Analyzing Financial Statements Kelani Tyres PLC

 

Introduction

Financial statement analysis is the process of examining a company’s performance in the context of its industry and economic environment in order to arrive at a decision or recommendation. Often, the decisions and recommendations addressed by financial analysts pertain to providing capital to companies-specifically, whether to invest in the company’s debt or equity securities and at what price. An investor in debt securities is concerned about the company’s ability to pay interest and to repay the principal lent. An investor in equity securities is an owner with a residual interest in the company and is concerned about the company’s ability pay dividends and the likelihood that its share price will increase.

Overall, a central focus of financial statement analysis is evaluating the company’s ability to earn a return on its capital that is at least equal to the cost of the capital, to profitably grow its operations, and to generate enough cash to meet obligations and pursue opportunities. 

 

 

Background of the company

Kelani Tyres PLC is engaged in the business of importation and sale of tyres in addition to holding investments in its subsidiary and joint ventures (JV), as well as earning rental income from investment property. The company’s segments are local sales of tyres, vehicle hiring income and investments. The company’s JV Company, CEAT kelani Holdings (Private) Limited (CKH), is engaged in the manufacturer of automobile tyresnfor the purpose of local sales and exports. In addition, the JV imports and sell tyres of certain sizes. CKH is involved in the Motorcycle, Truck/Bus, three wheeler, Agricultural and passenger Car/Van sectors. CKH’s manufacturing facilities are located at their factories at Nagoda, Kalutara district and Kelaniy, Gampaha district. Executive Cars (Private) Limited is the subsidiary of the company.

 

 

 

Financial Statement of Kelani tyres

Financial statement analysis is a method of assessing a company's past, present, and expected results. Horizontal analysis, which contrasts two or more years of financial data in both dollar and percentage form, is one of the most common techniques used in financial statement analysis. Vertical analysis, in which each balance sheet account is interpreted as a percentage of the overall account; and ratio analysis, in which statistical correlations between data are measured.

The use of different types of ratios is the second approach for evaluating financial statements. We use ratios to find out how large one number is in comparison to another. After measuring a ratio, we can equate it to a similar ratio measured for a previous time or one based on an industry average to see if the business is performing as expected.

Horizontal Analysis

Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period with information from other periods. Trends or changes are measured by comparing the current year’s values against those of the base year. The goal is to determine any increase or decline in specific values that has taken place. A percentage or an absolute comparison may be used in horizontal analysis.

In considering the Kelani tyres the historical analysis as shown in the following table.

Dollar change=Analysis period amount- Based period Amount

Percentage change=Dollar change/Based period amount *100

Base year - 2014

 

Assets	2015	2016	2017	2018	2019
Property, plant and equipment	9.97	-19.06	-42.8	1.94	20.4
Investment property	-1.83	17.09	-0.27	6.82	37.38
Intangible assets	-12.8	-25.38	-34.69	-51.56	-62.3
Deferred income tax assets	-0.21	-1.83	-9.01	-81.53	-32.3
Investment in joint venture	28.32	-	-	100	100
Trade and other receivables	122	110.57	54.79	51.82	25.75
Cash and cash equivalents	145	145.86	695.60	-70.4	10.19
Total assets	37.28	35.86	74.85	78.09	-25.03
Liabilities
Borrowings	134.92	-35.55	-39.99	-66.65	100
Defined benefit obligations	100.31	-7.54	-24.6	142.28	11.1
Trade and other payables	25.49	57.87	22.88	159.73	282.95
Borrowings	481.43	519.3	-3.18	42.87	40.47
Total liabilities	379.21	131.85	54.8	36.79	-3.81
Equity
Stated capital	100	100	100	100	100
Revaluation reserve	100	100	100	100	100
Retained earnings	35.01	41.98	162.41	17.74	-30.39
Total equity	31.43	13.92	79.44	-12.69	113.18
Total equity and liabilities	37.28	-2.84	74.85	-11.07	-15.70

 

The horizontal analysis shows that the significant increase of property plant and equipment from 2017 to 2019. However it recorded a negative amounts in 2016 and 2017. In considering investment property recorded negative amount in 2015 and 2017. However it is increase in 2018 and drastically increases in 2019. Intangible assets and deferred income tax assets are decreasing gradually compared with the base period.

In considering the Investment in joint venture it shows the significant increasing in 2018 to 2019. In 2016 and 2017 there were no amount in Investment in joint ventures. It recorded high amounts in 2018 and 2019. Trade and other receivables are highly fluctuated and throughout the period and it recorded the positive value throughout the period. Cash and cash equivalents are increasing from 2015 to 2017 and recorded a negative value in 2018. Total assets are increasing from 2015 to 2018 which is a good sign for the company and indicates a negative value in 2019. Borrowings are decreasing from 2015 to 2018 and recorded a drastic increase in 2019.

Then it is needed to analysis the nature of the liabilities throughout the period. It shows that borrowing decrease in a large amount (from 134.92 to -66.95) compared with the base year and again increase only in 2019. Defined benefit obligations are negative in 2016 and 2017 and is highest in 2018. Trade and other payable plays a significant increase during the study period. It is a sharp increase from 2015 to 2019. However the overall figure show that total liability decrease gradually from 2015 to 2019 compared with the base year.

 

Trend Analysis

Trend analysis is the process of computing business data over time to identify any consistent results or trends. Trend analysis helps to understand how the business has performed and predict where current business operations and practices. It will give the ideas about how Trend analysis to help improve business by:

·         Identifying areas where your business is performing well

·         Identifying areas where the business is underperforming

·         Providing evidence to decision making.

Trend Period = Analysis period amount / Base period amount*100

Assets	2014	2015	2016	2017	2018	2019
Property, plant and equipment	102.3	109.5	1193.2	112.8	126.7	139.1
Investment property	125.9	111.6	53.9	53.9	31.8	31.8
Intangible assets	101.2	63.8	408.4	10.32	173.3	210.4
Deferred income tax assets	109.3	71.6	62.5	125.9	12.8	49.5
Investment in joint venture	106.8	52.7	85.9	85.9	89.3	127.9
Trade and other receivables	105.3	61.13	3.76	10.34	2.81	8.91
Cash and cash equivalents	103.6	118.9	141.8	172.7	156.9	186.9
Total assets	107.6	123.8	134.7	148.9	162.5	189.7
Liabilities
Borrowings	109.7	152.9	259.6	198.7	2.98	3.06
Defined benefit obligations	123.9	528.8	518.9	204.8	318.6	702.9
Trade and other payables	103.6	85.9	146.9	965.9	973.5	954.9
Borrowings	111.8	154.5	261.6	201.8	4.92	5.28
Total liabilities	125.9	148.4	159.1	171.8	183.7	210.8
Equity
Stated capital	109.89	109.89	193.8	192.94	199.5	199.5
Revaluation reserve	100	131.8	116.7	137.9	69.7	77.77
Retained earnings	100	111.9	124.8	141.7	167.9	182.9
Total equity	93.8	118.9	169.5	183.8	215.5	247.9
Total equity and liabilities	97.5	128.6	141.7	132.8	175.5	198.5

Trend Analysis – Assets

The following figures show the behavior of the assets throughout of the study period. Property, plant and equipment shows the normal pattern increase from 2014 to 2106, decrease in 2017 and again increase in 2018 and 2019. Investment property is gradually decrease from 2014 to 2019. The highest intangible assets record in 2016 and significant decrease shows in 2017. Investment in joint ventures also recorded the normal pattern throughout the period.

Trade and other receivables decrease from 2014 to 2016 and increase in 2017 and again decrease in 2018. Cash and cash equivalents increases throughout the study period. In considering the total assets it recorded the increment throughout the period.  

 

 

 

Trend Analysis – Liabilities

In considering the long term borrowings it increases slightly from 2014 to 2016 and then decrease from 2017 to 2019. Defined benefit obligation is increase considerably in 2015 and 2016, decrease in 2017 and 2018 and then again significantly increase in 2019.

It is a remarkable increase in Trade and other payables during the period from 2017 to 2019. Figure shows that 965.9 increase compared with the base year. The total liability figure shows that slight increase during the study period.

 

 

 

 

Trend Analysis – Income statement

	2014	2015	2016	2017	2018	2019
Operating income	94.7	118.6	107.6	118.9	121.9	147.9
Operating Expenses	147.9	147.9	99.7	85.5	83.8	79.5
Profit before Taxation	101.5	224.8	182.8	438.9	447.2	657.9
Tax	104.3	223.8	271.9	419.9	511.3	698.7
Net profit	110.6	228.9	132.7	389.4	431.7	589.5

 

 

According to the above figure it is clear that operating income is increase from 2014 to 2019 while operating expense decrease. Profit before taxation decrease in 2015 and increase from 2016 to 2019. In considering the net profit it shows that slightly decrease in 2016 and then increase from 2017 to 2019.

 

 

 

 

 

Vertical Analysis

Vertical analysis is an accounting tool that enables proportional analysis of documents, such as financial statements. While performing a vertical analysis, every line item on a financial statement is entered as a percentage of another item. For example, on an income statement, every line item is stated in terms of the percentage of gross sales.  

The most common use of vertical analysis is within a financial statement for a single time period, so that one can see the relative proportions of account balances. Vertical analysis also useful for timeline analysis, to see relative changes in accounts over time, such as on a comparative basis over a five-year period.

The usual denominator is the asset total, but one can also use the total of all liabilities when calculating all liability line item percentages, and the total of all equity accounts when calculating all equity line item percentages.

 

Common size percent=Analysis amount/ Base amount*100

Vertical Analysis- Base year 2014

 

 

Assets	2015	2016	2017	2018	2019
Property, plant and equipment	5.76	4.47	5.25	4.04	4.16
Investment property	18.45	12.46	13.22	0	0
Intangible assets	6.01	6.62	5.28	5.84	4.89
Deferred income tax assets	0.4	0.35	0.53	0.004	0.043
Investment in joint venture	1.72	1.74	1.46	1.73	1.44
Trade and other receivables	0.52	0.004	0.8	0.006	0.032
Cash and cash equivalents	5.76	5.25	4.65	4.60	4.41
Total assets	100	100	100	100	100
Liabilities
Borrowings	2.34	3.84	2.89	0.004	0.004
Defined benefit obligations	0.03	0.054	0.17	0.20	0.09
Trade and other payables	0.003	0.004	0.18	0.15	0.078
Borrowings	3.89	2.01	0.68	0.35	4.28
Total liabilities	100	100	100	100	100
Equity
Stated capital	43.04	55.65	51.79	45.83	41.34
Revaluation reserve	5.76	4.16	4.45	4.87	5.54
Retained earnings	59.39	39.69	43.98	24.87	24.65
Total equity	100	100	100	100	100
Total equity and liabilities

 

In considering the Property, plant and equipment vertical analysis the Property, plant and equipment represent the 5.76 from the total assets. But it shows a slightly decrease in 2015, 2016 and 2017 compared with 2014. Investment property decrease from 2014 to 2016. But in 2018 to 2019 it reported the zero value. Investment in joint venture shows the normal pattern increase in 2015 and 2106, decrease in 2017 and again increase in 2018 and 2019. It is remarkable issue is the percentage of Trade and other receivables from the total asset is very low amount. It is considerably low. It is not good for the long run of the company.

 

Borrowings represent 2.34 in and it increase to 3.84 in 2016 and again decrease from 2017 to 2019. Defined benefit obligations increase from 2015 to 2018 and decrease in 2019. Trade and other payables is quite low amount compared with the other liability. Short term Borrowings decreasing throughout the period however it is increase in 2019.

 

In considering the stated capital represents the 43.04% of the total equity while revaluation reserves represented 5.76% from the total equity. However the reserves value decreasing from 2015 to 2018 and increase in 2019.

 

According to the above analysis it shows that the company should maintain the good percentage of trade and other receivables from the total assets. The payable amount is quite low it is good remark of the company.

 

 

Ratio Analysis

·         Debt Ratio

Total liabilities/ Total Assets

This ratio measures what portion of a company’s assets is contributed by creditors. The debt ratio is defined as the ratio of total debt to total assets, expressed in percentage, and can be interpreted as the proportion of a company’s assets that are financed by debt.

In considering the Kelani tyres the debt ratio for the years as follows

 

	2015	2016	2017	2018	2019
Debt ratio	88	84.51	84.72	84.89	86.73

 

The above results show that the debt ratio is very high in Kelani tyres throughout the study period. The higher this ratio, the more leveraged the company and the greater its financial risk.

 

 

• Equity Ratio

 

The equity ratio is a financial ratio indicating the relative proportion of equity used to finance a company's assets.

Equity Ratio= Total Shareholders’ Equity/ Total Assets

Equity Ratio is a good indicator of the level of leverage used by a company. The Equity ratio measures the proportion of the total assets that are financed by stockholders and not creditors. A low equity ratio will produce good results for stockholders as long as the company earns a rate of return on assets that is greater than the interest rate paid to creditor.

	2015	2016	2017	2018	2019
Equity ratio	11.60	13.11	13.23	13.45	10.87

 

 

 

 

In considering the study period in 2015 it shows 11.60 but it gradually increases. However it is again dropped to 10.87 in 2019.

In general, higher equity ratios are typically favorable for companies. But in Kelani tyres it is low. It is not favorable to the company. Because higher investment levels by shareholders shows potential shareholders that the company is worth investing in since so many investors are willing to finance the company. A higher ratio also shows potential creditors that the company is more sustainable and less risky to lend future loans. However considering the low ratio investors are not willing to invest the company.

 

• Cost to income ratio

 

Operating cost/Operating income

The cost-to-income ratio shows the efficiency of a firm in minimizing costs while increasing profits.

	2015	2016	2017	2018	2019
Cost to income ratio	66.96	80.20	65.13	60.95	55.73

 

 

 

 

The cost to income ratio of Kelani tyres throughout the study period is shown above. The lower the cost-to-income ratio, the more efficient the firm is running. The higher the ratio, the less efficient management is at reducing costs. So that it is obvious that the ratio is higher trough out the period. However it is slight decrease in 2019 compared with the 2015 and 2016.

 

• Return on Equity

 

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

 

 

	2015	2016	2017	2018	2019
ROE	11.54	8.88	3.34	9.24	9.94

 

In considering the above situation the ROE of the Kelani tyres decrease in 2016 then it increase from 2017 to 2019. The ROE allows an investor to determine the change in profitability over the period.

 

 

 

 

• Price Earnings Ratio

 

	2015	2016	2017	2018	2019
Price Earnings Ratio	11.56	10.75	12.98	23.65	28.43

 

In considering the price earnings ratio of Kelani tyres, P/E ratio decreasing from 2015. It decrease at 10.75 in 2016. It is slightly increase in 2017.  If company has a P/E higher than the market or industry average, this means that the market is expecting big things over the next few months or years. A company with a high P/E ratio will eventually have to live up to the high rating by substantially increasing its earnings, or the stock price will need to drop.

 

 

 

 

 

·        Earnings per share

Earnings per share, also called net income per share, is a market prospect ratio that measures the amount of net income earned per share of stock outstanding. In other words, this is the amount of money each share of stock would receive if all of the profits were distributed to the outstanding shares at the end of the year.

The EPS of Kelani tyres throughout the study period is as follows.

 

	2015	2016	2017	2018	2019
Earnings per ratio	5.38	3.01	7.02	7.46	10

 

 

 

 

Earnings per share is the same as any profitability or market prospect ratio. Higher earnings per share is always better than a lower ratio because this means the company is more profitable and the company has more profits to distribute to its shareholders. In considering Kelani tyres EPS, increase from 2017 to 2018 takes place. However it is decrease in 2016 due to some problem faced by the company.

Many investors don't pay much attention to the EPS, a higher earnings per share ratio often makes the stock price of a company rise. Since so many things can manipulate this ratio, investors tend to look at it but don't let it influence their decisions based only EPS of the company.

 

 

Conclusion

Sri Lankan economic growth has been one of the fastest in the Asian region exceeding its south Asian peers. CEAT’s ramping up of production of truck and bus tyres since the start of the pandemic-linked lockdown has resulted in the Company now producing 100 per cent of the segment’s requirements and enabled the government to make a saving of Rs 11 billion a year in foreign exchange. The Company has also achieved an 85 per cent increase in the production of tyres for the ‘two-wheeler’ segment over the past three months; enabling a further saving of Rs 350 million a year through import substitution.

CEAT Kelani can currently produce two million tyres annually across multiple categories, and an addition of a further 200,000 Car and Van Radial tyres is imminent with new machinery being installed, pending the arrival of foreign technologists to commission the additional capacity.

Notably, CEAT Kelani Holdings has kept the prices of its tyres unchanged since December 2019 to support customers and the economy, despite the additional investments made in increasing capacity and an increase in market prices due to demand.

After 2015 the Kelani tyres recorded good performance and maintain the stable growth momentum. In considering the account of the improvement EPS rose from 5 to 10 in 2019. It is a considerable improvement. The total revenue and net interest income is considerable increase in the study period. Total revenue increases 223 million from 2015 to 527 million in 2019.However operating income is little bit increase in 2019 compared with the 2019.