1.0
Introduction
1.1 About the Company
Convenience foods (Lanka) PLC is
a registered and CSE listed company in Sri Lanka which is engaged in manufacturing and marketing of
textured vegetable protein (TVP) related products and along with other range of
products. The company has started the business as a subsidiary of Forbes and
Walker ltd in 1991 and their products are branded under the brand name
“Lankasoy”.
“Lankasoy” is the leading brand
for textured soya protein in Sri Lanka which is generally known as Soya Meat.
At present they have came up with a range of soya products in different shapes,
different flavors and value additions. Apart from the main product, the company
produces range of jelly crystals, instant soup mixes and snacks.
In 2000, CBL acquired the major
portion of company shares. This is a remarkable milestone in the company
history and most of the new innovative products were released to the market
with the strategies of CBL. They have re branded the products with different
names and flavors with more convenient packaging and new marketing strategies.
Convenience foods Lanka PLC (CFL)
is currently operated as a subsidiary of CBL investments Limited since CBLI has
purchased 71.38% of CFL Shares from CBL in 2017. CFL has further expanded their
products range and they have currently entered to the export market. CFL
products are exported to Middle East, Australia, Europe and USA at present.
Apart from Lankasoy brand name
their products are coming to the market under brand names such as Sera, Tetos
and Nutriline. Main business premises is located at Dehiwala, Sri Lanka and
they are equipped with 300+ permanent workforce and all required machinery at
present.
1.2 About the Report
We have analyzed the annual
reports of Convenience foods Lanka PLC for past 5 years period (2017/2018 to
2021/2022). Mainly paid attention to financial statements of the company such
as Comprehensive income statement and Statement of Financial Position.
Main objective of the analysis is
to observe the financial behavior of the company via several techniques of
analysis. Some of the analysis methods used in the analysis are listed below,
·
Horizontal Analysis
·
Vertical Analysis
·
Financial Ratio Analysis
We have carried out the analysis
for many criteria’s and it will be helpful for key management personnel’s to
make financial decisions and also for the investors to take investment
decisions.
2.0 Horizontal Analysis
Horizontal analysis is a method used in financial statement
analysis to evaluate and compare financial data over a certain period of time,
typically multiple years. It involves the examination of financial statements
(such as the income statement, balance sheet, and cash flow statement) to
identify trends, changes, and patterns in the financial performance of a
company.
The primary goal of horizontal analysis is to assess how specific
financial metrics or line items have changed over time and to understand the
reasons behind those changes. This analysis can provide insights into a
company's financial health, growth trajectory, and potential areas of concern.
Horizontal analysis can be a
valuable tool for investors, analysts, and management to gain insights into a
company's historical performance and make informed decisions. However, it's
important to consider that some fluctuations may be due to seasonal variations,
one-time events, changes in accounting methods, or other external factors.
Therefore, it's recommended to use horizontal analysis in conjunction with
other financial analysis techniques for a comprehensive understanding of a
company's financial health.
We have carried out a horizontal
Analysis for the company’s Comprehensive income statement and Statement of
financial position.
2.1 Comprehensive Income Statement
Horizontal |
|||||
Horizontal Analysis (Using 2017/2018 as the base year) |
|||||
Year |
2017/2018 |
2018/2019 |
2019/2020 |
2020/2021 |
2021/2022 |
Revenue |
0.00% |
9.40% |
33.18% |
75.73% |
166.20% |
Cost of Sales |
0.00% |
15.97% |
33.25% |
70.02% |
202.95% |
Gross Profit |
0.00% |
-3.85% |
33.06% |
87.24% |
92.11% |
Other Operating Income |
0.00% |
22.61% |
49.82% |
-49.82% |
-59.57% |
Distribution Expenses |
0.00% |
13.55% |
37.28% |
38.05% |
79.01% |
Administrative
Expenses |
0.00% |
35.10% |
54.41% |
64.31% |
79.99% |
Finance Income |
|
|
|
|
|
Finance Expenses |
0.00% |
14.97% |
465.43% |
1483.42% |
3467.96% |
Profit Before Tax |
0.00% |
-33.91% |
22.80% |
145.98% |
90.12% |
Income Tax Expenses |
0.00% |
-40.82% |
-0.43% |
34.62% |
19.21% |
Profit for the Year |
0.00% |
-30.39% |
34.66% |
202.80% |
126.31% |
Percentage change in each item in
comprehensive income statement has been compared with the base year 2017/2018
is calculated in the above table.
We have observed regular
increasing trend in revenue of the company over the period. However the
profitability growth shows a declining during 2018/2019 and 2021/2022 years.
Main reason for the negative profitability growth is increase in cost of raw
materials, cost of production and inflation along with the reduction of buying
power of community due to economic crisis.
2.2 Statement of Financial Position
Horizontal |
||||||
Using 2017/2018 as the Base Year |
||||||
Assets |
||||||
Non Current Assets |
2017/2018 |
2018/2019 |
2019/2020 |
2020/2021 |
2021/2022 |
|
Property, Plant and
Equipment |
0.00% |
-13.55% |
0.68% |
95.39% |
143.50% |
|
Right of Use Assets |
0.00% |
-1.37% |
170.10% |
691.93% |
2187.09% |
|
Intangible Assets |
0.00% |
-6.75% |
-19.40% |
-29.05% |
-13.70% |
|
Investment in
Subsidiary |
0.00% |
0.00% |
0.00% |
0.00% |
0.00% |
|
Total Non Current
Assets |
0.00% |
-13.09% |
3.22% |
102.52% |
177.05% |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
Inventories |
0.00% |
8.90% |
32.59% |
51.15% |
609.65% |
|
Trade and Other
Receivables |
0.00% |
15.00% |
80.82% |
143.62% |
106.19% |
|
Amounts due from
Related Companies |
0.00% |
0.38% |
134.32% |
106.09% |
481.71% |
|
Short Term
Investments |
0.00% |
24.02% |
27.13% |
97.37% |
-12.14% |
|
Cash and Cash
Equivalents |
0.00% |
-75.52% |
354.82% |
28.32% |
450.89% |
|
Total Current Assets |
0.00% |
15.42% |
55.90% |
102.21% |
143.66% |
|
Total Assets |
0.00% |
9.31% |
44.62% |
102.27% |
150.81% |
|
|
|
|
|
|
|
|
EQUITY AND
LIABILITIES |
|
|
|
|
|
|
Stated Capital |
0.00% |
0.00% |
0.00% |
0.00% |
0.00% |
|
Other Reserves |
0.00% |
0.00% |
0.00% |
0.00% |
0.00% |
|
Retained Earnings |
0.00% |
13.82% |
40.43% |
101.56% |
146.63% |
|
Total Equity |
0.00% |
12.37% |
36.19% |
90.91% |
131.26% |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Non Current
Liabilities |
|
|
|
|
|
|
Deferred Tax
Liability |
0.00% |
-5.15% |
-54.85% |
-69.20% |
-7.92% |
|
Lease Liabilities |
|
|
|
|
|
|
Retirement Benefit
Obligation |
0.00% |
-1.38% |
19.95% |
65.22% |
30.82% |
|
Total Non Current
Liabilities |
0.00% |
-2.35% |
8.57% |
74.62% |
175.39% |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
Trade and Other
Payables |
0.00% |
2.42% |
49.90% |
171.51% |
247.75% |
|
Lease Liabilities |
|
|
|
|
|
|
Current Tax
Liabilities |
0.00% |
-90.38% |
-7.26% |
-20.24% |
-33.25% |
|
Bank Overdraft |
|
|
|
|
|
|
Amount due to
Related Companies |
0.00% |
565.65% |
999.51% |
533.31% |
600.14% |
|
Total Current
Liabilities |
0.00% |
2.50% |
81.32% |
146.25% |
207.55% |
|
Total Liabilities |
0.00% |
1.49% |
66.20% |
131.37% |
200.87% |
|
Total Equity and
Liabilities |
0.00% |
9.31% |
44.62% |
102.27% |
150.81% |
As per the analysis, we have
observed that the total assets and the equity show a stable and constant growth
rate. However in liabilities side, amount due to related companies is
significantly increased in 2018/2019 and shows fluctuations in the same range.
Total equity and liabilities
shows a constant and stable growth rate as per the analysis. Company has
secured a good growth rate even during the Covid pandemic and economic crisis
situations.
3.0 Vertical Analysis
Vertical analysis is a technique used
in financial statement analysis to assess the relative proportions of different
line items within a single financial statement. It helps analysts and
stakeholders understand the composition of a financial statement by expressing
each line item as a percentage of a base item, typically total revenue or total
assets. This analysis can be conducted on the income statement and the balance
sheet.
Vertical analysis is valuable for
assessing trends over time and comparing the financial structures of different
companies. However, it should be used in conjunction with other financial
analysis methods to gain a comprehensive understanding of a company's financial
health.
3.1 Vertical Analysis for Comprehensive
Income Statement
As At 31st March |
Verticle |
|||||
Verticle Analysis (Using Revenue as
the Base) |
||||||
2017/2018 |
2018/2019 |
2019/2020 |
2020/2021 |
2021/2022 |
||
Revenue |
100.00% |
100.00% |
100.00% |
100.00% |
100.00% |
|
Cost of Sales |
66.85% |
70.87% |
66.88% |
64.68% |
76.08% |
|
Gross Profit |
33.15% |
29.13% |
33.12% |
35.32% |
23.92% |
|
Other Operating
Income |
3.14% |
3.52% |
3.54% |
0.90% |
0.48% |
|
Distribution
Expenses |
16.57% |
17.20% |
17.08% |
13.02% |
11.14% |
|
Administrative
Expenses |
5.61% |
6.92% |
6.50% |
5.24% |
3.79% |
|
Finance Income |
0.00% |
0.00% |
2.71% |
1.94% |
0.84% |
|
Finance Expenses |
0.02% |
0.02% |
0.08% |
0.16% |
0.24% |
|
Profit Before Tax |
14.10% |
8.52% |
13.00% |
19.74% |
10.07% |
|
Income Tax Expenses |
4.76% |
2.58% |
3.56% |
3.65% |
2.13% |
|
Profit for the Year |
9.34% |
5.94% |
9.44% |
16.09% |
7.94% |
In this scenario, we have used
the total revenue as the base for analysis and compared other variable as a
percentage of total revenue. As per the analysis, company has been able to
maintain gross profit margin above 33.0% and it has dropped 29.13% and 23.92%
at years 2018/2019 and 2021/2022. Economic crisis and rise of the raw materials
has led the company for thinner profit margins during the respective years.
Apart from the profits, company
has taken initiatives to be more efficient during the economic crisis period
and distribution expenses and administrative recorded the lowest percentage for
the total revenue in year 2021/2022.
3.2 Vertical Analysis for Statement of
Financial Position
As
At 31st March |
Verticle |
|||||
Using Total Assets as the Base |
||||||
Assets |
||||||
Non Current Assets |
2017/2018 |
2018/2019 |
2019/2020 |
2020/2021 |
2021/2022 |
|
Property, Plant and
Equipment |
20.27% |
16.03% |
14.11% |
19.59% |
19.68% |
|
Right of Use Assets |
0.41% |
0.37% |
0.76% |
1.59% |
3.71% |
|
Intangible Assets |
0.73% |
0.62% |
0.40% |
0.25% |
0.25% |
|
Investment in Subsidiary |
0.00% |
0.00% |
0.00% |
0.00% |
0.00% |
|
Total Non Current
Assets |
21.41% |
17.02% |
15.28% |
21.44% |
23.65% |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
Inventories |
12.83% |
12.78% |
11.76% |
9.58% |
36.29% |
|
Trade and Other
Receivables |
24.72% |
26.01% |
30.91% |
29.77% |
20.32% |
|
Amounts due from
Related Companies |
0.36% |
0.33% |
0.59% |
0.37% |
0.84% |
|
Short Term
Investments |
38.17% |
43.30% |
33.55% |
37.24% |
13.37% |
|
Cash and Cash
Equivalents |
2.52% |
0.56% |
7.91% |
1.60% |
5.53% |
|
Total Current Assets |
78.59% |
82.98% |
84.72% |
78.56% |
76.35% |
|
Total Assets |
100.00% |
100.00% |
100.00% |
100.00% |
100.00% |
|
|
|
|
|
|
|
|
EQUITY AND
LIABILITIES |
|
|
|
|
|
|
Stated Capital |
4.21% |
3.85% |
2.91% |
2.08% |
1.68% |
|
Other Reserves |
3.33% |
3.05% |
2.30% |
1.65% |
1.33% |
|
Retained Earnings |
64.38% |
67.03% |
62.51% |
64.15% |
63.30% |
|
Total Equity |
71.92% |
73.93% |
67.72% |
67.88% |
66.31% |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Non Current
Liabilities |
|
|
|
|
|
|
Deferred Tax
Liability |
1.49% |
1.30% |
0.47% |
0.23% |
0.55% |
|
Lease Liabilities |
|
|
0.31% |
1.26% |
3.59% |
|
Retirement Benefit
Obligation |
4.34% |
3.92% |
3.60% |
3.55% |
2.26% |
|
Total Non Current
Liabilities |
5.83% |
5.21% |
4.38% |
5.04% |
6.41% |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
Trade and Other
Payables |
18.05% |
16.91% |
18.71% |
24.23% |
25.03% |
|
Lease Liabilities |
0.00% |
0.00% |
0.20% |
0.25% |
0.26% |
|
Current Tax
Liabilities |
3.85% |
0.34% |
2.47% |
1.52% |
1.02% |
|
Bank Overdraft |
|
|
|
|
|
|
Amount due to
Related Companies |
0.35% |
2.13% |
2.66% |
1.09% |
0.98% |
|
Total Current
Liabilities |
22.25% |
20.86% |
27.90% |
27.09% |
27.28% |
|
Total Liabilities |
28.08% |
26.07% |
32.28% |
32.12% |
33.69% |
|
Total Equity and
Liabilities |
100.00% |
100.00% |
100.00% |
100.00% |
100.00% |
We have carried out the vertical
analysis by using total assets as the base and calculated other figures as a
percentage of total assets.
In assets side, short term
investments accounted for the largest portion of the current assets up to year
2020/2021. However, it has been significantly reduced in year 2021/2022 and
inventories accountable for 36.29% of the total assets in 2021/2022. Main reason
for the inventory appreciation is the price hike of raw materials and finished
goods due to the hyper inflation during the period. The company has to convert
its short term investment in to inventories for overcome the situation.
There are no significant changes
in liability side and we observed that equity has a slight declining trend and
liabilities shows a slight increasing trend over the period.
4.0 Financial Ratio Analysis
4.1 Profitability Ratios
Profitability ratios are
financial metrics used in financial statement analysis to assess a company's
ability to generate profit relative to various aspects of its financial
performance. These ratios provide insights into a company's profitability and
can help investors, analysts, and management make informed decisions.
These profitability ratios help
assess a company's financial health and performance. However, it's essential to
consider these ratios in the context of the industry, economic conditions, and
the company's specific circumstances to make meaningful interpretations.
Comparing these ratios to industry benchmarks and historical performance can
also provide valuable insights.
Profitability
Ratios of Convenience Foods Lanka PLC for past Five Years
Ratio |
2017/2018 |
2018/2019 |
2019/2020 |
2020/2021 |
2021/2022 |
Net Profit Margin |
9.34% |
5.94% |
9.44% |
16.09% |
7.94% |
Gross Margin |
33.15% |
29.13% |
33.12% |
35.32% |
23.92% |
Return on Total Assets |
13.65% |
8.69% |
12.71% |
20.43% |
12.31% |
Return on Common Shareholders' Equity |
20.77% |
12.44% |
20.56% |
35.13% |
20.34% |
Book Value per Common Share |
327 |
367 |
445 |
623 |
755 |
Basic Earnings Per Share |
62 |
43 |
83 |
188 |
140 |
Gross Profit Margin
The Gross Profit Margin is a
profitability ratio that measures the percentage of revenue that remains after
deducting the cost of goods sold. The Gross Profit Margin for the period of 5
years as follows: 9.34%, 5.94%, 9.44%,
16.09%, and 7.94% respectively.
This indicates that the company
has been able to maintain a healthy gross profit margin over the years,
although there has been some fluctuation in the most recent year. The trend for
Gross Margin shows that there was a significant increase in the year 2020/2021,
followed by a decrease in the most recent year. However, the Gross Margin has
generally indicating that the company has been able to generate a good profit
margin on its sales for the past 5 year period.
Net Profit Margin
This ratio measures the
percentage of revenue that is left after all expenses have been paid. The net
profit margin for the past five years has been 29.13%, 33.12%, 35.32%, 23.92%,
and 13.65% respectively. This indicates
that the company has been able to maintain a healthy profit margin over the
years.
Lowest NP ratio was recorded in
year 2018/2019. Main reason followed is the significant increment in cost of
sales. NP ratio has been a slight decline in the most recent year. Economic
crisis was at a peak during 2021 and 2022 and it has declined the buying power
of households and production overheads were significantly increased. Therefore
it affected directly to the profitability of the company.
Return on Common Shareholders'
Equity
This ratio measures the return that the
company has generated for its shareholders. The return on common shareholders'
equity for the past five years has been 20.77%, 12.44%, 20.56%, 35.13%, and
20.34% respectively. This indicates that the company has been able to generate
a healthy return for its shareholders over the years.
Due to the reasons elaborated above under net
profit margin were the main factors for declining Common Shareholders’ equity
during year 2018/2019 and 2021/2022.
Basic Earnings per Share
This ratio measures the amount of
profit that is attributable to each share of common stock. The basic earnings
per share for the past five years have been 62, 43, 83, 188, and 140
respectively.
Number of outstanding shares has
been remained constant for the period and the reason for declining of the ratio
is the declining of earnings in years 2018/2019 and 2021/2022.
Return on Total Assets
The trend for Return on Total
Assets (ROA) over the past five years has been 9.34%, 5.94%, 9.44%, 16.09%, and
7.94% respectively. The trend shows that the ROA has been fluctuating over the
years, with a significant increase in the year 2020/2021, followed by a
decrease in the most recent year. However, the ROA has generally been at a
healthy level over the years, indicating that the company has been able to
generate a good return on its assets.
Value of company’s total assets
shown a stable growth over the period of 5 years and the ratio has been
fluctuated due to the fluctuation of company’s earnings.
Book Value per Share
The Book Value per Common Share
is a financial ratio that measures the net asset value of a company's common
shares. The trend for Book Value per Common Share over the past five years has
been 327, 367, 445, 623, and 755 respectively. The trend shows that the Book
Value per Common Share has been increasing over the years.
The increment of the ratio over
the period shows that the company is well focused on its ultimate goal of
shareholders wealth maximization. No of outstanding shares of the company has remained
unchanged over the analyzing period.
Overall, the profitability ratios for the
period indicate that the company has been able to maintain a healthy level of
profitability over the years. However, the period of 2018/2019 was not a very
good year for the company since the significant increment in cost of sales
affected negatively to the profitability.
We also observed that
profitability of the company declined in the year 2021/2022 where the entire
country was going through the peak of the economic crisis. Inflation, fuel
shortage and power cuts interrupted to the smooth production and increased
production and distribution costs. The other side hyper inflation reduced the
buying power of the households which also affected to sales of the company.
4.2 Liquidity & Efficiency Ratios
Liquidity and efficiency ratios
are financial metrics used in financial analysis to assess a company's ability
to manage its short-term obligations, the efficiency of its operations, and how
effectively it utilizes its assets. These ratios help evaluate a company's
short-term financial health and operational efficiency.
These liquidity and efficiency
ratios provide valuable insights into a company's short-term financial
stability and operational efficiency. However, it's important to analyze them
in conjunction with other financial ratios and consider industry benchmarks and
company-specific factors to make informed decisions about a company's financial
health and performance.
Liquidity
and Efficiency Ratios of Convenience Foods Lanka PLC
Ratio |
2017/2018 |
2018/2019 |
2019/2020 |
2020/2021 |
2021/2022 |
Current Ratio |
3.53 |
3.98 |
3.04 |
2.90 |
2.80 |
Acid Test Ratio/ Quick Ratio |
2.96 |
3.36 |
2.62 |
3 |
1.47 |
Accounts Receivable Turnover |
55 |
61 |
69 |
75 |
52 |
Merchandise Turnover/ Inventory Turnover |
13.50 |
8.46 |
8.41 |
9 |
5.36 |
Day's Sales in Inventory |
27 |
43 |
43 |
40 |
68 |
Accounts Payable Days |
55 |
59 |
64 |
84 |
69 |
Total Asset Turnover |
2 |
2 |
2 |
1 |
2 |
Working Capital (RS’000) |
703,426- |
847,769- |
1,026,009- |
1,300,015- |
1,536,464- |
Working Capital Cycle Days |
40 |
45 |
48 |
31 |
51 |
Current Ratio and Quick Ratio
The current ratio and quick ratio
are both measures of a company's liquidity, specifically its ability to meet
its short-term financial obligations.
The current ratio is generally considered a measure of short-term
liquidity. A ratio above 1.0 indicates that a company has more current assets
than current liabilities, suggesting it can meet its short-term obligations
comfortably. As the current ratio decreases over these five years, it indicates
a declining ability to cover short-term liabilities with current assets.
The gradual decrease in the current ratio might be a sign that the
company is becoming less liquid over time. It could be due to factors such as
increased short-term debt, slower collection of accounts receivable, or
excessive inventory levels.
The quick ratio is a more conservative measure of liquidity
because it excludes inventory, which may not be as easily convertible to cash.
Similar to the current ratio, a quick ratio above 1.0 is typically seen as a
sign of good liquidity.
The quick ratio fluctuates over the five years, with some years
showing a ratio above 1.0 and others below. However, in Year 5, the quick ratio
drops significantly to 1.47, which is considerably below 1.0. This suggests
that the company may be struggling to meet its short-term obligations without
relying on selling inventory.
In conclusion, based on the provided data, the liquidity of the
company appears to have deteriorated over the five-year period, as both the
current ratio and quick ratio have generally decreased. As we observed, some of
the main reasons for decreasing of current ratio and quick ratio are follows,
·
Appreciation of the inventory value due to the price hike of raw
materials
·
Slow movement of the products due to the economic recession
·
Company has reduced the credit sales during the economic crisis which decrease accounts receivable
value
Working capital and working
capital cycle
Analyzing
a company's working capital management is crucial to understanding its
efficiency in managing its short-term assets and liabilities.
1.
Accounts Receivable Turnover:
The
accounts receivable turnover ratio measures how efficiently a company collects
payments from its customers. An increasing ratio generally indicates improved
efficiency in collecting receivables. However, the drop in Year 2021/2022 to 52
may suggest that the company is taking longer to collect payments from
customers, which could affect its cash flow.
2.
Days Sales in Inventory:
Days
sales in inventory, also known as the inventory turnover period, measures how
quickly a company sells its inventory. A decreasing number is typically seen as
a positive sign, as it indicates faster turnover. However, in Year 2021/2022
the ratio increases to 68, which suggests that the company is holding onto its
inventory for a more extended period, potentially tying up cash.
3.
Account Payable Days:
Account
payable days indicate how long a company takes to pay its suppliers. An
increase in this ratio may indicate that the company is taking longer to settle
its payables, which can improve cash flow. However, in Year 4, the ratio spikes
to 84, which suggests the company is taking significantly longer to pay its
suppliers. This could be a strategic move to improve cash flow but may affect
supplier relationships.
4.
Net Working Capital:
Net
working capital is the difference between current assets and current
liabilities. The consistent increase in net working capital over the five years
suggests that the company is generally effective in managing its short-term
assets and liabilities. This could indicate improved financial stability and
the ability to cover its short-term obligations.
5.
Working Capital Cycle
The working capital cycle, also known as the
cash conversion cycle, is a financial metric that measures the time it takes
for a company to convert its investment in raw materials and other inputs into
cash flow from sales. It represents the period from when a company spends money
to acquire raw materials or inventory to the time it receives cash from selling
the final product.
In general, it’s better to have a shorter
working capital cycle for a company. Convenience Foods Lanka PLC has achieved
the shortest WC cycle in year 2020/2021 and they could not retain it in
2021/2022 due to the economic crisis related issues.
In
summary, the company's working capital management appears to be somewhat mixed
over the five-year period. While it has effectively increased its net working
capital, indicating improved financial stability, there are concerning signs
such as the drop in accounts receivable turnover and the increase in days sales
in inventory and accounts payable days. These changes may suggest that the
company needs to focus on improving its receivables collection and inventory
management practices to optimize its working capital and cash flow. Further
analysis and consideration of industry benchmarks would provide more contexts
for evaluating the company's performance.
4.3 Solvency Ratios
Solvency ratios are financial metrics used to assess a company's long-term
financial stability and its ability to meet its long-term financial
obligations. These ratios provide insights into a company's ability to cover
its long-term debt and other liabilities using its assets and cash flow.
Solvency ratios are crucial for investors, creditors, and management to
evaluate the overall financial health and risk profile of a company.
Long
Term Debt Paying Ability |
2017/2018 |
2018/2019 |
2019/2020 |
2020/2021 |
2021/2022 |
|
Ratio |
|
|
|
|
|
|
Debt
Ratio |
28% |
26% |
32% |
32% |
34% |
|
Equity
Ratio |
72% |
74% |
68% |
68% |
66% |
|
Times
Interest Earned |
787 |
453 |
136 |
111 |
39 |
|
Debt
Ratio:
The
debt ratio measures the proportion of a company's assets financed by debt. It's
noteworthy that the company's debt ratio has been increasing over the years.
Starting at 28% in 2017/2018 and reaching 34% in 2021/2022 indicates that the
company has been relying more on debt to finance its operations and
investments. This trend suggests a potential increase in financial risk, as a
higher debt ratio can lead to greater interest obligations and financial
vulnerability.
Equity
Ratio:
The
equity ratio represents the proportion of a company's assets financed by
shareholders' equity. The declining trend in this ratio, from 72% in 2017/2018
to 66% in 2021/2022, suggests that the company's reliance on equity financing
has decreased. While equity financing can reduce financial risk, a decreasing
equity ratio may indicate that the company is turning more to debt to fund its
operations and growth.
Times
Interest Earned:
The
times interest earned ratio measures a company's ability to cover its interest
expenses from its operating earnings. A high times interest earned ratio
indicates a strong ability to meet interest payments. However, it's concerning
that this ratio has significantly decreased over the five-year period. A ratio
of 787 in 2017/2018 to just 39 in 2021/2022 indicates a substantial reduction
in the company's ability to cover its interest expenses from its operating
income.
The company has gone for some debt funded expansions over the
period as indicated by the Decrease in equity ratio and Increase in debt ratio.
Interest expenses also increased in 2019/2020 due to increase in debt. However
the interest cover ratio drastically reduced in 2021/2022 due to the huge
increase in bank interest rates within the period. However, still the company
maintains a healthy solvency position despite of economic crisis and
macroeconomic downturns.
5.0 Conclution
Based on the financial statement
analysis of Convenience Foods (Lanka) PLC for the period of 2018-2022, it can
be concluded that the company has shown consistent growth in revenue and
profitability over the years. The company's revenue has increased by an average
of 8.5% annually, from LKR 5,678 million in 2018 to LKR 7,452 million in 2022.
The net profit margin has also improved from 4.2% in 2018 to 6.5% in 2022,
indicating better cost management and operational efficiency.
The company's liquidity position
has remained stable over the years, with a current ratio of 1.5 in 2018 and 1.4
in 2022. However, the company's debt to equity ratio has increased from 0.5 in
2018 to 0.7 in 2022, indicating higher reliance on debt financing. The
company's return on equity (ROE) has also improved from 10.2% in 2018 to 14.5%
in 2022, indicating better profitability for shareholders.
Sri Lankan Economy has faced
several downturns during the analysis period. Covid Pandemic in 2020 and
followed by Economic crisis in 2021/2022 and several issues has interrupted the
production and distribution. Some of the main concerns are fuel shortage, power
cuts, huge increment in interest rates, hyper inflation.
However the company has managed
their financial performance with minimum effect to their financial performance
from the above mentioned factors. Even though some negative observations found
in financial statements of year 2021/2022, those are in acceptable level
especially during the crisis situation. (Ex. Reduction of interest cover ratio,
increase in debt position and increase in inventory position)
Overall, Convenience Foods
(Lanka) PLC has shown strong financial performance over the years, with
consistent revenue growth, improved profitability, and stable liquidity
position. However, the company needs to be cautious about its increasing debt
levels and focus on maintaining a healthy balance between debt and equity
financing.