1967 and is headquartered in
Colombo, Sri Lanka. Chairman of the company is
Ranjith Page and the managing director is Saranga Wijesundara.
The company offers UHT milk
and pasteurized milk in plain and flavored variants, swiss and plain cheese,
spiced balls, cheese spreads, and spiced cheeses, milk cream, which is used as
whipped cream in desserts, toppings, and exotic recipes, ice creams in vanilla,
chocolate, strawberry, mango, wild berry, richy rich, and butter pecan flavors,
yoghurt and non-fat yoghurts; and curd primarily for retail and hospitality
sectors.
The company's strong market presence has allowed it to
maintain a prominent position in Sri Lanka's dairy industry. Kotmale Holdings
PLC's commitment to high-quality products, along with a focus on customer
satisfaction, has made it a trusted brand among consumers.
Moreover, Kotmale Holdings PLC is known for its corporate
social responsibility initiatives. These efforts often involve community
development projects and sustainability programs, especially in areas related
to dairy farming. Through these initiatives, the company aims to improve the
livelihoods of local dairy farmers, promote sustainable agricultural practices,
and contribute to the overall well-being of the communities it serves.
2.1 Vision
To be the leading producer of food and beverage products for
the local and international market.
2.2 Mission
Providing the nation with quality and affordable food and
beverage products using state of the art technology and local expertise,
continuously seeking opportunities for growth and creating an environment that
develops, motivates and rewards all employees whilst providing consistent
returns to all its stakeholders.
3.Financial Statement Analysis of Kotmale Holdings PLC
Under this part analysis of financial statements of Kotmale
Holdings PLC is done. Horizontal analysis, trend analysis, vertical analysis
and ratio analysis are the types considered in this section.
3.1 Horizontal Analysis
There are two main types as rupee change and percentage
change.
Rupee Change = Analysis period amount – Base period
amount
Percentage Change = (Rupee Change/ Base period amount) *
100
Table 1 : Horizontal analysis of current assets of financial
position
|
|
2023
Rs.’000 |
2022
Rs.’000 |
Rupee
change |
Percentage
Change |
|||||
|
Current assets
|
|
|
277,283 |
50.40% |
|||||
|
|
|
|
35,056 |
7.19% |
|||||
|
|
|
|
177,354 |
60.93% |
|||||
|
|
|
|
4972 |
15.04% |
|||||
|
|
|
|
26,627 |
61.65% |
|||||
|
|
|
|
461,292 |
35.31% |
Table 2 : Horizontal analysis of financial performance
|
|
2023 Rs.’000 |
2022 Rs.’000 |
Rupee change |
Percentage
Change |
|
|
8,470,935 |
4,341,314
|
4,129,621 |
95.12% |
|
|
Cost of sales
|
(6,457,843)
|
(3,335,624) |
3,122,219 |
93.60% |
|
|
Gross profit
|
2,013,092
|
1,005,690
|
1,007,402 |
100.17% |
|
|
Other income
|
4,329
|
13,252
|
(8923) |
-67.33% |
|
|
Distribution
expenses
|
(724,775)
|
(431,631)
|
293,144 |
67.92% |
|
|
Administrative
expenses
|
(243,880)
|
(177,200)
|
66,680 |
37.63% |
According to the above calculations, followings can be
identified.
Financial Position
When going to 2023 from 2022, asset increase of the
company as below.
Inventories - 50.40%
Trade and other receivables - 7.19%
Amounts due from related companies - 60.93%
Short term investments - 15.04%
Cash and cash equivalents - 61.65%
Total current assets - 35.31%
The company's substantial
increase in inventories by 50.40% reflects a strategic move to stock up on
goods or products for sale or production. This could be driven by several
factors, such as anticipating heightened demand, overproduction that might lead
to inventory management challenges, or taking advantage of favorable market
conditions. It's a clear signal of the company's confidence in its products and
future sales potential.
The 7.19% increase in
trade and other receivables indicates that the company is now owed more money
by its customers and other parties. This could be a result of extending credit
terms to customers, stimulating sales volume, or expanding the customer base.
While it signifies growing sales, it also implies heightened credit risk and
underscores the importance of effective credit management practices.
The remarkable 60.93%
increase in amounts due from related companies signifies the company's
deepening involvement with its affiliated entities. It could be due to growing
intercompany transactions, such as loans or investments, or an increased scope
of business activities with related companies. This points to a complex and
interconnected corporate structure and the potential for both opportunities and
risks within this network.
The 15.04% increase in
short-term investments highlights the company's strategy to generate additional
income from its available cash. It suggests a desire to make the most of its
liquid assets by investing in instruments with relatively short maturities.
This is often part of a broader financial strategy to maximize returns while
maintaining liquidity.
The significant 61.65%
increase in cash and cash equivalents reflects the company's substantial buildup
of liquid assets. This could be due to strong cash flow from operations, a
conservative approach, or the intention to maintain a large cash buffer for
various purposes. It might also signal potential plans for acquisitions or
investments that require significant cash reserves.
In total, the 35.31%
increase in current assets indicates a focused effort to bolster liquidity and
short-term assets. It suggests a strategy that prioritizes short-term liquidity
over other types of investments or long-term commitments. The company is
positioning itself to be well-prepared for different financial scenarios,
emphasizing financial stability and adaptability.
Financial Performance
Moving to 2023 from 2023 financial
performance percentages of each can be summarized as below.
Revenue - 95.12%
Cost of sales - 93.60%
Gross
profit - 100.17%
Other income - -67.33%
Distribution expenses - 67.92%
Administrative expenses - 37.63%
In here there are both increase and
decreases. Only decrease according to the calculated data is other income.
Those are reduced by 67.33% when coming to 2023. The decrease indicates that
there has been a major impact on the company's non-operating income, such as
interest income or returns on investments. This should be investigated and take
the necessary steps to increase the rate.
The 95.12% increase in
revenue is the most striking change in here. This shows the strong and positive
signal for the company’s financial health. Causes for this might be surge in
sales, increased customer demand, expanded market reach or effective marketing
strategies.
Simultaneously, cost of
sales has increased by 93.60% because of the revenue increase. In general,
because of increased production to meet the growing demand is affected to
increase the cost of sales. By doing efficient production management this cost
might be reduced.
Increasing of gross
profit in 100.17% shows the effort which has been put by the company not only to
boost sales but also optimize the cost structure of it. Streamlining production
processes, waste reduction or enhancing effective supply chain can be affected
to increase the rate of gross profit.
Distribution expenses and administrative
expenses are increased by 67.92% and 37.63% respectively. This might be
occurred due to improving customer service, expanding market reach or enhancing
operating capabilities. Also this raises a question about cost management of
the company.
3.2 Trend Analysis
Trend analysis is done using several
historical data. Therefore to do the analysis there should be more data than
two years.
Trend Percentage = (Analysis
Period Amount / Base Period Amount) * 100
3.2.1 Trend Analysis of financial
performance
Under this section revenue and gross profit
of the company are analyzed from 2019 to 2023. 2018 is considering as the base
year for 100%.
Table 3 : Revenue and gross profit of financial performance
(2018-2023)
|
Year |
Revenue
Rs’000 |
Gross
profit Rs’000 |
|
2023 |
8,470,935 |
2,013,092 |
|
2022 |
4,341,314 |
1,005,690 |
|
2021 |
3,269,820 |
734,049 |
|
2020 |
2,892,690 |
672,233 |
|
2019 |
2,545,600 |
619,715 |
|
2018 |
2,317,242 |
585,677 |
Table 4 : Trend
analysis of revenue and gross profit of financial performance
|
Item |
2023 |
2022 |
2021 |
2020 |
2019 |
2018 |
|
Revenue Rs’000 |
365.56% |
187.35% |
141.11% |
124.83% |
109.85% |
100% |
|
Gross
profit Rs’000 |
343.72% |
171.71% |
125.33% |
114.78% |
105.81% |
100% |
In here, revenue and gross profit is
gradually increasing from 2018 to 2021. From 2021 a rapid growth of the revenue
and gross profit can be identified up to 2023. According to the graph, can do
forecast about the company as it will have a healthy financial condition in future.
3.2.2 Trend Analysis of financial
position
Under this section assets and liabilities of the company are analyzed from
2019 to 2023. 2018 is considering as the base year for 100%.
Table 5 : Assets and liabilities of financial position
(2018-2023)
|
Year |
Assets Rs’000 |
Liabilities Rs’000 |
|
2023 |
4,074,644 |
1,880,254 |
|
2022 |
3,212,878 |
1,519,080 |
|
2021 |
2,723,989 |
1,315,089 |
|
2020 |
2,113,046 |
1,018,587 |
|
2019 |
1,482,640 |
536,964 |
|
2018 |
1,250,273 |
461,617 |
Table 6 : Trend analysis of assets and liabilities of
financial position
|
Item |
2023 |
2022 |
2021 |
2020 |
2019 |
2018 |
|
Assets Rs’000 |
325.90% |
256.97% |
217.87% |
169.0% |
118.59% |
100% |
|
Liabilities Rs’000 |
407.32% |
329.08% |
284.89% |
220.66% |
116.32% |
100% |
According to the graph both
assets and liabilities are increasing from 2018 to 2023. Up to 2019 there is a
slow growth and after 2019 a rapid growth can be identified. But liabilities
are more than assets in the company. For this high debt levels, asset
depreciation and poor financial management can be caused.
3.3 Vertical Analysis
This analysis is done for the selected
criteria within a year. Below equation is used to do the vertical analysis.
Common – size percentage =
(Analysis Amount/Base Amount) * 100
In financial performance the base amount
will be the revenue and in financial position it will be the total assets.
To do the analysis 2023 is selected as the
year and base year is 2022.
3.3.1 Vertical analysis of financial
performance
Table 7 : Vertical analysis of financial
performance - 2023
|
|
2023 Rs’000 |
Common
Size Percentage |
|
Revenue |
8,470,935 |
100
% |
|
Cost
of sales
|
(6,457,843)
|
76.24% |
|
Gross
profit |
2,013,092
|
23.76% |
|
Other
income
|
4,329
|
0.05% |
|
Distribution
expenses
|
(724,775)
|
8.56% |
|
Administrative
expenses
|
(243,880)
|
2.88% |
Cost of sales represents a significant
portion of the company's expenses, accounting for 76.24% of the total revenue.
High cost of sales can indicate significant production costs, high material
expenses, or pricing strategies that involve low profit margins.
The gross profit, which is the difference
between total revenue and the cost of sales, affects for 23.76% of the
company's total revenue. This percentage represents the profit made before
considering other operating and administrative expenses. A higher gross profit
margin is generally favorable as it indicates that the company retains a
significant portion of its revenue after covering direct production costs.
Other income is a relatively small
fraction of the total revenue, at just 0.05%. This line item typically includes
non-operating income, such as interest, dividends, or gains from investments.
Distribution expenses account for 8.56% of
the total revenue. These expenses are associated with the costs of delivering
products or services to customers, such as shipping, sales commissions, and
marketing.
Administrative expenses represent 2.88% of
the total revenue. These expenses cover the day-to-day overhead costs of
running the business, such as salaries, rent, and office supplies.
3.3.2 Vertical analysis of financial
position
Table 8 : Vertical analysis of financial
position of current assets – 2023
|
|
2023 Rs’000 |
Common
Size Percentage |
||
|
Total assets |
4,074,644 |
100% |
||
|
Inventories |
827,472 |
20.31% |
||
|
|
|
12.82% |
||
|
|
|
7.61% |
||
|
|
|
0.93% |
||
|
|
|
1.71% |
||
|
Total Non- current
Assets |
2,306,919 |
56.62% |
Inventories account for 20.31% of the
total assets. This suggests that a significant portion of the company's assets
is tied up in goods or products ready for sale or production. Monitoring this
percentage can help assess the efficiency of inventory management and its
impact on liquidity.
Trade and other receivables make up 12.82%
of the total assets. These assets represent amounts owed to the company by its
customers and other parties.
Amounts due from related companies
constitute 7.61% of total assets. This typically represents money owed to the
company by its affiliated entities.
Short-term investments represent a
relatively small fraction of the total assets, at 0.93%. These investments are
highly liquid and can be easily converted into cash. A low percentage suggests
that the company is not heavily reliant on these investments for its asset
base.
Cash and cash equivalents make up 1.71% of
total assets. These are the most liquid assets and include actual cash, bank
deposits, and highly liquid investments. This percentage reflects the company's
available cash for immediate needs and opportunities.
Non-current assets, as a whole, constitute
the majority of the company's assets, at 56.62%. Under non-current asset there
are property, plant, equipment, right of use assets, intangible assets, etc. A
significant proportion of non-current assets suggest a strong capital
investment in the company's future growth and operational capabilities.
3.4 Ratio Analysis (2023)
3.4.1 Liquidity and Efficiency Ratio
Current Ratio
Current Ratio = Current Assets/ Current Liabilities
Acid Test Ratio
Acid Test Ratio = Quick Assets/ Current Liabilities
Accounts Receivable Turnover
Accounts
Receivable Turnover = Revenue/ Average Accounts Receivable
Merchandise
Turnover
Merchandise
Turnover = Cost of goods sold/Average inventory
Day’s
Sales Uncollected
Day’s
Sales Uncollected = (Accounts receivable/Net sales) * 365
Day’s
Sales in Inventory
Day’s
Sales in Inventory = (Ending Inventory/Cost of Sales) * 365
Total
Asset Turnover
Total
Asset Turnover = Revenue/Average total asset
Table
9 : Liquidity & efficiency ratio
|
Ratio |
Amount |
|
Current Ratio |
1.05 : 1 |
|
Acid Test Ratio |
0.56 : 1 |
|
Accounts Receivable
Turnover |
16.77 times |
|
Merchandise Turnover |
9.36 times |
|
Day’s Sales Uncollected |
22.5 days |
|
Day’s Sales in
Inventory |
46.8 days |
|
Total Asset Turnover |
2.32 times |
The current ratio measures a company's
ability to cover its short-term liabilities with its short-term assets. A ratio
of 1.05:1 indicates that the company has slightly more current assets than
current liabilities. It suggests reasonable short-term liquidity, but it's
essential to monitor this ratio, as it's relatively close to 1, indicating a
small margin of safety.
The acid test ratio, also known as the
quick ratio, is a more stringent measure of liquidity that excludes inventory
from current assets. A ratio of 0.56:1 indicates that the company's ability to
meet its short-term liabilities without relying on inventory is relatively
weak. It may suggest challenges in covering immediate obligations.
This ratio reflects how many times the
company collects its accounts receivable in a year. A high accounts receivable
turnover (16.77 times) suggests efficient management of credit and timely
collection of outstanding payments. It's a positive indicator of cash flow
management.
Merchandise turnover measures how quickly
the company sells its inventory. A higher merchandise turnover (9.36 times)
indicates that the company is selling its inventory efficiently, which can help
prevent overstocking and minimize carrying costs.
This ratio provides an estimate of how
long it takes, on average, for the company to collect accounts receivable. A
lower number (22.5 days) suggests that the company typically collects payments
relatively quickly, which is beneficial for cash flow.
This ratio reflects how many days of sales
are tied up in inventory. A lower number (46.8 days) is generally better, as it
indicates that the company is not holding excessive amounts of inventory, which
can tie up capital and increase carrying costs.
This ratio measures how efficiently the
company utilizes its total assets to generate revenue. A higher asset turnover
(2.32 times) implies that the company is effectively utilizing its assets to
generate sales. It's a positive indicator of operational efficiency.
3.4.2 Solvency
Debt Ratio
Debt Ratio = Total
liabilities/Total assets
Equity Ratio
Equity Ratio = Total shareholder’s equity/Total
assets
Time Interest Earned
Time
Interest Earned = Net income before interest expense
& income taxes/Interest
expense
Table
10 : Solvency
|
Ratio
|
Amount |
|
Debt
Ratio |
41.44% |
|
Equity
Ratio |
53.85% |
|
Time
Interest Earned |
4.15
times |
A debt ratio of 41.44% suggests that a
significant portion of the company's assets is financed by debt, and it is
generally considered moderate. It's essential to assess whether this level of
debt is sustainable and whether the company can manage its debt obligations
effectively.
With an equity ratio of 53.85%, over half
of the company's assets are funded by equity. This indicates a relatively
strong equity position, which can provide a buffer against financial risks and
serve as a source of stability for the company.
A time interest earned ratio of 4.15 times
suggests that the company's operating income is sufficient to cover its
interest expenses 4.15 times over. This indicates a reasonable capacity to meet
its interest obligations.
3.4.3 Profitability
Profit Margin
Profit Margin = Net income/ Net sales
Gross Margin
Gross Margin = (Net sales – Cost of sales)/ Net sales
Return on Total Assets
Return on Total Assets = Net income / Average total assets
Return
on Common Shareholder’s Equity
Return
on Common Shareholder’s Equity = (Net income- Preferred dividends)/
Average shareholder’s equity
Book
Value per Common Share
Book
Value per Common Share = Shareholder’s equity applicable to
common shares/Number of common shares outstanding
Basic
Earnings per Share
Basic
Earnings per Share = (Net income- Preferred
dividends)/Weighted average common shares outstanding
Table
11 : Profitability Ratio
|
Ratio |
Amount |
|
Profit
Margin |
9.01% |
|
Gross
Margin |
23.76% |
|
Return
on Total Assets |
15.97% |
|
Return
on Common Shareholder’s Equity |
29.93% |
|
Book
Value per Common Share |
Rs.
69.88 |
|
Basic
Earnings per Share |
Rs.
18.53 |
With a profit margin of 9.01%, it
indicates that the company retains 9.01% of its revenue as profit after
covering all expenses. This margin reflects the company's efficiency in
managing costs and generating profit.
A gross margin of 23.76% suggests that the
company is able to retain 23.76% of its revenue as gross profit before
accounting for other operating costs. It signifies the profitability of the
company's products or services.
A return on total assets of 15.97%
indicates that the company earns a 15.97% return on its assets, which reflects
its operational efficiency and asset utilization.
A return on common shareholder's equity of
29.93% implies that common shareholders receive a 29.93% return on their equity
investment. This indicates a strong return for common shareholders and is a
positive sign of the company's ability to generate value for its investors.
In this case, it's Rs. 69.88 per common
share, indicating the theoretical value of a common share based on the
company's balance sheet. This value is used for assessing the company's
financial health and the potential value to shareholders if the company were to
be liquidated.
Earnings per share ( Rs. 18.53) indicates
the company's net earnings allocated to each common share. It reflects the
company's ability to generate profit on a per-share basis.
3.4.4 Market Ratio
Price Earnings Ratio
Price Earnings Ratio = Market
price per share/Earnings per share
Dividend Yield
Dividend Yield = Annual
dividends per share/Market price per share
Table
12 : Market ratio
|
Ratio |
Amount |
|
Price
Earnings Ratio |
1
time |
|
Dividend
Yield |
- |
A Price-Earnings Ratio (P/E ratio) of 1
time is an unusually low figure and warrants a close examination. The P/E ratio
typically reflects the market's valuation of a company's stock, and a P/E of 1
suggests that the market values the company at a level equal to its earnings
per share (EPS).
Annual dividend per share is not given in
the annual report. Therefore that cannot be calculated.
4. Z score Calculation
This is a model regarding ability to pay debts.
It assesses the financial health and likelihood of bankruptcy of a company.
Accuracy level of this is nearly 95%. If the score is greater than 2.99 it is
in the safe zone. If the score is in between 2.99 and 1.8 it is in grey zone if
not, in distress zone which is less than 1.8.
To do the calculations followings are
required.
X1 = working capital/total assets
X2 = retained earnings/total assets
X3 = earnings before interest &
taxes/total assets
X4 =
market value of equity/total
liabilities
X5 = sales/total assets
The main equation to calculate the Z Score
is given below.
Z =1.2X1
+ 1.4X2 +3.3X3 + 0.6X4 + 0.999X5
Below are the calculated amounts of X
values.
Table 13 : X values
|
X
value |
2022 |
2023 |
|
X1 |
-0.02 |
0.02 |
|
X2 |
0.53 |
0.39 |
|
X3 |
0.11 |
0.20 |
|
X4 |
1.12 |
1.17 |
|
X5 |
1.35 |
2.08 |
Table 14 : Z Score of Kotmale Holdings PLC
(2022 and 2023)
|
Year |
Z
Score |
Condition |
|
2022 |
3.10 |
Safe
Zone |
|
2023 |
4.00 |
Safe
Zone |
In both years company is in safe zone. It
indicates very low risk of financial distress or bankruptcy. Moving to 2023
from 2022 z score is increased from 3.10 to 4. It is a positive
sign about the company’s financial
position improvement. This could be due to various factors such as increased
profitability, reduced debt, improved asset management, or other positive
financial developments.
5. Conclusion
When considering overall financial health, Kotmale Holdings
PLC shows a great stability, strength
and precarious financial position based on the analysis of its financial
statements. Profit generating ability of the company is higher and it is a good
indicator of the financial performance of it. According to the analysis of
trend, in future company will gain more profit and can identify a rapid growth
of the profit.
Because of the current ratio is close to 1
it should essential to monitor further. Because, it indicates a small margin of
safety. Also this company has significantly high debt ratio because of the more
liabilities than assets and they have to focus on that and take necessary steps
to reduce that ratio. Also, time interest earned ratio of 4.15 times and high
ratio is typically preferred, as it provides a larger margin of safety for the
company to handle interest payments.
Cost of this company is a little bit
higher. Through the effective cost management this can be reduced. Company's
non-operating income , such as interest income or returns on investments are
reduced in significant amount and that also should be considered.
Apart from that all most all the things
are performed well in this company. It has high z scores in both years,
therefore this company will not be bankrupt easily. So that, this is a best company
to invest who are willing to invest in a company.
6. References
www.emis.com. (n.d.). Kotmale Holdings Plc Company
Profile - Sri Lanka | Financials & Key Executives | EMIS. [online]
Available at: https://www.emis.com/php/company-profile/LK/Kotmale_Holdings_Plc_en_2314015.html.
Https://finacialsrilanka.blogspot.com (2023). Financial
Statements analysis of Ceylon Cold Stores PLC. [online] Colombo Stock
Market Financial Research. Available at: https://finacialsrilanka.blogspot.com/search?q=financial+performance+analysis
[Accessed 21 Oct. 2023].
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