1.
Introduction
to company
Watawala
Plantations PLC is a reputed plantation company in diversified agribusiness. It
is a pioneer in palm oil plantation in Sri Lanka, catering to Sri Lanka’s
demand for edible oil, whilst providing thousands of employment opportunities
directly and livelihood opportunities to the communities we operate in on an
indirect basis in the southern province. Over the years, the Company has
evolved to become Sri Lanka's largest palm oil cultivator through strategic
investments and focus on innovation and value addition. Furthermore, Watawala
Plantations has, over the last decade, diversified into the dairy industry with
the establishment of its dairy farm in Ginigathhena on Lonach Estate which
boasts of a herd strength amounting to 1,741 cattle and over 800 milking cows
at any given time. The dairy farm caters to a growing national demand for dairy
in the face of the current dearth of said product in the industry.
Watawala
Plantations specializes in palm, dairy, rubber, tea, cinnamon, and coconut.
1
Trend
Analysis
With
the horizontal analysis we can derive the trend of financials to have an
overview how the company has behaved during a time series. Here the trend of
different variables of financial statement are analyzed cross 5-year period.
Revenue
It
can be observed that even though there had been a loss of revenue during
2019/18, company had recovered and had a steady growth for next 2 years and on
financial year 2022/21 had a massive revenue hike of 76%.
Gross Profit
Even
during the revenue drop during 2019/18 the gross profit had been maintained at
company average. During financial year 2022/21 company had a gross profit
increase of 88%. This shows that the cost of sale increase is not directly
proportionate to sales increase. It can be assumed that direct costs are
streamlined for better performance.
Net Profit
Net
profit is revenue attributable to shareholders after all the expenses. It can
be observed that in the year 2022/21 the net profit had increased by 107%. And
the trend indicates that the there is a positive trend in net profit increase.
Earnings Per Share
Earning
per share states the profit attributable to 1 share of the company. Watawala
Plantations. EPS has a growth which can be viewed through the trend line. With
a massive increase 107% corresponding to net profit increase. Which states
there had not been any share issue during the period.
Non-Current Assets
Non-Current
assets shows the growth of a business, this can be through either internal
growth or by acquisition or mergers. It can be observed that company have a
growth. During financial year 2022/21 non-current assets had grown by 9%
Current Assets
Current
assets are used in short term to manage working capital. Current assets had
increased by 87% during the financial year 2022/21.
Total Assets
Total
assets include the company position. Watawala plantations had positive growth
through out the years in consideration.
Equity
Equity
analysis below comprises of state capital, retained earnings showing equity
attributable to equity holders of the company. As there had not been any issue
of shares the retained earnings had grown in a uniform manner with business
growth. We can assume that the business is having a natural growth with its
internal funds. Equity had increased by 30% in the last financial year.
Non-Current Liability
Non-Current
liabilities are long term loans and credits used by business to assist in the
growth. Watawala Plantations had increased its non-current assets during
2022/19 to facilitate growth but reduced during 2022/21.the company is relying
less on non-current liabilities to facilitate growth.
Current Liability
Current
liabilities facilitate the working capital requirements on day-to-day business.
Current liabilities of the business had increased throughout the time period
showing company is better managing the working capital. During financial year
2022/21 the company had increased its current liabilities by 38%.
2
Common
size financial statement analysis
Income Statement
Income
statement shows the performance of the company during a specific time period.
Below
shows the composition of income statement of the financial year 2022/21. The
total revenue of the company is allocated across as per the below graph. 60% of
the sales are recognized as net profit. Cost of sales comprises of 30% of
sales.
Statement of Financial Position
Statement
of financial position or the balance sheet show the business financial status
of a specified date.
Assets
Watawala
plantations consists of 31% of bearer biological assets of its portfolio. And
25% on its investment is subsidiaries, while 17% of assets are in cash and cash
equivalent form.
Equity and Liabilities
Watawala
Plantations assets are 78% financed by its own retained earnings.
3
Ratio
Analysis
3.1
Liquidity/
Efficiency
Liquidity
or efficiency refers to how fast the company can obtain cash to pay short term
bills. This section covers the working capital analysis as well.
3.1.1
Current
Ratio and Acid Test Ratio
Current
ratio measures companies’ ability to pay short term obligations with one year.
This is calculated as a fraction of current assets vs current liabilities. It
is considered having a current ratio of 1.5 is ideal for industries. How ever
watawala plantations had increased their current ratio from 1.5 to 4.00.
Quick
ratio (Acid test) is calculated by dividing the most liquid assets by current
liabilities, which shows the liquidity to cover the liabilities on an immediate
day. Researchers indicate having a quick ratio of 1 is ideal in most business.
Watawala plantations had a quick ratio of 1.77 during financial year 2018/17
but had grown by 108% to achieve a quick ratio of 3.69.
3.1.2
Account
Receivable Turnover and Days’ Sales Uncollected
Accounts
receivable turnover is the number of times per year that a business collects
its average accounts receivable. Watawala plantations currently have a high
account receivable turnover during 2022/21 than the company average during past
years. This shows a great potential in the business.
Sales
days uncollected is used to estimate the number of days before receivables will
be collected. Watawala plantation had reduced its sales days uncollected during
past 5 years to achieve a considerable low day of 14.
3.1.3
Days’
Sales in Inventory and Merchandise Turnover
Day’s
sales of inventory (DSI) are the average number of days it takes for a firm to
sell off inventory. Watawala plantations have had an increase in this metric,
from 32 days to 43 days. Which means it takes 43 days to sell the inventory in
the stores.
Merchandise
turnover measures how many times in a given period a company is able to replace
the inventories that it has sold. Watawala Plantation had maintained a constant
merchandise turnover during past years.
3.1.4
Total
Asset Turnover
Total
assets turnover measures the efficiency of a company's use of its assets in
generating sales. In comparatively to past years Watawala plantations had used
a low level of assets to achieve a high sale. This shows a company is effectively
utilizing its assets and has a high growth potential.
3.2
Solvency
A
solvency ratio measures the extent to which assets cover commitments for future
payments, the liabilities.
3.2.1
Debt
Ratio and Equity Ratio
Debt
ratio shows Total Liabilities as a percentage of total assets. While equity
ratio shows the equity component of the company as a percentage of total
assets. Watawala plantations have had a low debt to equity ratio during past 5
years.
Further
during financial year 2022/21 the debt is reduced more. Watawala plantation is
a low geared company with a debt component of less than 20%. We can assume the
with lower leverage the company is not utilizing the full potential of tax
shields it can obtain and increase return to shareholders.
3.2.2
Times
interest earned
Times
interest earned shows the companies ability to pay its debt service. In
financial year 2022/21 watawala plantations had achieved a rate of 75 times.
Due to its increased profitability and low use of debt. This shows that the company
has a sound financial position and can attract more debt if needed.
3.3
Profitability
3.3.1
Profit
Margin and Gross Margin
Profit
margins measure the net profit and gross profit as a percentage of sales. This
shows the overall profitability of the company and its growth cross the time
period. Watawala plantations had achieved a staggering high net and gross
profit margin in 5 years of 59% and 60% respectively, in comparison to last 5
years data. from the below graph is can further be identified indirect overhead
costs have been greatly optimized as well. As the gap between net profit and
gross profit has decreased gradually.
3.3.2
Return
on Total Assets and Return on Common Shareholders’ equity
Return
on shareholder equity and total assets had increased by 82% and 72%
respectively. Which shows a promising future for the shareholders as with lower
debt more of the profits are allocated to shareholders.
3.3.3
Book
value per Common Share and Earnings per Share
Earnings
per share depicts the net profit attributable to shareholder divided by number
of outstanding shares, it is observed EPS of watawala plantations had improved
gradually from 2018/17 to 2022/21.
And
book value per share is value of total assets per share. Indicating that
shareholders have LKR 35 per share stake in the company.
Both
the metrics had improved during the past 5 years, from which we can believe
investors are getting a better return and will continue to do so with company
growth.
3.4
Market
3.4.1
Price
earnings ratio and Dividend Yield
The
price/earnings ratio, also called the P/E ratio, tells investors how much a
company is worth. PE ratio on watawala plantation had decreased during 2022/21
and the past data are variable that does not show a trend for predictions. Even
though the company had achieved high sales and its financial outlook seems
positive, the stock exchange trading prices had not reflected the same.
This
may be due to the lower dividend yield given to the shareholders. Dividend
yield had reduced to 10% where on 2019/18 the yield was at 12%.
4
Analysis
of Reporting
4.1
Executive
summary
In
the chairmen’s and CEO’s review it is mentioned of the impacts of the current
economic downfall the company is facing and steps the company had taken to
mitigate them. One of the issues was destroying and writing off palm nurseries
due to a government regulation. This new regulation had limited the ability to
uproot any unprofitable palm trees and replant the same. Which can affect the
future palm oil income. As palm oil and
other related product constitute a majority of the plantations income this can
lead to huge downfall in income in the next year.
Also,
the company had major impact from the ban on inorganic fertilizers. The company
had quickly adopted organic fertilizers from the dairy farm, and this the
reversal of the ban, company is now looking into a mix of organic and inorganic
fertilizer mixture to limit the cost impact from high prices of inorganic
fertilizers. This also can have an impact on the yield of crops for future
years where the harvest will be less.
Even
though the Chairmen states that the dairy operations have a promising future,
the lack of proper feed formula can decrease the milk yield in the future as
well.
Two
of the sectors Watawala plantation account for 90% of the company top line will
have a negative impact in the next year as per the executive summary. But the
company is working to address the issues through innovation and by increasing
the efficiency and yield in other products as well. but as the other products
such as cinnamon, tea, rubber and coconut accounts only to less than 10% of the
portfolio we can expect to see a less than average result on the next financial
year with the risks forecasted.