Executive Summary
The key objective of this task is to
analyze United Chemicals Lanka PLC’s financial statements during the period
from 2017/18 to 2021/22. Financial data were collected from the annual reports
published on the Colombo Stock Exchange by the aforesaid company. For the
analysis, different methods have been used throughout the report such as
horizontal analysis, vertical analysis, trend analysis, ratio analysis and
Altman’s Z - Score model. For comparison purpose another listed company in
Colombo Stock Exchange; Industrial Asphalts (Ceylon) PLC has been considered in
ratio analysis.
1.
Background of the company
Union Chemicals Lanka PLC is a
manufacturing trading organization for chemicals & allied products
specialized in waterborne polymer dispersions. It is a leading supplier of
chemical products such as paints, inks, packaging, detergents, cosmetics,
rubber, latex, textile, food and pharmaceutical industries.
Union Chemicals Lanka PLC has begun
chemical manufacturing in 1984 under Union Carbide Ceylon LTD. It remained as
an affiliate of Union Carbide Corporation (UCC) until year 2000 after which Dow
Chemicals acquired UCC and the company was renamed as Union Chemicals Lanka
Ltd. In November 2003, Dow Chemicals divested itself from Union Chemicals Lanka
Ltd.
Union Chemicals Lanka PLC is the
pioneering organization for manufacture of waterborne polymer dispersions in Sri
Lanka. The company ventured into consumer market through manufacturing a range
of waterborne coatings for wood and leather. Union Chemicals Lanka PLC
represents Dow Chemicals (USA), Eastman (USA), Macropolymers PTE Ltd (India),
Dominian Color Corporation (Netherlands), and Sunflag Chemicals (India) for a
range of chemical products.
2.
Horizontal analysis
Horizontal analysis is a comparative
analysis of a company’s financials across the years by comparing year by year
values with figures of a base year. In here basically rupee change and
percentage change are compared.
Rupee change = Analysis period amount –
Base period amount
Percentage change = (Rupee change/Base
period amount)*100%
Base year = 2016/17
Time period = from 2017/18 to 2021/22
2.1 Horizontal analysis
on financial position
Rupee
change (‘000)
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
Assets |
|
|
|
|
|
Property, plant
& equipment |
6,350 |
53,108 |
99,336 |
125,014 |
165,494 |
Intangible
assets |
(6) |
(7) |
(7) |
(7) |
(7) |
Retirement
benefit assets |
638 |
1,339 |
2,239 |
2,283 |
215 |
Other financial
assets |
277 |
114 |
50 |
387 |
220 |
Non-current assets |
7,259 |
54,554 |
101,618 |
127,677 |
165,922 |
|
|
|
|
|
|
Inventories |
18,552 |
45,655 |
80,452 |
44,843 |
188,813 |
Trade &
other receivables |
(6,745) |
38,216 |
5,905 |
32,682 |
173,554 |
Cash & cash equivalents |
(8,522) |
(69,114) |
(61,961) |
(13,161) |
5,590 |
Current assets |
3,285 |
14,757 |
24,396 |
64,364 |
367,957 |
Total assets |
10,544 |
69,311 |
126,014 |
192,041 |
533,879 |
|
|
|
|
|
|
Equity |
|
|
|
|
|
Stated capital |
- |
- |
- |
- |
- |
Retained
earnings |
23,781 |
56,677 |
108,573 |
174,980 |
300,960 |
Equity attributed to the owners of the company |
23,781 |
56,677 |
108,573 |
174,980 |
300,960 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Retiring benefit
obligation |
1,003 |
3,344 |
7,167 |
11,608 |
5,978 |
Differed tax
liabilities |
1673 |
(2,776) |
(5,543) |
(4,474) |
(2,222) |
Loans & borrowings |
- |
36,312 |
39,965 |
7,043 |
2,690 |
Non-current liabilities |
2,676 |
36,880 |
41,589 |
14,177 |
6,446 |
|
|
|
|
|
|
Loans and
borrowings |
19,927 |
26,802 |
(2,060) |
9,759 |
58,557 |
Trade &
other payables |
(25,306) |
(41,232) |
(28,271) |
(16,837) |
149,227 |
Current tax
liability |
(11,346) |
(8,085) |
3,474 |
7,944 |
12,392 |
Dividend payable |
2541 |
(2) |
(351) |
2,415 |
(1,673) |
Bank overdraft |
- |
(1,729) |
3060 |
(397) |
7970 |
Current liabilities |
(15,913) |
(24,246) |
(24,148) |
2,884 |
22,6473 |
Total liabilities |
(13,237) |
12,634 |
17,441 |
17,061 |
23,2919 |
Total equity & liabilities |
10,544 |
69,311 |
126,014 |
192,041 |
53,3879 |
Percentage change
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
Assets |
|
|
|
|
|
Property, plant
& equipment |
3.60% |
30.15% |
56.39% |
70.96% |
93.94% |
Intangible
assets |
-85.71% |
-100.00% |
-100.00% |
-100.00% |
-100.00% |
Retirement
benefit assets |
10.88% |
22.83% |
38.18% |
38.93% |
3.67% |
Other financial
assets |
374.32% |
154.05% |
67.57% |
522.97% |
297.30% |
Non-current assets |
3.99% |
29.96% |
55.80% |
70.11% |
91.11% |
|
|
|
|
|
|
Inventories |
11.84% |
29.15% |
51.36% |
28.63% |
120.54% |
Trade &
other receivables |
-3.24% |
18.33% |
2.83% |
15.68% |
83.26% |
Cash & cash
equivalents |
-12.00% |
-97.30% |
-87.23% |
-18.53% |
7.87% |
Current assets |
0.75% |
3.38% |
5.59% |
14.76% |
84.37% |
Total assets |
1.71% |
11.21% |
20.38% |
31.06% |
86.35% |
|
|
|
|
|
|
Equity |
|
|
|
|
|
Stated capital |
0.00% |
0.00% |
0.00% |
0.00% |
0.00% |
Retained
earnings |
5.07% |
12.09% |
23.15% |
37.31% |
64.18% |
Equity attributed to the owners of the company |
4.91% |
11.71% |
22.44% |
36.16% |
62.19% |
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Retiring benefit
obligation |
9.81% |
32.70% |
70.08% |
113.50% |
58.45% |
Differed tax
liabilities |
21.77% |
-36.12% |
-72.13% |
-58.22% |
-28.91% |
Loans &
borrowings |
0.00% |
0.00% |
10.06% |
-82.38% |
-61.81% |
Non-current liabilities |
14.94% |
205.90% |
232.19% |
79.15% |
35.99% |
|
|
|
|
|
|
Loans and
borrowings |
102.03% |
137.23% |
-10.55% |
49.97% |
299.82% |
Trade &
other payables |
-35.74% |
-58.23% |
-39.92% |
-23.78% |
210.73% |
Current tax
liability |
-69.69% |
-49.66% |
21.34% |
48.79% |
76.11% |
Dividend payable |
31.58% |
-0.02% |
-4.36% |
30.02% |
-20.80% |
Bank overdraft |
0.00% |
-100.00% |
176.98% |
-22.96% |
460.96% |
Current liabilities |
-13.67% |
-20.83% |
-20.75% |
2.48% |
194.57% |
Total liabilities |
-9.86% |
9.41% |
12.99% |
12.70% |
173.42% |
Total equity & liabilities |
1.71% |
11.21% |
20.38% |
31.06% |
86.35% |
The property, plant and equipment has
increased drastically from 2018/19 to 2021/22 as the highest for the period with
a steep increase in 2021/22 compared to the base year. Inventory has increased
drastically in 2018/19 and in 2019/20 and a gradual decrease in 2020/21
followed by another drastic increase in 2021/22 as the highest amount recorded
for the considered period. Trade and other receivables have a drop in 2017/18
compared to the base year followed by an increase in 2019/20 and then a
continuous increase till 2021/22 which is the highest. Intangible assets
decreased over the years, other financial assets recorded highest increase in
2020/21. Cash and cash equivalents decreased over the considered period except
in 2021/22 which records the highest amount for the period. Loans and borrowings
has increased in 2017/18 and 2018/19 followed by a decrease in 2020/21 and an
increase in 2021/22 as the highest. Bank overdraft has decreased in 2018/19 and
2020/21 with an increase in 2019/20 and 2021/22. Trade and other payables
decreased till 2020/21 followed by an increase in 2021/22. Stated capital has
remained constant over the years. However total assets has increased constantly
during the years with highest increase in 2021/22.
2.2 Horizontal analysis
on financial performance
Rupee change
(‘000)
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
|
|
|
|
|
|
Revenue |
(60,846) |
113,150 |
194,587 |
264,923 |
835,517 |
Cost of sales |
(4,859) |
(174,584) |
(209,098) |
(226,750) |
(732,201) |
Gross profit |
(65,705) |
(61,434) |
(14,511) |
38,173 |
103,316 |
Other income |
(5,458) |
1,172 |
2,466 |
(1,228) |
(232) |
Selling and
distribution expenses |
(2,145) |
(873) |
(8,008) |
(7,673) |
(3,216) |
Administrative
expenses |
5,006 |
786 |
(4,755) |
(10,477) |
(20,397) |
Result from operating activities |
(68,302) |
(60,349) |
(24,808) |
18,795 |
79,471 |
Finance income |
4,422 |
(407) |
(2,387) |
(1,756) |
(1,618) |
Finance cost |
299 |
(9,081) |
(4,142) |
(970) |
(10,165) |
Net finance cost
|
4,721 |
(9,488) |
(6,529) |
(2,726) |
(11,783) |
Profit before tax |
(63,581) |
(69,837) |
(31,337) |
16,069 |
67,688 |
Income tax
expense |
17,446 |
21,778 |
9,604 |
(4,694) |
7,274 |
Profit for the year |
(46,135) |
(48,059) |
(21,733) |
11,375 |
74,962 |
Percentage change
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
|
|
|
|
|
|
Revenue |
-7.99% |
14.86% |
25.56% |
34.80% |
109.76% |
Cost of sales |
0.87% |
31.19% |
37.35% |
40.50% |
130.79% |
Gross profit |
-32.62% |
-30.50% |
-7.20% |
18.95% |
51.30% |
Other income |
-70.34% |
15.10% |
31.78% |
-15.82% |
-2.99% |
Selling and
distribution expenses |
14.73% |
5.99% |
54.98% |
52.68% |
22.08% |
Administrative
expenses |
-8.39% |
-1.32% |
7.97% |
17.55% |
34.17% |
Result from operating activities |
-50.62% |
-44.73% |
-18.39% |
13.93% |
58.90% |
Finance income |
0.00% |
0.00% |
0.00% |
0.00% |
0.00% |
Finance cost |
-10.49% |
318.52% |
145.28% |
34.02% |
356.54% |
Net finance cost
|
973.40% |
-1956.29% |
-1346.19% |
-562.06% |
-2429.48% |
Profit before tax |
-46.96% |
-51.58% |
-23.14% |
11.87% |
49.99% |
Income tax
expense |
-45.13% |
-56.33% |
-24.84% |
12.14% |
-18.81% |
Profit for the year |
-47.69% |
-49.68% |
-22.46% |
11.76% |
77.49% |
There is a significant increase in revenue
from 2018/19 to 2021/22 despite the decrease in 2017/18. The cost of sales also
has increased accordingly from 2018/19 to 2021/22. Due to the high increase of
cost of sales than revenue gross profit has decreased in 2017/18, 2018/19 and
2019/20 compared to base year and increased in 2020/21 and 2021/22 with highest
recorded in 2021/22. Net profit also behaved as gross profit with decrease in
2017/18, 2018/19 and 2019/20 and increased in 2020/21 and 2021/22 respectively.
3.
Trend analysis
3.1 Trend analysis on
financial position
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
Assets |
|
|
|
|
|
Property, plant
& equipment |
103.60% |
125.62% |
120.16% |
109.32% |
113.44% |
Intangible
assets |
14.29% |
0.00% |
0.00% |
0.00% |
0.00% |
Retirement
benefit assets |
110.88% |
110.78% |
112.49% |
100.54% |
74.62% |
Other financial assets |
474.32% |
53.56% |
65.96% |
371.77% |
63.77% |
Non-current assets |
103.99% |
124.97% |
119.89% |
109.18% |
112.35% |
|
|
|
|
|
|
Inventories |
111.84% |
115.47% |
117.20% |
84.98% |
171.46% |
Trade &
other receivables |
96.76% |
122.29% |
86.90% |
112.49% |
158.42% |
Cash & cash
equivalents |
88.00% |
3.07% |
472.75% |
637.92% |
132.40% |
Current assets |
100.75% |
102.61% |
102.14% |
108.68% |
160.66% |
Total assets |
101.71% |
109.35% |
108.25% |
108.87% |
142.19% |
|
|
|
|
|
|
Equity |
|
|
|
|
|
Stated capital |
100.00% |
100.00% |
100.00% |
100.00% |
100.00% |
Retained
earnings |
105.07% |
106.68% |
109.87% |
111.50% |
119.56% |
Equity attributed to the owners of the company |
104.91% |
106.48% |
109.60% |
111.21% |
119.12% |
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Retiring benefit
obligation |
109.81% |
120.85% |
128.17% |
125.53% |
74.22% |
Differed tax
liabilities |
121.77% |
52.46% |
43.63% |
149.91% |
170.13% |
Loans &
borrowings |
0.00% |
0.00% |
110.06% |
17.62% |
38.19% |
Non-current liabilities |
114.94% |
266.14% |
108.59% |
53.93% |
75.91% |
|
|
|
|
|
|
Loans and
borrowings |
202.03% |
117.42% |
37.71% |
167.65% |
266.60% |
Trade &
other payables |
64.26% |
65.00% |
143.82% |
126.88% |
407.66% |
Current tax
liability |
30.31% |
166.08% |
241.03% |
122.63% |
118.36% |
Dividend payable |
131.58% |
75.98% |
95.66% |
135.95% |
60.92% |
Bank overdraft |
0.00% |
0.00% |
0.00% |
27.81% |
728.15% |
Current liabilities |
86.33% |
91.71% |
100.11% |
129.30% |
287.44% |
Total liabilities |
90.14% |
121.37% |
103.27% |
99.75% |
242.60% |
Total equity & liabilities |
101.71% |
109.35% |
108.25% |
108.87% |
142.19% |
Total assets, total equity and total
liability have increased during the years and has the highest amount recorded
in 2021/22 for all these categories.
3.2 Trend analysis on
financial performance
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
|
|
|
|
|
|
Revenue |
92.01% |
124.84% |
109.31% |
107.36% |
155.60% |
Cost of sales |
100.87% |
130.06% |
104.70% |
102.30% |
164.26% |
Gross profit |
67.38% |
103.15% |
133.52% |
128.19% |
127.19% |
Other income |
29.66% |
388.01% |
114.49% |
63.88% |
115.25% |
Selling and
distribution expenses |
114.73% |
92.39% |
146.22% |
98.52% |
79.96% |
Administrative
expenses |
91.61% |
107.72% |
109.41% |
108.88% |
114.14% |
Result from operating activities |
49.38% |
111.94% |
147.66% |
139.60% |
139.47% |
Finance income |
0.00% |
37.75% |
32.40% |
166.49% |
108.73% |
Finance cost |
89.51% |
467.55% |
58.61% |
54.64% |
340.64% |
Net finance cost
|
1073.40% |
-172.94% |
67.13% |
37.08% |
504.15% |
Profit before tax |
53.04% |
91.29% |
158.72% |
145.55% |
134.08% |
Income tax
expense |
54.87% |
79.58% |
172.11% |
149.21% |
72.40% |
Profit for the year |
52.31% |
96.20% |
154.08% |
144.14% |
158.81% |
There is a drastic increase in profit for
the year in 2019/20 followed by a decrease in 2020/21 and then a gradual increase
with highest in 2021/22 for the considered five years period.
4.
Vertical analysis
Vertical analysis use to analyze a line
item of the financial statement as a total of the category which the particular
line item belongs. As an example any line item comes under assets are compared
with total asset figure.
Common size percentage = (Analysis
amount/Base amount)*100%
4.1 Vertical analysis on
financial position
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
Assets |
|
|
|
|
|
Property, plant
& equipment |
29.03% |
33.35% |
37.02% |
37.17% |
29.66% |
Intangible
assets |
0.00% |
0.00% |
0.00% |
0.00% |
0.00% |
Retirement
benefit assets |
1.03% |
1.05% |
1.09% |
1.01% |
0.53% |
Other financial
assets |
0.06% |
0.03% |
0.02% |
0.06% |
0.03% |
Non-current assets |
30.12% |
34.42% |
38.12% |
38.23% |
30.21% |
|
|
|
|
|
|
Inventories |
27.86% |
29.42% |
31.86% |
24.87% |
29.98% |
Trade &
other receivables |
32.08% |
35.88% |
28.80% |
29.76% |
33.16% |
Cash & cash
equivalents |
9.94% |
0.28% |
1.22% |
7.14% |
6.65% |
Current assets |
69.88% |
65.58% |
61.88% |
61.77% |
69.79% |
Total assets |
100.00% |
100.00% |
100.00% |
100.00% |
100.00% |
|
|
|
|
|
|
Equity |
|
|
|
|
|
Stated capital |
2.39% |
2.18% |
2.02% |
1.85% |
1.30% |
Retained
earnings |
78.36% |
76.45% |
77.59% |
79.47% |
66.82% |
Equity attributed to the owners of the company |
80.74% |
78.63% |
79.61% |
81.32% |
68.13% |
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Retiring benefit
obligation |
1.79% |
1.97% |
2.34% |
2.69% |
1.41% |
Differed tax
liabilities |
1.49% |
0.71% |
0.29% |
0.40% |
0.47% |
Loans & borrowings |
0.00% |
5.28% |
5.37% |
0.87% |
0.23% |
Non-current liabilities |
3.27% |
7.97% |
7.99% |
3.96% |
2.11% |
|
|
|
|
|
|
Loans and
borrowings |
6.28% |
6.74% |
2.35% |
3.61% |
6.78% |
Trade &
other payables |
7.24% |
4.30% |
5.72% |
6.66% |
19.10% |
Current tax
liability |
0.78% |
1.19% |
2.65% |
2.99% |
2.49% |
Dividend payable |
1.68% |
1.17% |
1.03% |
1.29% |
0.55% |
Bank overdraft |
0.00% |
0.00% |
0.64% |
0.16% |
0.84% |
Current liabilities |
15.98% |
13.40% |
12.40% |
14.72% |
29.76% |
Total liabilities |
19.26% |
21.37% |
20.39% |
18.68% |
31.87% |
Total equity & liabilities |
100.00% |
100.00% |
100.00% |
100.00% |
100.00% |
Trade and other receivables comprise the
majority of total assets in 2017/18, 2018/19 and 2021/22. As well as property,
plant and equipment comprises the majority of total assets in 2019/20 and 2020/21.
Inventory’s portion out of total assets increased till 2019/20 and then
declined in 2020/21 followed by an increase in 2021/22. Cash amount out of
total assets steeply decreased in over the years after 2017/18 followed by a gradual
increase in 2020/21 and a decrease in 2021/22. Intangible assets, retirement
benefit obligations and other financial assets represented less than 2% out of
total assets over the years.
4.2 Vertical analysis on
financial performance
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
|
|
|
|
|
|
Revenue |
100.00% |
100.00% |
100.00% |
100.00% |
100.00% |
Cost of sales |
-80.62% |
-83.99% |
-80.45% |
-76.65% |
-80.92% |
Gross profit |
19.38% |
16.01% |
19.55% |
23.35% |
19.08% |
Other income |
0.33% |
1.02% |
1.07% |
0.64% |
0.47% |
Selling and
distribution expenses |
-2.39% |
-1.77% |
-2.36% |
-2.17% |
-1.11% |
Administrative
expenses |
-7.81% |
-6.74% |
-6.74% |
-6.84% |
-5.02% |
Result from operating activities |
9.51% |
8.53% |
11.52% |
14.98% |
13.43% |
Finance income |
1.11% |
0.33% |
0.10% |
0.15% |
0.11% |
Finance cost |
-0.36% |
-1.36% |
-0.73% |
-0.37% |
-0.82% |
Net finance cost
|
0.74% |
-1.03% |
-0.63% |
-0.22% |
-0.71% |
Profit before tax |
10.25% |
7.50% |
10.89% |
14.76% |
12.72% |
Income tax
expense |
-3.03% |
-1.93% |
-3.04% |
-4.22% |
-1.97% |
Profit for the year |
7.23% |
5.57% |
7.85% |
10.54% |
10.75% |
2020/21 has the highest gross profit
margin, result from operating activities margin and profit before tax margin
respectively for the period. 2021/22 has the highest profit for the year margin
during the considered period.
5.
Ratio Analysis
Ratio analysis is used for comparing
different line items of the financial statements to come up with a clear
picture of company’s performance in different aspects including the company’s;
·
Liquidity
and efficiency
·
Solvency
·
Profitability
·
Market
For comparison purpose we have selected a
similar manufacturing company - Industrial Asphalts (Ceylon) PLC (ACL), which
also manufactures chemical products such as paints, adhesives and coatings,
etc. UCL figures have been compared with same ratios which were also calculated
for ACL.
5.1 Liquidity and
efficiency
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
Current ratio |
4.37 |
4.89 |
4.99 |
4.20 |
2.35 |
Acid test ratio |
2.63 |
2.70 |
2.42 |
2.51 |
1.34 |
Account
receivable turnover |
3.42 |
3.90 |
4.15 |
4.51 |
5.12 |
Merchandise
turnover |
3.40 |
3.89 |
3.50 |
3.59 |
4.72 |
Day’s sales
uncollected |
105 |
103 |
82 |
86 |
87 |
Day’s sales
inventory |
113 |
101 |
113 |
93 |
98 |
Total asset
turnover |
1.12 |
1.33 |
1.34 |
1.32 |
1.63 |
(UCL)
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
Current ratio |
0.84 |
0.42 |
0.48 |
0.79 |
3.77 |
Acid test ratio |
0.38 |
0.14 |
0.39 |
0.76 |
1.25 |
Account
receivable turnover |
0.62 |
1.88 |
4.07 |
2.42 |
0.70 |
Merchandise
turnover |
0.39 |
1.14 |
7.74 |
42.57 |
9.01 |
Day’s sales
uncollected |
419 |
125 |
143 |
247 |
119 |
Day’s sales
inventory |
968 |
212 |
32 |
7 |
38 |
Total asset
turnover |
0.18 |
0.11 |
0.22 |
0.45 |
0.10 |
(ACL)
Current
ratio: This
ratio uses to measure the short-term debt repaying ability of the company. This
ratio shouldn’t be too much high or too much low. If the ratio is too much low
the company won’t be able to pay its short term loans which indicates a working
capital problem. On the other hand if the ratio is too high it indicates that
unutilized assets which need to be used for investments. UCL’s current ratio
has increased from 2017/18 till 2019/20 which is the highest recorded followed
by a decrease in 2020/21 to the lowest in 2021/22. Overall company has
maintained a good working capital position all during the period compared to
ACL except in 2021/22.
Acid
test ratio:
This ratio uses current assets after excluding less liquid assets like
inventory to measure the company’s ability to pay short term debt (ability to
pay short term debts using more liquid assets). UCL’s acid test ratio has
increased till 2018/19 as the highest recorded amount and a slight decrease in
2019/20 followed by a slight increase in 2020/21 and lowest in 2021/22. Which
shows a good working capital position of the company compared to ACL.
Account
receivables turnover: This ratio calculates the frequency which the company
turns its accounts receivables into cash during a year. If this ratio is high it
indicates a good level in company’s efficiency. UCL’s accounts receivable turnover has increased continuously over
the years from 2017/18 with highest recorded in 2021/22. Accounts receivables
turnover is at a beneficial level for UCL compared to ACL.
Merchandise
turnover: Merchandise
turnover ratio calculates how many times a company is turning its inventory in
to sales during a year (times inventory being replaced during a year). If the
merchandise ratio is high it indicates a high level in efficiency of the
company. UCL’s merchandise turnover has increased till 2018/19 which is the highest
followed by decrease thereafter. Overall UCL has kept a good level in
merchandise turnover ratio during the period. ACL’s merchandise turnover ratio
has increased drastically in 2020/21 due to increase in cost of sales and lower
inventory levels in 2019/20 and 2020/21 compared to previous years.
Day’s
sales uncollected:
This ratio measures the average days taken to collect cash after a credit
sales. If the ratio is low it indicates a good level in efficiency of the
company. UCL’s day’s sales uncollected increased in 2017/18 which is the
highest recorded followed by a constant decrease till 2019/20 which is the
lowest and a slight increase in 2020/21 and 2021/22. UCL keeps a healthy
position compared to ACL on day’s sales uncollected.
Day’s
sales inventory:
Day’s sales inventory measures the average dates taken to replace the
inventory. Lower the ratio better the performance. UCL’s day’s sales inventory
has increased in 2017/18 to 2019/20 which are the highest and lowest recorded
in 2020/21. Overall company has maintained a good level of day’s sales
inventory. ACL was able to lower its day’s sales inventory in 2019/20, 2020/21
and 2021/22 than UCL due to lower level of inventory and high amount of cost of
sales.
Total
assets turnover: Total
assets turnover is used to measure how efficiently assets being used to
generate revenue. If the ratio is high it indicates high level of efficiency.
UCL’s total assets turnover has decreased from 2019/20 to 2020/21 followed by
an increase in 2021/22 which is the highest in five years. Since the ratio is
more than 1 in all five years UCL is efficient in utilizing their assets on
generating revenue than ACL.
5.2 Solvency
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
Debt ratio |
19% |
21% |
20% |
19% |
32% |
Equity ratio |
81% |
79% |
80% |
81% |
68% |
Times interest
earned |
- |
8.28 |
18.22 |
68.59 |
18.98 |
(UCL)
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
Debt ratio |
59% |
18% |
22% |
33% |
4% |
Equity ratio |
41% |
81% |
78% |
67% |
96% |
Times interest
earned |
1.57 |
0.64 |
1.38 |
12.89 |
13.89 |
(ACL)
Debt
ratio: Debt
ratio is used to measure the proportionate of total debt out of total assets.
UCL’s debt ratio has fluctuated over the five years with highest value in
2021/22 and lowest in 2017/18 and 2020/21. By analyzing the debt ratio of UCL
it shows that a lower level of debt used to finance the total assets than ACL
does.
Equity
ratio:
Equity ratio is used to measure the proportionate of total equity out of total
assets. UCL’s equity ratio fluctuated over the five years with highest in
2017/18 and 2020/21 with lowest in 2021/22. By analyzing the equity ratio of
UCL it shows that high level of equity used to finance the total assets than
ACL does.
Times
interest earned:
This ratio measures company’s ability to pay its interest expense out of
operating profit. UCL has zero times interest earned in 2017/18 due to net
interest earn is positive. However UCL was able increase the ratio in 2018/19,
2019/20 and 2020/21 respectively displaying its ability to pay interest
expense. ACL has a slight increase in 2019/20 and a large increase in both
2020/21 and 2021/22 of this ratio due to a surplus on revaluation of investment
property.
5.3 Profitability
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
Profit margin |
7.23% |
5.57% |
7.85% |
10.54% |
10.75% |
Gross margin |
19.38% |
16.01% |
19.55% |
23.35% |
19.08% |
Return on total
assets |
8.12% |
7.40% |
10.48% |
13.91% |
17.50% |
Return on common
shareholder’s equity |
10.21% |
9.29% |
13.24% |
17.28% |
23.79% |
Book value per common
share |
0.34 |
0.36 |
0.40 |
0.44 |
0.52 |
Basic earnings
per share |
0.03 |
0.03 |
0.05 |
0.07 |
0.11 |
(UCL)
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
Profit margin |
-88% |
-44% |
10% |
44% |
108% |
Gross margin |
49% |
28% |
29% |
13% |
45% |
Return on total
assets |
-16% |
-5% |
2% |
20% |
11% |
Return on common
shareholder’s equity |
-37% |
-7% |
3% |
28% |
14% |
Book value per
common share |
91.23 |
801.87 |
821.07 |
1,082.63 |
1,482.83 |
Basic earnings
per share |
-36.45 |
-29.28 |
23.67 |
266.33 |
175.82 |
(ACL)
Profit
margin:
Profit margin is used to measure the proportionate of total profit earned out
of total revenue. If the ratio is high, more profitable the company is. UCL’s
highest profit margin is in 2021/22 and lowest in 2018/19followed by a gradual
increase after that till 2021/22. UCL has kept a healthy profit margin over the
years. ACL has recorded a high profit margin in 2020/21 due to a surplus on
revaluation of investment property.
Gross
margin:
Gross margin is used to measure gross profit as a proportionate of the total
revenue. Higher the gross profit higher the ability to pay operating expenses
of a company. In contrast to the way profit margin has behaved UCL’s gross
margin has the highest in 2020/21 and in 2018/19 the lowest followed by a
gradual increase after that till 2020/21. Overall ACL has a good gross margin
compared to UCL.
Return
on total assets:
This ratio measures profit as a proportionate of average total assets. Return
on total assets is an indication of company’s overall profitability. Higher the
ratio is better the performance of the company. UCL’s return on total assets
has the highest ratio recorded in 2021/22 and in 2018/19 lowest for the period.
ACL recorded a drastic increase in return on total assets in 2020/21 and slight
decrease in 2021/22.
Return
on common shareholder’s equity: Return on common shareholder’s equity
ratio is used to measure how well a company has utilized shareholder’s money.
Simply this ratio calculate percentage earned per 1 unit of money the investor
has invested. UCL’s return on common shareholder’s equity increased from its
lowest for the period in 2018/19 to 2021/22 which is the highest for the
period. ACL recorded a drastic increase in return on common shareholder’s
equity in 2020/21 and slight decrease in 2021/22.
Book
value per common share: This ratio uses to measure the amount per share that
a shareholder will get in an event of liquidation. UCL’s book value per common
share has increased over the period with highest recorded in 2021/22 which
indicates a good performance of the company. ACL have high amounts in this
ratio basically due to low number of shares compared to UCL.
Basic
earnings per share:
Basic earnings per share uses to calculate net income attributable per share.
Higher the ratio indicates better performance of the company. UCL’s basic
earnings per share has increased from 2017/18 to 2021/22 which is the highest.
ACL recorded a drastic increase in basic earnings per share in 2020/21 and
slight decrease in 2021/22 thereafter.
5.4 Market
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
Price earnings
ratio |
11,859 |
12,324 |
7,999 |
11,099 |
7,207 |
Dividend yield |
3.25% |
3.25% |
5.25% |
3.63% |
1.70% |
(UCL)
|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
Price earnings
ratio |
-8.38 |
-11.77 |
15.67 |
1.10 |
1.66 |
Dividend yield |
0.00% |
0.00% |
0.40% |
1.54% |
1.54% |
(ACL)
Price
earnings ratio:
This ratio is used by investors for selecting preferred stocks to invest.
Higher the ratio indicates that the ability to future growth of the company.
UCL has increased its price earnings ratio from 2017/18 to 2018/19 which is the
highest followed by decrease in 2019/20, increase in 2020 and a decline in
2021/22 which is the lowest. Overall UCL keeping a good position on this ratio
compared to ACL.
Dividend
yield:
This ratio uses to calculate dividend per share as a percentage of the market
value of the share. UCL’s dividend yield has fluctuated in the period and has
the highest in 2019/20. Overall UCL has kept a good position on this ratio
compared to ACL.
6.
Graphical illustration on trends of the
ratios for both companies.
7.
Analysis based on Zones on Discrimination:
Original Z – Score Model
By using the Altman’s Z score model a
company can be categorized into three zones; if the Z score is greater than
2.99 it is considered as “Safe”, whereas if the Z score is in between of 1.80
and 2.99 it is considered as “Grey” and finally if the Z score is lower than
1.80 it is considered as “Distress”. So the Z score is calculated based on the
following equation developed to analyze public limited companies. Weightages
were taken from Altman’s Z-Score Models of Predicting Corporate Distress
Evidence
from the Emerging Sri Lankan Stock Market (Samarakoon, 2009)
Z
= 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 +
1.0X5
where,
X1
= working capital/total assets
X2
= retained earnings/total assets
X3
= earnings before interest and tax/total assets
X4
= book value equity/book value of total liabilities
X5
= sales/total assets
Variable |
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
Weightage |
X1 |
0.54 |
0.52 |
0.49 |
0.47 |
0.40 |
1.20 |
X2 |
0.78 |
0.76 |
0.78 |
0.79 |
0.67 |
1.40 |
X3 |
0.11 |
0.11 |
0.15 |
0.19 |
0.19 |
3.30 |
X4 |
4.19 |
3.68 |
3.90 |
4.35 |
2.14 |
0.60 |
X5 |
1.11 |
1.27 |
1.28 |
1.27 |
1.39 |
1.00 |
|
|
|
|
|
|
|
Z Score |
5.72 |
5.53 |
5.80 |
6.18 |
4.70 |
|
As shown in the above table UCL was able
to remain in the “Safe” zone during the considered five years period as all the
yearly Z scores are more than 2.99.
8.
Forecasted Financial Statements
For forecasting of statement of financial
position, average growth rate of total assets during past five years (14%) used
and for forecasting of statement of financial performance, average growth rate
of sales during past five years (18%) used.
Forecasted financial position |
2022/23 |
Assets |
|
Property, plant
& equipment |
389,743 |
Intangible
assets |
- |
Retirement
benefit assets |
6,934 |
Other financial
assets |
335 |
Non-current assets |
397,013 |
|
|
Inventories |
394,059 |
Trade &
other receivables |
435,762 |
Cash & cash
equivalents |
87,405 |
Current assets |
917,226 |
Total assets |
1,314,238 |
|
|
Equity |
|
Stated capital |
17,111 |
Retained
earnings |
878,223 |
Equity attributed to the owners of the company |
895,333 |
|
|
Liabilities |
|
Retiring benefit
obligation |
18,485 |
Differed tax
liabilities |
6,232 |
Loans &
borrowings |
3,069 |
Non-current liabilities |
27,786 |
|
|
Loans and
borrowings |
89,076 |
Trade &
other payables |
251,003 |
Current tax
liability |
32,708 |
Dividend payable |
7,269 |
Bank overdraft |
11,064 |
Current liabilities |
391,120 |
Total liabilities |
418,905 |
Total equity & liabilities |
1,314,238 |
Forecasted financial performance |
2022/23 |
|
|
Revenue |
1,881,385 |
Cost of sales |
(1,522,340) |
Gross profit |
359,045 |
Other income |
8,870 |
Selling and
distribution expenses |
(20,951) |
Administrative
expenses |
(94,359) |
Result from operating activities |
252,606 |
Finance income |
2,024 |
Finance cost |
(15,336) |
Net finance cost
|
(13,312) |
Profit before tax |
239,294 |
Income tax
expense |
(36,982) |
Profit for the year |
202,312 |
9.
Conclusion
Financial analysis is used by investors
and other stakeholders of a company to analyze and predict its financials on
various aspects such as profitability, performance and efficiency, etc. to
facilitate their investment and other financial decisions. This report is a
study on Union Chemicals Lanka PLC (UCL)’s financials published for five years
ranging from 2017/18 to 2021/22. Those financials were analyzed using different
methods such as trend analysis, vertical analysis, horizontal analysis and
ratio analysis. For comparison purpose in ratio analysis section another
similar company; Industrial Asphalts (Ceylon) PLC (ACL) is used.
Overall United Chemicals Lanka PLC was
keeping healthy levels in financial performance and financial position. UCL had
an average growth rate of 14% in total assets during the period from 2017/18 to
2021/22. Also revenue has an average growth rate of 18% during the same period.
UCL’s trend is positive for the period
from 2017/18 to 2021/22 for assets and revenue which also shows ability on
further growth in the future. Property, plant and equipment, inventories and
trade receivables are at a stable stage as a percentage of total assets without
any major fluctuations during the period. Retained earnings also at a steady
level above 65% out of total equity and liabilities, without any losses
recorded during the considered period. Trade and other payables have reduced
over the years as a percentage of total equity and liabilities and an increase
in 2021/22. UCL was able to keep loans and borrowings percentage out of total
equity and liabilities at a very low level from 2017/18 to 2021/22. As a
percentage of revenue, both gross profit and profit for the year figures also
positive during the considered period. The average growth rate for revenue and
cost of sales are inline. There are some slight increases in selling and
distribution expenses and administrative expenses over the period.
Current ratio and acid test ratio are at a
healthy level which indicates a good working capital position of UCL compared
to the competitor ACL which is used for comparative analysis. Accounts
receivable turnover and merchandise turnover could be increased if UCL able to
introduce techniques to reduce inventory levels and debtors such as increase
cash sales, factoring debtors, update production process to a more efficient
one, introducing new costing methods, etc. By analyzing debt and equity ratios
we can identify that UCL is keener on financing their assets from equity rather
than on liabilities which will be beneficial with current economic situation in
the country. UCL’ ability to pay interest expense also high. UCL’s return on
total assets and return on common shareholder’s equity also at a good level
without major variations compared to ACL during the same five years period.
High price earnings ratio of UCL will create confidence among investors on
future growth and will attract more of them in the future to the company. By Z
score analysis also we can identify that UCL is at a better position during all
five years.
As a manufacturing company United
Chemicals Lanka (PLC) has shown positive results on its financial performance
throughout the period starting from 2017/18 to 2021/22 which is considered for
the analysis. It is important to keep the current management practices with new
improvements to keep overall performance level of the company at a healthy
level in the future.