.0
Introduction
Interpretation and analysis of the
financial statements is the process of arranging, examining and comparing the
results in order that users are equipped to make such decisions. Financial
statement analysis is the investigation of a company's financial statements for
the purpose of decision-making. External stakeholders use it to assess an
organization's overall status as well as financial performance and
business value. The financial accounts of an organization contain critical
financial information about every facet of the business's operations. They can
thus be evaluated based on their historical, current, and prospective
performance.
The balance sheet, income statement,
and cash flow statement are used by businesses to manage their operations and
to give transparency to their stakeholders. All three statements are
interrelated and provide distinct perspectives on a business's operations and
performance.
Financial statement analysis is used
to determine the performance or value of a business by examining the balance
sheet, income statement, or statement of cash flows. Investors can construct a
more nuanced view of a company's financial profile by utilizing a variety of
methodologies such as horizontal, vertical, or ratio analysis. Internal
components use it as a financial monitoring tool. There are four building
blocks in analyzing the financial statement. Such as solvency, liquidity and
efficiency, profitability and market.
2.0
Introduction of the Company
Dilmah is a world-famous Sri Lankan
family-owned tea firm with an unmatched reputation for creating authentic,
natural, and ethical Sri Lankan tea of the highest quality. In 1988, the
Company pioneered the notion of Single Origin Tea, delivering tea that was 'picked,
perfected, and packed' in Sri Lanka, reclaiming power for Sri Lankan tea
growers and customers worldwide. As the world's first producer-owned tea brand,
Dilmah is the only completely vertically integrated tea firm, owning stakes in
several of Sri Lanka's finest tea gardens, factories, printing and packaging
facilities. Dilmah products are available in over a hundred countries and are
distributed through a global distribution network.
The Company has remained faithful to its
Founder, Merrill J. Fernando's vision of business as a matter of human service
and recognizes that its most precious asset is its people. The Company's
dedication to sustainability is evident in its fundamental pillars of Taste,
Goodness, and Purpose, which balance commercial success, environmental
preservation, and social responsibility. Each year, a large amount of the
Group's income is donated to Dilmah Conservation and the MJF Charitable
Foundation to assist their humanitarian and environmental activities. DCTC is
87 percent controlled by the MJF Group of enterprises, which includes MJF Teas
(Pvt) Ltd. and MJF Exports (Pvt) Ltd.
3. Financial Statement Analysis of DILMAH
CEYLON TEA COMPANY PLC
The following statement taken from
their official website and the company’s financial year ends at 31st
march.
3.1 Horizontal Analysis
Horizontal analysis is a type of
financial statement analysis that examines historical data throughout many
accounting periods, such as ratios or line items. Horizontal analysis can be
done with absolute or percentage comparisons, with each subsequent period's
values expressed as a percentage of the baseline year's value, with the
baseline value set to 100%. This is commonly referred to as baseline analysis.
Table : 1
3.2 Vertical Analysis
Vertical analysis is a type of ratio
analysis in which each line item in a financial statement is expressed as a
percentage of another line item. This means that on an income statement, each
line item is expressed as a percentage of gross sales, whereas on a balance
sheet, each line item is expressed as a percentage of total assets.
Vertical analysis is most typically
utilized inside a single reporting period's financial statement to illustrate
the relative proportions of account balances. Vertical analysis is especially
advantageous for trend analysis, which enables the assessment of account
changes over time, such as on a five-year comparative basis.
3.3 Ratio Analysis
3.3.1 Liquidity and efficiency ratio
Liquidity ratio mainly used to
determine the ability of the company to pay its short tem debt.
There are several ratios can be used
to determine the liquidity of the company.
3.3.1.1
Working Capital
Working
Capital = Current Assets – Current Liabilities
Table : 2
Graph : 1
Over the
years the working capital seems to be increasing after 2018. Increasing working
capital is a good sign for the increasing efficiency of a company. A high
working capital ratio indicates that a business is prudently managed and also
indicates that it has the potential for rapid growth.
3.3.1.2
Current ratio
The current ratio is used to compare
a company's current assets and current liabilities.
Current Ratio = Current Assets /
Current Liabilities
Table : 3
Graph : 2
A value greater than one implies that
current assets exceed current liabilities. This indicates us to which extent
the entity is able to meet its current liabilities as they fall due. Dilmah PLC
having a ratio greater than 1 which means they have enough current assets to
pay off their current liabilities. On average they are maintaining their
current ratio in a good level. From 2017 to 2019 there’s a increase in the
current ratio and in 2020 a dramatic drop in the current ratio and again a increase
in the ratio. The significant drop in 2020 is mainly due to the short term
borrowing of 1,895,000
Mn in the year.
3.3.1.3
Acid Ratio / Quick ratio
This compares the current assets,
excluding inventory, to current liabilities. The quick ratio gives a better
indicator of the liquidity if the inventory of an entity is difficult to
realize into cash
Acid Ratio = (Current Assets –
Inventory) / Current Liabilities
Table : 4
Graph : 3
Dilmah PLC having a ratio greater than
1 which means they have enough current assets excluding inventories to pay off
their current liabilities. On average they are maintaining their acid ratio in
a good level. From 2017 to 2019 there’s an increase in the acid ratio and in
2020 a dramatic drop in the acid ratio and again an increase in the ratio. The
significant drop in 2020 is mainly due to the short term borrowing of 1,895,000 Mn in the year.
3.3.1.4
Accounts Receivable Turnover
This ratio indicates how frequently a
business converts receivables to cash each year.
Accounts receivable Turnover = Sales
on Account / Average Accounts Receivable
Table : 5
Graph : 4
During the last 5 years account
receivable turnover ratio kept around 2.5. but a considerable drop occurs in
the year of 2021. This is primarily due to a decline in revenue. Several
reasons may affect the revenue reduction, but COVID 19 pandemic could have
played a major role in this. This reason seems acceptable as it affected every
business across the globe.
3.3.1.5
Merchandise turnover
This ratio indicates the frequency
with which merchandise is sold and replaced during the year.
Merchandise turnover = Cost of goods
sold / Average Inventory
Table : 6
Graph : 5
During the last 5 years merchandise turnover ratio kept around 5.0. But
a considerable drop occurs in the year of 2021. This is primarily as a result
of the rise in inventories. The increase in the inventory may be due to lack of
budgeting where the COVID 19 may not take into account.
3.3.1.6 Days
Sales Uncollected
Days Sales Uncollected = (Accounts receivable
/ Net Sales) * 365
Graph : 6
The Days Sales Uncollected decrease along the
years from 2017 to 2019 and then gradually increase till 2021. This tells when
companies receive cash from its creditors. The increasing trend of the Days
Sales Uncollected is not favourable for the company.
3.3.1.7 Days
Sales in inventory
Days Sales in inventory = (Ending Inventory /
Cost of sales) * 365
Table : 8
Graph : 7
The days sales in Inventory is slightly steady
in the 2017 and 2018 and then suddenly decreases in the year 2019, gradually
rising thereafter till 2021. This shows how many days the sales inventory of a
company will last. Increasing trend is not good for a company as it shows less
sales happened.
3.3.1.8 Total
Asset Turnover
This ratio indicates the efficiency with which assets generate revenue.
Total Asset Turnover = Revenue / Average Total Asset
Table : 9
Graph : 8
During the last 5 years total asset
turnover ratio kept around 0.7. but a considerable drop occurs in the year of
2021. This is primarily due to a decline in revenue. Several reasons may affect
the revenue reduction but COVID 19 pandemic could have played a major role in
this. This reason seems acceptable as it affected the every business across the
globe.
3.3.2 Solvency Ratios
3.3.2.1 Debt ratio
Debt Ratio = Total Liabilities / Total Assets
Table : 10
Graph : 9
The debit ratio is showing a sharp
decrease from 2017 to 2018 and then showing a zig zag movement till 2021. It is
an expression of the relationship between a company's total debt and its
assets. The decreasing debit ratio is a good sign for the financial situation
of the company which means that a larger part of the company’s assets are
financed by equity.
3.3.2.2 Equity Ratio
Equity Ratio = Total Shareholders’ equity / Total Assets
Table : 11
Graph : 10
The shareholder equity ratio
indicates how much of a company's assets are supported through stock issuance
rather than debt. As this ratio is closer to 100% as an overall over the period
even though there are variations, the it means that more assets of the company
are financed with stock rather than debt. This shows a stable financial level
in the long run.
3.3.2.3 Times Interest Earned
Times Interest Earned = Net Income before Interest expense and Income
taxes / Interest expenses
Table : 12
Graph : 11
Only in the year 2019, the company
shows a high ratio which implies the company is able to meet obligations
because earnings are significantly greater than annual interest obligations. In
the other years, the ratio is really low which implies that fewer earnings are
available to meet interest payments.
3.3.3 Profitability Ratios
3.3.3.1 Profit margin
Profit Margin = (Net Income / Net Sales) * 100
Table : 13
Graph : 12
The profit margin ratio is a measure of what percentage of sales is made
up of net income. This company’s profit margin gradually increases over the
years.
3.3.3.2 Gross Margin
Gross Margin = (Gross profit / Revenue) * 100
Table : 14
Graph : 13
The Gross margin is decreasing from
2017 to 2018 and then shows a significant increase till 2020, then a sharp
decrease from 2020 to 2021. This ratio tends to be more or less constant from
one year to the next within an entity. Even if there is an increase in the
direct cost an efficicent entity could be expected to pass on the increases in
the form of increased sales prices. However this may not be the case in
reality.
In order to comprehend variations in the gross profit margin, a detailed
breakdown is required. In a perfect world, the analyst would need data on
opening and closing inventories, purchases, direct wages, and overheads. In
order to completely evaluate gross profit margin, more information on the
following items is required.-breakdown by product geographically
-inventory valuation policies
-overhead allocation mentod
-purchasing details such as bilk discount,purchasing errors, wastage
-selling price of different products over the period.
Obviouslsy much of this information
is not available from an entity’s annual report. Dilmah also didn’t report
these information in their annual report. Therefore cannot come to a conclusion
with the information provided in the annual report.
3.3.3.3 Return on total assets
Return on total assets = Net Income / Average Total Assets
Table : 15
Graph : 14
The Return on Total Assets ratio increases over the years from 2017 to
2019, then decreases in the year 2020 and again increase in the year 2021.
This ratio depicts the asset's
productivity in terms of generating sales. It's worth noting that this ratio isn't
always accurate and useful. The ratio is likely to be high if a company is
employing assets that are towards the end of their useful lives and have been
exposed to annual depreciation charges for a long time. Similarly, asset
valuations are likely to be low when a company adopts the historical cost
convention, which is unaffected by revaluation, an effect that becomes more
pronounced as the assets age. In labor-intensive businesses with a small
noncurrent asset base, the ratio is often meaningless.
3.3.3.4 Return on Common shareholders’ Equity
Return on Common Shareholders Equity = (Net Income – Preferred Dividends)
/ Average Shareholders’ Equity
Table : 16
Graph : 15
The return on Common Shareholders’ Equity gradually increases over the
years from 2017 to 2019, decreases in 2020 and maintains approximately at the
same level in 2021.
3.3.3.5 Book Value Per Common Share
Book Value Per Common Share = Total Equity / Number of Shares
Table : 17
Graph : 16
The books value per common share is
highest at 2017 and then suddenly decreases significantly in 2018, then
slightly increasing from 2018 to 2021.
3.3.3.6 Basic Earnings per share
Investors can see how much of a
company's net income was allocated to each share of common stock using basic
earnings per share (EPS). It appears on a company's income statement and is
particularly useful for companies with solely common stock as a capital
structure.
Basic Earnings per share = Net profit for the year / Number of shares
Table : 18
Graph : 17
Basic earnings per share is the highest in the year 2017 and then suddenly
decreases slightly towards 2021.
3.3.4 Market ratios
3.3.4.1 Price Earnings Ratio
The price-to-earnings ratio (P/E
ratio) is a valuation ratio that compares a company's current share price to
its earnings per share (EPS). The price-to-earnings ratio, also known as the
price multiple or the earnings multiple, is a ratio that compares the price of
a stock to its earnings.
Price Earnings Ratio = Market Price per Share / Earnings per Share
Table : 19
Graph : 18
Price Earnings Ratio is the Lowest in 2017 and then significantly
increases to 2018 and then shows a gradual deceases till 2020 and increase at
2021.
3.3.4.2 Dividend Yield
The dividend yield is a financial ratio (dividend/price) that shows how
much a company pays out in dividends each year as a percentage of its stock
price.
Dividend Yield = Annual Dividends per share / Market price per share
Table : 20
Graph : 19
The Dividend Yield shows a Zigzag movement over the years, while showing
an overall decreasing movement from 2018 to 2021
3.3.5 Z-score Test
Investors compute and analyze a
variety of financial parameters, including working capital, profitability, debt
levels, and liquidity, to discover any indicators of impending bankruptcy. The
problem is that each ratio is different and conveys a different picture about
the financial health of a company. They can even appear to be contradicting
each other at times. Whether an investor is forced to rely on a slew of
different ratios, it can be complicated and difficult to determine when a stock
is about to crash. I introducing the Z-score formula is an
attempt to overcome this problem. Instead of looking for a single optimal
ratio, Altman created a model that combines five important performance ratios
into a consolidated single score. As it turns out, the Z-score provides
investors a pretty good picture of a company's financial health. The Z-score is
a heuristic calculation used to predict if a company would go bankrupt. Working
capital, retained earnings, and EBIT (Earnings Before Interest and
Tax) are all measured in relation to a company's total assets in
this formula. A Z-score of 3.0 or higher depicts strong financial health, but a
score of less than 1.8 indicates a significant chance of bankruptcy.
Z = 1.2 T1 + 1.4 T2 + 3.3 T3 +0.6 T4 + 0.999T5
Table : 21
Graph : 20
Over the years the Z-score has been showing variations around 2-3 which
shows an approximate solid financial positioning.
4.0 Conclusion
Analysis of financial accounts is
beneficial because it highlights links between items in the financial
statements. They do, however, have several limits that should be considered
when producing or utilizing them. Ratios are calculated using accounting
statistics from financial statements. Accounting figures, on the other hand,
are prone to flaws, approximations, variation in practice, and even
manipulation to some level. As a result, ratios aren't very useful for making
solid conclusions. The difficulty of comparability is inherent in ratios.
Companies that are generally comparable may use various accounting methods, which
can make it difficult to compare key linkages. For example, inventory turnover
for a company utilizing the FIFO method of inventory valuation may differ from
that of a company using the LIFO method of inventory valuation. The usefulness
of accounting ratios may be hampered by inflation. Historical cost-based
financial statements and accounting data do not reflect current value figures
due to inflation, especially when assets are purchased at different times by
different firms. Accounting ratios calculated (using different costs or prices)
have distortions and are deceptive since financial statements are not adjusted
for inflation. The utility of accounting ratios is also influenced by the
varied techniques of computation. Even under identical scenarios, the differing
concepts utilized to determine the numerator and denominator in a certain
accounting ratio will not aid in making meaningful conclusions.
According to the above evaluation, a
decrease in the progress of the financials of the DILMAH CEYLON TEA COMPANY PLC
is visible in the years 2019, 2020 and recovering in the year 2021. With the
Z-score, we can interpret the overall financial state of the company as in a
good financial state in 2021, even though it has been in a decreased state than
the previous years. But the company management can enhance the financial
situation of the country with proper plans and strategies with the downset of
the Covid-19 situation.
